By TIOL News Service

MUMBAI, AUG 21, 2017: THE issue before the Bench is - Whether if a conditional grant comes from abroad, a foreign country is to be construed as a person or authority as per Explanation 10 to Section 43(1). NO is the verdict.

Facts of the case

The assessee is a limited company. It had received a sum of Rs. 9,97,28,611/- from US Aid through ICICI under the Program for Acceleration of Commercial Energy Research (PACER) in the years 1996-97, and 1997-98, which was credited to the capital reserve in the balance sheet. In the F.Y. 1999- 2000, the assessee company had adjusted this amount against the investment in plant and machinery made during the year. However, the cost of plant & machinery was not reduced to this extent while calculating the written down value (WDV) for the purpose of determining the depreciation. This resulted in excess allowance of depreciation as claimed by the assessee. The Assessing Officer treated the grant received by the assessee from US Aid through ICICI as cost met directly or indirectly by any other person or authority as per the provisions of Section 43 of the I.T.Act. The first appellate authority dismissed the appeal of the assessee. When the matter went in first round before the ITAT, the Tribunal set aside the assessment and directed the Assessing Officer to adjudicate afresh the issue in accordance with law, after giving adequate opportunity of hearing to the assessee. The Assessing Officer took the view that the amount of the grant received under PACER from US Aid through ICICI amounted to cost met by US Aid on the purchase of plant and machinery as per the provisions of Section 43(1) of the IT Act and, therefore, he took the WDV of the plant and machinery for the purpose of calculation of depreciation at the cost of plant and machinery reduced by the amount of grant received by the assessee company from US aid through ICICI under PACER. The CIT(A) confirmed the order of the Assessing Officer.

On appeal, the Tribunal held that,

++ on the basis of this clauses in the agreement, it is apparent that the assessee has to repay the said conditional grant subject to the condition that the maximum repayment amount will not exceed to 200% of the conditional grant and till that the assessee has to pay 2% of the gross annual sales of the coal beneficiated under the proposed commercial project. The grant from this agreement is conditional. The grant so received by the assessee is a financial arrangement and cannot be regarded to be a subsidy grant. From the said agreement, it is apparent that the agreement is for financing the project grant under PACER. The grant is to create an institutional environment for technological innovations in the energy sector and disbursement of the grant is to be made by ICICI. This agreement, even if we take the contention of the DR, that it is not a financial arrangement but a subsidy, it is not for a specific plant & machinery;

++ Section 43(1) defines the actual cost to mean the actual cost of the assets of the assessee reduced by that portion of the cost thereof, if any, as has been met directly or indirectly by other person or authority. In the impugned case, we noted that what the ICICI has financed by way of conditional grant to the assessee is the amount received from USA under the project grant agreement for the Program for Acceleration of Commercial Energy Research. Now the question arises whether USA can be regarded to be a person or authority. In our view, this provision cannot be read without Explanation 10. From the reading of the said explanation, it is explicitly clear that if a portion of a cost of an asset acquired by the assessee has been met directly or indirectly by Central Government or State Government or any authority established under any law or by any other person in the form of a subsidy or a grant or reimbursement, said subsidy grant or reimbursement as is relatable to the asset shall be reduced out of the actual cost of the assessee to the assessee. USA is a sovereign and cannot be Central Government or State Government or any authority established by any law in India. Now the question arises, whether USA can be regarded to be a person. A person has been defined u/s. 2(31) and from its definition, the USA cannot be regarded to be a person under the IT Act. Even on this basis also financial assistance given by ICICI cannot be regarded to be a cost met directly or indirectly by any other person. We are of the view that the condition of financial grant received by the assessee could not be reduced from the actual cost of fixed assets for computing the depreciation under the Income tax Act.

(See 2017-TIOL-1173-ITAT-MUM)