Madras H.C : Whether, on the facts and in the circumstances of the case, the Tribunal is justified in holding that the subsidy received by the assessee under the scheme is to meet the cost of the machinery and, therefore, will fall under s. 43(1) of the IT Act, 1961 ?

High Court Of Madras

Srinivas Industries vs. CIT

Section 43(1)

Asst. Year 1974-75, 1975-76, 1976-77, 1977-78

Ratnam & Thanikkachalam, JJ.

Tax Case Nos. 764 to 767 of 1981, 900 & 901 of 1982 and 1136 of 1984

18th January, 1991

Counsel Appeared

C.V. Rajan, for the Petitioner : R. Janakiraman, for the Respondent

RATNAM, J.:

These tax case references, though relating to different assessees and different assessment years, are dealt with together, as an important and interesting common question of law arises for decision. However, it will be convenient to refer to the facts and the questions arising for decision in each of these references. We shall first take up T. C. Nos. 764 to 767 of 1981, where the assessee, Srinivas Industries, is a registered firm carrying on business in the manufacture and sale of printed stationery, such as cartons, wedding cards, labels, etc. The assessment years relevant to these references are 1974-75 to 1977-78. During the accounting year ended 31st March, 1974, the assessee purchased two colour offset printing machines at a cost of Rs. 5,64,059.57 and installed them in March, 1974, and the total outlay including the cost of installation came to Rs. 5,69,060.32. Under a scheme sponsored by the Government of India styled as 10per cent (which was later increased to 15per cent, subject to a maximum of 15 lakhs of rupees) Central Outright Grant or Subsidy Scheme, 1971, for industrial units set up in backward areas w.e.f. 26th Aug., 1971, covering the Fourth Five Year Plan period, the assessee obtained Rs. 85,359 by way of subsidy and entered into an agreement with the State Industries Promotion Corporation of Tamil Nadu Ltd. (SIPCOT, for short) undertaking to utilise the said subsidy for the scheme and to submit periodical reports of such continued use. For the asst. yrs. 1974-75 and 1975-76, depreciation and development rebate had been granted to the assessee on the original cost without making any deduction for the subsidy.

While dealing with the assessment for the asst. yr. 1976-77, the ITO became aware of the availing of the subsidy by the assessee and reopened the assessments for the asst. yrs. 1974-75 and 197576 withdrawing the depreciation granted earlier with reference to the original cost without reckoning the subsidy and passed reassessment orders reducing the development rebate and depreciation granted earlier. For the asst. yrs. 1976-77 and 1977-78 also, depreciation and reliefs under s. 80J of the IT Act, 1961 (hereinafter referred to as “the Act”), were restricted on the basis that the subsidy made available to the assessee reduced the cost of the capital assets.

On appeal by the assessee before the AAC, the reassessment and assessment orders were affirmed rejecting the stand of the assessee that the subsidy received could not be reckoned for purposes of granting depreciation and development rebate. On further appeal by the assessee before the Tribunal, it took the view that, though under the scheme, subsidy was meant as an incentive for the setting up of industries in backward areas, it was made to cover the cost of the machinery and, therefore, liable to be reduced from the total cost in order to arrive at the actual cost under s. 43 (1) of the Act and the assessee was held entitled to depreciation only on the reduced cost. So holding, the Tribunal upheld the reassessment as well as assessment orders for the asst. yrs. 1974-75 to 1977-78. Under s. 256(2) of the Act, at the instance of the assessee, the following questions of law have been referred to this Court for its opinion :

“1. Whether, on the facts and in the circumstances of the case, the Tribunal is justified in holding that the subsidy received by the assessee under the scheme is to meet the cost of the machinery and, therefore, will fall under s. 43(1) of the IT Act, 1961 ?

2. Whether the Tribunal is tight in holding that it is an outright grant even though it is subject to certain conditions as per the agreement entered into with SIPCOT on 21st Jan., 1975 ? 3. Whether the Tribunal is correct in holding that the subsidy has to be taken note of for the purpose of determining the actual cost under s.43(1) even though it is received in a year later than the year in which the machinery was acquired and installed ?”

We may now notice the facts in T. C. Nos. 900 and 901 of 1982. The assessee, in these references, is a registered firm and the assessment years with which we are concerned are 1974-75 and 197576. Pursuant to the subsidy scheme referred to earlier, the assessee received a sum of Rs. 32,537 through SIPCOT by way of subsidy and, in the course of the assessment for the asst. yr. 1974-75, the assessee claimed depreciation on the value of the plant and machinery without deducting the subsidy received by it. In computing the allowable depreciation, the ITO took the view that the subsidy received by the assessee resulted in the reduction of the cost of the plant and machinery and, by applying s. 43(1) of the Act, depreciation and development rebate were allowed on the amount of cost as reduced by the amount of subsidy received. In other words, depreciation and development rebate were allowed on the reduced cost.

On appeal, the AAC viewed the subsidy scheme as one intended to help the entrepreneurs in the installation of machinery, the result of which was to reduce the actual cost of plant and machinery and held that, as a consequence, the grant of subsidy resulted in the reduction of the cost of capital assets, attracting s. 43(1) of the Act. On further appeals by the assessee before the Tribunal, a Special Bench of the Tribunal dealt with those appeals, as there was a difference of opinion between two Benches on the issues that arose in the appeals. The Special Bench of the Tribunal considered the scope of the scheme as well as the provisions therein elaborately and ultimately concluded that the subsidy should not be deducted from the actual cost in terms of s. 43 (1) of the Act in allowing depreciation and development rebate. Under s. 256(1) of the Act, at the instance of the Revenue, the following common question of law has been referred to this Court for its opinion : “Whether, on the facts and in the circumstances of the case and having regard to the provisions of s. 43(1) of the IT Act, 1961, the view expressed by the Tribunal that the subsidy received from SIPCOT did not go to reduce the actual cost of the plant and machinery for allowing depreciation and development rebate, is right in law?”

In Tax Cases Nos. 122 and 1136 of 1984, the assessee is a firm carrying on business in tanning and export of skins and hides and the relevant assessment years are 1975-76 and. 1976-77. In respect of the assessment year 1975-76, the assessment was originally completed by allowing depreciation on assets at a fair value, without deduction of the subsidy received by the assessee under the scheme referred to earlier from the cost of machinery which was later considered to be a mistake and the assessment was reopened and the excess depreciation allowed earlier was withdrawn. On appeal by the assessee against the order of reassessment on the question of jurisdiction and also on merits, the AAC followed the decision of the Special Bench of the Tribunal which forms the subject- matter of references in T. C. Nos. 900 and 901 of 1982 and cancelled the reassessment without going into the question of jurisdiction. On further appeal by the Revenue before the Tribunal, the Tribunal upheld the order of the AAC and dismissed the appeal. Under s. 256(1) of the Act, at the instance of the Revenue, the following question of law has been referred to this Court for its opinion : “Whether, on the facts and in the circumstances of the case, and having regard to the provisions of s. 43(1) of the IT Act, the Tribunal was justified in holding that the subsidy received under, the Central Outright Grant or Subsidy Scheme, 1971, should not be deducted from the actual cost of the assets for allowing depreciation in the assessee’s case ?”

For the asst. yr. 1976-77, the assessment already made did not take into account the subsidy received by the assessee under the scheme referred to earlier and that led to the reopening of the assessment under s. 147(a) of the Act and the depreciation was recomputed by reducing the cost of the plant and machinery to the extent of subsidy received from SIPCOT in terms of s. 43(1) of the Act. On appeal by the assessee, the AAC followed the decision of the Tribunal in respect of the same assessee for the asst. yr. 1975-76 and held that the subsidy received by the assessee cannot be treated as a portion of the cost of the plant and machinery, either directly or indirectly, and,consequently, should not be deducted from the cost of the assets for computing the actual cost for allowing depreciation. On further appeal by the Revenue to the Tribunal, it referred to the decision of the Special Bench of the Tribunal forming the subject-matter of references in Tax Cases Nos. 900 and 901 of 1982 and the assessee’s own case in respect of the asst. yr. 1975-76 and dismissed the Departmental appeal. Under s. 256(1) of the Act, at the instance of the Revenue, the following question of law, for the asst. yr. 1976-77, has been referred to this Court for its opinion : “Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that the subsidy received from SIPCOT should not be taken into account while determining the cost of the assets tinder s. 43(1) of the IT Act, 1961, for the purpose of allowance of depreciation?” Referring to the provisions in the subsidy scheme, learned counsel for the assessees contended that the avowed object of the scheme is to encourage the setting up of industries in the industrially backward areas of the State and for that purpose subsidy is granted not in an outright manner, but subsequent to the setting up of the industry and upon certain conditions and that only after the fulfilment of those conditions, the subsidy becomes a receipt on which the chronology of dates, as per the scheme, has a material bearing, touching upon the question of meeting the cost of the plant and machinery. Drawing attention to s. 43(1) of the Act, learned counsel submitted that the provision should be strictly construed and a subsidy of the nature provided under the scheme cannot be construed to be one to meet the cost of the plant and machinery and would not, therefore, go towards the reduction of the amount of actual cost.

It was also the further submission of learned counsel that though the quantum of subsidy to be made available is determined as a percentage of the fixed capital assets inclusive of the plant and machinery, that would only be for purposes of quantification and not for defraying part of the cost of the plant and machinery and the subsidy amount made available is not the cost of the machinery met at the cost of the subsidy, as the amount could be spent for other purposes connected with the industry. Our attention was also drawn to several decisions in support of these submissions which we shall notice later in the course of this judgment.

On the other hand, learned counsel for the Revenue submitted that the real object and purpose of granting subsidy under the scheme was that if industries were set up in industrially backward areas, the Government would meet a portion of the cost of the fixed capital assets and, therefore, the subsidy amount should be reduced from the cost of the plant and machinery while allowing depreciation. Learned counsel for the Revenue also attempted to justify the deduction of the subsidy amount for purposes of allowing depreciation by invoking the theory of reimbursement of the entrepreneur by the Government in respect of the amounts spent by him in the acquisition of the plant and machinery for setting up the industry. Reference in this connection was also made to Departmental Circular No. 190, dt. 1st March, 1976, and some decisions which we shall notice later.

In order to consider the rival submissions made as aforesaid, it would be first necessary to ascertain what exactly is meant by the word “subsidy” in the context of the provisions of the scheme. The word “subsidy” connotes aid, particularly financial, given by the Government to entrepreneurs, industries, etc., or to keep down the price of a commodity, by making available to the consumer, goods at a lower cost. Bearing this in mind, we, may now scrutinise the provisions of the subsidy scheme which forms annexure “D” to the stated case in Tax Cases Nos, 764 to 767 of 1981. The scheme is styled as a subsidy scheme for industrial units to be set up in certain selected backward districts/areas with a view to promote the growth of industries there. We find, therefore, that the primary object of the launching of the scheme is to promote the growth and development of industries in certain industrially undeveloped and backward areas. Clause 3 fixes the sanction of 15per cent subsidy up to 15 lakhs of rupees. Under clause 4(f) of the scheme, fixed capital investment means investment in land, building and plant and machinery. The further provision for assessment of total fixed capital investment shows that land, building and the plant and machinery will be taken into account. With reference to land, the actual price paid for the land to the extent needed for the purpose of the plant will be taken into account. Regarding building, the price paid for the building would be considered, but not the rent of a hired building. In respect of plant and machinery, the value of the plant and machinery as erected at site will be taken into account, inclusive of the cost of productive equipment, such as tools, jigs, dies and moulds, transport charges, demurrage, insurance premium, etc., and the amount invested on goods carriers to the extent of utilisation for transport of raw materials and marketing of the finished products. Clause 4(h) states that 10per cent Central Outright Grant or Subsidy means one-tenth of the total fixed capital investment or additional total fixed capital investment, as the case may be, or a sum of five lakhs of rupees, whichever is less. For units coming up after 1st March, 1973, subsidy had been provided at 15per cent of the total fixed capital investment or additional total fixed capital investment, as the case may be, subject to a maximum of fifteen lakhs of rupees. Clauses 5 and 6 of the scheme outlined the procedure for claiming the subsidy and the disbursement thereof. Clause 7 is significant in that it provides for the disbursement of the subsidy to the unit at the time the unit goes into production in respect of new industrial units. In respect of the existing industrial units, the subsidy will be disbursed at the time substantial expansion has been effected and the unit had gone into production.

The scheme contains certain other Provisions which will not be really necessary for purposes of these references. Annexure “F” to the stated case in Tax Cases Nos. 764 to 767 of 1981 is the agreement entered into between the assesseel-firm and the SIPCOT and one of the clauses therein states that the subsidy sanctioned is to be disbursed after the unit goes into production and it is also again reiterated in another clause that the disbursement shall be made after the unit goes into production and proof of the same is produced to SIPCOT. Provision is also made for periodical inspection for a period of five years from the date on which the unit goes into production. Thus, from the provisions of the scheme as well as the agreement referred to above, it is seen that the predominant object is generally to encourage the setting up of new industries and the expansion of existing industries in certain backward and specified areas. The scheme for subsidy may provide assistance to entrepreneurs for the purpose of industrial development and expansion in a variety of ways. For instance, the Government may supply free power, give a holiday from taxes, provide land free or at cheap rates or at cost or other infrastructural facilities at subsidised rates. Such subsidy may also take the form of financial aid as under this scheme. In order to determine the quantum of subsidy to be made available to a person eligible for such subsidy under the provisions of the scheme, some method has necessarily to be adopted and, under the scheme in question, the method adopted to quantify the subsidy is 10per cent or 15per cent on the fixed capital investment which includes the actual, price paid for the land, building, value of machinery erected at site, etc., as stated in cl. 4(f) of the scheme.

The quantification of the subsidy in the manner provided under the scheme, though at a percentage of the value of the fixed capital investment as provided under cl. 4(f) of the scheme, is only in the nature of a formula, as it were, and not relatable to working out of the subsidy in relation to each one of the assets, like land, building, machinery, etc., forming the component parts of the fixed capital investment under cl. 4(f) of the scheme. We may, in this connection, make a reference to Senairam Doongarmal vs. CIT (1961) 42 ITR 392 (SC), where the question arose regarding the character of the payments made to the assessee in respect of factory and other buildings belonging to the assessee situate in an estate and requisitioned for defence purposes by military authorities.

Under the Defence of India Rules, the assessee was paid compensation calculated on the basis of the out-turn of tea that would have been manufactured by the assessee during the years 1944 and 1945 and that amount was sought to be assessed as income of the assessee. One of the arguments raised, was that the compensation was paid as the equivalent of the likely , profits and in repelling that, the Supreme Court, after referring to the observations of Lord Buckmaster in Glenboig Union Fireclay Co. Ltd. vs. CIR (1922) 12 TC 427 (HL) and affirmed by Lord MacMillan in Van den Berghs Ltd. vs. Clark (1935) 3 ITR (Eng Cas) 17 (HL), that there is no relation between the measure that is used for the purpose of calculating a particular result and the quality of the figure that is arrived at by means of the application of that test, stated that that proposition is as, sound as it is well-expressed and that it is the quality of the payment that is decisive of the character of the payment and not the method of the payment or its measure.

These observations would be apposite in these cases also for, it is the real quality of the payment by way of subsidy that matters and not the method evolved to quantify or measure such subsidy. We may observe that the omission of a clause in the scheme regarding the purposes for which the subsidy amount made available could be expended is not without significance. Under the scheme, or even under the terms of the agreement, there is nothing which compels or obliges a person receiving subsidy to spend it in the acquisition of machinery, land or building. This also reinforces the view that the subsidy, though worked out at a percentage of the value of the fixed capital investment as defined in cl. 4(f) of the scheme, is really a method of quantifying the subsidy and does not in any manner impress the subsidy with the character of aid given for an; definite or particular purpose and to be applied for that purpose only. The subsidy scheme, in our view, attempts to bring about expansion and rapid industrial growth in certain areas and also a balanced regional industrial development and the subsidy given appears to us, on the terms of the scheme, to be in the nature of an incentive for an industrial adventure in industrially ill- developed and undeveloped backward areas and remote, distant and inaccessible areas with uneconomical infrastructure as well, We are also of the view that the subsidy really partakes the character of a cash grant expendable for any purpose and not necessarily to be utilised only for the purchase of a particular capital asset.

Having noticed the predominant purpose of the scheme and also the methodology adopted for working out or quantifying the subsidy in any given case, it is now necessary to refer to s. 43(1) of the Act, which defines “actual cost” for purposes of ss. 28 to 41 of the Act. s. 43(1) of the Act states that “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. Sections 32, 32A and 33 of the Act deal with depreciation, investment allowance and development rebate and all these sections constitute a group of sections, i.e., ss. 28 to 41 mentioned in s. 43 of the Act. For the purpose of working out depreciation, the definition of “actual cost” given in s. 43(1) of the Act will apply. Though the expression “actual cost” had been interpreted by Lord Atkin in Corporation of Birmingham vs. Barnes (1935) 3 ITR (Eng Cas) 26 (1935) AC 292 (HL), as the cost, the whole cost and nothing but the cost and that it did not have any relation whatever to the source from which that person had received the money, which he had expended on the plant, to nullify the applicability of a similar interpretation, an Explanation was added w.e.f.1st April, 1962 to s. 10(5) of the Indian IT Act, 1922, that the expression ” 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 the Government or by any public or local authority, etc.

Under s. 43(1) of the Act, “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. The subsidy made available under the scheme, as noticed earlier, cannot be regarded to be a portion of the cost of the capital assets met directly or indirectly by the Government. We may also in this connection point out to the importance of the point of time at which the subsidy was made available, viz., after the units go into production and it is obvious that the availability of the subsidy has no connection whatever with the acquisition of the machinery in respect of that industrial undertaking.

We have carefully considered the provisions of the scheme and we are unable to find anything therein to indicate that the subsidy was intended to enable an entrepreneur to meet a portion of the cost of the machinery acquired for the purpose of setting up an industrial undertaking, as contended by learned counsel for the Revenue. We have earlier pointed out that the subsidy made available is generally in the nature of an incentive, not intended or meant to be utilised by the recipient for the purpose of acquiring a fixed capital asset, like land, building, machinery, etc. We had also referred to the subsidy being made available after the unit goes into production and this would not fit in with the concept of the subsidy being given for the purpose of acquisition of the machinery in respect of the industrial undertaking.

The argument of reimbursment attempted to be put forward by counsel for the Revenue also does not deserve serious consideration or acceptance, for, the nature of the subsidy is determined essentially by the terms of the scheme and, on the provisions found in the scheme, it is difficult to consider the subsidy scheme as one of reimbursement. We had earlier pointed out that the scheme itself is only an incentive scheme with a view to encourage industrialists to venture into industrially undeveloped and ill-developed areas. Regarding Circular No. 190, dt. 1st March, 1976, we may point out that it proceeds on the footing that the subsidy is related to various capital assets, thus attracting s. 43(1) of the Act and the amount of subsidy, accordingly, will have to be deducted from the cost of the asset for purposes of allowing development rebate and depreciation on such asset. We have already referred to the provisions in the subsidy scheme and we have pointed out that the quantum of subsidy is worked out with reference to a certain percentage on the value of the fixed capital investment as detailed in cl. 4(f) of the scheme and that this is only a method and is not in any manner related to the component parts constituting fixed capital investment for purposes of cl. 4(f) of the scheme. We are, therefore, of the view that the circular relied on by learned counsel for the Revenue is of no assistance.

We may make a brief reference to some of the decisions to which our attention was drawn by counsel on both sides in support of their respective contentions. CIT vs. Godavari Plywoods Ltd. (1987) 168 ITR 632 (AP), considered the scope of the Central Subsidy Scheme, 1971, as well as the Andhra Pradesh State Incentive Scheme,1976, and it was held by the Andhra Pradesh High Court that the subsidy scheme was in the nature of a financial incentive directed to encourage and induce entrepreneurs to move to backward areas and establish industries there, so that the region may develop and the grant of subsidy is not for the specific purpose of meeting a portion of the cost of the assets and the percentage of the fixed capital cost adopted as the basis for determining the subsidy is only a measure to quantify the subsidy.

It was also pointed out that the subsidy cannot be deducted from the actual cost of the assets to the assessee and depreciation should be allowed on the actual cost of the assets without reducing the same by the amount of subsidy granted. In CIT vs. Bhandari Capacitors Pvt. Ltd. (1987) 168 ITR 647 (MP), considering the scope of the Central Subsidy Scheme, 1971, the Madhya Pradesh High Court has laid down that the amount of capital subsidy is not deductible in computing the actual cost of the asset, as defined by s. 43(1) of the Act, for the purpose of calculating the depreciation and investment allowance admissible to the assessee. In CIT vs. Premier Extraction Pvt. Ltd. (1989) 175 ITR 22 (MP), the same view had been reiterated. In CIT vs. Diamond Dies Manufacturing Corporation Ltd. (1988) 172 ITR 655, the Karnataka High Court held that, under the subsidy scheme, the amount made available did not have a nexus, direct or indirect, to meet a portion of the actual, cost of any specific capital asset and it could not, therefore, be brought within the purview of s. 43(1) of the Act and the deduction of the subsidy, from the actual cost of the asset, could not be done for purposes of allowing depreciation. In CIT vs. Relish Foods (1989) 180 ITR 454, the Kerala High, Court considered the scope of the subsidy scheme for setting up an industry in, a backward area and laid down that it is really in the nature of an incentive with nothing whatever to do with the cost of a particular asset and as such deductible from the cost of the asset for, the purpose of allowing depreciation and development rebate or even for computation of relief under s. 80J of the Act. In CIT v; Elys Plastics Pvt. Ltd. (1991) 188 ITR 11 (Bom), the Bombay High Court held that under s. 43(1) Of the Act, “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 person or authority and the subsidy under the Central Government Subsidy Scheme worked by the State of Gujarat was given as an incentive and though the quantum of subsidy is calculated on the basis of fixed capital investment of the company in land, building, plant and machinery, etc., that does not lead to the conclusion that the subsidy is to meet the cost of land, building, plant or machinery and there is nothing in the scheme requiring its utilisation towards meeting the cost of land, building, plant or machinery and that s. 43(1) of the Act does not stand attracted to such a subsidy.

In CIT vs. Dewas Synthetics (P.) Ltd. (1991) 188 ITR 16 (Cal), the, Calcutta High Court, considering the Subsidy Scheme of 1971, held that the subsidy was given after the units started operation and it cannot be said that the subsidy must be reduced from the capital asset for the purpose of granting depreciation. The Gujarat High Court, in CIT vs. Grace Paper Industries Pvt. Ltd. (1990) 183 ITR 591 considered the question of “actual cost” to the assessee in terms of section 43(1) of the Act, for purposes of depreciation, development rebate and investment allowance and relief under s. 80J of the Act and held that, under the subsidy scheme of the Central Government implemented by the State Government the subsidy did not form part of the actual cost of plant and machinery and cannot be deducted from the cost of assets in computing depreciation, development rebate and investment allowance, We thus find that the majority of the High Courts have taken the view that the subsidy made available under the scheme cannot be deducted in arriving at the cost of the capital asset for purposes of working out depreciation. However, in CIT vs. Jindal Brothers Rice Mills (1989) 179 ITR 470, relied on by learned counsel for the Revenue, the Punjab and Haryana High Court has taken a contrary view with reference to the scope of the Central Government Subsidy Scheme implemented by the State of Punjab and the grant of subsidy thereunder. After referring to the provisions of the subsidy scheme and s. 43(1) of the Act and also the decisions referred to earlier taking a contrary view, it had been stated that, on a deeper consideration, the learned judges were unable to subscribe to the view taken in those decisions.

The only basis we are able to find for the view so expressed is the fixation of the subsidy at 15per cent of the cost of plant, machinery and building and that would indicate, according to the learned judges, that the object was to reduce the cost of plant, machinery and building by 15per cent of the actual cost. We are with respect, unable to agree with this line of reasoning. The learned judges accepted that, in order to evolve a uniform method avoiding discrimination, the subsidy provided was arrived at a percentage of the value of the plant, machinery and building. When the method of arriving at the quantum of subsidy is accepted as a fixed percentage of the totality of the cost of the plant, machinery and building, we find it difficult to accept that the underlying object of the scheme was to reduce the value of each, one of the component items, for the purpose of quantifying the subsidy by. 16per cent of the actual cost .

The circumstance that there is no indication in the scheme that the subsidy is granted for a particular purpose, thus enabling the recipient to expend the subsidy received on anything, had been brushed aside by merely stating that they were not in agreement. Further, it is seen that it had been erroneously assumed that the subsidy is given for each item separately and, therefore, it would not be open to the assessee to appropriate the subsidy for a purpose other than that for which it was given to him. From the provisions of the subsidy scheme as found in the reports, we are unable to find anything in support of the view taken that the subsidy had been given for each item separately and it was not open to the assessee to appropriate the subsidy for a purpose other than that for which it was given. It had also been stated that there is a nexus between the cost of each item and the subsidy under each head. We are unable to discern any nexus between the cost of each item and the subsidy under each head from the provisions of the scheme, especially when the subsidy fixation is on the basis of a percentage on the totality of the value of the fixed capital investment.

We are unable, therefore, with respect, to subscribe to the view taken in CIT vs. Jindal Brothers Rice Mills (1989) 179 ITR 470 (P & H).

That leaves for consideration the decision in Cyril Lord Carpets Ltd. vs. Schofield (1966) 42 TC 637 (CA), relied on by learned counsel for the Revenue. The assessee-company therein received grants from the Government of Northern Ireland under the Capital Grants to Industry Acts (Northern Ireland) in respect of the capital expenditure on plant or machinery which had already been incurred and paid by the company. The assessee, in the course of the assessment proceedings, took up the stand that reimbursement by a discretionary grant would not amount to meeting the expenditure of the assessee directly or indirectly and the Crown countered it by contending that the expression “met directly or indirectly” includes reimbursement. The Court of Appeal upheld the stand of the Crown holding that to reimburse was to meet the expenditure indirectly and that though the expression “directly or indirectly” was intended to have an enlarging effect, the case did not require such enlargement, as the expenditure incurred was paid off or met by the grants, either directly or indirectly We are of the view that on the provisions in the subsidy scheme, it is difficult to import the idea of reimbursement to justify the reduction of the amount of subsidy received by assessees from the cost of the capital assets for the purpose of working out depreciation. Thus, on a careful consideration of the provisions of the subsidy scheme, its purpose and object and the character of the subsidy, we hold that the amount of subsidy made available cannot be deducted from the cost of the capital asset for purposes of working out depreciation under s. 43(1) of the Act.

We may now proceed to consider the second and the third questions referred in T. C. Nos. 764 to 767 of 1981. We find from the order of the Tribunal that the assessee had taken up the stand that the subsidy was not in the nature of an outright grant and that it should be taken into account only for the asst. yr. 1977-78 and not the earlier years with a view to establish that the subsidy will not fall under s. 43(1) of the Act. We have earlier held, on a consideration of the provisions in the subsidy scheme, the relevant provisions of the Act and the decisions rendered, that the cost of the capital assets cannot be reduced by the amount of subsidy received and s. 43(1) of the Act would be inapplicable. In view of that, it is unnecessary, in our view, to consider the second and the third questions in T. C. Nos. 764 to 767 of 1981.

We, therefore, answer the questions referred to us as under : In T. C. Nos. 764 to 767 of, 1981, the first question is answered in the negative and against the Revenue and the reference in so far as questions Nos. 2 and 3 are concerned, is returned unanswered. The only question referred in T. C. Nos. 900 and 901 of 1982 is answered in the affirmative and against the Revenue. The questions referred in T. C. Nos. 122 and 1136 of 1984 are answered in the affirmative and against the Revenue. There will be, how ever, no order as to costs in all these tax cases.

[Citation : 188 ITR 22]

Malcare WordPress Security