1994 (9) TMI 1 - SC - Income Tax

Central Government granted subsidy to assessee as incentive for setting up industry in backward areas - Held that subsidies granted to industries on a percentage of the capital cost are not deductible from the actual cost under section 43(1) of the Act for the purpose of calculation of depreciation, etc.

Issues Involved:
1. Deductibility of subsidies from "actual cost" under section 43(1) of the Income-tax Act, 1961, for the purpose of calculating depreciation.
2. Divergence of judicial opinion on the interpretation of "actual cost" and the treatment of subsidies.

Issue-wise Detailed Analysis:

1. Deductibility of subsidies from "actual cost" under section 43(1) of the Income-tax Act, 1961, for the purpose of calculating depreciation:

The core issue revolves around whether subsidies granted to industries should be deducted from the "actual cost" of assets for the purpose of calculating depreciation under section 43(1) of the Income-tax Act, 1961. The court examined several cases where High Courts had divergent views on this matter.

In Civil Appeal No. 2474 of 1991, the assessee, Messrs. P. J. Chemicals Ltd., received a Central subsidy of Rs. 9,97,085. The Income-tax Officer deducted this subsidy from the "actual cost," but the Income-tax Appellate Tribunal reversed this decision, relying on the Andhra Pradesh High Court's decision in CIT v. Godavari Plywoods Ltd. [1987] 168 ITR 632, which held that such subsidies should not be deducted from the actual cost.

Conversely, in Civil Appeal No. 3699 of 1990, the assessee, Messrs. Janak Steel Tubes P. Ltd., contested the deduction of a subsidy of Rs. 7,58,000 by the Income-tax Officer. The Tribunal allowed the assessee's claim, but the High Court ruled in favor of the Revenue, stating that the subsidy should be deducted from the value of the assets.

2. Divergence of judicial opinion on the interpretation of "actual cost" and the treatment of subsidies:

The court noted a sharp divergence of judicial opinion on this issue. High Courts in various states, including Allahabad, Andhra Pradesh, Bombay, Calcutta, Gauhati, Gujarat, Karnataka, Kerala, Madras, Madhya Pradesh, Orissa, and Rajasthan, upheld the assessee's claim that subsidies should not be deducted from the actual cost. These courts reasoned that the subsidy was intended as an incentive to encourage industrial development in backward areas and not to subsidize the cost of capital assets directly.

For instance, the Gujarat High Court in CIT v. Grace Paper Industries P. Ltd. [1990] 183 ITR 591 stated that the subsidy was not given for the specific purpose of meeting any portion of the cost of fixed assets, and hence, it should not be deducted from the actual cost.

On the other hand, the Punjab and Haryana High Court, in cases like CIT v. Jindal Brothers Rice Mills [1989] 179 ITR 470, held that the subsidy should be deducted from the actual cost, arguing that the subsidy was intended to reduce the value of the plant, machinery, and building.

Supreme Court's Conclusion:

The Supreme Court preferred the reasoning of the majority of the High Courts, which held that the subsidy should not be deducted from the actual cost. The court emphasized that the subsidy was an incentive for industrial development rather than a direct or indirect payment to meet the cost of assets. The expression "actual cost" should be interpreted liberally, and the subsidy does not partake of the incidents which attract the conditions for their deductibility from "actual cost."

The court affirmed the judgments of the High Courts that ruled against the Revenue and dismissed the first batch of appeals. It allowed the second batch of appeals preferred by the assessee, reversing the opinion of the High Court and answering the question against the Revenue.

Final Order:

The Supreme Court affirmed the judgments of the High Courts that ruled in favor of the assessee and dismissed the Revenue's appeals. The second batch of appeals preferred by the assessee was allowed, and the question was answered against the Revenue. There was no order as to costs.

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