TMI Blog1991 (1) TMI 120X X X X Extracts X X X X X X X X Extracts X X X X ..... 0.32. Under a scheme sponsored by the Government of India styled as 10% (which was later increased to 15%, subject to a maximum of 15 lakhs of rupees) Central Outright Grant or Subsidy Scheme, 1971, for industrial units set up in backward areas with effect from August 26, 1971, covering the Fourth Five Year Plan period, the assessee obtained Rs. 85,359 by way of subsidy and entered into an agreement with the State Industries Promotion Corporation of Tamil Nadu Ltd. (SIPCOT, for short) undertaking to utilise the said subsidy for the scheme and to submit periodical reports of such continued use. For the assessment years 1974-75 and 1975-76, depreciation and development rebate had been granted to the assessee on the original cost without making any deduction for the subsidy. While dealing with the assessment for the assessment year 1976-77, the Income-tax Officer became aware of the availing of the subsidy by the assessee and reopened the assessments for the assessment years 1974-75 and 1975-76 withdrawing the depreciation granted earlier with reference to the original cost without reckoning the subsidy and passed reassessment orders reducing the development rebate and depreciation gr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the assessee claimed depreciation on the value of the plant and machinery without deducting the subsidy received by it. In computing the allowable depreciation, the Income-tax Officer took the view that the subsidy received by the assessee resulted in the reduction of the cost of the plant and machinery and, by applying section 43(1) of the Act, depreciation and development rebate were allowed on the amount of cost as reduced by the amount of subsidy received. In other words, depreciation and development rebate were allowed on the reduced cost. On appeal, the Appellate Assistant Commissioner viewed the subsidy scheme as one intended to help the entrepreneurs in the installation of machinery, the result of which was to reduce the actual cost of plant and machinery and held that, as a consequence, the grant of subsidy resulted in the reduction of the cost of capital assets, attracting section 43(1) of the Act. On further appeals by the assessee before the Tribunal, a Special Bench of the Tribunal dealt with those appeals, as there was a difference of opinion between two Benches on the issues that arose in the appeals. The Special Bench of the Tribunal considered the scope of the sch ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... dy made did not take into account the subsidy received by the assessee under the scheme referred to earlier and that led to the reopening of the assessment under section 147(a) of the Act and the depreciation was recomputed by reducing the cost of the plant and machinery to the extent of subsidy received from SIPCOT in terms of section 43(1) of the Act. On appeal by the assessee, the Appellate Assistant Commissioner followed the decision of the Tribunal in respect of the same assessee for the assessment year 1975-76 and held that the subsidy received by the assessee cannot be treated as a portion of the cost of the plant and machinery, either directly or indirectly, and, consequently, should not be deducted from the cost of the assets for computing the actual cost for allowing depreciation. On further appeal by the Revenue to the Tribunal, it referred to the decision of the Special Bench of the Tribunal forming the subject-matter of references in Tax Cases Nos. 900 and 901 of 1982 and the assessee's own case in respect of the assessment year 1975-76 and dismissed the departmental appeal. Under section 256(1) of the Act, at the instance of the Revenue, the following question of law, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e Revenue also attempted to justify the deduction of the subsidy amount for purposes of allowing depreciation by invoking the theory of reimbursement of the entrepreneur by the Government in respect of the amounts spent by him in the acquisition of the plant and machinery for setting up the industry. Reference in this connection was also made to Departmental Circular No. 190, dated March 1, 1976, and some decisions which we shall notice later. In order to consider the rival submissions made as aforesaid, it would be first necessary to ascertain what exactly is meant by the word "subsidy" in the context of the provisions of the scheme. The word "subsidy" connotes aid, particularly financial, given by the Government to entrepreneurs, industries, etc., or to keep down the price of a commodity, by making available to the consumer, goods at a lower cost. Bearing this in mind, we, may now scrutinise the provisions of the subsidy scheme which forms annexure "D" to the stated case in Tax Cases Nos, 764 to 767 of 1981. The scheme is styled as a subsidy scheme for industrial units to be set up in certain selected backward districts/areas with a view to promote the growth of industries ther ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ned is to be disbursed after the unit goes into production and it is also again reiterated in another clause that the disbursement shall be made after the unit goes into production and proof of the same is produced to SIPCOT. Provision is also made for periodical inspection for a period of five years from the date on which the unit goes into production. Thus, from the provisions of the scheme as well as the agreement referred to above, it is seen that the predominant object is generally to encourage the setting up of new industries and the expansion of existing industries in certain backward and specified areas. The scheme for subsidy may provide assistance to entrepreneurs for the purpose of industrial development and expansion in a variety of ways. For instance, the Government may supply free power, give a holiday from taxes, provide land free or at cheap rates or at cost or other infrastructural facilities at subsidised rates. Such subsidy may also take the form of financial aid as under this scheme. In order to determine the quantum of subsidy to be made available to a person eligible for such subsidy under the provisions of the scheme, some method has necessarily to be adopted ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... unt made available could be expended is not without significance. Under the scheme, or even under the terms of the agreement, there is nothing which compels or obliges a person receiving subsidy to spend it in the acquisition of machinery, land or building. This also reinforces the view that the subsidy, though worked out at a percentage of the value of the fixed capital investment as defined in clause 4(f) of the scheme, is really a method of quantifying the subsidy and does not in any manner impress the subsidy with the character of aid given for an; definite or particular purpose and to be applied for that purpose only. The subsidy scheme, in our view, attempts to bring about expansion and rapid industrial growth in certain areas and also a balanced regional industrial development and the subsidy given appears to us, on the terms of the scheme, to be in the nature of an incentive for an industrial adventure in industrially ill-developed and undeveloped backward areas and remote, distant and inaccessible areas with uneconomical infrastructure as well, We are also of the view that the subsidy really partakes the character of a cash grant expendable for any purpose and not necessar ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... undertaking. We have carefully considered the provisions of the scheme and we are unable to find anything therein to indicate that the subsidy was intended to enable an entrepreneur to meet a portion of the cost of the machinery acquired for the purpose of setting up an industrial undertaking, as contended by learned counsel for the Revenue. We have earlier pointed out that the subsidy made available is generally in the nature of an incentive, not intended or meant to be utilised by the recipient for the purpose of acquiring a fixed capital asset, like land, building, machinery, etc. We had also referred to the subsidy being made available after the unit goes into production and this would not fit in with the concept of the subsidy being given for the purpose of acquisition of the machinery in respect of the industrial undertaking. The argument of reimbursment attempted to be put forward by counsel for the Revenue also does not deserve serious consideration or acceptance, for, the nature of the subsidy is determined essentially by the terms of the scheme and, on the provisions found in the scheme, it is difficult to consider the subsidy scheme as one of reimbursement. We had ear ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s defined by section 43(1) of the Act, for the purpose of calculating the depreciation and investment allowance admissible to the assessee. In CIT v. Premier Extraction Pvt. Ltd. [1989] 175 ITR 22 (MP), the same view had been reiterated. In CIT v. Diamond Dies Manufacturing Corporation Ltd. [1988] 172 ITR 655, the Karnataka High Court held that, under the subsidy scheme, the amount made available did not have a nexus, direct or indirect, to meet a portion of the actual, cost of any specific capital asset and it could not, therefore, be brought within the purview of section 43(1) of the Act and the deduction of the subsidy, from the actual cost of the asset, could not be done for purposes of allowing depreciation. In CIT v. Relish Foods [1989] 180 ITR 454, the Kerala High, Court considered the scope of the subsidy scheme for setting up an industry in, a backward area and laid down that it is really in the nature of an incentive with nothing whatever to do with the cost of a particular asset and as such deductible from the cost of the asset for, the purpose of allowing depreciation and development rebate or even for computation of relief under section 80J of the Act. In CIT v; Elys P ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d also the decisions referred to earlier taking a contrary view, it had been stated that, on deeper consideration, the learned judges were unable to subscribe to the view taken in those decisions. The only basis we are able to find for the view so expressed is the fixation of the subsidy at 15% of the cost of plant, machinery and building and that would indicate, according to the learned judges, that the object was to reduce the cost of plant, machinery and building by 15% of the actual cost. We are with respect, unable to agree with this line of reasoning. The learned judges accepted that, in order to evolve a uniform method avoiding discrimination, the subsidy provided was arrived at a percentage of the value of the plant, machinery and building. When the method of arriving at the quantum of subsidy is accepted as fixed percentage of the totality of the cost of the plant, machinery and building, we find it difficult to accept that the underlying object of the scheme was to reduce the value of each, one of the component items, for the purpose of quantifying the subsidy by. 16% of the actual cost The circumstance that there is no indication in the scheme that the subsidy is granted ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mport the idea of reimbursement to justify the reduction of the amount of subsidy received by assessees from the cost of the capital assets for the purpose of working out depreciation. Thus, on a careful consideration of the provisions of the subsidy scheme, its purpose and object and the character of the subsidy, we hold that the amount of subsidy made available cannot be deducted from the cost of the capital asset for purposes of working out depreciation under section 43(1) of the Act. We may now proceed to consider the second and the third questions referred in T. C. Nos. 764 to 767 of 1981. We find from the order of the Tribunal that the assessee had taken up the stand that the subsidy was not in the nature of an outright grant and that it should be taken into account only for the assessment year 1977-78 and not the earlier years with a view to establish that the subsidy will not fall under section 43(1) of the Act. We have earlier held, on a consideration of the provisions in the subsidy scheme, the relevant provisions of the Act and the decisions rendered, that the cost of the capital assets cannot be reduced by the amount of subsidy received and section 43(1) of the Act wo ..... X X X X Extracts X X X X X X X X Extracts X X X X
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