Ita 312/2010 v. Ita 312/2010

IN THE HIGH COURT OF KERALA AT ERNAKULAM PRESENT : THE HONOURABLE MR. JUSTICE C.N.RAMACHANDRAN NAIR & THE HONOURABLE MR. JUSTICE K.SURENDRA MOHAN MONDAY, THE 20TH SEPTEMBER 2010 / 29TH BHADRA 1932 ITA.No. 312 of 2010 () --------------------- (ITA.880/COCH/2008 OF INCOME TAX APPELLATE TRIBUNAL,COCHIN BENCH) .................... APPELLANT/APPELLANT/ASSESSEE ---------------------------------------------------- KISHORKUMAR SHAMJI PROP:KISHOR SPICES COMPANY JEW TOWN, KOCHI-682 002 BY SENIOR ADV. SRI. SARANGAN.V. BY ADV. SRI.R.MOHANDAS RESPONDENT/RESPONDENT/REVENUE ---------------------------------------------------------- THE DEPUTY COMMISSIONER OF INCOME TAX, CIRCLE- 1, MATTANCHERY,KOCHI-682 005 BY ADVOCATE SRI.JOSE JOSEPH, SC THIS INCOME TAX APPEAL HAVING BEEN FINALLY HEARD ON 20/09/2010, THE COURT ON THE SAME DAY DELIVERED THE FOLLOWING: VK ITA.No. 312 of 2010 () C.N.RAMACHANDRAN NAIR &K. SURENDRA MOHAN, JJ. ------------------------------------------------------------ I.T.A. NO:312 OF 2010 ----------------------------------------------------------- Dated this the 20[th] September, 2010. JUDGMENT Ramachandran Nair, J. This is an appeal filed by the assessee raising two questionsof law as arising from orders of the Tribunal. The facts leading tothe controversy are the following. 2. The assessee is engaged in processing and exporting of spices including pepper. During the previous year relevant forassessment 1997-98 assessee installed machinery for processingof goods for export which entitled it to a subsidy of Rs.8 lakhs fromthe Spices Board. The amount received is credited in the capitalaccount and assessee neither returned it as income nor reduced thesubsidy from the cost of plant and machinery for the purpose ofdepreciation while working out actual cost in terms of Section 43(1)of the Income Tax Act, 1961. Even though assessment wasoriginally completed without reckoning the subsidy amount for anypurpose, the Assessing Officer later rectified assessment order inexercise of the powers under Section 154 bringing to tax the entiresubsidy amount of Rs.8 lakhs received from the Spices Board as ITA 312/2010 revenue receipt in the form of income assessable under the Act. The correctness of the rectification proceedings was challenged inappeal before the CIT (Appeal) which rejected it. However, onsecond appeal filed by the assessee, the Income Tax AppellateTribunal held reversing the order of the lower authorities thatsubsidy amount in this case is capital receipt not assessable asincome under the Act. However, the Tribunal further proceeded toconsider the applicability of Section 43(1) and directedrecomputation of depreciation on plant and machinery by reducingsubsidy amount from the cost of plant and machinery to arrive atthe actual cost in terms of the said Section. It is against this orderof the Tribunal, the assessee has come up before us in appealunder Section 260A raising two questions:- i) as to whether the Tribunal was justified in upholding the validity of the rectification made underSection 154 and ii) whether the Tribunal was justified in directingrecomputation of cost of plant and machinery byreducing subsidy amount from actual cost in terms ofSection 43(1) of the Income Tax Act. ITA 312/2010 3. We have heard senior counsel Shri. Sarangan appearing forappellant-assessee and Shri. Jose Joseph appearing for therespondent. i) as to whether the Tribunal was justified in upholding the validity of the rectification made underSection 154 and ii) whether the Tribunal was justified in directingrecomputation of cost of plant and machinery byreducing subsidy amount from actual cost in terms ofSection 43(1) of the Income Tax Act. ITA 312/2010 3. We have heard senior counsel Shri. Sarangan appearing forappellant-assessee and Shri. Jose Joseph appearing for therespondent. 4. The contention raised by the assessee's counsel is thatrectification in this case is not warranted because the questionwhether subsidy is of capital or revenue in nature itself is debatableand the same has to be decided with reference to the details ofsubsidy scheme under which it is granted. The standing counsel onthe other hand contended that subsidy was granted for carrying onbusiness and so much so the decision of the Hon'ble SupremeCourt reported in Sahney Steel and Press Works Ltd. v.Commissioner of Income Tax (228 ITR 253) squarely applies andtherefore, it was rightly treated as income of the assessee.However, assessee's counsel has relied on the decision of theHon'ble Supreme in Mepco Industries Ltd. v. Commissioner ofIncome Tax (319 ITR 208) wherein the Supreme Court hasconcluded that nature of subsidy being a debatable issue, it cannotbe brought to tax through rectification of assessment. From thefacts of this case we have to necessarily conclude that two viewsare possible as to whether subsidy received by the assessee in thiscase is a revenue receipt or whether it is a capital receipt because ITA 312/2010 the assessing authority and the first appellate authority took oneview that it is a revenue receipt whereas tribunal on facts foundthat it is a capital receipt not assessable as income, but it should bereduced to arrive at the actual cost of plant and machinery for thepurpose of depreciation. The Supreme Court, in the decisionreported in T.S.Balaram, Income Tax Officer v. Volkart Brothers(82 ITR 50) held that a mistake apparent on the record must be anobvious and patent mistake and not something which can beestablished by long drawn process of reasoning on points on whichthere may be conceivably two opinions. The nature of subsidy inthis case that is as to whether it is revenue receipt or capital receiptis not self-evident to treat it as not capable of more than onemeaning. On the other hand the subsidy scheme was understoodby three authorities viz., the assessing officer, the first appellateauthority and the tribunal in two different ways. Therefore,intrinsically two opinions are possible about the type and nature ofthe subsidy and so much so it is a debatable issue on which twoviews are possible and therefore the subsidy cannot be brought totax through rectification proceedings. The tribunal has not givenany specific finding in this regard even though the assessee hadspecifically taken a ground in these lines. However, since we find ITA 312/2010 that assessee's case squarely falls within the scope of judgment ofthe Supreme Court above referred, we allow the appeal on thisissue by reversing the order of the Tribunal and that of the lowerauthorities and by declaring that no rectification proceedings underSection 154 is maintainable to bring to tax subsidy amount. ITA 312/2010 that assessee's case squarely falls within the scope of judgment ofthe Supreme Court above referred, we allow the appeal on thisissue by reversing the order of the Tribunal and that of the lowerauthorities and by declaring that no rectification proceedings underSection 154 is maintainable to bring to tax subsidy amount. 5. In view of our above findings the next question raised as towhether the Tribunal was justified in limiting the depreciationallowance on the actual cost of machinery reduced by subsidyamount has become academic in nature because since rectificationproceedings itself is not tenable then even part disallowance ofdepreciation through rectification is also not possible. Eventhough counsel for the appellant contended that Tribunal has nopower to enhance assessment and so much so they could not havemade part disallowance of depreciation by reducing the subsidyfrom cost of machinery to arrive at actual cost under Section 43(1).We are unable to accept this contention because when the Tribunalfinds that assessment of the amount of subsidy as revenue orincome is not correct then it was open for the Tribunal to considerwhether part disallowance is called for while computingdepreciation benefit with specific reference of Section 43(1) of theAct. The Supreme Court in the case of Kapurchand Shrimal v. ITA 312/2010 Commissioner of Income Tax, Andhra Pradesh (131 ITR 451) heldthat an appellate authority has the jurisdiction as well as the dutyto correct all errors in the proceedings under appeal and to issue, ifnecessary, appropriate directions to the authority against whosedecision the appeal is preferred to dispose of the whole or any partof the matter afresh, unless forbidden from doing so by the statute. 6. Counsel for the appellant contended that the effect of theTribunal's order in making part disallowance of depreciationamounted to enhancement of assessment for which Tribunal is notclothed with powers under the Income Tax Act. We are unable toaccept this contention also because after holding that subsidyamount is not income, the Tribunal can consider whetherassessment of part of it is possible through part disallowance ofdepreciation more so when Tribunal clearly found that subsidy itselfwas given to meet capital cost of machinery. Therefore, inprinciple we feel the Tribunal was within their powers to considerthe question of disallowance for the purpose of depreciation afternoticing that the assessment of subsidy amount as revenue/incomeis unsustainable. However, in this case since we have reversed thefinding of the Tribunal with regard to the validity of the rectification ITA 312/2010 proceedings there is no scope for considering any part disallowancefor depreciation. 7. We therefore allow the appeal by holding that therectification proceedings issued under Section 154 against theassessee and partly confirmed by the I.T Act is invalid. C.N.RAMACHANDRAN NAIR Judge jj K. SURENDRA MOHANJudge