1985 (7) TMI 147 - AT - Income Tax

Summary

Issues Involved:
1. Whether the amount of Rs. 41,86,349 credited as the price of medicines supplied to the Government of Kerala should be treated as part of the trading receipts of the assessee.
2. Whether the Central subsidy received by the assessee should be reduced from the cost of the assets for calculating depreciation.

Issue-Wise Detailed Analysis:

1. Treatment of Rs. 41,86,349 as Trading Receipts:
The primary issue in this appeal was whether the amount of Rs. 41,86,349, credited as the price of medicines supplied to the Government of Kerala, should be treated as part of the trading receipts of the assessee. The assessee, a company engaged in the manufacture and sale of pharmaceutical products, had credited this amount in its accounts based on a recommendation by the Bureau of Industrial Costs and Prices. However, the Government of Kerala did not accept this claim. The Income Tax Officer (ITO) included this amount in the total receipts of the assessee, reasoning that the assessee followed the mercantile system of accounting and the credit once taken could not be excluded.

The Commissioner (Appeals) held that the amount of Rs. 41,86,349 should be excluded from the total income of the assessee for the assessment year 1978-79. The Commissioner reasoned that a mere claim does not constitute income and that the treatment in the accounts is not conclusive of its real character. The Commissioner emphasized that the claim was never admitted by the Government, and thus, no income had accrued.

In the second appeal, the Tribunal examined the arrangement between the assessee and the Government of Kerala. It was noted that the price of drugs supplied was only tentative and subject to final approval by the Government of India. The Tribunal referenced the Supreme Court decision in CIT v. Shoorji Vallabhdas & Co. [1962] 46 ITR 144, which held that income tax is a levy on income, and if income does not result, there cannot be a tax. The Tribunal concluded that the amount represented only a tentative claim and not an accrued income or receipt. Therefore, the Tribunal upheld the Commissioner (Appeals)'s decision to exclude the amount from the total income.

2. Central Subsidy and Depreciation Calculation:
The second issue was whether the Central subsidy received by the assessee should be reduced from the cost of the assets for calculating depreciation. The Commissioner (Appeals) had held that the Central subsidy should not be reduced from the cost of the assets, as provided in section 43(1) of the Income-tax Act, for the purpose of calculating depreciation.

The Tribunal referred to the Madras Special Bench decision in Pioneer Match Works v. ITO [1982] 1 SOT 331, which held that the Central subsidy amount cannot reduce the real cost of plant and machinery for granting depreciation. Based on this precedent, the Tribunal found no merit in the departmental appeal and dismissed it.

Conclusion:
The Tribunal dismissed the departmental appeal, upholding the Commissioner (Appeals)'s decision on both issues. The amount of Rs. 41,86,349 was rightly excluded from the total income of the assessee as it represented only a tentative claim and not an accrued income. Additionally, the Central subsidy received by the assessee should not be reduced from the cost of the assets for calculating depreciation.