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TMI Blog1981 (2) TMI 134X X X X Extracts X X X X X X X X Extracts X X X X ..... stion will arise as to what is the cost of asset to the assessee on which depreciation is to be allowed to the assessee. Is it the original cost the assessee has incurred or is it the cost incurred as reduced by the portion met on its behalf by any other agency ? Again, the further question arising in its wake would be whether the portion met would have the effect of reducing the cost of the asset from the date from which it is provided or from the very inception. The underlying principle is that an assessee should obtain the benefit of depreciation only on so much of the cost as he has incurred or met. With a view to provide for this situation, the Income-tax Act defined the expression 'actual cost' in section 43(1) of the Income-tax Act to mean 'the actual cost of the assets to the assessee, reduced by that portion of the cost thereof, if any, as has been met directly or indirectly by any of the person or authority'. The definition of the expression 'actual cost' does not solve all the problems that may normally arise in the life of a business, e.g., this definition is silent on the question as to at what point of time the assistance granted in the cost of an asset by any other ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... re to assess the value of the fixed capital investment has also been laid down copiously. 6. In pursuance of the scheme, the assessees herein approached the SIPCOT for subsidy and received varying amounts, of which we will take by way of representative assessee The Pioneer Match Works, Printing Department, Sivakasi, which received a sum of Rs. 32,537. While making the assessment, the ITO took the view that the subsidy received by the assessee in the year of account resulted in reducing the cost of the machinery and, therefore, the depreciation and the development rebate to be allowed to the assessee should be on reduced cost. By this process, he reduced the allowance of depreciation and development rebate as follows : Asst. Depreciation Development year rebate Rs. Rs. IT Appeal No. 2899 (Mad.) of 1977-78 1974-75 2,698 3,875 IT Appeal No. 2971 (Mad.) of 1977-78 1975-76 4,276 1,273 The assessee then appealed to the AAC in vain. He was of the opinion that when the Government announced the subsidy scheme, it was only with a view to help installation of machinery and its effect was to reduce the actual cost and thus the grant of subsidy fell within the meaning of section 4 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... w that such subsidy has to be deducted from the actual cost for allowance of depreciation and development rebate. When the case of one of the assessees, i.e., Pioneer Match Works [IT Appeal Nos. 2899 and 2971 (Mad.) of 1977-78] came up for consideration before the Madras Bench 'C' of the Tribunal, it felt that the earlier Bench had not correctly decided the matter and that the matter should be reconsidered. It made reference to constitute a Special Bench. It was in pursuance of that request that the President constituted this Special Bench and, at our instance, the other cases were allowed to join as interveners. 12. Shri K.R. Ramamani, appearing for the assessee, submitted that the whole object and purpose of the grant of subsidy was totally misunderstood by the revenue. It was not to reduce the cost as defined in section 43(1), but to help rapid development of industries in the backward areas of the country and, therefore, it is wrong to contend that subsidy had reduced or had the effect of reducing the actual cost of the depreciable assets within the meaning of section 43(1). He then referred to us conditions for the grant of subsidy and laying stress on the provisions made ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... (Jaipur Bench), in IT Appeal No. 878 (Jp.) of 1978-79, dated 4-8-1980, in the case of Laxmi Udyog v. ITO, in which case the Tribunal under identical circumstances held that the subsidy was not to be deducted from the cost of the assets for purpose of allowance of depreciation. He commended for the acceptance of that view before us. 14. The learned departmental representative, on the other hand, contended that there is no gainsaying of the fact that the whole idea behind the scheme was to help industrialisation of backward areas, and that the Government thought that it could be achieved more easily by meeting a portion of the cost of the fixed capital investment and, thus, the amount of subsidy was conceived only to meet the cost of the assets and in fact it did that in practice. There is no question of saying that to the extent of the subsidy a portion of the actual cost had not been met by the Government when it paid the subsidy. Merely because there is difficulty in the apportionment of the amount of subsidy received between various assets, it does not detract from the fact that the amount was to be a part of the actual cost of the fixed capital investment, which would certai ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... portion of the cost thereof, if any, as has been met directly or indirectly by Government or by any public or local authority . . . ." Laying emphasis on the words used in this Explanation, particularly, in the words 'directly or indirectly', he submitted that the amount of subsidy is nothing but an amount from the Government which had the effect of reducing the actual cost to the assessee if not directly, at least indirectly. Merely because the Government paid it in lump sum without apportioning it to any particular asset, it does not mean that the actual cost of the assets had not been met by the Government. He then reverted to his argument that there were several ways of apportioning the subsidy received towards several assets ; but in principle it could not be said that the amount received from the Government was not to reduce the actual cost. Explanation to section 10(5) of the 1922 Act corresponds to section 43(1) of the 1961 Act which has been enacted with further modification widening its scope. While under the 1922 Act, the amount spent by the Government or public or local authority is only to be considered for the purpose of reducing the actual cost, under the 1961 Act ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nd gone through the decision relied upon. Before we deal with these submissions and the applicability of the authorities relied upon, we would like to have a close look at the scheme itself under which the subsidy was granted. We have pointed out earlier that this is a scheme introduced by the Central Government for the sole purpose of granting outright grant or subsidy with a view to industrialise the country and provide employment by providing incentives to start industrial units in selected districts and areas. As the very name implies, it is a Central investment subsidy scheme. This scheme is applied to industrial units both existing and new and also to expansions. The eligibility to this subsidy is confined to new industrial units engaged in the manufacture of items specified in Part B of Annexure II to this scheme. Those industrial units are to be located in areas specified in Part A of Annexure II and are also to be covered by sections 1 to 3. Existing industrial units are also eligible to this scheme provided they are engaged in the manufacture of those items referred to above and provided they are located in the same areas. It is an undisputed fact that the present subsi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e proforma prescribed under Annexure III for purposes of finding out the total fixed capital investment, it is seen that in addition to land, building, plant and machinery, other assets on which depreciation is not admissible are also included like tools, goods carriers, promotional and pre-operative expenses capitalised or to be capitalised and margin money for working capital. Nowhere the scheme has provided how the amount of subsidy should be utilised. Though several assets on which depreciation is admissible are required to be included as forming part of the fixed capital investment, independent authorities, like chartered accountants and engineers, are required to certify how the expenditure had been incurred. This shows that the amount received by way of subsidy could be utilised for any purpose acquiring plant and machinery or for erection of building or for working capital or even for repaying of loans already borrowed. The whole idea appears to be to attract entrepreneurs to set up industries in backward areas by providing assistance to be utilised for purpose by which an industry could be promoted. This is thus an incentive offered for entrepreneurs existing or new to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... pplier and credited the same amount in the capital reserve account. The Gujarat High Court held that in view of the fact that the foreign supplier had not recovered the amount of Rs. 30,572 and no legal steps had been taken towards its recovery for so long a time, it was not unreasonable to infer that the foreign supplier had treated the liability of the assessee to itself as having ceased and in fact and in substance there had been a cessation of this liability. The 1922 Act applied to the assessment year 1961-62, and as the foreign supplier was neither the Government nor public nor local authority, though there was cessation of liability, the assessee was entitled to have the benefit of the entire amount of Rs. 30,572 as the actual cost. Depreciation was allowable to the assessee for the assessment year 1961-62 on the basis that the cost to it of the machinery was Rs. 30,572. The 1961 Act applied to the assessment years 1962-63 to 1964-65 and under section 43(1), since there was cessation of liability, the actual cost of the machinery to the assessee for these assessment years should be reduced by Rs. 30,572. This decision does not really resolve the problem before us and on th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... unit is established and has gone into production and that the beneficiary shall utilise this subsidy for the industrial unit in accordance with the scheme, which means for any purpose. This clearly demonstrates that the subsidy granted by the Government under the scheme has nothing to do with the meeting of the cost of any particular assets, though it may end up in such a result in a theoretical sense or in the ultimate analysis ; but that is not to say that the requirement of section 43(1) is satisfied, which requires direct contribution to meet a particular depreciable asset. This, in our opinion, requires a more direct subsidy or grant to meet the cost of the depreciable assets and not a subsidy given in a lump sum for the whole of an industry. The Jaipur Bench of the Tribunal in Laxmi's case, after referring to the preamble to the scheme, observed that the subsidy was granted to encourage the citizens to set up more and more industries in the selected backward areas and it has nothing to do with a meeting out of the cost directly or indirectly of the assets belonging to the assessee. There is nothing on record to show that the Government granted subsidy to meet the cost of ..... X X X X Extracts X X X X X X X X Extracts X X X X
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