1990 (3) TMI 66 - HC - Income Tax

Actual Cost, Depreciation, Developement Rebate, Investment Allowance, New Industrial Undertaking, Special Deduction

Issues Involved
1. Whether the subsidy received by an assessee from the Central Government/State Government under the Assistance Scheme for the development of backward areas should be deducted from the cost of its/his assets for the purpose of allowing depreciation, investment allowance, and relief under section 80J of the Income-tax Act, 1961.

Issue-Wise Detailed Analysis

1. Subsidy Deduction from Cost of Assets for Depreciation and Investment Allowance
The primary issue is whether the subsidy received under the Central/State Government Assistance Scheme should be deducted from the cost of assets for calculating depreciation and investment allowance. The Income-tax Officer initially held that the subsidy should be deducted from the cost of plant and machinery, as it was directly related to the installation costs. However, the Tribunal, following its earlier decisions, ruled that the subsidy should not reduce the actual cost of the assets within the meaning of section 43(1) of the Act. The Tribunal's decision was based on the interpretation that the subsidy was granted as an incentive for setting up industries in backward areas and not specifically to meet the cost of assets.

2. Subsidy and Relief under Section 80J of the Income-tax Act
For relief under section 80J, the basis is the capital employed in an industrial undertaking, not the actual cost of assets. The Tribunal held that the subsidy should not be deducted from the value of the plant and machinery for computing the capital employed. The Tribunal's position was that the subsidy was an incentive for establishing industries in backward areas and was not intended to meet the cost of fixed assets directly or indirectly.

3. Arguments and Interpretation of "Actual Cost" under Section 43(1)
The Revenue argued that the subsidy had a direct nexus with the actual cost of fixed assets, thereby reducing the actual cost. On the other hand, the assessee contended that the subsidy was an incentive for setting up industries in backward areas, not to meet the cost of assets. The court examined the definition of "actual cost" under section 43(1), which means the actual cost of the assets to the assessee, reduced by any portion met directly or indirectly by any other person or authority. The court concluded that the subsidy was not granted to meet the cost of fixed assets but was a measure to quantify the incentive.

4. Comparison with Other Judicial Decisions
The court referred to several judicial decisions to support its interpretation. The Andhra Pradesh High Court in CIT v. Godavari Plywoods Ltd. held that the subsidy granted could not be related to meeting a portion of the cost of assets. Similarly, the Karnataka High Court in CIT v. Diamond Dies Mfg. Corpn. Ltd. observed that the subsidy amount was a percentage of the total fixed capital investment and could be utilized for any purpose, not specifically for meeting the cost of assets. The Kerala High Court in CIT v. Relish Foods also held that the subsidy was an incentive and not related to the cost of assets.

5. Contrary View by Punjab and Haryana High Court
The Punjab and Haryana High Court in CIT v. Jindal Brothers Rice Mills took a contrary view, holding that there was a nexus between the cost of each item and the subsidy, thereby reducing the actual cost. However, the Gujarat High Court disagreed with this view, stating that the provisions of the scheme and the underlying objectives were not properly appreciated.

6. Final Judgment
The court concluded that the subsidy did not meet the cost of fixed assets directly or indirectly. Therefore, the computation of depreciation, investment allowance, and development rebate should be made on the actual cost of the assets without any reduction. For relief under section 80J, the subsidy should not be deducted from the capital employed as it is not directly linked to the cost of assets.

Conclusion
The court answered the questions in the affirmative, holding that the subsidy received under the Assistance Scheme should not be deducted from the cost of assets for the purpose of allowing depreciation, investment allowance, and relief under section 80J of the Income-tax Act. The references were answered accordingly, with no order as to costs.

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