1990 (9) TMI 24 - HC - Income Tax

Summary

Issues Involved:
1. Whether the Central Government subsidy is deductible from the cost of plant and machinery while computing the actual cost u/s 43(1) of the Income-tax Act, 1961, for purposes of allowing depreciation.

Summary:

Issue 1: Deductibility of Central Government Subsidy from Actual Cost u/s 43(1) for Depreciation
The primary issue in this case is whether the Central Government subsidy received by the assessee should be deducted from the cost of plant and machinery while computing the actual cost u/s 43(1) of the Income-tax Act, 1961, for the purpose of allowing depreciation.

The assessee argued that the subsidy was an incentive to promote industrial growth in backward areas and should not be deducted from the cost of the assets. The Income-tax Officer initially excluded the subsidy amounts while allowing depreciation, but the Appellate Assistant Commissioner and the Tribunal upheld the assessee's contention, relying on precedents such as Laxmi Udyog and Pioneer Match Works.

The High Court examined the definition of "actual cost" in section 43(1), which states that the actual cost of the assets to the assessee should be reduced by any portion of the cost met directly or indirectly by any other person or authority. The Court also reviewed the Central Government's subsidy schemes, which aimed to promote industrial growth in backward areas by providing financial incentives quantified as a percentage of the fixed capital investment.

The Court noted that the subsidy was not intended to meet the cost of specific assets but was a general incentive for setting up industries in backward areas. Various High Courts, including Andhra Pradesh, Madhya Pradesh, Karnataka, Kerala, and Gujarat, had consistently held that such subsidies should not be deducted from the actual cost of assets for the purpose of calculating depreciation.

The Court distinguished the present case from the Punjab and Haryana High Court's decision in CIT v. Jindal Brothers Rice Mills, which had held that the subsidy should be deducted. The Court found that the subsidy schemes did not specify that the subsidy should be used for particular assets, thus supporting the view that the subsidy was a general incentive.

In conclusion, the Court held that the subsidy should not be deducted from the actual cost of the assets for the purpose of allowing depreciation, as it was an incentive to promote industrial growth rather than a contribution towards the cost of specific assets. The references were answered in favor of the assessee and against the Revenue.