Taxpublishers.in - Monday Corner Answer to the Quiz for the week (02 Dec 2024)

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Quiz for the week (02 Dec 2024): Prasad (P) Ltd is engaged in manufacturing activity. In April, 2024 it acquired a machine 'M' for Rs.50 lakhs from a machinery manufacturing company. The supply was delayed by 2 months. The supplier therefore gave waiver of Rs.4 lakhs to compensate the delay as per purchase order / agreement. In October, 2024 it also placed an order for another machinery 'P' from yet another manufacturer for Rs.30 lakhs. The supplier voluntarily waived Rs.3 lakhs due from the assessee in spite of there being no delay or defect in supply. Both the machineries were put to use from 1st December,2024. Explain how the amounts waived would impact Prasad (P) Ltd. Best Answer : The above query poses two situations where the suppliers of capital assets i.e. machineries have waived a part of the sale proceeds payable by the buyer i.e. assessee. Reference is invited to section 43(1) which says "actual cost" means the actual cost of asset to the assessee as reduced by that portion of the cost thereof, if any, met directly or indirectly by any other person or authority. Therefore, the cost of the asset is reduced when it is partly met by some other person. One may also take note of section 2(24)(xviii) which says that assistance in the form of a subsidy or grant or cash incentive or duty drawback or waiver or concession or reimbursement (by whatever name called) by the Central Government or a State Government or any authority or body or agency in cash or kind to the assessee is taxable as income except where such subsidy or grant or reimbursement is taken into account for determination of the actual cost of the asset in accordance with the provisions of Explanation 10 to section 43(1). Explanation 10 to section 43(1) says that where a portion of the cost of an asset acquired by the assessee has been met directly or indirectly by the Central Government or a State Government or any authority established under any law or by any other person, in the form of a subsidy or grant or reimbursement (by whatever name called), then, so much of the cost as is relatable to such subsidy or grant or reimbursement shall not be included in the actual cost of the asset to the assessee. ICDS V relating to tangible fixed assets in paragraph 6 says that the cost of a tangible fixed asset may undergo changes subsequent to its acquisition or construction on account of (i) price adjustment, changes in duties or similar factors; or (ii) exchange fluctuation as specified in Income Computation and Disclosure Standard on the effects of changes in foreign exchange rates. Since the acquisition of asset and waiver of amounts relate to same accounting year, the rationale of the decision in the case of Shapers India (P) Ltd. v. Dy. CIT 2021 TaxPub(DT) 5475 (Pune-Trib) could not be applied. In Shree Digvijay Cement Co. Ltd. v. CIT (1982) 138 ITR 45 (Guj) : 1982 TaxPub(DT) 0646 (Guj-HC) it was held that amount paid as compensation by the seller to the buyer for the delayed delivery of machinery was taxable as trading receipt. However, in this case there is no payment by the supplier to the buyer. Since it is stated that the waiver is for the delayed supply of machinery and to compensate the loss due to delay in delivery of machinery. Therefore, Rs.4 lakhs waived for machinery 'M' is taxable as revenue receipt. The actual cost of asset would be Rs.50 lakhs which is eligible for depreciation. Whereas in the case of waiver for machinery 'P' it is not liable to tax as it was a voluntary act of the supplier to forego the amount due. Thus, the amount forgone by the supplier if supported by way of discount, credit note and consequent adjustment of GST input credit, the net amount would be the actual cost which is eligible for depreciation.

Quiz for the week (02 Dec 2024):

Prasad (P) Ltd is engaged in manufacturing activity. In April, 2024 it acquired a machine 'M' for Rs.50 lakhs from a machinery manufacturing company. The supply was delayed by 2 months. The supplier therefore gave waiver of Rs.4 lakhs to compensate the delay as per purchase order / agreement. In October, 2024 it also placed an order for another machinery 'P' from yet another manufacturer for Rs.30 lakhs. The supplier voluntarily waived Rs.3 lakhs due from the assessee in spite of there being no delay or defect in supply. Both the machineries were put to use from 1st December,2024.

Explain how the amounts waived would impact Prasad (P) Ltd.

Best Answer :

The above query poses two situations where the suppliers of capital assets i.e. machineries have waived a part of the sale proceeds payable by the buyer i.e. assessee. Reference is invited to section 43(1) which says "actual cost" means the actual cost of asset to the assessee as reduced by that portion of the cost thereof, if any, met directly or indirectly by any other person or authority. Therefore, the cost of the asset is reduced when it is partly met by some other person.

One may also take note of section 2(24)(xviii) which says that assistance in the form of a subsidy or grant or cash incentive or duty drawback or waiver or concession or reimbursement (by whatever name called) by the Central Government or a State Government or any authority or body or agency in cash or kind to the assessee is taxable as income except where such subsidy or grant or reimbursement is taken into account for determination of the actual cost of the asset in accordance with the provisions of Explanation 10 to section 43(1).

Explanation 10 to section 43(1) says that where a portion of the cost of an asset acquired by the assessee has been met directly or indirectly by the Central Government or a State Government or any authority established under any law or by any other person, in the form of a subsidy or grant or reimbursement (by whatever name called), then, so much of the cost as is relatable to such subsidy or grant or reimbursement shall not be included in the actual cost of the asset to the assessee.

ICDS V relating to tangible fixed assets in paragraph 6 says that the cost of a tangible fixed asset may undergo changes subsequent to its acquisition or construction on account of (i) price adjustment, changes in duties or similar factors; or (ii) exchange fluctuation as specified in Income Computation and Disclosure Standard on the effects of changes in foreign exchange rates.

Since the acquisition of asset and waiver of amounts relate to same accounting year, the rationale of the decision in the case of Shapers India (P) Ltd. v. Dy. CIT 2021 TaxPub(DT) 5475 (Pune-Trib) could not be applied.

In Shree Digvijay Cement Co. Ltd. v. CIT (1982) 138 ITR 45 (Guj) : 1982 TaxPub(DT) 0646 (Guj-HC) it was held that amount paid as compensation by the seller to the buyer for the delayed delivery of machinery was taxable as trading receipt. However, in this case there is no payment by the supplier to the buyer.

Since it is stated that the waiver is for the delayed supply of machinery and to compensate the loss due to delay in delivery of machinery. Therefore, Rs.4 lakhs waived for machinery 'M' is taxable as revenue receipt. The actual cost of asset would be Rs.50 lakhs which is eligible for depreciation.

Whereas in the case of waiver for machinery 'P' it is not liable to tax as it was a voluntary act of the supplier to forego the amount due. Thus, the amount forgone by the supplier if supported by way of discount, credit note and consequent adjustment of GST input credit, the net amount would be the actual cost which is eligible for depreciation.