Commissioner of Income Tax vs India Linoleums Ltd.

Ajit K. Sengupta, J.—In this reference u/s 256(1) of the income tax Act, 1961 (''the Act'') for the assessment years 1980-81 to 1983-84 the following common question of law has been referred to this Court: Whether, on the facts and in the circumstances of the case, the Tribunal was justified in upholding the order of the Commissioner (Appeals) to the effect that the capital subsidy of Rs. 1,94,000 in respect of Captive Power Generator should not be deducted from the cost of the asset for the computation of depreciation including extra-shift allowance and investment allowance ?

The facts relating to this reference are that the assessee carried on mainly the business of manufacture and sale of Linoleum and textile yarn in the two divisions, viz., (i) Linoleum division, and (ii) Victoria division. The ITO in the course of assessment found that the assessee received capital subsidy of Rs. 1,94,000 from West Bengal Industrial Development Corporation for the installation of capitive power generator during the period relevant to the assessment year 1980-81 in its Victoria division. The assessee claimed depreciation and extra shift allowance on the cost of generator including the capital subsidy of Rs. 1,94,000.

The ITO viewed that since the assessee received the capital subsidy for the installation of the generator, the cost of the generator will be reduced by Rs. 1,94,000 for the purpose of computation of depreciation. The ITO disallowed the assessee''s claim to the tune of Rs. 38,980, being the proportionate depreciation and extra-shift allowance on the generator to the extent of its value of Rs. 1,94,000. Similarly on the same ground the ITO disallowed the assessee''s claim of investment allowance to the extent of Rs. 48,720, being the 25 per cent of capital subsidy of Rs. 1,94,000. The assessee being aggrieved by the order of the Assessing Officer went in appeal before the Commissioner (Appeals) on the issue and argued that the object or purpose of the grant of that subsidy was to help in maintaining and increasing industrial production and it cannot be taken as an amount intended to meet the part of the cost of depreciable asset.

The Commissioner (Appeals) considering the matter and relying on the decision in the case of Pioneer Match Works v. ITO [1983] 3 ITD 714 (Mad.)(SB) deleted the disallowance on Rs. 38,980 being depreciation and extra-shift allowance on the value of generator to the extent of the capital subsidy of Rs. 1,94,900. He further held that the assessee was also entitled to investment allowance on the actual cost of the generator without reducing the same by the amount of capital subsidy received by the assessee.

The revenue, being aggrieved by the said order of the Commissioner (Appeals), preferred second appeal before the Tribunal. The Tribunal followed the decision of the Special Bench of the Tribunal, Madras, in the case of Pioneer Match Works (supra) and held that the assessee''s claim was allowable relating to depreciation, extra-shift allowance and investment allowance as mentioned hereinabove. Thus, the Tribunal confirmed the Commissioner (Appeals)'' order.

A similar question came up for consideration before this Court in the case of CIT v. Woodcraft Products Ltd. [IT Reference No. 281 of 1987 dated 28-2-1992]. There we have held that unless a capital subsidy is relatable to any particular asset, such subsidy cannot be deducted from the written down value of the capital asset for the purpose of allowing depreciation allowance or investment allowance, as the case may be. In this case we have noted that this subsidy was allowed specifically for the purpose of installation of captive power generator during the relevant assessment year 1980-81. It was not a subsidy which was generally granted for the development of industries.

Having regard to the facts and circumstances of this case and having regard to the principles laid down in the aforesaid judgment, the question in this reference is answered in the negative and in favour of the revenue. There will be no order as to costs.

Shyamal Kumar Sen, J.

I agree.