The Hindu Business Line : Tax effect on shifting an undertaking

The recent imbroglio relating to Nano project of Tata Motors and eventual pullout from Singur and relocation at Sanand, Gujarat, throws up some interesting tax issues. Shifting an undertaking from one location to another has tax implications that are general in nature and do not have any particular reference to Nano pullout from Singur.

Plant and machinery

Expenditure towards shifting of plant and machinery does not add to the value of asset nor brings any enduring benefit to the taxpayer. In Joint CIT vs ITC Ltd (2008 112 ITD 57 Kol. SB) it was held that by shifting if the machineries are put to efficient utilisation then such expenditure is deductible as revenue expenditure.

Contrary decisions could be found in CIT vs Otis Elevator Co (I) Ltd (1990 51 Taxman 443 Bom.) / India Pistons Repco Ltd vs CIT (1983 143 ITR 424 Mad.).

Employees

When an undertaking is shifted from one location to another, valuable human resource has to be shifted notwithstanding a small portion of employees being left out on such shifting due to variety of reasons. The expenditure incurred towards shifting of employees was held as revenue expenditure in CIT vs Bimetal Bearings Ltd (1994) 210 ITR 945 (Mad.).

Compensation to employees: Where some of the employees decide not to get relocated consequent to shifting of undertaking, the employer may pay compensation. This compensation whether eligible for deduction as revenue expenditure was decided in the affirmative in CIT vs Margarine & Refined Oils Co Ltd (2006 154 Taxman 95 Karn.).

In this case, the employer continued to carry on business and hence the retrenchment compensation paid to the employees was held as expenditure incurred wholly and exclusively for the purpose of business.

Abandoning of assets

A taxpayer would not abandon an asset unless it is not capable of being shifted — an example could be a civil work water tank/sump beneath the ground. Where an asset fully constructed is abandoned it is a capital loss. However, it is not a capital loss in contradistinction to the term capital gain.

Unless an asset is transferred there cannot be a capital loss except certain exceptions such as those given in Section 45(1A). Value of assets abandoned by the taxpayer is not a capital loss eligible for any set off benefit but is a capital loss in the sense of erosion of capital. It cannot be set off against taxable capital gain (J.P.Srivastava & Sons v. CIT (1972 86 ITR 730 All.).

Damaged assets

Where an asset is damaged and compensation from insurance company is received, it amounts to transfer in view of Section 45(1A). However, the damage must be due to any of the exigencies mentioned in the Section.

If the Singur crisis is taken as civil disturbance then any amount received due to damage or destruction of capital asset is chargeable to capital gains.

However, in the case of depreciable assets because of block asset concept, the insurance compensation would go to reduce the block value, which might again increase due to subsequent acquisitions.

Tax incentives: If an undertaking eligible for Section 10AA benefits is shifted to yet another place being another SEZ then the tax benefit might not be denied as the further proviso to Section 10 AA (3) covers such contingency. However, a unit having remained in a non-SEZ is subsequently shifted to a SEZ then in view of Section 10 AA (4), the tax incentive could be denied.

Subsidy in respect of power, etc: In respect of any revenue subsidy such as concessional power tariff, exemption from local taxes, etc, the taxpayer would be having higher operating income.

Hence, the revenue subsidies by way of concession would indirectly result in inflated profits being chargeable to tax. No separate tax provision is necessary for taxing such concessional subsidies.

Capital subsidy: In the case of capital subsidy granted to meet the cost of plant, machinery, etc., the subsidy so granted would go to reduce the cost of assets as per Explanation 10 to Section 43 and the resultant impact on depreciation claim.

(The author is an Erode-based chartered accountant.)

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