Commissioner of Income Tax vs P. Glass Works

This is a reference at the instance of the income tax Department (the Department) u/s 256(2) of the income tax Act, 1961 (the Act) for the assessment year 1985-86.

The income tax Appellate Tribunal (the Tribunal) has referred the following two questions:

(i) Whether on the facts and in the circumstances of the case, the Tribunal was right in law in allowing relief in respect of sales tax payable which amount was paid subsequent to the close of the accounting year and not before the close of the accounting year ?

(ii) Whether on the facts and in the circumstances of the case, the Tribunal was right in holding that the subsidy received for generator set is not contribution made by the Government towards the cost of the generator and further whether the Tribunal was right in law in allowing depreciation on generator at 20 per cent.?

The facts

The Assessee was a registered firm carrying on a business of manufacturing and sale of glass wares. It filed return for the assessment year 1985-86 and claimed.

� Deduction of sales tax collected in the month of March 1985 but deposited in the month of April 1985;

� Depreciation on the cost of the generator.

The Assessee also claimed some other benefits with which we are not concerned in this reference.

The Assessing Officer by his order dated February 18, 1986 added the sales tax deposited in the month of April, 1985 and gave depreciation of 15 per cent, on the cost of the generator after reducing it by the subsidy received from the State Government.

The Assessee filed an appeal. This appeal was partly allowed by the Commissioner of income tax (Appeals) (the "CIT(A)") on December 2, 1986. He deleted the addition of the sales tax amount and allowed 20 per cent, depreciation on the cost of the generator without reducing it by the subsidy received form the Government.

A part of the order of the Commissioner of income tax (Appeals) was against the Assessee also. Subsequently the Assessee as well as the Department filed appeals. The appeal filed by the Department regarding the question referred was dismissed. The appeal of the Assessee was partly allowed.

The Department filed an application to refer four questions to the High Court for opinion. This application was partly allowed on September 10, 2010. The two questions as aforesaid have been referred to for opinion.

The decision

We have heard Sri Shambhu Chopara, counsel for the Appellant and Sri R.R. Agarwal and Sri Suresh Agarwal, counsel for the Assessee.

The first question

There is no dispute that the sales tax dues collected for the month of March, 1985 was paid by the Assessee in the month of April 1985. This finding has been recorded by the Assessing Officer. Section 43B of the Act, as the initially enacted, did not allow such deductions but this was changed with insertion of a proviso that allowed such deduction. However, there was dispute whether the proviso was with retrospective effect or not.

The Supreme Court in Allied Motors (P.) Ltd. Vs. Commissioner of Income Tax, Delhi, has held that the proviso to Section 43B is retrospective and it came into operation from the date the section was operative.

In view of the above, the Tribunal as well as the Commissioner of income tax (Appeals) did not commit any illegality in deleting the addition made by the Assessing Officer. The first question is answered in the affirmative in favour of the Assessee and against the Department.

The second question

The Assessing Officer by his order dated February 18, 1986 had given depreciation of 15 per cent, after deducting subsidy amount from the cost of the generator. The Commissioner of income tax (Appeals) as alleged by the Tribunal granted depreciation on the cost of the generator without reducing it by the subsidy. However, they granted depreciation at the rate of 20 per cent.

The Supreme Court in Commissioner of Income Tax, Hyderabad Vs. M/s. P.J. Chemicals Ltd., held that the Government subsidy is an incentive that is not meant for any specific purpose though it might be quantified as a percentage of such cost: it does not partake of the character of a payment intended either directly or indirectly to meet the actual cost u/s 43 of the Act.

The principle laid down in the aforesaid Supreme Court has been applied by our court in respect of generators in Commissioner of Income Tax Vs. Jayana Cold Storage and Ice Factory, , Commissioner of Income Tax Vs. Rakesh Cold Storage, and Janta Sugar Industries Vs. Commissioner of Income Tax, . In view of this, there was no illegality in allowing depreciation without reducing its cost by the amount of subsidy.

The counsel for the Department submitted that:

� The generator is not specified in Appendix 1 relating to table of rates;

� The depreciation of 20 per cent, is on the higher side;

� The depreciation should be given at the rate of 10 per cent.

The generator is not mentioned in Appendix 1 relating to table of rates and as such award of depreciation at 20 per cent, was incorrect and is on the higher side.

The Assessing Officer had given depreciation at the rate of 15 per cent. This was enhanced to 20 per cent, by the Commissioner of income tax (Appeals) and confirmed by the Tribunal. We have held that depreciation of 20 per cent, is incorrect and is on the higher side but the grant of depreciation of 15 per cent, by the Assessing Officer was not challenged by the Department and it cannot be done in the reference.

In view of the above, the second question is partly decided in favour of the Assessee and partly in favour of the Department.

The reference is answered accordingly.