In Spectrum Coal & Power Ltd v. ACIT, a division bench of the Mumbai ITAT held that a ‘person’ or ‘authority’ as prescribed under Section 43(1) of the Income Tax Act, does not include USA as USA is a Sovereign.
The bench further observed that a person is defined in Section 2(31) of the Income Tax Act, also makes no reference to any Sovereign and therefore, a foreign sovereign does not fall under Explanation 10 to Section 43(1) nor does it fall under the definition of person as given under section 2(31) of the Income Tax Act.
Assessee received a sum of 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 of the company’s accounts. Later, 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 as per the provisions of the Income tax Act.
The Assessing Officer, while completing assessment, treated the grant received by the assesse 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 Income Tax Act.
The bench noted the fact that the grant was given to assesse subject to conditions laid down in the agreement to create an institutional environment for technological innovations in the energy sector and disbursement of the grant is to be made by ICICI. The grant so received by the assessee is a financial arrangement and cannot be regarded to be a subsidy grant.
As per Section 43(1), “actual cost” means the actual cost of the assets to the assessee reduced by that portion of the cost thereof, if any, as has been met directly or indirectly by any other person or authority.
The question before the Tribunal was that whether USA can be regarded to be a person or authority.
After perusing Explanation 10 of the above section, the bench noted 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 assesse to the assessee. USA is a sovereign and cannot be Central Government or State Government or any authority established by any law in India.
It said that USA cannot be regarded to be a ‘person’ as defined under section 2(35) of 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.
Following the decision of the Supreme Court in the case of P J Chemicals, the bench held 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.
Read the full text of the Order below.
