1. In these group of appeals relating to different parties, the sole point that arose for consideration is whether the subsidy received from the State Industries Promotion Corporation of Tamilnadu Ltd. ('SIPCOT') could be said to be a portion of the cost of the assets entitled to depreciation 'met' directly or indirectly by that authority so as to reduce the cost of those assets to the assessees. This matter became relevant for the. purpose of allowing depreciation.
2. Under the Income-tax Act, depreciation is allowable to an assessee on specified assets utilised for business at a percentage of the actual cost of that asset to the assessee. Occasions may arise when an assessee may incur some expenditure on acquiring an asset, but a part of the cost may have been provided by some other agency in a way as to reduce the cost of that asset to the assessee. In such an event, a question will arise as to what is the cost of asset to the assessee on which depreciation is to be. allowed to the assessee. Is it the original cost the assessee has incurred or is it the cost incurred as reduced by the portion met on its behalf by any other agency? Again, the further question arising in its wake would be whether the portion met would have the effect of reducing the cost of the asset from the date from which it is provided or from the very inception. The underlying principle is that an assessee should obtain the benefit of depreciation only on so much of the cost as he has incurred or met.
With a view to provide for this situation, the Income-tax Act defined the expression 'actual cost' in Section 43(1) of the Income-tax Act to mean '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 of the person or authority'.
The definition of the expression 'actual cost' does not solve all the problems that may normally arise in the life of a business, e.g., this definition is silent on the question as to at what point of time the assistance granted in the cost of an asset by any other person or authority is to be given effect to, viz., whether it relates back or not Secondly, it does not amplify what exactly is the meaning of the expression 'reduction of that portion of the cost as has been met directly or indirectly by any other person or authority'? 3. Suppose an assessee might receive a long-term interest-free loan by way of assistance. In colloquial sense, it is also meeting a portion of the cost. Then should the cost be reduced by the amount of interest-free loan? An assessee might receive a subvention to meet a portion of the cost subject to certain conditions and suppose there are violations of the conditions, should the subvention still go to reduce the cost and if so, when? We are faced in these appeals with a problem somewhat similar to the second category.
4. In order that the actual cost is reduced by any portion, that portion of the cost must be met either directly or indirectly by a person or authority other than the assessee. The point to be examined is whether any portion of the cost to the assessee has been met by a person or authority which has resulted in the reduction of the cost to the assessee.
5. The Government of India in 1971 announced a scheme called 'National Investment Subsidy or Outright Grant' for the industrial units to be set up in selected backward districts or areas with a view to give an impetus to economic growth by rapid industrialisation of the country.
This scheme has come into operation with effect from 1-10-1970 in respect of certain areas indicated in column 3 of Part A of Annexure II to the scheme. This scheme defined what is meant by an industrial unit entitled to the outright grant or subsidy and the conditions for the grant of subsidy.
Under this scheme, the maximum investment subsidy admissible to an eligible industrial unit ranged between 10 per cent to 15 per cent of the fixed capital investment made on or after a particular date or Rs. 15,00,000, whichever is less. Under this scheme, disbursement of the money is entrusted to the State Governments by constituting State level committees and it was in pursuance of this that the SIPCOT was constituted.
Before we go further, we may mention that since the subsidy admissible is a percentage of the fixed capital, investment has also been defined in the scheme meaning investment made in land, building, plant and machinery. The procedure to assess the value of the fixed capital investment has also been laid down copiously.
6. In pursuance of the scheme, the assessees herein approached the SIPCOT for subsidy and received varying amounts, of which we will take by way of representative assessee The Pioneer Match Works, Printing Department, Sivakasi, which received a sum of Rs. 32,537 While making the assessment, the ITO took the view that the subsidy received by the assessee in the year of account resulted in reducing the cost of the machinery and, therefore, the depreciation and the development rebate to be allowed to the assessee should be on reduced cost. By this process, he reduced the allowance of depreciation and development rebate as follows:(Mad.) of 1977-78 1974-75 2,698 3,875IT Appeal No. 2971 The assessee then appealed to the AAC in vain. He was of the opinion that when the Government announced the subsidy scheme, it was only with a view to help installation of machinery and its effect was to reduce the actual cost and thus the grant of subsidy fell within the meaning of Section 43(1). The appeal for the assessment year 1975-76 was also dismissed on the same lines.
7. In the case of Moorthy Board Industries [IT Appeal No. 93 (Mad.) of 1979], the same view was taken.
8. In the case of V.S. Rathnaswamy [IT Appeal No. 2696 (Mad.) of 1977-78], the assessment was originally completed allowing depreciation on the original cost without deducting the subsidy. Subsequently, the assessment was reopened to reduce the actual cost by the amount of subsidy received and allowance of depreciation was withdrawn on the amount of subsidy. This action was confirmed on appeal.
9. In the case of S.S. Sankaralingam [IT Appeal Nos. 1858 and 1859 (Mad.) of 1979], which are departmental appeals, the view taken was slightly different. There the Commissioner (Appeals) held the view that, even though the subsidy had the effect of reducing the original cost, the cost should be reduced from the date of receipt of the subsidy. He found that in that case the subsidy was received on 26-5-1977. He, therefore, held that the ITO was not justified in making the adjustment of reducing the cost from a date prior to 26-5-1977, since that date fell outside the accounting year for the assessment years 1975-76 and 1976-77 under appeals, he allowed the assessee's claim. It is against that order the department had come up in appeal urging that even though subsidy was received at a later date, it relates back to the date of actual installation of machinery and thus the actual cost should have been reduced from the inception in which case the years under appeal were fully covered for withdrawal of depreciation.
For the assessment year 1977-78, however, the claim of the assessee was totally disallowed against which the assessee has come up in appeal, but this appeal is time-barred by five days. It was stated that the assessee was held up at a far off place at Andamans and was not able to obtain return ticket by air to Madras and was forced to sail by sea, which took time. We are satisfied with this reason and condone the delay.
10. In the case of Ayyappan Textiles Ltd. [IT Appeal No. 1831 (Mad.) of 1979], which is again a departmental appeal, the view taken was the same as in the case of S.S. Sankaralingam.
11. In another case of Srinivasa Industries [IT Appeal Nos. 2070 to 2073 (Mad.)of 1977-78, dated 27-11-1978], the Madras Bench 'B' of the Tribunal has taken the view that such subsidy has to be deducted from the actual cost for allowance of depreciation and development rebate.
When the case of one of the assessees, i.e., Pioneer Match Works [IT Appeal Nos. 2899 and 2971 (Mad.) of 1977-78] came up for consideration before the Madras Bench 'C of the Tribunal, it felt that the earlier Bench had not correctly decided the matter and that the matter should be reconsidered. It made reference to constitute a Special Bench. It was in pursuance of that request that the President constituted this Special Bench and, at our instance, the other cases were allowed to join as interveners.
12. Shri K.R. Ramamani, appearing for the assessee, submitted that the whole object and purpose of the grant of subsidy was totally misunderstood by the revenue. It was not to reduce the cost as defined in Section 43(2), but to help rapid development of industries in the backward areas of the country and, therefore, it is wrong to contend that subsidy had reduced or had the effect of reducing the actual cost of the depreciable assets within the meaning of Section 43(1). He then referred to us. conditions for the grant of subsidy and laying stress on the provisions made for the recovery of the subsidy, he submitted that should those circumstances happen, the subsidy becomes recoverable by the Government and, therefore, it remained at the outset in the nature of a loan. Since it becomes a subsidy only on the fulfilment of the conditions and since a period of five years is provided for the fulfilment of the conditions, the amount granted does not partake the character of subsidy until all the conditions were satisfied. The amount awarded will only take the character of subsidy only after the period of five years or so provided for in the scheme and in the intervening period the amount could not be treated as subsidy. This "argument is advanced as an alternative to the main argument that considering the scheme and its object, the amount awarded by the Government as a bounty cannot be taken as an amount intended to meeting a portion of the cost of the depreciable assets. During that period it remained only as a loan and after it become subsidy, only then the question of reducing it from the cost might arise. Even then, considered in the context of the purpose for which grant of the subsidy was made, it could not be said that it was meant to meet the cost of the assets entitled to depreciation.
13. Shri K. Srinivasan, appearing as an intervener, submitted that there was nothing in the scheme to suggest that the amount, granted by way of subsidy would go to reduce the cost of the plant and machinery, which alone are entitled to depreciation. The amount of subsidy granted by the Government was a percentage of the fixed capital investment, which included land also. Since the amount of subsidy is granted by the Government after the industry had started functioning and the amount could be utilised for any purpose including working capital, there is no direct nexus between the amount of subsidy granted and the cost of the depreciable assets. The amount of subsidy unless it meets a portion of the cost, will fall outside the purview of Section 43(1). Since the establishment of nexus between the subsidy and the actual cost is very essential, rather a condition precedent for the application of Section 43(1), the view taken by the department is wholly erroneous.
The purpose of the subsidy was to improve the backward areas and not so much as to meet the cost of the depreciable assets. He produced before us a copy of the Tribunal's order (Jaipur Bench), in IT Appeal No. 878 (Jp.) of 1978-79, dated 4-8-1980, in the case of Laxmi Udyog v. ITO, in which case the Tribunal under identical circumstances held that the subsidy was not to be deducted from the cost of the assets for purpose of allowance of depreciation. He commended for the acceptance of that view before us.
14. The learned departmental representative, on the other hand, contended that there is no gainsaying of the fact that the whole idea behind the scheme was to help industrialisation of backward areas and that the Government thought that it could be achieved more easily by meeting a portion of the cost of the fixed capital investment and, thus, the amount of subsidy was conceived only to meet the cost of the assets and in fact it did that in practice.
There is no question of saying that to the extent of the subsidy a portion of the actual cost had not been met by the Government when it paid the subsidy. Merely because there is difficulty in the apportionment of the amount of subsidy received between various assets, it does not detract from the fact that the amount was to be a part of the actual cost of the fixed capital investment, which would certainly reduce the cost to the assessee for those assets.
Apportionment is a mere matter of procedure and detail, not principle.
Whatever may be the motive of the Government in the granting of the subsidy, its consequence, its outcome is to meet a portion of the assets. The consequence in all these cases was thus definitely to reduce the cost of assets. He then traced the legislative history as to how the concept of actual cost had first come to surface. It was first introduced by amending Section 10(5) of the Indian Income-tax Act, 1922 by Clause 8 of the Indian Income-tax (Amendment) Bill, 1952 by inserting an Explanation therein.
The Explanation added to Section 10(5) provided the meaning of 'actual cost', which said that the actual cost of the asset as reduced by the amounts, if any, received in the course of the business from any outside source or in connection with the purchase of such assets, shall be the actual cost. The Statement of Objects and Reasons appended to the Amendment Bill clearly provided that the intention for the insertion of the Explanation was to make it clear that where a part of the cost of the asset was met in the course of business from an outside scurce, depreciation is to be allowed only on the net cost borne by the owner.
He submitted that when this was the object of the expression 'actual cost', any amount met from an outside source must necessarily go to reduce the cost of the asset because to that extent the cost was not borne by the owner and the object of the legislation was to allow depreciation only on the cost borne by the owner, as it should be and not on the total cost. The Bill was then referred to the Select Committee and the Select Committee submitted its report and in Clause 8 of that report the Select Committee made it clear that what can be deducted from the actual cost is any amount advanced by the Government or by any public or other local authority for the purchase of such assets. Relying upon this clause, he drew support for his argument that the amount of subsidy given by the Government should go to reduce the cost of the asset. This Bill became an Act receiving the assent of the President on 24-5-1953 and the Explanation finally added to Section 10(5) was as follows: For the purposes of this Sub-section, 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 Government or by any public or local authority....
Laying emphasis on the words used in this Explanation, particularly, in the words 'directly or indirectly', he submitted that the amount of subsidy is nothing but an amount from the Government which had the effect of reducing the actual cost to the assessee if not directly, at least indirectly. Merely because the Government paid it in lump sum without apportioning it to any particular asset, it does not mean that the actual cost of the assets had not been met by the Government. He then reverted to his argument that there were several ways of apportioning the subsidy received towards several assets; but in principle it could not be said that the amount received from the Government was not to reduce the actual cost Explanation to Section 10(5) of the 1922 Act corresponds to Section 43(i) of the 1961 Act which has been enacted with further modification widening its scope. While under the 1922 Act, the amount spent by the Government or public or local authority is only to be considered for the purpose of reducing the actual cost, under the 1961 Act, that definition had been enlarged so as to include the amounts received not only from the Government, public or local authority but also from any person. He then referred us to Maxwell on The Interpretation of Statutes wherein the author has explained the mischief rule. Relying on this rule, he submitted that for the sure and true interpretation of any statute, four things are to be discerned and considered: 2. What was the mischief and defect for which the law did not provide? 3. What remedy the Parliament has resolved and appointed to cure the disease? 4. The true reason of the remedy and the construction that the judge has to place upon such a rule especially to suppress the mischief and advance the remedy and to suppress subtle inventions and evasions for continuance of mischief and to add force and life to the cure or remedy.
He says that before the definition of the words 'actual cost', the Legislature was allowing depreciation on what can be described as cost not borne by the assessee. In order to remove this mischief and to allow depreciation only on the cost borne by the assessee, the definition had been inserted. It must, therefore, receive a very wide construction which shall be to advance the cause of the remedy, viz., to arrive at the cost borne by the assessee, which can be ascertained only after deducting subsidy received from SIPCOT. He also referred us to the decision of the Supreme Court in the case of Challapali Sugars Ltd. v. CIT  98 ITR 167 and the Gujarat High Court decision in CIT v. Hides & Leather Products (P.) Ltd.  101 ITR 61 for the purpose of finding out the meaning of the word 'met' used in the definition.
He also referred us to Section 19 of the Transfer of Property Act for the difference between vested interest and contingent interest and contended that what the assessee got by way of subsidy is not a contingent interest but a vested interest. This is to meet the argument raised by Shri Rama-mani that the amount received from SIPCOT does not become subsidy until the conditions laid down under the scheme are satisfied. The departmental representative thus submitted that the view taken by the revenue is correct and that no interference is called for.
These are, in sum, his elaborate arguments.
15. We have carefully considered the submissions and gone through the decision relied upon. Before we deal with these submissions and the applicability of the authorities relied upon, we would like to have a close look at the scheme itself under which the subsidy was granted.
We have pointed out earlier that this is a scheme introduced by the Central Government for the sole purpose of granting outright grant or subsidy with a view to industrialise the country and provide employment by providing incentives to start industrial units in selected districts and areas. As the very name implies, it is a Central investment subsidy scheme. This scheme is applied to industrial units both existing and new and also to expansions. The eligibility to this subsidy is confined to new industrial units engaged in the manufacture of items specified in Part B of Annexure II to this scheme. Those industrial units are to be located in areas specified in Part A of Annexure II and are also to be covered by Sections 1 to 3. Existing industrial units are also eligible to this scheme provided they are engaged in the manufacture of those items referred to above and provided they are located in the same areas. It is an undisputed fact that the present subsidy was given to the existing units and not to new units. Then the procedure for claiming subsidy, the extent of the subsidy and the persons authorised to grant subsidy are all provided for. In order to publicise the scheme, SIPCOT has brought out a brochure, which proclaims: Dramatic changes have taken place that will make the top management people sit up. Now the 15 per cent Central subsidy is available for any industry migrating from any metropolitan/developed area to any of the backward taluks in Tamil Nadu. Innocent though this may appear, the implications are radical. For instance, if you have been finding it difficult to run your industry, may be for any reason, you can just pack up and go over to backward area in Tamil Nadu. The source of your trouble may be anything : Ecology, market, raw material, finance, skilled labour.
Or just that you want to have a change in the scenery. If you desire to shift, you shift. No questions asked. What a blessing in disguise ! If you know your Tamil Nadu, you must know SIPCOT-the most dynamic corporation in the business of development industry and industrial complexes in Tamil Nadu. SIPCOT will swing into action, the moment you decide to shift your plant to any of the backward areas in Tamil Nadu. Tamil Nadu is leading disbursement of 15 per cent Central subsidy on fixed assets.
The Central Subsidy Scheme has been liberalised from 1-1-1977. There are 32 taluks where you will get the 15 percent Central subsidy plus SIPCOT's assistance to transplant your industry and restart it.
Existing units in these taluks undertaking substantial expansion are also eligible, for subsidy substantial expansion means an increase in the value of fixed capital investment of the existing unit by not less than 10 per cent. The subsidy will be made available up to 85 percent of the eligible amount before commencement of production ; the balance on the unit's going into actual production.
This would demonstratively show that the purpose for the grant of subsidy is to develop industries in backward areas. Secondly, the amount that is provided for under the scherhe, though is a percentage of the fixed capital investment, the fixed capital investment is only taken as a measure. The fixed capital investment includes investment made in land, building, plant and machinery to be assessed in the manner provided under the scheme.
In the proforma prescribed under Annexure III for purposes of finding out the total fixed capital investment, it is seen that in addition to land, building, plant and machinery, other assets on which depreciation is not admissible are also included like tools, goods carriers, promotional and pre-operative expenses capitalised or to be capitalised and margin money for working capital. Nowhere the scheme has provided how the amount of subsidy should be utilised.
Though several assets on which depreciation is admissible are required to be included as forming part of the fixed capital investment, independent authorities, like chartered accountants and engineers, are required to certify how the expenditure had been incurred. This shows that the amount received by way of subsidy could be utilised for any purpose acquiring plant and machinery or for erection of building or for working capital or even for repaying of loans already borrowed.
The whole idea appears to be to attract entrepreneurs to set up industries in backward areas by providing assistance to be utilised for purpose by which an industry could be promoted. This is thus an incentive offered for entrepreneurs existing or new to go to backward areas. The object of the subsidy given by the Government is thus to develop industries as a whole and not to meet the cost of any particular asset. It is very difficult to say the amount of subsidy received from SIPCOT, which is to keep the industry as a whole as an unit, is the amount received for meeting either directly or indirectly a portion of the asset on which the assessee has claimed depreciation.
By its very nature it cannot be traced to any particular asset.
16. Unless the subsidy received has a relation direct or indirect to meet portion of the actual cost, it cannot be said that the subsidy has gone to reduce the cost of the asset. It can be argued, as was done before us ably by the learned departmental respresentative, that apportionment is possible. What is to be seen is not the capacity to apportion the subsidy amongst various assets, but the nature and the purpose for which the subsidy is envisaged and granted and how far it has nexus to the asset on which depreciation is claimed.
The Section used the expression 'met'. It has got a definite connotation. The amount given by way of subsidy must have gone directly or indirectly to 'meet' the cost of the asset. If there is no meeting of the cost either directly or indirectly of the asset, then the amount received cannot go to reduce that cost.
17. We have gone through the decision of the Gujarat High Court referred to by the learned departmental representative and reported in Hides & Leather Products (supra). There the question arose as to what is the meaning of the words 'actual cost' for purposes of allowing depreciation. After tracing the legislative history and the difference between the 1922 Act and the 1961 Act, the High Court pointed out. that 'actual cost' meant the amount expended or laid out for purposes of acquiring the depreciable assets. The facts in that case were : The assessee who maintained its accounts on the mercantile system, purchased a piece of machinery from a foreign firm in 1955. No amount was paid towards the price thereof on the ground that there was some defect in the machinery. The liability to the foreign supplier was shown in the books of account and balance sheet of the assessee. But in 1960 by making appropriate entries the assessee wrote back the amount of Rs. 30,572 being the price of machinery; it debited the amount in the account of the foreign supplier and credited the same amount in the capital reserve account. The Gujarat High Court held that in view of the fact that the- foreign supplier had not recovered the amount of Rs. 30,572 and no legal steps had been taken towards its recovery for so long a time, it was not unreasonable to infer that the foreign supplier had treated the liability of the assessee to itself as having ceased and in fact and in substance there had been a cessation of this liability. The 1922 Act applied to the assessment year 1961-62 and as the foreign supplier was neither the Government nor public nor local authority, though there was cessation of liability, the assessee was entitled to have the benefit of the entire amount of Rs. 30,572 as the actual cost. Depreciation was allowable to the assessee for the assessment year 1961-62 on the basis that the cost to it of the machinery was Rs. 30,572. The 1961 Act applied to the assessment years 1962-63 to 1964-65 and under Section 43(1), since there was cessation of liability, the actual cost of the machinery to the assessee for these assessment years should be reduced by Rs. 30,572.
This decision does not really resolve the problem before us and on the contrary this suggests that the meeting of the cost must be such as to be traceable to the concerned asset, for the High Court pointed out that because of the cessation of the liability, which directly related to the cost of the machinery, the actual cost of the machinery to the assessee got diminished by Rs, 30,572 which was the liability ceased.
It, therefore, postulates that in a case where the amount that is sought to be held as meeting the cost of an asset, directly or indirectly, it should be relatable to depreciable assets.
One of the shades of the meaning of the word 'met' used in the definition of Section 43(1) is 'satisfied by payment'. Therefore, the amount received by way of subsidy, in order that it can be said that it has met directly or indirectly any portion of the cost of the assets to the assessee, must have 'satisfied by payment' a portion of the cost of the asset now in question. The plain answer to this is in the negative.
The whole purpose of the subsidy, as we observed earlier, is to encourage industries by providing incentives to lure the entrepreneurs to move to backward areas promising to grant subsidy which was measure as a percentage of the total investment. For the Government to grant subsidy, there must be a rationale basis. It cannot be indiscriminate or fanciful. It has, therefore, adopted the investment in its entirety as a criteria.
18. An argument may be advanced that the requirement of Section 43(1) is that a portion of the cost of asset must be met directly or indirectly. There is an agreement entered into before the subsidy is actually granted between the assessee and the SIPCOT. This agreement provides the terms and conditions for the grant of the subsidy. Clause 1 of the agreement provides that the subsidy shall be disbursed only after verification of the fixed capital investment of the industrial unit of the beneficiary and shall be restricted to 10 per cent of the said fixed capital investment actually made. It then provides, that the subsidy shall be disbursed only after the unit goes into production. It then provides that the beneficiary, meaning the assessee, shall utilise the said subsidy for the industrial unit in accordance with the scheme and shall also furnish to the Corporation a certificate of the utilisation of the subsidy within a period of one year.
This shows that the subsidy is given after a unit is established and has gone into production and that the beneficiary shall utilise this subsidy for the industrial unit in accordance with the scheme, which means for any purpose. This clearly demonstrates that the subsidy granted by the Government under the scheme has nothing to do with the meeting of the cost of any particular assets, though it may end up in such a result in a theoretical sense or in the ultimate analysis; but that is not to say that the requirement of Section 43(1) is satisfied, which requires direct contribution to meet a particular depreciable asset. This, in our opinion, requires a more direct subsidy or grant to meet the cost of the depreciable assets and not a subsidy given in a lump sum for the whole of an industry.
The Jaipur Bench of the Tribunal in Laxmi's case (supra), after referring to the preamble to the scheme, observed that the subsidy was granted to encourage the citizens to set up more and more industries in the selected backward areas and it has nothing to do with a meeting out of the cost directly or indirectly of the assets belonging to the assessee. There is nothing on record to show that the Government granted subsidy to meet the cost of the assets directly or indirectly within the meaning of Section 43(1). In our opinion, this is the correct view and the correct approach. It has also to be borne in mind that the assessee incurs the cost first, then the Government gives the subsidy to which point we had already adverted to, which again brings to surface the point that the subsidy given by the Government does not go to meet the cost of the assets either directly or indirectly, but to the unit as a whole.
There is, therefore, no scope to consider the applicability of the interpretation to be placed as explained in Maxwell's book or the other cases relied on by the learned departmental representative. The simple point is whether the subsidy has met any portion of the asset. The answer is no, both schematically and factually, because the department has not proved that the subsidy amount had been utilised for purchasing the depreciable assets.
19. We are, therefore, of the opinion that the subsidy granted by the Government for promotion of industries in backward areas as a lump sum by way of meeting a part of the total investment in the industry cannot be said to have reduced the actual cost of the assets to the assessee, directly or indirectly, that the assessee had incurred in acquiring the assets. We are, therefore, unable to agree with the view expressed by the earlier Bench in IT Appeal Nos. 2070 to 2073 (Mad.) of 1977-78, referred to above.
20. For the above reasons, we accept the assessees' claim that the amount received by way of subsidy should not go to reduce the cost of the asset for purposes of allowing depreciation. The decision of the lower authorities to the contrary is, therefore, reversed, which means, the assessees' appeals succeed and the departmental appeals fail.
21. In view of the above conclusion that we are reaching, there is no need for us to decide any other issue raised more so the question whether the subsidy received would relate back to the installation of the assets or not.