1990-VIL-527-RAJ-DT

Equivalent Citation: [1991] 191 ITR 494, 91 CTR 49, 56 TAXMANN 103

RAJASTHAN HIGH COURT

Date: 12.09.1990

COMMISSIONER OF INCOME-TAX

Vs

AMBIKA ELECTROLYTIC CAPACITORS PVT. LIMITED AND OTHERS

BENCH

Judge(s)  : A. K. MATHUR., K. C. AGARWAL 

JUDGMENT

The judgment of the court was delivered by

A. K. MATHUR J. -All these references mentioned in the schedule appended to this order involve a common question of law, and, therefore, they are disposed of by this common judgment. Arguments were heard at the principal seat at Jodhpur as well as at the Bench at Jaipur.

In order to appreciate the controversy involved in all these references, the facts of D. B. Income-tax Reference No. 20 of 1984 CIT v. Ambica Electrolytic Capacitors Pvt. Ltd., jodhpur, are taken into consideration for the convenient disposal of all these references:

The facts giving rise to this reference are that the assessee received subsidy from the Central Government twice in different amounts. The Income-tax Officer allowed depreciation on building, plant and machinery after excluding these two amounts of subsidy. The contention of the assessee was that the subsidy was not given by the Central Government to meet the cost of assets directly or indirectly within the meaning of section 43(1) of the Income-tax Act, 1961 (referred to hereinafter as "the Act"), and, therefore, for allowing the depreciation, these two amounts of subsidy should not be deducted from the cost of the assets. It was urged that the subsidy was given by the Government just as an incentive to the assessee with a view to promote industrial growth in backward areas. On appeal, the Appellate Assistant Commissioner, relying on the orders of the Appellate Tribunal, accepted the contention of the assessee and directed the Incometax Officer to allow depreciation on building, plant and machinery on the full cost without deducting the amounts of subsidy. On appeal by the Revenue, the Tribunal, relying on a decision of the Jaipur Bench in the case of Laxmi Udyog [1980] 18 CTR (Trib) 27 and a decision of a special Bench of the Tribunal in the case of Pioneer Match Works [1983] 15 TTJ 88 (Mad) in which the former decision was relied on and approved, upheld the order of the Appellate Assistant Commissioner, because he also relied on the same decisions. Before the Tribunal, the Revenue relied on a decision of the Calcutta High Court in the case of jeewanlal (1929) Ltd. v. CIT [1983] 142 ITR 448. This was distinguished. On these facts and circumstances of the case, the Tribunal referred the following question for opinion to this court under section 256 of the Income-tax Act, 1961:

"Whether, on Vie facts and in the circumstances of the case, the Tribunal was justified in law in holding that the Central Government subsidy is not deductible from the money cost to the assessee of its plant and machinery while computing the actual cost thereof under section 43(1) of the Income-tax Act, 1961, for purposes of allowing depreciation?"

The case of the Revenue is that the subsidy/investment subsidy does not become part of the assessee's total assets and, therefore, it would not come within the definition of actual cost and this amount can be deducted for the purpose of granting the benefit of depreciation thereby reducing the quantum of deduction by way of depreciation allowance from the gross profit for the purpose of arriving at the net taxable income. As against this, the contention of the assessee was that since this grant has been made as an encouragement to the assessee in selected areas, it will form part of the actual cost of the unit and as such it will come within the definition of actual cost so as to entitle the assessee to the benefit of depreciation allowance.

We have considered the rival contentions of learned counsel for the parties.

In order to answer this question, it is necessary to refer first to section 43(1) of the Act as well as the provisions under which subsidy is granted by the Central Government. Section 43(1) of the Act, which is relevant for our purposes, reads as under:

"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 subsidy is granted by the Government of India through the Ministry of Industrial Development by its notification dated August 26, 1971. The broad features of the Scheme which are necessary for our purpose is reproduced as under:

"The Government of India are pleased to make the following scheme of 10 per cent. Central grant or subsidy for industrial units to be set up in certain selected backward districts/areas with a view to promoting the growth of industries there.

1. Short title. -This scheme may be called the 10 per cent. Central Outright Grant or Subsidy Scheme, 1971, for industrial units to be set up in selected backward districts/ areas.

2. Commencement and duration. -It will come into effect from the 26th August, 1971, and remain in force for the remaining period of the Fourth Five Year Plan and for such further period as may be decided by the Government of India.

3. Applicability. -It is applicable to industrial units in selected districts/areas as defined in the scheme, other than those whose total fixed capital investment would exceed Rs. 50 lakhs. In the case of units involving total fixed capital investment exceeding Rs. 50 lakhs, the scheme might be made applicable on consideration of merits at the discretion of the Government of India or the State/Union Territory.

4. Definition. -(a) 'Industrial unit' means any industrial undertaking and suitable servicing unit, other than that run departmentally by Government.

(b) 'new industrial unit' means an industrial unit for the setting up of which effective steps were not taken prior to 1 st October, 1970.

(c) 'existing industrial unit' means an industrial unit for the setting up of which effective steps were taken prior to 1 st October, 1970,

(d) 'substantial expansion' means increase in the value of fixed capital investment of an industrial unit by not less than 25 per cent. for the purpose of expansion of capacity, modernisation, etc.

(e) 'effective steps' means one or more of the following steps:

(I) that 60 per cent. or more of the capital issued for the industrial unit has been paid.

(II) that a substantial part of the factory building has been constructed.

(III) that a firm order has been placed for a substantial part of the plant and machinery required for the industrial unit.

(f) 'fixed capital investment' means investment in lands, building and plant and machinery.

Total fixed capital investment will be assessed as follows:

(1) Land:

The actual price paid for the land to the extent needed for the purposes of the plant. Charges for the leased land will not be taken Into account.

(2) Building:

Same as in the case of land. Rent of a hired building will not be taken into account.

(3) Plant and machinery:

(i) In calculating the value of plant and machinery the cost of plant and machinery as erected at site will be taken into account, which will include the cost of productive equipment, such as tools, jigs, dies, moulds, transport charges, demurrage, insurance premium, etc., will also be taken into account.

(ii) The amount invested on goods carriers to the extent they are actually utilised for transport of raw materials and marketing of the finished products will be taken into account.

(iii) Working capital including raw materials and other consumable stores will be excluded for computing the value of plant and machinery."

It is further laid down as to how the total fixed capital investment will be assessed and for which detailed guidelines have also been provided, as reproduced above. After this, the Government also came forward with another scheme of 15 per cent. Central Investment Subsidy Scheme which reads as under:

"MANUAL FOR 10-15% CENTRAL INVESTMENT SUBSIDY SCHEME

1. Introduction

1.1. Government of India had announced in 1971 a scheme for Central outright grant/subsidy for the industrial units to be set up in selected backward districts/areas. A copy of the scheme published, vide Notification No. F. 7(15)/71-IC in Part I, Section I, of the Gazette of India Extraordinary dated 26-8-1971, as amended, vide notification of 30th September, 1972, and 19th June, 1973, is attached at Annexure I. During the course of implementation of the scheme over the past few years, some liberalisation had been introduced in the scheme. Some further changes have also been incorporated herein with a view to ensuring quicker disbursement and reimbursement of Central Investment Subsidy to the industrial units. Eligibility and procedures for claiming disbursement and reimbursement, etc., of the Central Investment Subsidy are dealt with in the succeeding sections.

Detailed procedure has been given for such Central Investment Subsidy Scheme also. This Central Investment Subsidy Scheme is almost on the same lines as was the Central Subsidy Scheme floated by the Government of India for backward areas by the notification dated August 26, 1971. Therefore, it is not necessary to reproduce the Scheme. The same governing principles have been adopted.

Now, a perusal of the scheme shows that this subsidy/investment subsidy was given to the industrial units in certain backward districts/areas with a view to promoting the growth of industries in those areas. It is the Government which is to select the backward districts/areas where this subsidy is to be given. This subsidy is to be given to those selected backward districts/areas where the industrial undertaking and suitable servicing units are to be established and they are not run departmentally by the Government. It is further clarified that new industrial unit means an industrial unit for which effective steps were not taken prior to October 1, 1970. For the existing industrial unit, it is clarified that, for the setting up of such units, effective steps should have been taken prior to October 1, 1970. It shows that the units must have been established prior to October 1, 1970, or that effective steps were taken for setting up the industrial unit prior to October 1, 1970. The first and foremost thing for implementing this scheme was that the Government has to select the units for promoting the growth of industries. Therefore, this was, as a matter of fact, an incentive to the entrepreneur so as to promote the growth of industrial units in backward areas. In this background, we will have to see whether such investment shall form part of the actual cost within the meaning of section 43(1) of the Act or not. Section 43(1) defines the expression "actual cost". The actual cost of the assets to the assessee is to be worked out by reducing the cost, if any, as has been met directly or indirectly by any other person or authority. In the present case, the subsidy which has been given to the assessee is in the nature of an encouragement or incentive in order to attract the entrepreneurs for developing industrial growth in backward districts or areas. But it is, as a matter of fact, an encouragement for the upcoming industries in backward areas. Another significant feature of this scheme is that 10% or 15% central investment subsidy is given to the entrepreneurs provided they fulfil the minimum requirements as mentioned above and this subsidy is not qualified in any manner that they will invest this subsidy on a particular item. It is an ex gratia encouragement allowance to the industries in the selected backward areas or districts. A detailed method has been laid down as to how this 10% or 15% subsidy will be given. In order to arrive at this amount of subsidy firstly the amount of fixed capital investment of the assessee will be arrived at on the basis of investment on land, machinery, etc. Thereafter, subsidy will be given on that amount.

Subsidy has been defined in New Oxford Illustrated Dictionary as "financial aid given by Government towards expenses of an undertaking or institution held to be of public utility, or to producers of commodities, etc., to enable goods or services to be provided at lower cost to consumer". In Webster's New Twentieth Century Dictionary Unabridged, Second Edition, one of the meanings of the word "subsidy" is "a grant of money from a Government to a private enterprise considered as beneficial to the public". In Random House Dictionary of the English Language, Unabridged Edition, one of the meanings of the word "subsidy" is "a direct pecuniary aid furnished by a Government to a private industrial undertaking, charity Organisation, or the like". From the definition of subsidy, it appears that it is in the nature of a pecuniary assistance to entrepreneurs by the Government so as to encourage the establishment of industries in backward areas. Therefore, such subsidy/investment subsidy cannot be excluded from the actual cost. This assistance will certainly form part of the total assets of the assessee.

First, we shall take into consideration the cases cited by learned counsel in favour of the assessee supporting their contention which supports the view which we have taken above.

In CIT v. Godavari Plywoods Ltd. [1987] 168 ITR 632, a similar question came up before the Andhra Pradesh High Court and the Division Bench answered the question in favour of the assessee. It was observed as under (headnote):

"A perusal of the Central Subsidy Scheme, 1971, as well as the Andhra Pradesh State Incentive Scheme, 1976, shows that the financial incentives granted by the Central Government as well as the State Government are basically directed to encourage and induce entrepreneurs to move to backward areas and establish industries there so that the region may develop in promoting the welfare of the people living in that region. There is no provision either in the Central Subsidy Scheme or in the State Incentive Scheme to show that the entrepreneurs are granted the subsidy for the specific purpose of meeting a portion of the cost of the assets. Under both the schemes, the cash subsidy is quantified by determining the same at a specified percentage of the fixed capital cost. The specified percentage of the fixed capital cost taken as the basis for determining the subsidy is only a measure adopted under the scheme to quantify the subsidy. The subsidy is granted more as a recompense for the hardships and inconveniences which the entrepreneur may encounter while setting up industries in backward areas. The subsidy cannot be deducted from the actual cost of the assets to the assessee. Depreciation should be allowed on the actual cost of the assets without reducing the same by the amount of subsidy granted. "

Similarly, in CIT v. Bhandar Capacitors Private Ltd. [1987] 168 ITR 647, the Madhya Pradesh High Court has also taken the same view. Division Bench of the Madhya Pradesh High Court also answered the question in favour of the assessee. It was observed as under (headnote) :

"There is no provision in the Central Subsidy Scheme, 1971, or in the State Incentive Scheme to indicate that the entrepreneurs setting up industries in backward areas are granted the subsidy for the specific purpose of meeting a portion of the cost of the assets. The cash subsidy is quantified by determining the same at a specified percentage of the fixed capital cost. The basis adopted for determining cash subsidy with reference to the fixed capital cost is only a measure adopted and cannot make the subsidy one for the specific purpose of meeting any portion of the fixed capital cost. Therefore, the amount of capital subsidy is not deductible in computing the actual cost of the asset, as defined by section 43(1) of the Act, for the purpose of calculating the depreciation and investment allowance admissible to the assessee."

The Madhya Pradesh High Court agreed with the reasoning given by the Andhra Pradesh High Court in Godavari Plywoods' case [1987] 168 ITR 632.

Similarly, the Karnataka High Court has also taken the same view in CIT v. Diamond Dies Manufacturing Corporation Ltd. [1988] 172 ITR 655 as has been taken by the Andhra Pradesh and the Madhya Pradesh High Courts. The Karnataka High Court has also followed the view taken by the Andhra Pradesh High Court in the case of Godavari Plywoods Ltd. [1987] 168 ITR 632. It was observed as under (headnote) :

"The scheme for the grant of subsidy was to develop industries in selected backward areas. On a perusal of the scheme, it was clear that the subsidy amount granted was a percentage of the total fixed capital investment, which was taken only as a measure for quantifying the subsidy. From the pro forma prescribed under the scheme to find out the total fixed capital investment, it could be seen that in addition to land, building, plant, machinery, other assets on which depreciation was not admissible, such as tools, goods carriers, promotional and pre-operative expenses capitalised or to be capitalised and margin money for working capital, were also included. Nowhere had the scheme provided as to how the subsidy should be utilised and for which assets. It was open to the assessee to legitimately reduce the cost of land in its books of account to the full extent of the subsidy, in which case the cost of plant and machinery would remain at invoice price uninfluenced by the amount of subsidy. The amount received by way of subsidy could be utilised for any purpose such as acquiring land on which no depreciation was admissible or on plant and machinery or for erection of buildings or for working capital or for repaying the loans already borrowed. Hence, unless the subsidy received had a nexus, direct or indirect, to meet a portion of the actual cost of any specific capital asset, it could not be brought within the purview of section 43(1) of the Act. Therefore, the subsidy could not be deducted from the actual cost of the assets to the assessee and depreciation should be allowed without reducing the same by the amount of subsidy granted. "

Similarly, the Kerala High Court in CIT v. Relish Foods [1989] 180 ITR 454, observed as under (headnote):

"The subsidy received from the Government for setting up an industry in a backward area is really an incentive. It has nothing to do with the cost of a particular asset. The subsidy cannot, therefore, be deducted from the cost of assets for the purpose of allowing depreciation and development rebate on such assets or for computation of relief under section 80J of the Income-tax Act, 1961."

In CIT v. Grace Paper Industries Pvt. Ltd. [1990] 183 ITR 591, Division Bench of the Gujarat High Court has also taken the same view. It was observed as under (headnote) :

"The Central Government as well as the State Government noticed that areas specified as backward areas and tribal areas were undeveloped or underdeveloped and entrepreneurs were not willing to set up industries in such undeveloped or underdeveloped areas. The Government, therefore, decided to give financial incentives to encourage and induce entrepreneurs to move to backward areas and establish industries there so that the region may develop and promote the welfare of the people living in that region One of the incentives which the Government decided to grant was cash subsidy. The dictionary meaning of 'subsidy' is 'a grant of money from Government to a private enterprise considered as beneficial to the public'. The Government, in order to determine the amount of cash subsidy, decided to follow one of the recognised methods of working it out on the basis of the amount invested by an entrepreneur in acquiring capital assets and specified a certain percentage of the amount so invested in the capital assets as cash subsidy. The basis adopted for determining the cash subsidy with reference to the cost or value of fixed assets was only a measure for quantifying the subsidy and the subsidy was not given for the special purpose of meeting any portion of the cost of the fixed assets. Consequently, the subsidy did not form part of the actual cost of plant and machinery within the meaning of section 43 of the Income-tax Act, 1961. It cannot be deducted from the cost of assets in computing depreciation, development rebate and investment allowance."

The Gujarat High Court has also placed heavy reliance on the decision given by the Andhra Pradesh High Court in Godavari Plywoods Ltd. [1987] 168 ITR 632, and the Madhya Pradesh High Court in Bhandari Capacitors P. Ltd. [1987] 168 ITR 647. They have also followed the decision of the Karnataka and Kerala High Courts in Diamond Dies Manufacturing Corporation Ltd. [1988] 172 ITR 655 and Relish Foods [1989] 180 ITR 454 respectively.

Learned counsel has also invited our attention to the subsequent decisions of the Madhya Pradesh High Court in CIT v. Steel Tubes of India (P.) Ltd. [1989] 180 ITR 159 ; CIT v. Steel Ingots (P.) Ltd. [1990] 181 ITR 42 and CIT v. Steel Tubes of India Ltd. [1990] 181 ITR 90 reiterating the same view as was taken in the case of Bhandari Capacitors Pvt. Ltd. [1987] 168 ITR 647 (MP). Therefore, the Andhra Pradesh, Madhya Pradesh, Karnataka, Gujarat and Kerala High Courts have taken the view that such subsidy shall not be deducted in computing the actual cost of the assets for the purpose of calculating the depreciation allowance admissible to the assessee.

As against this, learned counsel for the Revenue has invited our attention to CIT v. Jindal Brothers Rice Mills [1989] 179 ITR 470 (P & H). The Punjab and Haryana High Court has taken the view that the amount of subsidy received by the assessee shall be deducted from his assets for arriving at the actual cost. With utmost respect, we do not agree with the view taken by the Punjab and Haryana High Court. More so, the Central Scheme which has been reproduced above shows that the subsidy or the investment subsidy was not given item-wise. The Punjab Government issued a notification on March 21, 1979 and, under that Scheme, subsidy was given to the various units and there also it was laid down that the subsidy will be given at the rate of 15 per cent. of the fixed capital investment made by the unit in certain specified areas. 15 per cent. of the fixed capital investment was to be assessed on the basis of land, building etc., as was in the case of the notification of the Central Government of 1971. As a matter of fact, that was only a mode to arrive at 15% on the basis of the fixed capital investment. This was only a mode to arrive at the percentage of the subsidy but unfortunately the learned judges have taken it to mean that when the Government has specified in the investment policy that 15% of the cost of the plant, machinery and building would be provided by the State Government, the underlying object is to reduce the value of the plant, machinery and building by 15% of the actual cost. This line of reasoning, with due respect, is not correct. In fact, it was a mode to arrive at 10% or 15% of the subsidy on the land, building and machinery. This 10% or 15% subsidy was wholly misconstrued by the hon'ble judges to mean as an investment on plant, building and machinery so as to reduce this amount from the actual cost. With great respect, we do not agree with the view taken by the Division Bench of the Punjab and Haryana High Court.

This case came up for consideration before the Gujarat High Court also in Grace Paper Industries Pvt. Ltd. [1990] 183 ITR 591 and the Gujarat High Court differed from the view taken by the Division Bench of the Punjab and Haryana High Court.

Our attention was also drawn to Ludhiana Central Co-operative Consumers' Stores Ltd. v. CIT [1980] 122 ITR 942 (P & H). In that case, the assessee-co-operative stores did not succeed in its venture and approached the Government for subsidy which was given in the sum of Rs. 15,719 (Rs. 2,500 for the delivery van, Rs. 1,250 for equipment and Rs. 11,969 for managerial and rental expenses) for the assessment year 1965-66, and Rs. 12,815 on account of managerial expenses for the assessment year 1967-68. The assessee's case for both the years in question was that the subsidy was a receipt of casual and non-recurring nature and was hence exempted from tax. The Income-tax Officer did not accept this contention. But, on appeal, the Appellate Assistant Commissioner upheld the claim. The Appellate Tribunal agreed with the Income-tax Officer and held that the receipts were revenue receipts. The Punjab and Haryana High Court held that it is a revenue receipt. But that case is distinguishable as, in that case, the subsidy was given item-wise and it was not a subsidy by way of an incentive for encouraging the entrepreneurs to establish their units in backward districts or areas. It was given for the purpose of grant for specific items like a delivery van, equipment and for managerial and rental expenses. As against this, the subsidy which has been given under the Central Scheme of 1971 or the investment subsidy was a subsidy to the entrepreneurs so as to attract them for establishing the industries in the selected backward districts/areas. Thus, this kind of subsidy cannot be equated with the case of Ludhiana Central Co-operative Consumers' Stores [1980] 122 ITR 942 (P & H). This case also came up for consideration before the Gujarat High Court in the case of Grace Paper Industries Pvt. Ltd. [1990] 183 ITR 591 and it was observed as under (at p. 608) :

"Since the subsidy was not granted to meet the cost of fixed assets or a portion thereof, there is no question of it taking the colour of the cost of the fixed assets. It is the character of the receipt that has to be considered. Here, the subsidy, though based on the cost of fixed assets, was not to meet the cost of the fixed assets, but was given as an incentive, cost being only measure to quantify it. In our opinion, therefore, the said decision of the Punjab and Haryana High Court is of no assistance to the Revenue. "

We are in respectful agreement with the view expressed by the Gujarat High Court and we are also of the view that the case of Ludhiana Central Co-operative Consumers Stores Ltd. [1980] 122 ITR 942 (P & H) is distinguishable and cannot be of any assistance to the Revenue.

CIT v. J. K. Cotton Spinning and Weaving Mills Ltd. [1975] 98 ITR 153 (All) is not relevant for the present purpose as it was not a case of subsidy.

CIT v. Kaira District Co-operative Milk Producers' Union Ltd. [1979] 116 ITR 319 (Guj) does not also relate to subsidy. This was a case of grants-in-aid, which was found to be not included in the computation of the capital investment under the Income-tax Act, 1961.

CIT v. Dalmia Dadri Cement Ltd. [1980] 125 ITR 510 (Delhi) was also not a case of subsidy.

Rohtak and Hissar Districts Electric Supply Co.(P) Ltd. v. CIT [1981] 128 ITR 52 (Delhi) was also not a case of subsidy. In this case, it was held that since the assessment year was 1962-63, the "actual cost" had to be determined under section 43(1) of the Act of 1961 and the written down value as on April 1, 1961, had to be determined under that section. Therefore, the "actual cost" had to be determined after deducting the contributions received from consumers and, therefore, the written down value as on April 1, 1961, could not be the same as that on March 31, 1961.

In Jeewanlal (1929) Ltd. v. CIT [1983] 142 ITR 448 (Cal) one of the questions was whether the cash assistance received by exporters from the Government for the purpose of encouraging more exports constituted a revenue receipt or capital receipt and, in that context, it was found that this is a subsidy inextricably connected with the act of exportation. It was observed that this is incidental to and supplemental to trading receipts and this is to be treated as a revenue receipt. Therefore, the question whether the subsidy received from the Government should be treated as actual cost or not was the question before the Calcutta High Court.

Similarly, in Dhrangadhra Chemical Works Ltd. v. CIT [1977] 106 ITR 473 the same question came up for consideration before the Bombay High Court. The question was whether subsidy or grant received from the Government to assist the business should be treated as a revenue receipt or a casual or non-recurring receipt. The Bombay High Court, relying upon the test laid down in Ostime (H. M. Inspector of Taxes) v. Pontypridd and Rhondda Joint Water Board [1946] 14 ITR (Supp) 45; [1946] 28 TC 261 (HL), held that such receipts would clearly be treated as revenue receipts and the same shall be taken into account in arriving at the income, profits and gains of the business. In this case also, the question did not call for consideration as to whether such subsidy can be deducted or not from the actual cost of the industrial unit.

In CIT v. Ranchi Electric Supply Co. Ltd. [1954] 26 ITR 89 (Patna), it was observed that the effect of the amendment under the Amendment Act of 1953 is to nullify the decision of the Bombay High Court in Poona Electric Supply Co. Ltd.'s case [1946] 14 ITR 622. In that context, it was observed that, by means of the Amending Act, a new Explanation has been added to section 10(5)(c) which is in the following terms (at p. 97):

"For the purposes of this sub-section, the expression, '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 Government or by any public or local authority, and any allowance in respect of any depreciation carried forward under clause (b) of the proviso to clause (vi) of sub-section (2) shall be deemed to be depreciation 'actually allowed'."

This case also does not help the Revenue for the simple reason that before the Patna High Court, the question was what should be the effect of a general subsidy granted by the Government. Therefore, these stray observations will not be of any help to the Revenue which barely interpreted the text of the provision without regard to the nature of the subsidy.

Jogta Coal Co. Ltd. v. CIT [1959] 36 ITR 521 (SC) was a case in which the question was the interpretation of a sale deed and whether the goodwill purchased by the assessee can be taxed or not by the Income-tax Officer. It was held that goodwill is an asset well understood in business and capable of valuation. In this connection, it was held that the cost to be calculated for the purpose of depreciation allowance is the cost to the assessee and not to the person who sells to the assessee. It was observed that it was within the discretion of the Income-tax Officer to determine the cost which the assessee had actually incurred. It was for the Income-tax Officer to find out, in reality, what is the actual cost excluding the collusive, unduly inflated or fictitious cost. This case has no relevance whatsoever to the case in hand.

In the case of V. S. S. V. Meenakshi Achi v. CIT [1966] 60 ITR 253 (SC), the question was whether payments made by the Government out of the cess fund against the expenditure incurred by the assessee on the maintenance of plantations will be included in the income or is a capital receipt. In this context, it was observed that as the amount received from the fund earmarked for the assessee on the basis of the rubber produced by them were paid against the expenditure incurred by them for maintaining the rubber plantations and producing the rubber, the amounts received by the assessees were revenue receipts and, therefore, liable to be included in their assessable income. Here also, there was no question whether the grant given by the Government could be deductible from the actual cost or not.

CIT v. South Madras Electric Supply Corporation Ltd. [1977] 109 ITR 426 (Mad) was a case where the question was whether, after the amendment of the Income-tax Act of 1922, and the Income-tax Act, 1961, coming into force, the term "actual cost" occurring in section 43(1) should be applied only in respect of assets which came into existence on or after April 1, 1961. The Madras High Court took the view that the actual cost for the purpose of arriving at the written down value under section 43(6)(b) of the Act of 1961 for the assessment years 1962-63 onwards will be as defined in section 43(1) of the Act. It was further held that the contribution by the consumers towards the cost of house service connections should be deducted in arriving at the actual cost thereof. Thus, in this case, the question was whether, the contribution made by the consumers towards the cost of house service connections should be deducted or not in order to arrive at the actual cost. This was not a case of a subsidy or grant made by the Government. As such, this case has no relevance whatsoever with the case in hand.

In Lucknow Producers' Co-operative Milk Union Ltd. v. CIT [1983] 143 ITR 60 (All), the question was that when an assessee purchased capital assets with the help of a grant from Government, that grant or amount should be deducted from the actual cost or not for the purpose of arriving at depreciation. It was held that, in order to work out the depreciation, the amount of grant should be deducted from the cost of the assets. This was not a case subsidy, but it was a grant made by the Government which is different from that of subsidy to the backward areas.

CIT v. Bassein Electric Supply Co. Ltd. [1979] 118 ITR 884 (Bom); Ranchi Electric Supply Co. Ltd. v. CIT [1984] 150 ITR 95 (Patna) ; CIT v. Sahney Steel and Press Works Ltd. [1985] 152 ITR 39 (AP) and CIT v. Hides and Leather Products Pvt. Ltd. [1975] 101 ITR 61 (Guj), have no relevance whatsoever to the case in hand. All these cases are not of subsidy and as such they are distinguishable on that point.

Thus, from a survey of all the cases, which have been cited on behalf of the assessee and the Revenue, the consensus of opinion which emerges from the various decisions of the High Courts throughout the country is that the subsidy or investment subsidy given by the Government which is for development of industries in selected backward districts/areas cannot be deducted from the actual cost for giving the benefit of depreciation or investment allowance. As a matter of fact, the subsidy is a grant for encouraging entrepreneurs to come forward and develop the backward areas. As such, it cannot be deducted from the cost of the assets to the assessee for denying the benefit of depreciation or investment allowance.

Thus, we are in respectful agreement with the views expressed by the Andhra Pradesh, Gujarat, Karnataka and Kerala High Courts.

In the result, for the reasons mentioned above, we answer this reference and the references mentioned in the schedule appended with this judgment in favour of the assessee and against the Revenue.

 

DISCLAIMER: Though all efforts have been made to reproduce the order accurately and correctly however the access, usage and circulation is subject to the condition that VATinfoline Multimedia is not responsible/liable for any loss or damage caused to anyone due to any mistake/error/omissions.