2007 (9) TMI 215 - HC - Income Tax

Depreciation actual cost of asset in view of decision of apex court in CIT v. P. J. Chemicals Ltd., reference made to this court is answered in favour of the assessee and against the Revenue held that Tribunal was right in law in holding that the cost of assets shall not be reduced by the amount of subsidy received by the assessee from the Government for the purpose of working out depreciation u/s 32 read with section 43(1) of the Income-tax Act, 1961

Summary

Issues: Interpretation of 'actual cost' for working out depreciation under Income-tax Act, 1961.

The judgment by the High Court of Himachal Pradesh involved the interpretation of the term 'actual cost' for working out depreciation under the Income-tax Act, 1961. The main question referred to the court was whether the cost of assets should be reduced by the amount of subsidy received by the assessee from the Government. The Tribunal had ruled in favor of the assessee, citing conflicting views among different High Courts. The court referred to the decision in CIT v. Ruchira Papers Ltd. where it was held that the actual cost of assets cannot be reduced by the subsidy received. The court also referenced the apex court's decision in CIT v. P. J. Chemicals Ltd., which upheld the judgment of the Madras High Court and set aside the decision of the Punjab and Haryana High Court. The apex court interpreted the term 'actual cost' liberally, stating that government subsidy does not meet the conditions for deductibility from 'actual cost' as it is an incentive not specifically intended to meet the cost of assets. Therefore, the court answered the reference in favor of the assessee based on the settled law by the Supreme Court.

In conclusion, the judgment clarified that the cost of assets should not be reduced by the amount of subsidy received by the assessee from the Government for the purpose of working out depreciation under section 32 read with section 43(1) of the Income-tax Act, 1961. The court's decision was based on the interpretation of 'actual cost' as settled by the Supreme Court, which considered government subsidy as an incentive not directly intended to meet the actual cost of assets. The judgment favored the assessee and was against the Revenue, aligning with the majority view of High Courts in the country and the apex court's interpretation of the term 'actual cost'.