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Judgment
S. N. PHUKAN C.J. - By this common judgment and order, we propose to dispose of the abovesaid Income Tax references.
All the references are under sub-section (1) of section 256 of the Income Tax Act, 1961 ("the Act", in short), from the Income Tax Appellate Tribunal, Chandigarh, on the prayer of the Revenue. The common question has been referred to this court for opinion. We may refer to only one question in Income Tax Reference No. 1 of 1991. The said question is :
"Whether, on the facts and in the circumstances of the case, the Income Tax Appellate Tribunal was right in law in holding that cash subsidies received by the assessee are not to be deducted from the cost of machinery and plant and building u/s 43(1) of the Income Tax Act, 1961, for determining their actual cost for the purposes of depreciation u/s 32 of the Act ?"
We may also refer to the facts of the case in the above reference (1 of 1991). The Assessing Officer in this case found that subsidy was received for the value of the capital assets, and the assessee did not reduce the said subsidy to work out depreciation and investment allowance. Accordingly, the Assessing Officer deducted the subsidy received in that respect and made the assessment accordingly, thereby allowing the depreciation and investment allowance after reducing the subsidy from the value of the assets. Being aggrieved, the assessee filed an appeal before the Commissioner of Income Tax (Appeals) who decided the case in favour of the assessee. An appeal was laid by the Revenue before the Tribunal which was also decided in favour of the assessee.
The Tribunal took note of the decisions of the Madhya Pradesh High Court in COMMISSIONER OF Income Tax Vs. BHANDARI CAPACITORS PRIVATE LTD., and Commissioner of Income Tax Vs. Premier Extraction (P.) Ltd., and also the decision of the Karnataka High Court in Commissioner of Income Tax Vs. Diamond Dies Manufacturing Corporation Ltd., and noted that there are conflicting views expressed by various High Courts and accordingly made the present references holding that the above question, being a question of law, is referable to this court.
We have heard learned counsel for the Revenue as well as learned counsel for the assessees.
Before considering the question independently, we may first refer to various decisions of different High Courts on this point.
The Madhya Pradesh High Court in COMMISSIONER OF Income Tax Vs. BHANDARI CAPACITORS PRIVATE LTD., considered the question, namely, whether the capital subsidy was not deductible in computing the actual cost of the asset as defined in section 43(1) of the Act for the purposes of calculating the depreciation and investment allowance admissible to the assessee and relying upon the decision of the Andhra Pradesh High Commissioner of Income Tax Vs. Godavari Plywoods Ltd., held that as the cash subsidy was not granted for the specific purpose of meeting any portion of the fixed capital cost, machinery, etc., the amount of such subsidy was not deductible in computing the actual cost of the asset as defined in section 43(1) of the Act. In Commissioner of Income Tax Vs. Godavari Plywoods Ltd., , the High Court, while considering the Central Subsidy Scheme as well as the State Incentive Schemes for such subsidies, took a similar view.
The same point was also considered by the Karnataka High Court in Commissioner of Income Tax Vs. Diamond Dies Manufacturing Corporation Ltd., and held that subsidy cannot be deducted from the actual cost of the assets and depreciation shall be allowed without reducing the same by the amount of the subsidy granted. The Madhya Pradesh High Court in Commissioner of Income Tax Vs. Premier Extraction (P.) Ltd., also considered the same question and answered it in favour of the assessee and against the Revenue. The same view was expressed by the Gujarat High Court in Commissioner of Income Tax Vs. Grace Paper Industries Pvt. Ltd., Whitco Ltd., Amit Stampings and Narendra M. Lakhadia, and also by the Kerala High Court in Commissioner of Income Tax Vs. Kerala State Drugs and Pharmaceuticals Ltd. (No. 1), . The Madras High Court was also of a similar view as in Srinivas Industries Vs. Commissioner of Income Tax, .
A similar view was taken on the same question by different High Courts in the following cases. COMMISSIONER OF Income Tax Vs. COCHIN CO. (P.) LTD., ; Commissioner of Income Tax Vs. Ambica Electrolytic Capacitors Pvt. Ltd. and Others, Commissioner of Income Tax Vs. Shree Rayalaseema Papers Mills Ltd., ; Commissioner of Income Tax Vs. Orissa Industries Ltd., ; Commissioner of Income Tax Vs. Coromandel Leathers (Pvt.) Ltd., ; Commissioner of Income Tax Vs. Kalinga Jute Products Pvt. Ltd., ; Commissioner of Income Tax Vs. Metal Powder Co. Ltd., ; Commissioner of Income Tax Vs. Progressive Engineering and Annapurna Roller Flour Mills Pvt. Ltd., and Commissioner of Income Tax Vs. Meghalaya Plywood Ltd.,
This question also came up before this court and the same answer was given. The decision was rendered in CIT v. Ruchira Papers Ltd. [1994] 208 ITR 601.
It may be stated that only the Punjab and Haryana High Court has taken a contrary view in Ludhiana Central Co-operative Consumers Stores Ltd. Vs. Commissioner of Income Tax, We are unable to accept the view expressed by the Punjab and Haryana High Court and instead accept the view expressed by other High Courts for the reasons stated below.
From the facts of the cases, we find that subsidy was granted to promote industries in backward areas by affording incentive to entrepreneurs to start industries in such areas. This subsidy is, however, refundable if the industry is not operated for five years. It appears from the record that this amount of subsidy can be used for any purpose connected with the industry as it desires and the subsidy amount is relative to the cost of land, the rent for the building or plant and machinery and out of the total amount, a percentage is given as cost.
Section 43 of the Act defines certain terms relevant to income from profits and gains of business or profession. Sub-section (1) of the said section, inter alia, provides that for the purpose of sections 28 to 41 and section 43, "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.
From the subsidy scheme, it appears that the subsidy is not to subsidise the cost of any particular asset such is plant and machinery but the purpose of the said scheme is to give incentive to entrepreneurs. Therefore, it cannot be said that the subsidy offered or granted is to subsidise the cost of plant or machinery. The assessee has to pay the full cost of plant and machinery and that being the position and as the subsidy is not granted to meet any portion of the cost of acquiring any plant and machinery, the subsidy received by the assessee from the Government is not deductible from the cost of plant and machinery for the purpose of calculating depreciation thereon. We say so as this subsidy will not come u/s 43 of the Act. We may also add that the assessee may spend the subsidy as he desires in connection with the industry established by him as it is a monetary incentive to set up industry in the backward areas.
For the above reasons, we are unable to agree with the views expressed by the Punjab and Haryana High Court, but accept the view expressed by other High Courts.
We, therefore, answer the question in the affirmative, that is, in favour of the assessee and against the Revenue and dispose of all the abovesaid references accordingly. A copy of the judgment under the signature of the Registrar and the seal of the High Court shall be transmitted to the Appellate Tribunal. No order as to costs.