TMI Blog1990 (9) TMI 24X X X X Extracts X X X X X X X X Extracts X X X X ..... given by the Central Government to meet the cost of assets directly or indirectly within the meaning of section 43(1) of the Income-tax Act, 1961 (referred to hereinafter as "the Act"), and, therefore, for allowing the depreciation, these two amounts of subsidy should not be deducted from the cost of the assets. It was urged that the subsidy was given by the Government just as an incentive to the assessee with a view to promote industrial growth in backward areas. On appeal, the Appellate Assistant Commissioner, relying on the orders of the Appellate Tribunal, accepted the contention of the assessee and directed the Incometax Officer to allow depreciation on building, plant and machinery on the full cost without deducting the amounts of subsidy. On appeal by the Revenue, the Tribunal, relying on a decision of the Jaipur Bench in the case of Laxmi Udyog [1980] 18 CTR (Trib) 27 and a decision of a special Bench of the Tribunal in the case of Pioneer Match Works [1983] 15 TTJ 88 (Mad) in which the former decision was relied on and approved, upheld the order of the Appellate Assistant Commissioner, because he also relied on the same decisions. Before the Tribunal, the Revenue relied o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... industries there. 1. Short title. -This scheme may be called the 10 per cent. Central Outright Grant or Subsidy Scheme, 1971, for industrial units to be set up in selected backward districts/ areas. 2. Commencement and duration. -It will come into effect from the 26th August, 1971, and remain in force for the remaining period of the Fourth Five Year Plan and for such further period as may be decided by the Government of India. 3. Applicability. -It is applicable to industrial units in selected districts/areas as defined in the scheme, other than those whose total fixed capital investment would exceed Rs. 50 lakhs. In the case of units involving total fixed capital investment exceeding Rs. 50 lakhs, the scheme might be made applicable on consideration of merits at the discretion of the Government of India or the State/Union Territory. 4. Definition. -(a) 'Industrial unit' means any industrial undertaking and suitable servicing unit, other than that run departmentally by Government. (b) 'new industrial unit' means an industrial unit for the setting up of which effective steps were not taken prior to 1 st October, 1970. (c) 'existing industrial unit' means an industrial u ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ordinary dated 26-8-1971, as amended, vide notification of 30th September, 1972, and 19th June, 1973, is attached at Annexure I. During the course of implementation of the scheme over the past few years, some liberalisation had been introduced in the scheme. Some further changes have also been incorporated herein with a view to ensuring quicker disbursement and reimbursement of Central Investment Subsidy to the industrial units. Eligibility and procedures for claiming disbursement and reimbursement, etc., of the Central Investment Subsidy are dealt with in the succeeding sections. Detailed procedure has been given for such Central Investment Subsidy Scheme also. This Central Investment Subsidy Scheme is almost on the same lines as was the Central Subsidy Scheme floated by the Government of India for backward areas by the notification dated August 26, 1971. Therefore, it is not necessary to reproduce the Scheme. The same governing principles have been adopted. Now, a perusal of the scheme shows that this subsidy/investment subsidy was given to the industrial units in certain backward districts/areas with a view to promoting the growth of industries in those areas. It is the Gove ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nery, etc. Thereafter, subsidy will be given on that amount. Subsidy has been defined in New Oxford Illustrated Dictionary as "financial aid given by Government towards expenses of an undertaking or institution held to be of public utility, or to producers of commodities, etc., to enable goods or services to be provided at lower cost to consumer". In Webster's New Twentieth Century Dictionary Unabridged, Second Edition, one of the meanings of the word "subsidy" is "a grant of money from a Government to a private enterprise considered as beneficial to the public". In Random House Dictionary of the English Language, Unabridged Edition, one of the meanings of the word "subsidy" is "a direct pecuniary aid furnished by a Government to a private industrial undertaking, charity Organisation, or the like". From the definition of subsidy, it appears that it is in the nature of a pecuniary assistance to entrepreneurs by the Government so as to encourage the establishment of industries in backward areas. Therefore, such subsidy/investment subsidy cannot be excluded from the actual cost. This assistance will certainly form part of the total assets of the assessee. First, we shall take into ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... reference to the fixed capital cost is only a measure adopted and cannot make the subsidy one for the specific purpose of meeting any portion of the fixed capital cost. Therefore, the amount of capital subsidy is not deductible in computing the actual cost of the asset, as defined by section 43(1) of the Act, for the purpose of calculating the depreciation and investment allowance admissible to the assessee." The Madhya Pradesh High Court agreed with the reasoning given by the Andhra Pradesh High Court in Godavari Plywoods' case [1987] 168 ITR 632. Similarly, the Karnataka High Court has also taken the same view in CIT v. Diamond Dies Manufacturing Corporation Ltd. [1988] 172 ITR 655 as has been taken by the Andhra Pradesh and the Madhya Pradesh High Courts. The Karnataka High Court has also followed the view taken by the Andhra Pradesh High Court in the case of Godavari Plywoods Ltd. [1987] 168 ITR 632. It was observed as under (headnote) : "The scheme for the grant of subsidy was to develop industries in selected backward areas. On a perusal of the scheme, it was clear that the subsidy amount granted was a percentage of the total fixed capital investment, which was taken on ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... financial incentives to encourage and induce entrepreneurs to move to backward areas and establish industries there so that the region may develop and promote the welfare of the people living in that region One of the incentives which the Government decided to grant was cash subsidy. The dictionary meaning of 'subsidy' is 'a grant of money from Government to a private enterprise considered as beneficial to the public'. The Government, in order to determine the amount of cash subsidy, decided to follow one of the recognised methods of working it out on the basis of the amount invested by an entrepreneur in acquiring capital assets and specified a certain percentage of the amount so invested in the capital assets as cash subsidy. The basis adopted for determining the cash subsidy with reference to the cost or value of fixed assets was only a measure for quantifying the subsidy and the subsidy was not given for the special purpose of meeting any portion of the cost of the fixed assets. Consequently, the subsidy did not form part of the actual cost of plant and machinery within the meaning of section 43 of the Income-tax Act, 1961. It cannot be deducted from the cost of assets in compu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... that when the Government has specified in the investment policy that 15% of the cost of the plant, machinery and building would be provided by the State Government, the underlying object is to reduce the value of the plant, machinery and building by 15% of the actual cost. This line of reasoning, with due respect, is not correct. In fact, it was a mode to arrive at 10% or 15% of the subsidy on the land, building and machinery. This 10% or 15% subsidy was wholly misconstrued by the hon'ble judges to mean as an investment on plant, building and machinery so as to reduce this amount from the actual cost. With great respect, we do not agree with the view taken by the Division Bench of the Punjab and Haryana High Court. This case came up for consideration before the Gujarat High Court also in Grace Paper Industries Pvt. Ltd. [1990] 183 ITR 591 and the Gujarat High Court differed from the view taken by the Division Bench of the Punjab and Haryana High Court. Our attention was also drawn to Ludhiana Central Co-operative Consumers' Stores Ltd. v. CIT [1980] 122 ITR 942 (P H). In that case, the assessee-co-operative stores did not succeed in its venture and approached the Government ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d cannot be of any assistance to the Revenue. CIT v. J. K. Cotton Spinning and Weaving Mills Ltd. [1975] 98 ITR 153 (All) is not relevant for the present purpose as it was not a case of subsidy. CIT v. Kaira District Co-operative Milk Producers' Union Ltd. [1979] 116 ITR 319 (Guj) does not also relate to subsidy. This was a case of grants-in-aid, which was found to be not included in the computation of the capital investment under the Income-tax Act, 1961. CIT v. Dalmia Dadri Cement Ltd. [1980] 125 ITR 510 (Delhi) was also not a case of subsidy. Rohtak and Hissar Districts Electric Supply Co.(P) Ltd. v. CIT [1981] 128 ITR 52 (Delhi) was also not a case of subsidy. In this case, it was held that since the assessment year was 1962-63, the "actual cost" had to be determined under section 43(1) of the Act of 1961 and the written down value as on April 1, 1961, had to be determined under that section. Therefore, the "actual cost" had to be determined after deducting the contributions received from consumers and, therefore, the written down value as on April 1, 1961, could not be the same as that on March 31, 1961. In Jeewanlal (1929) Ltd. v. CIT [1983] 142 ITR 448 (Cal) one of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... question was what should be the effect of a general subsidy granted by the Government. Therefore, these stray observations will not be of any help to the Revenue which barely interpreted the text of the provision without regard to the nature of the subsidy. Jogta Coal Co. Ltd. v. CIT [1959] 36 ITR 521 (SC) was a case in which the question was the interpretation of a sale deed and whether the goodwill purchased by the assessee can be taxed or not by the Income-tax Officer. It was held that goodwill is an asset well understood in business and capable of valuation. In this connection, it was held that the cost to be calculated for the purpose of depreciation allowance is the cost to the assessee and not to the person who sells to the assessee. It was observed that it was within the discretion of the Income-tax Officer to determine the cost which the assessee had actually incurred. It was for the Income-tax Officer to find out, in reality, what is the actual cost excluding the collusive, unduly inflated or fictitious cost. This case has no relevance whatsoever to the case in hand. In the case of V. S. S. V. Meenakshi Achi v. CIT [1966] 60 ITR 253 (SC), the question was whether paym ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ply Co. Ltd. [1979] 118 ITR 884 (Bom); Ranchi Electric Supply Co. Ltd. v. CIT [1984] 150 ITR 95 (Patna) ; CIT v. Sahney Steel and Press Works Ltd. [1985] 152 ITR 39 (AP) and CIT v. Hides and Leather Products Pvt. Ltd. [1975] 101 ITR 61 (Guj), have no relevance whatsoever to the case in hand. All these cases are not of subsidy and as such they are distinguishable on that point. Thus, from a survey of all the cases, which have been cited on behalf of the assessee and the Revenue, the consensus of opinion which emerges from the various decisions of the High Courts throughout the country is that the subsidy or investment subsidy given by the Government which is for development of industries in selected backward districts/areas cannot be deducted from the actual cost for giving the benefit of depreciation or investment allowance. As a matter of fact, the subsidy is a grant for encouraging entrepreneurs to come forward and develop the backward areas. As such, it cannot be deducted from the cost of the assets to the assessee for denying the benefit of depreciation or investment allowance. Thus, we are in respectful agreement with the views expressed by the Andhra Pradesh, Gujarat, Kar ..... X X X X Extracts X X X X X X X X Extracts X X X X
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