SRINIVAS INDUSTRIES Vs. COMMISSIONER OF INCOME TAX

JUDGEMENT

(1.) 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, s labels, etc. The assessment years relevant to these references are 1974-75 to 1977-78. During the accounting year ended March 31, 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 10% (which was later increased to 15% subject to a maximum of 15 lakhs of rupees) Central Outright Grant or Subsidy Scheme, 1971, for industrial units set up in backward areas with effect from August 26, 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 assessment years 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 assessment year 1976-77, the Income-tax Officer became aware of the availing of the subsidy by the assessee and reopened the assessments for the assessment years 1974-75 and 1975-76 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 assessment years 1976-77 and 1977-78 also, depreciation and reliefs under section 80J of the Income-tax 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 able to the assessee reduced the cost of the capital assets. On appeal by the assessee before the Appellate Assistant Commissioner, 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 section 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 assessment years 1974-75 to 1977-78. Under section 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 :

(2.) 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 1975-76. 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 assessment year 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 Income-tax Officer 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 section 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 Appellate Assistant Commissioner 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 section 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 section 43(1) of the Act in allowing depreciation and development rebate. Under section 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 section 43(1) of the Income-tax Act, 1961, the view expressed by the Tribunal that the subsidy received from SIPCOT did not go to reduced the actual cost of the plant and machinery for allowing depreciation and development rebate, is right in law ?"

(3.) 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 v. Godavari Plywoods Ltd. , 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 v. 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 section 43(1) of the Act, for the purpose of calculating the depreciation and investment allowance admissible to the assessee. In CIT v. Premier Extraction Pvt. Ltd. , the same view had been reiterated. In CIT v. 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 section 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 v. 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 such deductible from the cost of the asset for the purpose of allowing depreciation and development rebate or even for computation of relief under section 80J of the Act. In CIT v. Elys Plastics pvt. Ltd. [1991] 188 ITR 11 (Bom), the Bombay High Court held that under section 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 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 section 43(1) of the Act does not stand attracted to such a subsidy. In CIT v. Dewas Synthetics (P.) Ltd. , 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, development rebate and investment allowance and relief under section 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 v. 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 section 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 15% 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 15% 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 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 15% 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 v. Jindal Brothers Rice Mills .