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Commissioner of Income-tax Vs. Godavari Plywoods Ltd. - Court Judgment

LegalCrystal Citation
SubjectDirect Taxation
CourtAndhra Pradesh High Court
Decided On
Case NumberR.C. No. 113 of 1984
Judge
Reported in(1987)62CTR(AP)179; [1987]168ITR632(AP)
ActsIncome Tax Act, 1961 - Sections 28, 29, 30, 31, 32, 32(1), 33, 34, 35, 36, 37, 38, 39, 40, 41, 43(1) and 43(6)
AppellantCommissioner of Income-tax
RespondentGodavari Plywoods Ltd.
Appellant AdvocateM.S.N. Murthy and ;A.V. Krishna Koundinya, Advs.
Respondent AdvocateM.J. Swamy and ;Manmohan, Advs.
Excerpt:
direct taxation - subsidy - sections 28 to 43 of income tax act, 1961 - government announced certain financial incentives to ensure balanced regional development - pursuant to scheme assessee made investment and claimed depreciation on total actual cost of all fixed assets - assessment authority declined depreciation on actual cost of fixed assets and granted depreciation after deduction of subsidy they received applying rule of proportion of subsidy to total cost - careful consideration suggested that subsidy cannot be reduced from actual cost of assets to assessee and depreciation should be allowed under section 32 on actual cost of assets without reducing same by the amount of subsidy granted - held, assessee entitled to depreciation claimed. - motor vehicles act (59 of 1988)section.....y.v. anjaneyulu, j.1. in a batch of cases, references were made to this court by the income-tax appellate tribunal under section 256(1) of the income-tax act, 1961 ('the act' for short). all the cases involve a common question of law; there are other questions also in a few cases. before setting out the main question referred for the consideration of this court, it will be expedient to refer to the facts giving rise to this question. 2. as part of the measures to ensure balanced regional development, the government of india had announced certain financial incentives for industries established in selected backward districts/areas. these are in addition to the facilities and incentives offered by the individual state governments. the incentive scheme for the country as a whole, as announced.....
Judgment:

Y.V. Anjaneyulu, J.

1. In a batch of cases, references were made to this court by the Income-tax Appellate Tribunal under section 256(1) of the Income-tax Act, 1961 ('the Act' for short). All the cases involve a common question of law; there are other questions also in a few cases. Before setting out the main question referred for the consideration of this court, it will be expedient to refer to the facts giving rise to this question.

2. As part of the measures to ensure balanced regional development, the Government of India had announced certain financial incentives for industries established in selected backward districts/areas. These are in addition to the facilities and incentives offered by the individual State Governments. The incentive scheme for the country as a whole, as announced by the Government of India in the year 1971, is 'CENTRAL OUTRIGHT GRANT OR SUBSIDY SCHEME, 1971'. The backward areas under the scheme were clearly specified. In order to become eligible to the Central subsidy, the industrial units should have been set up in the backward areas after the dates specified in the scheme. The industrial units are also eligible for Central subsidy where effective steps were taken to set them up after the specified dates. The scheme specifies the nature of 'effective steps' to be taken for this purpose. All industrial units including servicing units, having fixed capital investment in land, buildings and machinery, whether in the public or private sectors, are eligible for the subsidy. Existing units can also claim subsidy for effecting substantial expansion after the crucial dates mentioned in the scheme in so far as the expanded portion is concerned. The quantum of subsidy is also specified in the scheme. For claims relating to the period ending February 28, 1973, the subsidy is 10% of the fixed capital investment or Rs. 5 lakhs, whichever is lower. For claims relating to the period commencing from March 1, 1973, the subsidy is 15% of the fixed capital investment or Rs. 15 lakhs, whichever is lower. The procedure for claiming the subsidy is specified in the scheme. It is not necessary to refer to the same except to state that the subsidy has to be claimed from the State Governments which scrutinise the claims through State level Committees. The claims for subsidy should be submitted to the Director of Industries of the State concerned.

3. As already pointed out above, the financial incentives offered by the Government of India are in addition to the facilities and incentives offered by the individual State Governments. The State of Andhra Pradesh had also offered certain facilities and incentives to industries established in backward areas. Certain incentives were offered by the State Government in G. O. Ms. No 1225, Industries Department, dated December 31, 1968. and also in G. O. Ms. No. 455, Industries and Commerce Department, through schemes formulated by the aforesaid Government orders were in vogue till February, 1976. Taking into consideration the developments subsequent to the issue of the above referred G.Os., and reviewing the industrial needs, the Government revised the scheme of incentives so as to more effectively serve the purpose of bringing about rapid industrial growth in the State and, along with it, to serve the purpose of bringing about this growth in all parts of the State, with particular attention to the backward taluks and blocks and of stimulating new entrepreneurial development. The State Government felt that principles of selectiveness and gradation should be introduced. Based on these considerations, the Government approved the State Incentive Scheme through G. O. Ms. No. 224, Industries and Commerce Department, dated March 9, 1976. The incentives scheme formulated through the aforementioned G. O. Ms. No. 224, dated March 9, 1976, superseded the incentive scheme covered by the earlier two G.Os. dated December 31, 1968, and May 3, 1971.

4. Under the 1976 State Incentive Scheme, new industries going into regular production on or after January 1, 1976, are offered certain incentives. Those industries, which go in for substantial expansion, are also eligible for the incentives. Under the new scheme, entrepreneurs setting up new industrial units and/or effecting substantial expansion of the existing units are eligible for investment subsidy on the 'fixed capital cost' at 10% of the fixed capital cost subject to a ceiling of Rs. 10 lakhs in all the areas which had been declared as backward under the Six-Point Formula by the Government and excluding those covered by the Central Subsidy Scheme. In respect of industrial units set up, or where substantial expansion of the existing unit is effected, in Scheduled (Tribal) Areas, investment subsidy is granted on the fixed capital cost at 20%, subject to a ceiling of Rs. 15 lakhs. In such Scheduled (Tribal) Areas where Central subsidy is admissible, the balance to make up the total of 20% of the investment subsidy will be given by the State Government. No investment subsidy is admissible in the areas not declared as backward either under the Central Subsidy Scheme or under the Six-Point Formula. The investment subsidy is admissible provided the fixed capital cost on land, buildings, plant and machinery does not exceed Rs. 1 crore. In exceptional circumstances, investment subsidy is granted where fixed capital cost exceeds Rs. 1 crore.

5. Inasmuch as the investment subsidy is determined at a specified percentage of the fixed capital cost, the scheme defines the expression, 'Fixed Capital Cost'. According to the definition, 'Fixed Capital Cost' means investment in land, buildings, plant and machinery including jigs and fixtures. The expression 'substantial expansion' is also defined. It is not necessary to refer to the details. The expression 'investment subsidy' is defined as the subsidy given at the specified percentage on the fixed capital cost. The incentives scheme also contains provisions for grant of subsidy to the educated self-employed and the technocrats and also for the grant of interest-free sales tax loan. It is not necessary to refer to these matters as they are not relevant for our purpose.

6. Pursuant to the Central Outright Grant or Subsidy Scheme, 1971, and the State Incentive Scheme of the State Government formulated through G. O. Ms. No. 224, dated March 9, 1976, subsidies were granted and paid to various entrepreneurs in accordance with the scheme. In the tax assessments of all such entrepreneurs, who may be hereinafter referred to as 'the assesses', the question regarding the grant of depreciation on the actual cost of land, buildings, plant and machinery engaged the attention of the tax authorities. The assessees claimed that they are entitled to depreciation on the total actual cost of all the fixed assets. In some cases, there were claims for development rebate/investment allowance under the Act. The Income-tax Officer who scrutinised the claims of the assessees for depreciation, development rebate/investment allowance, came to the conclusion that for the purpose of determining the 'actual cost' of the fixed asset under section 43(1) of the Act, the subsidy received by the assessees either under the Central Subsidy Scheme or under the State Incentive Scheme should be reduced and depreciation allowed only on the cost of the fixed assets as reduced by such subsidy. In other words, the Revenue was of the view that the subsidy granted to the assessees under the above schemes was for the specific purpose of meeting a portion of the cost of the fixed assets and consequently the actual cost of the asset to the assessees should be reduced by that portion of the cost thereof covered by the subsidy granted under the schemes above referred to. The Revenue held that to the extent of the subsidy, the cost of the fixed assets has been met by the Government, whether directly or indirectly. In that view of the matter, the Income-tax Officer who completed the tax assessments of the assessees reduced from the actual cost of the fixed assets to the assessees, the amount of subsidy received by the assessees under the schemes above referred to and granted depreciation on the actual cost of the assets so reduced. The Income-tax Officer reduced the cost of the various fixed assets by applying the rule of proportion of the subsidy to the total cost.

7. Similar adjustment was made by the Income-tax Officers in regard to claims for development rebate/investment allowance. The assessee questioned, in appeals filed, the correctness of the adjustment made by the Income-tax Officers, as mentioned above. The appeals filed by the assessees were allowed by the commissioner of Income-tax (Appeals) / Appellate Assistant Commissioner accepting the assessees' contention that the subsidy paid to the assessees, in accordance with the schemes above referred to cannot be reduced from the actual cost of the fixed assests. Thereupon, the Revenue filed appeals before the Income-tax Appellate Tribunal. The Income-tax Appellate Tribunal dismissed the appeals filed by the Revenue upholding the view of the first appellate authority.

8. Aggrieved by the order of the Income-tax Officer Appellate Tribunal, the Commissioner of Income-tax applied for and obtained a reference under section 256(1) of the Act for consideration of the above question by this court. That is how all the references are laid before us.

9. Learned standing counsel for the Revenue, Sri M. Suryanarayana Murthy, has dealt with the case of Godavari Plywoods Limited in R. C. No. 113 of 1984. It is represented that the decision concerning the aforesaid question in this case will govern all the other cases also. We will, therefore, refer to the facts in R. C. No. 113 of 1984.

10. The assessment in this case relates to the year 1978-79 for which the corresponding previous year ended on June 30, 1977. The assessee received a sum of Rs. 10,01,310 by way of investment subsidy from the State Government in accordance with the scheme formulated under G. O. Ms. No. 224 dated March 9, 1976. In its tax assessment, the assessee claimed depreciation on the actual cost of land, buildings, plant and machinery, jigs, fixtures, etc. The Income-tax Officer held that the subsidy amount of Rs. 10,01,310 received should be reduced from the actual cost of the fixed assets and depreciation granted on the cost as so reduced. The subsidy amount of Rs. 10,01,310 was proportionately distributed on factory and non-factory buildings and plant and machinery. After reducing the actual cost of the fixed assets by the aggregate amount of subsidy of Rs. 10,01,310, depreciation was allowed on the cost of the assets as so reduced. On appeal, the Commissioner of Income-tax (Appeals) allowed the assessee's contention that depreciation should have been allowed on the total cost of the assets without reducing therefrom the subsidy received. The Commissioner of Income-tax (Appeals) felt that the principles laid down by the Special Bench of the Income-tax Appellate Tribunal in Pioneer Match Works v. ITO [1983] 3 ITD 714 (Mad) govern the facts in the assessee's case and consequently no part of the subsidy could go to reduce the cost of the assets. Having so observed, the Income-tax Officer was directed to amend the order.

11. The Income-tax Officer filed an appeal before the Income-tax Appellate Tribunal against the aforesaid decision of the Commissioner. The Tribunal was equally brief in dealing with the matter. Referring to the decision of the Special Bench in the case of Pioneer match Works v. ITO [1983] 3 ITD 714 (Mad), the Tribunal upheld the decision of the Commissioner of Income-tax (Appeals) and dismissed the appeal filed by the Revenue.

12. The submissions of learned standing counsel for the Revenue are brief and basically founded on section 43(1) of the Income-tax Act which contains the definition of the expression, 'Actual cost'.

13. It may be relevant to extract the definition, 'Actual cost' below :

'43. In sections 28 to 41 and in this section, unless the context otherwise requires - (1) '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.'

14. Learned standing counsel contends that the basic purpose of granting subsidy to entrepreneurs under the Central Outright Grant or Subsidy Scheme, 1971, or under the State Incentive Scheme formulated through G. O. Ms. No. 224, dated March 9, 1976, is to enable the entrepreneurs to meet a part of the cost of the fixed asset for setting up the industry. It is pointed out that the investment subsidy is given at a specified percentage on the fixed capital cost. Drawing attention to the definition of the expression, 'fixed capital cost', learned standing counsel pointed out that it represented the investment in land, buildings, plant and machinery. Inasmuch as the subsidy is at a specified percentage of the total cost of land, buildings, plant and machinery, it must be held that the subsidy granted to the entrepreneur reduces to that extent the cost of land, buildings, plant and machinery. Under section 32 of the Act, depreciation is allowable on the actual cost of buildings, machinery and plant. The expression 'actual cost' occurring in section 32 should be understood in the light of the definition of that expression contained in section 43(1) of the Act. According to section 43(1) of the Act, the actual cost of the assets to an assessee has to be reduced by that portion of the cost thereof which has been met directly or indirectly by any other person or authority. It is said that in the present case, to the extent of the subsidy granted, the cost of the assets has been directly as well as indirectly met by the Government. Consequently, the actual cost of the assets to the assessee has to be reduced by the amount of subsidy granted to the assessee. Learned standing counsel, therefore, submitted that the Revenue was right in claiming that for the purpose of determining the actual cost of the assets on which depreciation has to be allowed under section 32 of the Act, the amount of subsidy received by the assessee should be reduced from the actual cost of the assets and depreciation allowed only on the actual cost so reduced. It is stated that the appellate authorities below were in error in directing the allowance of depreciation on the actual cost of the assets without reducing the same by the amount of subsidy. Learned standing counsel invited our attention to the decision of the Special Bench of the Income-tax Appellate Tribunal consisting of the President, the Vice-President and a Judicial Member and submitted that the view taken by the Special Bench is erroneous. Learned standing counsel relied on the decisions in Riverside (Bhatpara) Electric Supply Co. Ltd. v. CIT : [1977]109ITR399(Cal) , CIT v. South Madras Electric Supply Corporation Ltd. : [1977]109ITR426(Mad) , CIT v. Saharanpur Electric Supply Company Ltd. : [1977]109ITR545(All) and CIT v. Bassein Electric Supply Co. Ltd. : [1979]118ITR884(Bom) .

15. Appearing for the assessee, Sri M. J. Swamy, advocate, commended for our consideration the order of the Special Bench stating that the view taken by the Special Bench is correct in law. It is submitted by learned counsel that on an examination of the Central Subsidy Scheme as well as the State Incentive Scheme above referred to, it is not possible to come to the conclusion that the subsidy is granted for the purpose of meeting a portion of the cost of land, buildings, plant and machinery, etc. Unless it can be definitely said that the subsidy is granted for the specific purpose of enabling the assessee to meet a part of the cost of the assets, learned counsel contends, it is not permissible to reduce the actual cost of the assets by the amount of subsidy granted, acting under section 43(1) of the Act. Learned counsel pointed out that the subsidy under the schemes is granted basically for the purpose of ensuring balanced regional development so that the entrepreneurs can be induced to set up new industries in backward areas, thus assuring development of the backward regions. The subsidy is to serve the purpose of bringing about rapid industrial growth in the State. As the subsidy is granted for these basic purposes, it is not permissible to hold that the subsidy is granted to enable the entrepreneurs to meet a part of the actual cost of the assets. The payment of subsidy at a specified percentage of the fixed capital cost, according to learned counsel, is only a measure adopted under the schemes to quantify the subsidy and there is no justification to hold that the subsidy is to meet a part of the fixed capital cost. Learned counsel, therefore, urged that the orders of the appellate authorities below are correct.

16. We have carefully considered the provisions relating to the Central Outright Grant or Subsidy Scheme, 1971, as well as the State Incentive Scheme formulated in March, 1976. At the outset, it is necessary to notice that the subsidies are granted only in respect of industries set up in specified backward areas and Scheduled (Tribal) Areas. The Central Government as well as the State Government noticed that these specified backward areas and Scheduled (Tribal) Areas are undeveloped. In order to bring about rapid growth and development of these areas, the Government felt that the entrepreneurs must be induced to go to these areas and set up industries. But then entrepreneurs are unwilling to move to these backward areas and set up new industries keeping national interest alone in mind. The facilities required are lacking in these areas for promoting industries. Although labour may be cheap, it is wholly unskilled. Though land may be available at a comparatively cheaper price, the remoteness and inaccessibility of these areas and the distance from the raw material procuring centers make it uneconomical to set up industries in these areas. Infrastructural facilities are also lacking in the backward areas. By and large, entrepreneurs have to face serious difficulties in establishing industries in backward areas and national interests alone are unlikely to coerce these entrepreneurs to move to backward areas and set up industries in order to bring about a balanced regional development. The financial incentives granted by the Central Government as well as the State Government are basically directed to encourage and induce the entrepreneurs to move to backward areas and establish industries there so that the region may develop in promoting the welfare of the people living in that region. Keeping in mind the basic policy, the Government has to determine how best and in what respects incentives can be granted to the entrepreneurs to establish industries in backward areas. The incentives can vary in character. Supply of power free or at a concessional cost, holiday from the levy of taxes (State or Central) either wholly or in part, provision of government land free of cost or at comparatively cheaper prices and provision of other infrastructural facilities at a subsidised cost are some of the measures which can be adopted and offered to entrepreneurs. In some cases, the Government may decide upon a cash grant by way of subsidy so that the cash assistance granted to the entrepreneurs can be utilised for any purpose connected with the establishment of industry in backward areas. The cash subsidy may be used by way of working capital or for a variety of other purposes connected with the establishment and running of the business. Where grant of cash assistance is considered by the Government to be an appropriate form of incentive, the question for consideration is how the amount of cash subsidy should be determined. Here again the Government may follow various methods to determine the cash subsidy. One of the accepted methods is to find out the total amount invested by an entrepreneur in acquiring capital assets and grant specified percentage of the amount so invested in the capital assets as cash subsidy. The entrepreneur will be at liberty to utilise the subsidy granted in whatever manner he likes. The quantification of cash subsidy in such cases is done by adopting a convenient measure. In a case where cash subsidy is granted by the Government, the crucial question that falls for consideration is whether the cash subsidy is granted for any specific purpose or whether full liberty is given to the recipient of the subsidy of cash assistance to use the subsidy in whatever manner it considered expedient for establishing and promoting the industry. If the provisions of the scheme under which the subsidy is granted show that it is granted for a specific purpose, no difficulty arises because there is a direct nexus between the subsidy granted and the purpose for which it has to be utilised. Take, for instance, a case where the provisions of a subsidy scheme specifically stated that cash subsidy is granted to enable an entrepreneur to meet a portion of the cost of the assets. In order to meet that portion of the cost of the assets, the amount may be paid by the government directly to the person from whom the assets are acquired by the entrepreneur or the entrepreneur may be required to initially acquire the assets and then be reimbursed of the specified portion of the cost of the assets. In that event, it will be meeting the cost of the assets indirectly. In either case, it would amount to the subsidy being granted for the specific purpose of the entrepreneur meeting a portion of the cost of the assets. If the scheme granting subsidy does not specifically state the purpose for which the subsidy is granted but sets out a procedure to quantify the subsidy on a particular basis, the basis adopted for quantification can only be considered as a measure (of quantification).

17. We have examined the subsidy schemes under consideration bearing the above principles in mind. We do not find any provision either in the Central Subsidy Scheme, 1971, or in the State Incentive Scheme that the entrepreneurs are granted the subsidy for the specific purpose of meeting a portion of the cost of the assets. Under both the schemes, the cash subsidy is quantified by determining the same at a specified percentage of the fixed capital cost. The basis adopted for determining cash subsidy with reference to the fixed capital cost is only a measure (of quantification) adopted and cannot, in our opinion, be considered to be for the specific purpose of meeting any portion of the fixed capital cost. We have, therefore, no hesitation in coming to the conclusion, on a careful examination of the schemes under consideration, that the subsidy granted to the assessee cannot be related to meeting a portion of the cost of the assets so that, for purposes of section 43(1) of the Act, such subsidy can be reduced from the amount of actual cost of the assets to the assessee. It seems to us that the specified percentage of the fixed capital cost taken as the basis for determining the subsidy under the scheme is only a measure (of quantification). The subsidy is granted more as a recompense for the hardships and inconveniences which the entrepreneur may encounter while setting up industries in backward areas. In that view of the matter, we uphold the decision of the Special Bench of the Tribunal that the subsidy granted to the entrepreneurs cannot be reduced from the actual cost of the assets to the assessee. In our opinion, therefore, the Tribunal was correct in coming to the conclusion in the case of the assesee in R.C. No. 113 of 1984, that the subsidy of Rs. 10,01,310 cannot be reduced from the actual cost of the assets to the assessee and depreciation should, therefore, be allowed under section 32 of the Act on the actual cost of the assets without reducing the same by the amount of subsidy granted.

18. Adverting to the decisions cited by learned standing counsel, we may state that those cases do not deal with the point arising for consideration in this case. The question considered in all those cases was whether the actual cost of the assets determined under the 1922 Act can be varied under the 1961 Act by reducing from the actual cost the portion of the cost met by other persons. That question is quite different from the one arising for consideration in this case.

19. We may, for the sake of completeness, extract below the question referred to us in this case (R. C. No. 113 of 1984) :

'Whether, on the facts and in the circumstances of the case, the Income-tax Appellate Tribunal is correct in law in holding that the subsidy received by the assessee-company should not be deducted from the value of the assets to arrive at the actual cost for purposes of allowing depreciation ?'

20. We answer the aforesaid question in the affirmative, that is, in favour of the assessee and against the Revenue. Having regard to the facts and circumstances, we direct the parties to bear their own costs. Standing counsel's fee Rs. 250.

Jeevan Reddy, J.

21. I agree with my learned brother, Y. V. Anjaneyulu J., that the question referred to us should be answered in the affirmative, i.e., in favour of the assessee. However, having regard to the importance of the question referred, I wish to say a few words. All the relevant facts are stated in the judgment of my learned brother and need no repetition.

22. With a view to bring about rapid industrial growth, both the Government of India and the State Government have been offering various types of incentives to entrepreneurs, particularly to those who are to set up industries in backward areas. G. O. Ms. No. 1225 dated December 31, 1968, and G. O. Ms. No. 455 dated May 3, 1971, were issued offering various types of incentives and subsidies. These two G.Os. were superseded and G. O. Ms. 224 was issued on March 9, 1976. Paragraph 2 of the G. O. says :

'In the light of the subsequent developments and the needs of the present situation, Government have been considering revision of these incentives (mentioned in the two G. Os. aforesaid) so as to more effectively serve the purpose of bringing about rapid industrial growth in the State and along with it to serve the purpose of bringing about this growth in all parts of the State, with particular attention to the backward taluks and blocks and of stimulating new entrepreneurial development......'.

23. Various incentives were provided under the scheme called 'State Incentive Scheme'. The first such incentive is called 'Investment Subsidy' mentioned in paragraph 'A'. These incentives were offered to all new industries which go into regular production on or after January 1, 1976. Those industries which go in for substantial expansion, i.e., added fixed capital cost of a value of not less than 25% of the undepreciated value of the existing unit's capital cost, were also eligible for these incentives. The investment subsidy incentive is provided in the following terms :

'A. Investment Subsidy :

Under this scheme, entrepreneurs setting up new industrial units and/or effecting substantial expansion of the existing units will be eligible for investment subsidy on the fixed capital cost -

(i) at 10% of the fixed capital cost subject to a ceiling of Rs. 10 lakhs in all the areas which have been declared as backward under the Six-Point Formula by the Government (vide annexure-I) and excluding those covered by the Central Subsidy Scheme or the list of Scheduled (Tribal) Areas;

(ii) at 20% of the fixed capital cost subject to a ceiling of Rs. 15 lakhs in all the Scheduled (Tribal) Areas (vide annexure-II). In such Scheduled (Tribal) Areas where Central Subsidy is admissible, the balance to make up the total of 20% will be given by the State Government.

No investment subsidy is admissible in the areas not declared as backward whether under the Central Subsidy Scheme or under the Six-Point Formula including the municipal limits of Hyderabad and Secunderabad, Vijayawada and Visakhapatnam.

The investment subsidy is admissible provided the fixed capital cost on land, buildings, plant and machinery does not exceed Rs. 1 crore. Cases where fixed capital cost exceeds Rs. 1 crore can be considered in exceptional circumstances on merits based on the criteria of relevance of the industry to the economy of the area and subject to a ceiling of Rs. 10 or 15 lakhs, as the case may be.'

24. These incentives were to be in operation for a period of 5 years from January 1, 1976, whereafter the implementation of the scheme was to be reviewed and changes or modifications, as may be necessary, approved. Annexure-I to the G. O. notified the blocks/taluks declared as backward. Annexure-II notified the list of Scheduled (Tribal) Areas, while Annexure-III sets out the list of industries which are not eligible for grant of investment subsidy and sales tax loans under the State Incentive Scheme. Guidelines were issued elaborating the State Incentive Scheme, Called 'Revised State Incentive Scheme - Guidelines on Procedure for claiming State investment subsidy and sales tax loan'. The expressions 'fixed capital cost' and 'investment subsidy' were defined in the following terms :

'1. 'Fixed capital cost' means the investment in land, buildings, plant and machinery including jigs and fixtures. Land and buildings will be taken into consideration to the extent required for the successful running of the industry including office building, stores and godowns. Plant and machinery will likewise be taken into consideration to the extent required for the successful running of the industry including equipment, laboratory equipment, dies, jigs and fixtures excluding small tools but including maintenance machinery.'

'4. 'Investment subsidy' means the subsidy given at specified percentage on the fixed capital cost.'

25. It was further provided that before an industry avails of the investment subsidy, it has to execute an agreement bond in the prescribed form provided in annexure-V, before the disbursing authority. The actual amount was to be released only on executing such agreement. Annexure-V provides the form of agreement. The agreement provides that if the unit goes out of production within 5 years after commencement, the State Government shall have the right to claim refund of the amount paid.

26. The Central Outright Grant or Subsidy Scheme, 1971, also provides similar incentives. Clause 5 of the Scheme provides that the subsidy shall be 10% of the fixed capital investment or Rs. 5 lakhs, whichever is lower, relating to the period ending February 28, 1973. In respect of the claim relating to the period commencing from March 1, 1973, the subsidy to be given was 15% of the fixed capital investment or Rs. 15 lakhs, irrespective of the capital cost of the project, whichever is lower. Clause 6 of the Central Scheme says :

'6. The subsidy has to be claimed from the State Governments who scrutinize the claims through State Level Committees. The industrial units have to comply with the procedural and other requirements as devised by the respective State Governments.....'.

27. The Central Scheme notifies the list of backward areas covered by the scheme in Appendix-XXI.

28. If we read the two schemes together, the following position emerges :

(i) in the areas declared as backward under the Six-Point Formula by the Government (annexure I to G.O.Ms. No. 224) excluding the areas covered by the Central Subsidy Scheme or the Scheduled (Tribal) Areas, the investment subsidy provided by the State Government is at the rate of 10% of the fixed capital cost, subject to a ceiling of Rs. 10 lakhs;

(ii) in the Scheduled (Tribal) Areas mentioned in annexure II to G. O. Ms. No. 224, the investment subsidy is 20% of the fixed capital cost, subject to a ceiling of Rs. 15 lakhs. Where, however, the Central Subsidy Scheme is admissible, the State Government will merely make up the total of 20% taking into account the Central subsidy;

(iii) in areas notified as backward areas in Appendix XXI to the Central Scheme of 1971, the subsidy is available at the rate of and subject to the ceiling mentioned in clause 5 of the Central Scheme; and

(iv) no investment subsidy is admissible in the areas not declared as backward either under the Central Subsidy Scheme or under the Six-Point Formula including the municipal limits of Hyderabad and Secunderabad, Vijayawada and Visakhapatnam.

29. The nature of subsidies, particularly the refund of sales tax paid, provided by G. O. Ms. Nos. 1225 and 455 was considered by a Bench of this court in CIT v. Sahney Steel & Press works Ltd. : [1985]152ITR39(AP) . It was held, for the reasons stated in the judgment, that the amounts so refunded constitute income of the recipient. The Bench had also granted leave to appeal to the Supreme Court against the said judgment; we are told that the appeal is now pending in the Supreme Court. The Correctness of the said judgment is not in question before us. Indeed, where similar questions have arisen, we are answering the same in favour of the Revenue and against the assessees, following the said decision (see our judgments being pronounced today in R. C. No. 144 of 1985 and R. C. No. 148 of 1985). The question before us is entirely different and it is this : whether the amount of subsidy received by the assessees should be deducted from the value of the assets while determining the 'actual cost' for the purpose of allowing depreciatioan

30. According to section 32(1) of the Income-tax Act, depreciation in the case of buildings, machinery, plant or furniture shall be allowed at such percentage 'on the written down value thereof' as may in any case or class of cases be prescribed. Clause (6) of section 43 defines 'written down value'. Excluding the proviso and the Explanations which are not necessary for our purpose, the definition reads as follows :

'(6) 'written down value' means -

(a) in the case of assets acquired in the previous year, the actual cost to the assessee;

(b) in the case of assets acquired before the previous year, the actual cost to the assessee less all depreciation actually allowed to him under this Act, or under the Indian Income-tax Act, 1922 (11 of 1922), or any Act repealed by that Act, or under any executive orders issued when the Indian Income-tax Act, 1886 (2 of 1886), was in force......'

The expression 'actual cost' is defined in clause (1) of the same section. Excluding the proviso and the Explanations which are again not relevant for our purpose, the definition reads as follows : '(1) '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.'

31. The controversy centers round the definition of the expression 'actual cost'. The controversy, to be precise, is : whether it can be said in the present case that by granting the investment subsidy, the Central Government or the State Government, as the case may be, have 'met directly or indirectly' any portion of the cost of the buildings and machinery, etc. This question has to be answered on an examination of the two subsidy schemes. If we hold that by granting the said investment subsidy, the Central Government/State Government had directly or indirectly met a portion of the cost of the building and machinery, etc., it has to be deducted for determining the actual cost for the purpose of depreciation. But, if we hold that the formula contained in the said schemes is only a measure for giving subsidy, the said amount is not liable to be deducted for arriving at the actual cost.

32. The contention of learned standing counsel for the Revenue is that the investment subsidy is granted exclusively for the purpose of setting up the industry and that the government in effect pays 10% or 20% of the fixed capital cost of the project. The definition of 'fixed capital cost' contained in the guidelines is relied upon in support of this argument. According to learned counsel, the scheme simply means this : 'if you set up a new industry in a backward area, you will be paid a particular percentage of the total investment for the setting up of that industry' : it was open to the Government to pay 10% or 20% of the cost of the buildings or machinery directly to the supplier or the contractor, as the case may be, in which case the amount so paid is liable to be deducted for arriving at the actual cost; merely because the amount is paid after the industry is set up, the character of the payment is not altered. If not direct, it is certainly an indirect method of meeting a portion of the cost of the buildings and machinery, it is argued. It is further contended by learned standing counsel that if the investment subsidy is not so deducted, it would amount to conferring an unwarranted benefit upon the assessee since he would be getting the depreciation not only upon the actual amount spent by him but also upon the amount of investment subsidy received by him from the Government; there are no reasons to confer such double benefit. On the other hand, it is contended by learned counsel appearing for the assessees that the percentage indicated in the schemes is merely a measure for determining the amount of subsidy and that by granting the said subsidy, it cannot be said that the Central Government/State Government has met either directly or indirectly any portion of the cost of the buildings or machinery. It is submitted that the said subsidy is granted as a recompense for, and in lieu of setting up of, industries in backward areas with all their disadvantages and handicaps.

33. On an examination of the scheme, I am of the opinion that it is capable of being understood on both the hypotheses. The language of G.O.Ms. No. 224 is that entrepreneurs setting up new industrial units shall be 'eligible for investment subsidy on the fixed capital cost at 10% of the fixed capital cost subject to a ceiling of Rs. 10 lakhs......' 'Fixed capital cost' is defined in the guidelines as meaning the investment in land, buildings, plant and machinery to the extent it is strictly necessary for successful running of the industry. The subsidy is granted after the industry is set up and goes into regular production. If, however, the industrial unit goes out of production, within five years of commencement of the regular production, the Government is entitled to claim refund of the amount paid. In one sense, the Government is, in effect, paying a portion of the cost of the buildings and machinery and, in another sense, what is paid is merely a subsidy - a recompense for the trouble and jeopardy suffered by the entrepreneur in setting up the industry in a backward area. In the latter sense, the formula contained in the said G. O. is merely a measure for determining the amount of subsidy. After all, some measure has to be adopted for determining the amount of investment subsidy and the fixed capital cost is taken only for the purpose of determining the amount of investment subsidy at a particular percentage thereof. It is for this reason that I said that both the views, canvassed respectively by the Revenue and the assessees, are plausible. It cannot be said that the interpretation placed by the Revenue is the only plausible interpretation and that the other interpretation is not plausible or reasonable. In such a situation, I am of the opinion that the interpretation favourable to the assessees must be adopted.

34. For the above reasons, I agree with the answer proposed by my learned brother.


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