1994 (6) TMI 2 - HC - Income Tax

Actual Cost, Computation Of Capital, Income Tax Act, New Industrial Undertaking, Preliminary Expenses, Special Deduction

Summary

Issues:
1. Deductibility of subsidy from the cost of assets for depreciation under section 43(1) of the Income-tax Act, 1961.
2. Inclusion of preliminary expenses and government subsidy in the computation of capital employed for relief under section 80J of the Income-tax Act, 1961.

Analysis:
1. The case involved a limited company deriving income from manufacturing and selling caffeine, which received a subsidy under the Central Investment Subsidy Scheme. The Assessing Officer deducted the subsidy from the cost of plant and machinery for depreciation calculation. However, the Commissioner of Income-tax (Appeals) allowed depreciation on the full cost without deducting the subsidy. The Income-tax Appellate Tribunal upheld this decision, stating that the subsidy need not be deducted for depreciation under section 43 of the Act. The High Court referred to a previous judgment and affirmed that the subsidy was not deductible for depreciation, ruling in favor of the assessee on this issue.

2. Regarding the inclusion of preliminary expenses and government subsidy in the computation of capital employed for relief under section 80J of the Income-tax Act, the court analyzed the provisions of sub-section (1A) of section 80J. It was established that preliminary expenses could be capitalized as assets and included in the computation of capital employed. The court reasoned that such expenses fell under assets acquired otherwise than by purchase and not entitled to depreciation, thus forming part of the capital employed for relief under section 80J. Concerning the government subsidy, the court noted that the subsidy would only need to be refunded if the business closed within five years. As the business was ongoing, the subsidy did not qualify as "borrowed money" or a "debt owed by the assessee." Therefore, the subsidy amount should not be deducted from the assets for computing capital employed under section 80J. Consequently, the court held that both preliminary expenses and the government subsidy should be included in the computation of capital employed for the purpose of relief under section 80J, ruling in favor of the assessee on this issue as well.

In conclusion, the High Court answered both questions in favor of the assessee and against the Revenue, emphasizing that the subsidy need not be deducted for depreciation and that both preliminary expenses and the government subsidy should be included in the computation of capital employed for relief under section 80J.