1995 (4) TMI 5 - HC - Income Tax

Actual Cost, Borrowed Capital, Capital For Purposes, Computation Of Capital, Industrial Undertaking, Special Deduction

Summary

Issues:
1. Interpretation of subsidy as a loan or capital receipt for the purpose of deduction under section 80J of the Income-tax Act, 1961.
2. Determining the eligibility of subsidy amount for deduction under section 80J as part of the assessee's capital contribution.

Analysis:
The case involved the interpretation of the nature of a subsidy granted to an assessee for the assessment year 1982-83 under section 80J of the Income-tax Act, 1961. The assessee claimed a deduction under section 80J by treating the subsidy amount as part of the capital employed by the firm. The assessing authority rejected the claim, considering the subsidy as a cost contributed towards capital assets and not part of the capital employed by the assessee. The Appellate Assistant Commissioner allowed the claim, directing the Income-tax Officer to recompute the deduction without reducing the subsidy value. In the subsequent appeal before the Tribunal, it was found that the subsidy was granted for the establishment of the industry and not towards any specific asset, leading to a dispute on the nature of the subsidy.

The Tribunal referred two questions of law to the High Court for consideration. Firstly, whether the subsidy should be treated as a loan until a period of five years from the grant, and secondly, whether the deduction under section 80J on the subsidy amount was permissible as the assessee's capital contribution. The High Court analyzed the provisions of section 80J, highlighting that borrowed capital is excluded from the definition of capital employed, and the subsidy received cannot be categorized as borrowed money or debt owed by the assessee. The Court emphasized that the subsidy merges with the capital employed by the industrial undertaking and should not be excluded from the actual cost calculation under section 43(1).

The Court also referred to a Supreme Court judgment regarding the interpretation of "actual cost" and the nature of government subsidies as incentives not specifically aimed at meeting the cost of assets. Additionally, the Court cited a previous decision where it was held that a subsidy cannot be considered a loan. Relying on these precedents and statutory provisions, the High Court concluded that the Tribunal erred in treating the subsidy as a loan until the completion of five years and in denying the deduction under section 80J based on the nature of the subsidy as the assessee's capital contribution.

Therefore, the High Court ruled in favor of the assessee, holding that the subsidy should be considered a capital receipt, not a loan, and that the deduction under section 80J on the subsidy amount was permissible as part of the capital employed. The judgment favored the assessee, rejecting the Revenue's appeal and providing no order as to costs.