Commissioner of Income Tax vs Radha Madhav Gum Factory

B.R. Arora, J.—The Tribunal, Jaipur Bench, Jaipur, at the instance of the revenue u/s 256(1) of the income tax Act, 1961 (''the Act'') has referred the following questions for the opinion of this Court:

Whether, on the facts and in the circumstances of the case, the Tribunal was justified in:

(a) holding that cash compensatory support for export is not taxable as revenue receipt?

(b) holding that the amount of Central Government Subsidy is not deductible from the money cost to the assessee of its plant, machinery and building while computing the original cost thereof u/s 43(1) of the income tax Act, 1961 for the purpose of allowing depreciation, etc.?

The material facts, on the basis of which question No. (a) is to be decided, are similar to the facts in CIT v. Saboo Emery Stones [D.B. IT Reference No. 7 of 1990] and the above-quoted question No. (a) is identical with the question which was for decision in Saboo Emery Stone''s case (supra). For the same reasons given in Saboo Emery Stone''s case (supra), this question is decided in favour of the revenue and against the assessee and it is held that the cash compensatory support (by whatever name it may be called) is liable to tax under the provisions of the Act.

An identical question to question No. (b) referred above, came up for consideration before the Division Bench of this Court in the case of Commissioner of Income Tax Vs. Ambica Electrolytic Capacitors Pvt. Ltd. and Others, and the Division Bench held as under:

The subsidy or investment subsidy given by the Government for the development of industries in backward areas cannot be deducted from the actual cost for purposes of depreciation or investment allowance. A perusal of the Central Outright Grant or Subsidy Scheme, 1971, shows that the subsidy is given to industrial units in certain backward areas with a view to promoting the growth of industries in these areas. The subsidy is not qualified in any manner. It is an ex gratia allowance to industries in selected backward areas or districts. The meaning of the term ''subsidy'' as given in the dictionary is ''financial aid given by Government towards expenses of an undertaking or institution held to be of public utility, or to producers of commodities, etc., to enable goods or services to be provided at lower cost to the consumer''. From the definition of subsidy, it appears that is in the nature of pecuniary assistance from the Government to the entrepreneurs so as to encourage the establishment of industries in all backward areas. Therefore, such subsidy/investment subsidy cannot be excluded from the actual cost for giving the benefit of depreciation. This assistance will certainly form part of the total assets of the assessee." (p. 494)

An identical question quoted above, came up for consideration before the Supreme Court in the case of Commissioner of Income Tax, Hyderabad Vs. M/s. P.J. Chemicals Ltd., whether the amount of subsidy is liable to be deducted from the ''actual cost'' u/s 43(1) of the Act for the purpose of calculating the depreciation, etc., and the Supreme Court held as under:

Where Government subsidy is intended as an incentive to encourage entrepreneurs to move to backward areas and establish industries, the specified percentage of the fixed capital cost, which is the basis for determining the subsidy, being only a measure adopted under the scheme to quantify the financial aid, is not a payment, directly or indirectly, to meet any portion of the ''actual cost''. The expression ''actual cost'' in section 43(1) of the income tax Act, 1961, needs to be interpreted liberally. Such a subsidy does not partake of the incidents which attract the conditions for its deducibility from ''actual cost''. The amount of subsidy is not to be deducted for the ''actual cost'' u/s 43(1) for the purpose of calculation of depreciation, etc." (p. 830)

For the reasons given in Ambica Electrolytic Capacitors (P.) Ltd.''s case (supra) and P.J. Chemicals Ltd.''s case (supra), question No. (b) is answered in favour of the assessee and against the revenue. Consequently, the reference is answered as under:

Question No. (a) : Question No. (a) is answered in favour of the revenue and against the assessee, and it is held that the cash compensatory support (by whatever name it may be called) is liable to tax under the provisions of the Act.

Question No. (b) : Question No. (b) is answered in favour of the assessee and against the revenue and it is held that the amount of subsidy is not liable to be deducted from the ''actual cost'' u/s 43(1) for the purpose of calculation of the depreciation, etc.