ITAT: Renewable Energy Capital Subsidy Not to Reduce Asset Cost for Depreciation in AY 2014-15

ITAT Delhi held that the capital subsidy for promoting renewable energy projects need not reduce the asset cost for depreciation in AY 2014-15. Section 2(24)(xviii) was inapplicable. Depreciation disallowance of Rs. 72.90 lakh was deleted.

Puri Oil Mills Limited has filed the present appeal in the ITAT Delhi, challenging an order dated January 05, 2018, passed by the CIT(A). The main dispute in this case is whether a capital subsidy received by the assessee company should reduce the cost of its fixed assets for depreciation purposes for the Assessment Year (AY) 2014-15.

During the assessment year in consideration, the assessee company filed its income tax return (ITR), declaring the total income of Rs. 5.45 crore. The AO (Assessing Officer) selected the case for scrutiny. It was noted that the assessee had received a capital subsidy worth Rs. 4.86 crore from the Government of India under the Ministry of New and Renewable Energy (MNRE) scheme for establishing Small Hydro Power (SHP) projects in Himachal Pradesh and Haryana. The subsidy was granted to encourage setting up renewable energy projects and was linked to installed capacity (MW), not to the purchase price of specific machinery. The assessee considered this subsidy as a capital receipt and did not reduce the amount from the cost of fixed assets, and hence claimed full depreciation on it.

During scrutiny, AO noted that since the assessee had been given a subsidy on plant and machinery, it should be reduced from the actual cost of assets under Section 43(1). But the assessee did not do so. As a result, AO disallowed the claimed depreciation of Rs. 72.90 lakh (15% of Rs. 4.86 crore). When the case was taken to the CIT(A), the Commissioner of Income Tax (Appeals) [CIT(A)] upheld the disallowance, relying on the same section 2(24)(xviii).

Thereafter, the assessee company approached the ITAT Delhi. After hearing arguments from both sides, the tribunal noted that although the subsidy was released for the promotion of renewable projects, it was not to meet the cost of plant and machinery. It was only a mechanism for the release of incentive, not a payment towards asset cost. To announce the final decision, the tribunal relied on earlier judgements of the Supreme Court and ITAT, including cases titled CIT v. P.J. Chemicals Ltd. and Sasisri Extractions Ltd., all favouring the assessee, ruling that subsidies meant to promote any industrial development should not be deducted from actual cost for the purpose of depreciation.

The Tribunal also held that section 2(24)(xviii) is effective from the AY 2016-17 and cannot be applied to retrospective AYs; hence, it is not applicable to the present case either. In conclusion, the Tribunal held the Assessing Officer wrong for disallowing depreciation of Rs. 72.90 lakh. Allowed all the grounds raised by the assessee and allowed the appeal in full.