2005 (7) TMI 57 - HC - Income Tax

Actual cost - 1. Whether, Tribunal was right in law in holding that the amount received under the Central Government s outright grant of Subsidy Scheme of 1971 for industrial units set up in selected backward districts or areas did not go to reduce the actual cost as defined in section 43(1) of the Income-tax Act, 1961, for the purpose of computing the depreciation for the assessment year 1980-81? 2. Whether, Tribunal was justified in holding that deduction under sub-section (1) of section 35CC could not be denied to the assessee although the statement of expenditure which was required to be furnished under sub-section (3) of section 35CC had been furnished in the course of assessment proceedings and not with the return itself? held that the provisions of section 35CC(3) which provide for filing of the statement of expenses along with the return for that particular assessment year are directory - Tribunal was thus justified in holding that the statement of expenses which was required to be furnished u/s 35 CC(3) along with the return could be furnished during the course of assessment

Issues Involved:
1. Whether the amount received under the Central Government's outright grant of Subsidy Scheme of 1971 should reduce the actual cost as defined in section 43(1) of the Income-tax Act, 1961, for computing depreciation for the assessment year 1980-81.
2. Whether the deduction under sub-section (1) of section 35CC could be denied to the assessee if the statement of expenditure required under sub-section (3) of section 35CC was furnished during the assessment proceedings and not with the return itself.

Issue-wise Detailed Analysis:

Issue 1: Subsidy and Actual Cost for Depreciation Calculation
The first issue pertains to whether the subsidy received under the Central Government's outright grant of Subsidy Scheme of 1971 should reduce the actual cost of assets for the purpose of computing depreciation. The factual matrix reveals that the assessee received a cash subsidy of Rs. 4,42,654 for its "New Vapi Project" from the Government of Gujarat, which was credited to the capital reserve. The Income-tax Officer (ITO) concluded that the subsidy was towards meeting the cost of investments in fixed assets and, therefore, reduced the written down value of buildings and plant and machinery by the subsidy amounts before allowing depreciation.

The Tribunal, however, held that the subsidy was an incentive to establish industries in backward areas and not specifically to meet the cost of any particular asset. The subsidy could be used for any purpose, including working capital or repaying loans, and thus did not directly or indirectly relate to the actual cost of the assets under section 43(1) of the Act. The Tribunal relied on the Special Bench decision in Pioneer Match Works [1982] 1 BOT 331.

This issue was previously adjudicated by the Supreme Court in CIT v. P.J. Chemicals Ltd. [1994] 210 ITR 830, where it was held that such subsidies do not reduce the actual cost as defined in section 43(1) for computing depreciation. Following this precedent, the court answered the question in the affirmative, in favor of the assessee and against the Revenue.

Issue 2: Deduction under Section 35CC and Filing Requirements
The second issue concerns whether the deduction under section 35CC(1) can be denied if the statement of expenditure required under section 35CC(3) was submitted during the assessment proceedings instead of with the return of income. The assessee incurred Rs. 51,825 on rural development and claimed a deduction under section 35CC(1). The ITO rejected the claim because the statement of expenditure was not filed with the return, although it was submitted during the assessment proceedings.

The Commissioner of Income-tax (Appeals) and the Tribunal held that filing the statement during the assessment proceedings was sufficient compliance with section 35CC(3), relying on the Allahabad High Court decision in Addl. CIT v. Murlidhar Mathura Prasad [1979] 118 ITR 392. The Tribunal noted that the requirement to file the statement along with the return was directory, not mandatory, and that the statement being before the assessing authority during assessment sufficed.

The court compared this with section 80J(6A), which also required filing an audit report with the return. In CIT v. Shivanand Electronics [1994] 209 ITR 63, it was held that such requirements are directory, allowing the submission of documents before the assessment's completion. The court found the provisions of section 35CC(3) to be in pari materia with section 80J(6A) and thus held that the requirement to file the statement along with the return is directory.

Consequently, the court answered the second question in the affirmative, in favor of the assessee and against the Revenue, affirming that the statement of expenses could be furnished during the assessment proceedings.

Conclusion:
Both issues were resolved in favor of the assessee. The subsidy did not reduce the actual cost for depreciation purposes, and the statement of expenses required under section 35CC(3) could be submitted during the assessment proceedings. The reference was disposed of with no order as to costs.

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