Govt Grants Received in Lieu of FRP need not be Reduced from Cost of Capital Assets: ITAT [Read Order]

The Ahmedabad Bench of Income Tax Appellate Tribunal (ITAT) has held that the government grants received in lieu of Financial Restructuring Plant (FRP) need not be reduced from the cost of capital assets.

The case of the assessee, Gujarat Urja Vikas Nigam Ltd was reopened exercising revisionary jurisdiction finding the assessment order to be erroneous causing prejudice to the Revenue on account that the Book Profits of the assessee, for the purposes of paying taxes thereon under Section 115JB of the Income Tax Act, having not been enhanced by the depreciation, to the tune of Rs.29.28 crores, was incorrectly allowed to be set off against the same by the AO.

The case of the Principal Commissioner of Income Tax (PCIT) being that Government grant of Rs.250 crores received by the assessee was taken to reserves & surplus, when as per the applicable Accounting Standards, it should have gone to reduce value of the asset and as a consequence reduce the assessee’s claim of depreciation to the tune of Rs.29.28 crores and that resultant book profits of the assessee for the purpose of paying taxes as per Section 115JB of the Income Tax Act to be enhanced to the extent of Rs.29.63 crores on account of incorrect claim of depreciation allowed to the assessee.

The PCIT was of the view that the government grant of Rs.250 Crs received by the assessee during the year ought to have been accounted for by reducing the value of Fixed assets, as per normal accounting principles/standards, which would have resulted in wiping off the entire fixed assets entitling the assessee to no claim of depreciation.

M.J. Shah, who appeared for the assessee submitted that it was explained to the PCIT that this grant had been received from the State Government in terms of Financial Restructuring Plant (FRP) of the Electricity Transmission Bodies and was to be passed to these entities; that the assessee had no fixed assets, and that the assessee had rightly accounted for the grants as Reserves & Surplus which was in accordance with prescribed Accounting Standards AS-12; that the book profits of the assessee therefore required no adjustment to be made on account of depreciation allowed to the assessee.

It was also pointed out that the AO had made addition on account of the said grants while computing income liable to tax as per normal provisions of the Income Tax Act as per section 143(1) of the Income TaxAct, which was of no consequence for the purposes of computing the Book Profits for the purposes of section 115JB of the Income Tax Act.

Vijay Kumar Jaiswal, on behalf of the revenue, supported the order of the PCIT.

The two-member Bench of Annapurna Gupta, (Accountant Member) and Madhumita Roy, (Judicial Member), held that no error in the assessment order was for not enhancing the Book Profits of the assessee by the depreciation element of the government grants received. 

The Bench further observed that the grants were received in lieu of FRP of the subsidiary and therefore held that the Book Profits of the assessee had been correctly computed in terms of applicable accounting standards and the finding of error by the PCIT was therefore incorrect with reference to the decision in Dakshin Gujarat Vij Co. Ltd.

To Read the full text of the Order CLICK HERE

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