1999 (7) TMI 62 - HC - Income Tax

Summary

Issues:
1. Whether Central subsidy can be reduced from the total cost of assets for computing the investment allowance.

Analysis:
The High Court of BOMBAY was presented with a reference under section 256(1) of the Income-tax Act, 1961, regarding the treatment of Central subsidy in computing the investment allowance. The assessee had installed plant and machinery and received a Central subsidy, leading to a revision of the investment allowance claimed. The Commissioner of Income-tax directed a modification of the assessment order, reducing the investment allowance. The Income-tax Appellate Tribunal, however, held that the Central subsidy should not be reduced from the total cost of assets for calculating the investment allowance, prompting the reference to the High Court.

The High Court considered the relevant facts and legal precedents, including the decision in CIT v. Menezes Farmaco, where it was held that the Central subsidy need not be deducted from the cost of plant and machinery for the purpose of determining the actual cost. The High Court also referred to the Supreme Court's decisions in CIT v. P. J. Chemicals Ltd. and Sahney Steel and Press Works Ltd. to distinguish the nature of the subsidy received by the assessee. It was emphasized that the Central subsidy was intended as an incentive for entrepreneurs and not as a payment to meet the actual cost of assets.

Based on the analysis of the purpose behind the Central subsidy scheme and the nature of the subsidy as an incentive for industrial development in backward areas, the High Court concluded that the Central subsidy should not be deducted from the total cost of assets for computing the investment allowance. The Court held that the character of the subsidy, whether revenue or capital, must be determined based on the purpose for which it is provided. Consequently, the High Court ruled in favor of the assessee, stating that the Central subsidy cannot be reduced from the total cost of assets for calculating the investment allowance. The reference was disposed of with a decision in favor of the assessee, with no order as to costs.