TMI Blog1986 (10) TMI 14X X X X Extracts X X X X X X X X Extracts X X X X ..... s under the scheme were clearly specified. In order to become eligible to the Central subsidy, the industrial units should have been set up in the backward areas after the dates specified in the scheme. The industrial units are also eligible for Central subsidy where effective steps were taken to set them up after the specified dates. The scheme specifies the nature of " effective steps " to be taken for this purpose. All industrial units including servicing units, having fixed capital investment in land, buildings and machinery, whether in the public or private sectors, are eligible for the subsidy. Existing units can also claim subsidy for effecting substantial expansion after the crucial dates mentioned in the scheme in so far as the expanded portion is concerned. The quantum of subsidy is also specified in the scheme. For claims relating to the period ending February 28, 1973, the subsidy is 10% of the fixed capital investment or Rs. 5 lakhs, whichever is lower. For claims relating to the period commencing from March 1, 1973, the subsidy is 15% of the fixed capital investment or Rs. 15 lakhs, whichever is lower. The procedure for claiming the subsidy is specified in the scheme. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 0 lakhs in all the areas which had been declared as backward under the Six-Point Formula by the Government and excluding those covered by the Central Subsidy Scheme. In respect of industrial units set up, or where substantial expansion of the existing unit is effected, in Scheduled (Tribal) Areas, investment subsidy is granted on the fixed capital cost at 20%, subject to a ceiling of Rs. 15 lakhs. In such Scheduled (Tribal) Areas where Central subsidy is admissible, the balance to make up the total of 20% of the investment subsidy will be given by the State Government. No investment subsidy is admissible in the areas not declared as backward either under the Central Subsidy Scheme or under the Six-Point Formula. The investment subsidy is admissible provided the fixed capital cost on land, buildings, plant and machinery does not exceed Rs. 1 crore. In exceptional circumstances, investment subsidy is granted where fixed capital cost exceeds Rs. 1 crore. Inasmuch as the investment subsidy is determined at a specified percentage of the fixed capital cost, the scheme defines the expression, " Fixed Capital Cost ". According to the definition, " Fixed Capital Cost " means investment i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... om the actual cost of the fixed assets to the assessees, the amount of subsidy received by the assessees under the schemes above referred to and granted depreciation on the actual cost of the assets so reduced. The Income-tax Officers reduced the cost of the various fixed assets by applying the rule of proportion of the subsidy to the total cost. Similar adjustment was made by the Income-tax Officers in regard to claims for development rebate/investment allowance. The assessees questioned, in appeals filed, the correctness of the adjustments made by the Income-tax Officers, as mentioned above. The appeals filed by the assessees were allowed by the Commissioner of Income-tax (Appeals)/ Appellate Assistant Commissioners accepting the assessees' contention that the subsidy paid to the assessees, in accordance with the schemes above referred to cannot be reduced from the actual cost of the fixed assets. Thereupon, the Revenue filed appeals before the Income-tax Appellate Tribunal. The Income-tax Appellate Tribunal dismissed the appeals filed by the Revenue upholding the view of the first appellate authority. Aggrieved by the order of the Income-tax Appellate Tribunal, the Commiss ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ecision of the Commissioner of Income-tax (Appeals) and dismissed the appeal filed by the Revenue. The submissions of learned standing counsel for the Revenue are brief and basically founded on section 43(1) of the Income-tax Act which contains the definition of the expression, " Actual cost It may be relevant to extract the definition, " Actual cost " below: " 43. In sections 28 to 41 and in this section, unless the context otherwise requires (1) `actual cost' means 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 other person or authority. " Learned standing counsel contends that the basic purpose of granting subsidy to entrepreneurs under the Central Outright Grant or Subsidy Scheme, 1971, or under the State Incentive Scheme formulated through G. 0. Ms. No. 224, dated March 9, 1976, is to enable the entrepreneurs to meet a part of the cost of the fixed asset for setting up the industry. It is pointed out that the investment subsidy is given at a specified percentage on the fixed capital cost. Drawing attention to the definition of the expression, " fixed capital cost ", le ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eration the order of the Special Bench stating that the view taken by the Special Bench is correct in law. It is submitted by learned counsel that on an examination of the Central Subsidy Scheme as well as the State Incentive Scheme above referred to, it is not possible to come to the conclusion that the subsidy is granted for the purpose of meeting a portion of the cost of land, buildings, plant and machinery, etc. Unless it can be definitely said that the subsidy is granted for the specific purpose of enabling the assessee to meet a part of the cost of the assets, learned counsel contends, it is not permissible to reduce the actual cost of the assets by the amount of subsidy granted, acting under section 43(1) of the Act. Learned counsel pointed out that the subsidy under the schemes is granted basically for the purpose of ensuring balanced regional development so that the entrepreneurs can be induced to set up new industries in backward areas, thus assuring development of the backward regions. The subsidy is to serve the purpose of bringing about rapid industrial growth in the State. As the subsidy is granted for these basic purposes, it is not permissible to hold that the subsi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the entrepreneurs to establish industries in backward areas. The incentives can vary in character. Supply of power free or at a concessional cost, holiday from the levy of taxes (State or Central) either wholly or in part, provision of government land free of cost or at comparatively cheaper prices and provision of other infrastructural facilities at a subsidised cost are some of the measures which can be adopted and offered to entrepreneurs. In some cases, the Government may decide upon a cash grant by way of subsidy so that the cash assistance granted to the entrepreneurs can be utilised for any purpose connected with the establishment of industry in backward areas. The cash subsidy may be used by way of working capital or for a variety of other purposes connected with the establishment and running of the business. Where grant of cash assistance is considered by the Government to be an appropriate form of incentive, the question for consideration is how the amount of cash subsidy should be determined. Here again the Government may follow various methods to determine the cash subsidy. One of the accepted methods is to find out the total amount invested by an entrepreneur in acquir ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... h subsidy with reference to the fixed capital cost is only a measure (of quantification) adopted and cannot, in our opinion, be considered to be for the specific purpose of meeting any portion of the fixed capital cost. We have, therefore, no hesitation in coming to the conclusion, on a careful examination of the schemes under consideration, that the subsidy granted to the assessee cannot be related to meeting a portion of the cost of the assets so that, for purposes of section 43(1) of the Act, such subsidy can be reduced from the amount of actual cost of the assets to the assessee. It seems to us that the specified percentage of the fixed capital cost taken as the basis for determining the subsidy under the scheme is only a measure (of quantification). The subsidy is granted more as recompense for the hardships and inconveniences which the entrepreneur may encounter while setting up industries in backward areas. In that view of the matter, we uphold the decision of the Special Bench of the Tribunal that the subsidy granted to the entrepreneurs cannot be reduced from the actual cost of the assets to the assessee. In our opinion, therefore, the Tribunal was correct in coming to the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... needs of the present situation, Government have been considering revision of these incentives (mentioned in the two G.Os. aforesaid) so as to more effectively serve the purpose of bringing about rapid industrial growth in the State and along with it to serve the purpose of bringing about this growth in all parts of the State, with particular attention to the backward taluks and blocks and of stimulating new entrepreneurial development ......" Various incentives were provided under the scheme called " State Incentive Scheme ". The first such incentive is called " Investment Subsidy " mentioned in paragraph " A ". These incentives were offered to all new industries which go into regular production on Or after January 1, 1976. Those industries which go in for substantial expansion, i.e., added fixed capital cost of a value of not less than 25% of the undepreciated value of the existing unit's capital cost, were also eligible for these incentives. The investment subsidy incentive is provided in the following terms: "A. Investment Subsidy Under this scheme, entrepreneurs setting up new industrial units and/or effecting substantial expansion of the existing units will be eligibl ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ration to the extent required for the successful running of the industry including equipment, laboratory equipment, dies, jigs and fixtures excluding small tools but including maintenance machinery. " " 4. 'Investment subsidy' means the subsidy given at specified percentage on the fixed capital cost. " It was further provided that before an industry avails of the investment subsidy, it has to execute an agreement bond in the prescribed form provided in annexure-V, before the disbursing authority. The actual amount was to be released only on executing such agreement. Annexure-V provides the form of agreement. The agreement provides that if the unit goes out of production within 5 years after commencement, the State Government shall have the right to claim refund of the amount paid. The Central Outright Grant or Subsidy Scheme, 1971, also provides similar incentives. Clause 5 of the Scheme provides that the subsidy shall be 10% of the fixed capital investment or Rs. 5 lakhs, whichever is lower, relating to the period ending February 28, 1973. In respect of the claim relating to the period commencing from March 1, 1973, the subsidy to be given was 15% of the fixed capital inv ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ision (see our judgments being pronounced today in R.C. No. 144 of 1985 and R.C. No. 148 of 1985). The question before us is entirely different and it is this : whether the amount of subsidy received by the assessees should be deducted from the value of the assets while determining the " actual cost " for the purpose of allowing depreciation ? According to section 32(1) of the Income-tax Act, depreciation in the case of buildings, machinery, plant or furniture shall be allowed at such percentage " on the written down value thereof " as may in any case or class of cases be prescribed. Clause (6) of section 43 defines " written down value ". Excluding the proviso and the Explanations which are not necessary for our purpose, the definition reads as follows "(6) `written down value' means (a) in the case of assets acquired in the previous year, the actual cost to the assessee ; (b) in the case of assets acquired before the previous year, the actual cost to the assessee less all depreciation actually allowed to him under this Act, or under the Indian Income-tax Act, 1922 (11 of 1922), or any Act repealed by that Act, or under any executive orders issued when the Indian Income ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... it is argued. It is further contended by learned standing counsel that if the investment subsidy is not so deducted, it would amount to conferring an unwarranted benefit upon the assessee since he, would be getting the depreciation not only upon the actual amount spent by him but also upon the amount of investment subsidy received by him from the Government; there are no reasons to confer such double benefit. On the other hand, it is contended by learned counsel appearing for the assessees that the percentage indicated in the schemes is merely a measure for determining the amount of subsidy and that by granting the said subsidy, it cannot be said that the Central Government/State Government has met either directly or indirectly any portion of the cost of the buildings or machinery. It is submitted that the said subsidy is granted as a recompense for, and in lieu of setting up of, industries in backward areas with all their disadvantages and handicaps. On an examination of the scheme, I am of the opinion that it is capable of being understood on both the hypotheses. The language of G.O. Ms. No. 224 is that entrepreneurs setting up new industrial units shall be " eligible for inve ..... X X X X Extracts X X X X X X X X Extracts X X X X
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