TMI Blog1990 (3) TMI 66X X X X Extracts X X X X X X X X Extracts X X X X ..... ce, the stable and adequate power position and responsiveness and efficiency of the State administration, these plus points were not found fully adequate and there was need for cash incentives for the balanced growth of industries in the State. There was also a need for dispersal and location of industries keeping in view the rapid urbanisation that had been taking place in the metropolitan cities, especially Baroda, Ahmedabad and Surat and the growing strain on the municipal services on account of rapid growth of industries in these sectors. Several problems as a result of urbanisation such as pollution, growth of slums, etc., had also arisen. Simultaneously, judicious locational balance was required to be maintained keeping in view the availability of infrastructure and the hazards of considerable health problems to residential neighbourhoods located downstream of the river into which industrial effluents were discharged. It was, therefore, felt that while a package of incentives could be evolved, it should be used as an effective lever to assist in identifying the right location for industries based on infrastructure and the requirements of water, drainage, effluent treatment, e ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nt while computing the value of plant and machinery. Value of investment in second-hand machinery purchased by an industrial unit in the selected areas was also to be counted for claiming cash subsidy subject to the conditions laid down in the scheme. An industrial unit undertaking modernisation of its plant and machinery was also eligible for being considered for grant of cash subsidy on the value of plant and machinery purchased by the industrial unit as a part of the modernisation programme reduced by the sale value, written down value or market value of the old machinery, whichever was the highest value of the machinery so arrived at as might be certified by a chartered accountant. The scheme also provided that investment on plant, and machinery shifted to "developing areas" from other non-eligible areas was also eligible for disbursement of cash subsidy. Value of such machinery was to be assessed subject to certain conditions laid down in the scheme. Uniform cash subsidy of 10 per cent. of the fixed capital investment was given to all new small scale industries set up in Zones II and III as well as at growth centres outside Zones I, II and III. The growth centres were given ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... subject to the conditions enumerated above being fulfilled. However, in all such cases, the claim for reimbursement from the Central Ministry of Industrial Development will only be made by the State Government/Union Territory Administration concerned." It would thus appear that, as part of the measure to ensure balanced development of industries in different regions, the State Government and the Central Government announced certain financial incentives for industries established in areas and districts which were identified as backward. Backward areas were clearly specified under the scheme. All industrial units having fixed capital investment in land, building and machinery were eligible for subsidy. Existing units could also claim subsidy for effective substantial expansion as provided in the scheme. The quantum of subsidy was also specified in the scheme. In I.T.R. No. 8 of 1985, the assessee is a private limited company. In the course of assessment for the year 1978-79, it claimed investment allowance of Rs. 4,47,033, depreciation of Rs. 2,88,276 and relief of Rs. 3,01,380 under section 80J of the Act. The assessee had received cash subsidy under the aforesaid scheme for ba ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t be deducted from the cost of the assets for the purpose of allowing depreciation, investment allowance and relief under section 80J of the Income-tax Act, 1961?" In I.T.R. No. 32 of 1985, the assessee is a public limited company. The factory of the assessee is situated at Kalol in Panchmahal District, a backward area. The assessee received cash subsidy of Rs. 14,55,132 during the previous year relevant to the assessment year 1977-78 for establishing factory in a notified backward area. The subsidy was worked out on the basis of 15% of the cost of plant and machinery. It was contended on behalf of the assessee that the subsidy which was given to it by the Central Government Was not to meet the cost of plant and machinery but as an incentive to establish a factory in a backward area and, therefore, the cost of the plant and machinery was not required to be reduced by the amount of subsidy for the purpose of working out depreciation and development rebate. The Income-tax Officer, however, rejected the claim made by the assessee holding that since the subsidy had been granted on the basis of cost of installation of plant and machinery, it was directly related to the installation of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... employed under section 80J of the Act, the subsidy of Rs. 14,58,408 received from the Government could not be deducted from the value of the plant and machinery ?" In I. T. R. No. 256 of 1985, the assessee is a partnership firm. In the year of account relevant to the assessment year 1982-83, the assessee received subsidy of Rs. 34,617 from the District Industries Centre, Government of Gujarat, Valsad, under the aforesaid cash subsidy scheme. The assessee contended that the said subsidy could not be taken into account in computing the actual cost of machinery under the provisions of section 43(1) of the Act because the object and purpose of granting the subsidy was to give encouragement for development of industries in the specified backward area. According to the assessee, the subsidy was not granted to meet the cost of machinery purchased by it. The assessee, therefore, claimed that depreciation and investment allowance should be worked out on the basis of the actual cost of machinery without deduction of the Subsidy., The Income-tax Officer rejected the claim made by the assessee holding that subsidy was granted to the assessee at a specified percentage of the cost of the fixed ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... h it had received from the Government, was for growth of industry in a backward area and that it could not be deducted from the cost of its assets. After referring to section 43(1) of the Act and the provisions of the scheme, the Income-tax Officer held that the assessee had become entitled to the subsidy on account of the investment in the fixed assets. The subsidy had been determined with reference to the fixed assets of the assessee in the form of land, building, plant and machinery. The scheme itself showed that there was a nexus between the investment in the fixed assets and the amount of subsidy received. According to the Income-tax Officer, the cost of the fixed assets had been met directly or indirectly from the subsidy and, consequently the cost of such assets had to be reduced to the extent of the subsidy to determine the actual cost of the assets. The assessee carried the matter in appeal before the Commissioner of Income-tax (Appeals) contending that the value of the subsidy should not be applied for reducing the actual cost/written down value of various items of assets as was done by the Income-tax Office?. The Commissioner, however, upheld the action of the Income-t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ubsidy. On the other hand, it was argued on behalf of the assessees that the subsidy granted to the assessee was not to meet the cost of the assets directly or indirectly. It was granted by way of incentive for setting up industry in backward area. The entrepreneurs were not willing to set up industries in backward area because of the several difficulties they had to face in setting up industries in such areas. It was with a view to attract entrepreneurs to set up industries in backward area and to achieve balanced growth of industries in different regions that the Government decided to grant subsidy. The Government had to adopt some standard or measure for granting such subsidy and it was for this reason that it decided to adopt the cost of the fixed assets as basis for grant of subsidy. Cost of the fixed assets was taken as a basis to work out the investment made by the entrepreneurs in the backward area. It was to encourage the entrepreneurs to make investment in backward areas that subsidy was granted and to compute the amount of subsidy payable to the entrepreneurs, the measure adopted was the cost of the fixed assets. However, the scheme nowhere says that the Government was g ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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." We have to bear in mind these dictionary meanings of the word "subsidy" while proceeding to consider the schemes for cash subsidy of the Central Government and the State Government and the purpose for which the said schemes were framed. We have carefully considered the provisions relating to the grant of cash subsidy under the schemes framed by the Central Government and the State Government. The Central Government as well as the State Government noticed that areas specified as backward areas and tribal areas were undeveloped or underdeveloped. Entrepreneurs were not willing to set up industries in such undeveloped or under-developed areas. The industries were concentrating only in urban areas. In other words, rapid urbanisation was taking place. So far as the State of Gujarat is concerned, there was rapid industrial growth in cities like Baroda, Ahmedabad and Surat resulting in strain on municipal services. Urbanisa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... amount of the subsidy. Emphasis on value and not the cost is evident from the fact that land and building already owned by an industrial unit, cost of tools, jigs, dies and moulds, transport charges, insurance premium, erection cost, value of second-hand machinery purchased by an industrial unit, etc., were to be taken into account while computing the value of fixed assets for the purposes of subsidy. In other words, it was the value of the fixed assets which formed the basis for computation of subsidy to be granted under the scheme. Subsidy, in our opinion, did not meet the cost of the fixed assets directly or indirectly. Under the scheme of the Central Government or the scheme of the State Government, cash subsidy was quantified by determining the same at a specified percentage of the value/cost of the fixed assets. Therefore, as observed above, 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 it could not be said that the subsidy was given for the specific purpose of meeting any portion of the cost of the fixed assets. The subsidy was granted to compensate the entrepreneur fo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o business was left or was done in the two years ... Where an assessee does not carry on business at all, the section cannot be made applicable, and the compensation that he receives cannot bear the character of profits of a business." In the case before the Supreme Court, the, measure for working out compensation payable to the assessee was the out-turn of tea that would have been manufactured by the assessee during the relevant period. However, for that reason payment made to the assessee could not be said to bear the character of profits of a business. In the instant case, in order to quantify the subsidy payable to an entrepreneur, the Government adopted certain percentage of the cost of fixed assets as the basis. In other words, this percentage of cost of fixed assets was adopted as a measure for determining the amount of subsidy payable to the entrepreneur. However, that would not, make the amount of subsidy granted part of the cost of fixed assets. In CIT v. Godavari Plywoods Ltd. [1987] 168 ITR 632 (AP), a question similar to the one which arises in this case arose for our consideration before the Andhra Pradesh High Court. We may refer with advantage to the following o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... areas, observed as follows : "The scheme for the grant of the subsidy, as stated earlier, is to develop industries in selected backward areas. On a perusal of the scheme, it is clear that the subsidy amount granted is a percentage of the total fixed capital investment, which is only taken as a measure for quantifying the subsidy. In the pro forma prescribed under the scheme to find out the total fixed capital investment, it can be seen that in addition to the land, building plant and machinery, other assets on which depreciation is not admissible, such as tools, goods carrier; promotional and pre-operative expenses capitalised or to be capitalised and margin money for working capital are also included. Nowhere has the scheme provided as to how the subsidy should be utilised and for which assets. For instance, it is open to the assessee to legitimately reduce the cost of land in its books of account to the full extent of the subsidy, in which case the cost of plant and machinery will remain at invoice price uninfluenced by the amount of subsidy. In the circumstances, it appears that the amount received by way of subsidy could be utilised for any purpose such as acquiring land on w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the decision of the Punjab and Haryana High Court in Ludhiana Central Co-operative Consumers' Stores Ltd. v. CIT [1980] 122 ITR 942 in support of its contention that subsidy received by the assessee would go to reduce the cost. In that case, the assessee-co-operative society did not succeed in its venture and approached the Government for subsidy which was given in the sum of Rs. 15,719 (Rs. 2,500 for delivery van, Rs. 1,250 for equipment and Rs. 11,969 for managerial and rental expenses) for the assessment year 1965-66, and Rs. 12,815 on account of managerial expenses for the assessment year 1967-68. The assessee's case for both the years in question was that the subsidy was a receipt of casual and non-recurring nature and was hence exempted from tax. The Income-tax Officer did not accept this contention. But, on appeal, the Appellate Assistant Commissioner upheld that claim. The Tribunal agreed with the Income-tax Officer and held that the receipts were revenue receipts. The Punjab and Haryana High Court held that it is the character of the receipt that has to be considered. If a subsidy is given to recoup revenue expenditure, it will take the same colour and will be deemed to be ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e hold that no portion of the cost of the fixed assets has been met directly or indirectly by the Government as urged on behalf of the Revenue. Consequently, the question of reduction of the actual cost of the assets to the assessee does not arise. Computation of the depreciation, investment allowance and development rebate has to be made on the basis of the actual cost of the assets to the assessee without any such reduction. Now, so far as relief under section 80J is concerned, the basis for working it out is the capital employed in an industrial undertaking and not the actual cost of the assets to an assessee. In other words, to compute relief allowable under section 80J of the Act, what is to be considered is the capital employed. It may be that to work out the capital employed, one may have to take into consideration the cost of various assets to the assessee. However, it cannot be gainsaid that the relief under section 80J is not directly linked with the cost of the assets to the assessee. But, apart from that, for the purpose of computation of relief under section 80J of the Act, the definition of "actual cost" in section 43(1) is not relevant. This definition is relevant ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the assessee-society, it could not have been held that the assets so acquired were the assets by purchase by the assessee-society and its value would certainly have gone into computation of capital for purposes of working out tax benefit, and that, merely because the Government, instead of granting machinery or equipment in specie, aided by grant in cash with the avowed and specific object of purchase of equipment and machinery, the form of the transaction should not at all be relevant and material for purposes of determining whether it was an asset acquired by purchase by assessee-society or any other kind of asset. This court held that it was not possible to agree with the assessee that this was in effect and substance a gift of machinery and, therefore, would come within the scope of clause (a) of rule 19(1) prescribing the capital value of the assets acquired by purchase. This court further held that the grants-in-aid were not given by the Government for the specific purpose of acquiring plant and machinery for the two projects, but they were general grants, not specifically relatable to the plant and machinery The basis of the argument for the assessee for taking out the part ..... X X X X Extracts X X X X X X X X Extracts X X X X
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