H.L. Anand, J.
1. These are two petitions by the Commissioner of Income-tax under section 256(2) of the Income-tax Act, 1961, for a direction to the Tribunal to state a case and to refer to this court the following question of law for its opinion :
'Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that the subsidy as received by the assessed-company under '10 per cent. Central Outright Grant or Subsidy Scheme, 1971' was not to be reduced from the cost of the assets owned by the assessed-company under section 43 of the Income-tax Act, 1961 ?'
2. The petitions were field in the following circumstances. The assessed, in both the petitions, Ravindra Tube Limited, had set up an industrial unit in a selected backward/area and was entitled in terms of '10 per cent. Central Outright Grant or Subsidy Scheme, 1971', to 10% grant or subsidy by the financial institutions/stage government, during the two previous years corresponding to the assessment years 1977-78 and 1978-79. The assessed received amounts of Rs. 3,91,275 and of Rs. 3,57,907, respectively, as subsidy in terms of the aforesaid Scheme,. The Central Board of Direct Taxes, vide their circular dated August 1, 1974 : 95ITR151(Delhi) , had given a clarification that such subsidy was to be regarded as being in the nature of capital receipt in the hands of the recipient. The Income-tax Officer concerned, thereforee, reduced the amount of subsidy from the cost of the asset in respect of the aforesaid two years before allowing the depreciation/development rebate. The assessed challenged this reduction in an appeal to the Commissioner of Income-tax (Appeals) objecting to the Income-tax officer's order in disallowing the depreciation of Rs. 35,500 and Rs. 67,830 in respects of the assessment years 1977-78 and 1978-79, respectively. The Commissioner (Appeals) allowed the claims and the Tribunal upheld the orders of the Commissioners (Appeals). The Tribunal also turned down the application of the Commissioner of Income-tax under section 256(1) of the Act for a reference of the question to this court on the ground that another Bench of the Tribunal had turned down a plea for a reference of an identical question in the case of Jindal Industries Ltd., a sister company of the assessed. In the case of Jindal Industries Ltd., the Commissioner of Income-tax had moved this court under section 256(2) to call for a reference but the plea was turned down by a Division Bench of this court on the shore ground that 'the question appeared to have been settled by a finding of fact because the Tribunal had returned the finding that the fixed assets in question were bought long before the subsidy was received and also because the subsidy was in relation to some other purpose.
3. We have heard learned counsel for the Revenue and the assessed. By its notification of August 26, 1971, the Central Government promulgated the '10% Central Outright Grant Subsidy Scheme, 1971' for industrial units 'to be set up' in selected backward districts/areas. According to para 3 of the Scheme, it is application to industrial units in selected districts/areas as defined in the Scheme other than those whose total fixed capital investment would exceed Rs. 50 lakhs. Clause 4(f) of the Scheme defines the expression 'fixed capital investment', as meaning, investment on land, building, plant and machinery. Sub-clause(3) of this clause, which deals with plant and machinery, further provides that the amount invested on goods' carries to the extent they actually are utilized for transport of raw material and marketing of the finished products will be taken into account but the 'working capital, including raw material and other consumable store will be excluded for computing the value of plant and machinery'. Clause(5) of the Scheme lays down the procedure for claiming the grant of subsidy and, inter alia, provides that the industrial units will get themselves registered with the State Department concerned 'prior to taking effective steps for setting up the new units or undertaking substantial expansion of the existing units' and indicate their assessment of the 'total additional fixed capital likely to be invested by them'. Clause(12) provides that in respect of all units to which grant or subsidy was disbursed, a 'certificate of utilization of grant or subsidy for the purposes for which it was given' shall be furnished to the appropriate authority within a period of one year of the date of the receipt of the last installment/full amount.
4. According to section 43 of the Income-tax Act, 'actual cost' means the actual cost of the assets to the assessed, reduced by that portion of the cost thereof, if any, 'as has been met directly or indirectly by any other person or authority'.
5. The Income-tax Officer disallowed the claims of the assessed on the ground that the assessed had claimed depreciation even on those assets which were 'linked with the subsidy received from the Government'. The assessment order, however, gave no indication as to how the assets in respect of which depreciation was claimed were linked with the subsidy received from Government. In appeal, the Commissioner of Income-tax posed the question whether the cost of any of the assessed's fixed assets was met, directly or indirectly, within the meaning of section 43(1) of the Act by the Government as a result of the Subsidy granted to the assessed. The Commissioner then noted the permeable to the Scheme that subsidy was meant for industrial units 'to be set up' in certain selected areas with a view to promoting the growth of industry there, and observed that it was view of promoting the growth of industry there, and observed that it was clear from the Scheme 'that it was only the computation of the subsidy which was linked to the total fixed capital investment' and that the Scheme nowhere laid down that the subsidy should, in fact, be utilized by direct or indirect investment in any fixed assets. The Commissioner further noted that the utilization certificate furnished by the assessed stated that the subsidy received was in respects of investments already made by the assessed during the previous years. The Commissioner, thereforee, concluded that the subsidy received could not have gone even indirectly to meet the cost of depreciable assets already created in the previous year. This is how the Commissioner justified the allowance of full depreciation in respect of the fixed assets. The Tribunal upheld the order of the Commissioner following a decision of the Special Bench of the Tribunal in certain cases to the effect that the subsidy granted by the Government for promotion of industrial in backward areas as as 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 assessed directly or indirectly that the assessed had incurred in acquiring the assets.
6. In the course of hearing of the petition, it appeared to us that on the existing material, it was not possible to have a clear idea whether the assessed had met directly or indirectly a part of the cost of the fixed assets in question by the subsidy received within the financial year. We asked learned counsel for the assessed to file a copy of the assessed's application for the grant and of the correspondence exchanged between the parties as also a copy of the mortgage deed that may have been executed by the assessed in favor of the Government in terms of the Scheme. The assessed filed a compilation of documents consisting of the aforesaid copied. A copy of the order of this court in the case of Jindal Industries was also filed.
7. The mortgage deed executed by the assessed in favor of the financial institution, inter alia, recites that the company required money for the purchase of machinery and construction of factory building, and that the assessed guarantees utilization of the amount of subsidy for the setting up and/or substantial expansion of the industry for which the subsidy has been granted. Prima facie, the Scheme and the documents required to be executed by the recipient of the subsidy seem to indicate that the subsidy is not intended as a reward for the setting up or expansion of an industrial unit in the specified areas nor for the working capital requirement of the industrialist who may set up such a unit or who may intend to set it up, but to subsidize the setting up and/or expansion of the existing unit. Section 43(1) while defining 'actual cost' visualizes the reduction by that portion of the cost which may have been met 'directly or indirectly by any other persons or authority'. The question whether, having regard to terms of the Scheme and the recitals of the mortgage deed and the other undertaking of the assessed, the subsidy received even after the creation of the assets, to which the deduction relates, could be said to have been made directly or indirectly by the subsidy, appears to us to raise a question of construction not only of the section but also of the Scheme and the various documents executed pursuant to it. On the material, it could not be said that the question sought to be referred has, in any manner, been concluded by a finding of fact or that there could be no linkage between the assets in existence and the subsidy or the assets which are sought to be added by the subsidy. The consideration of the question would also involve the interpretation of the Scheme of determine if the subsidy could be utilized merely for the purpose of meeting the working capital requirements of the recipient. While we express no opinion as to how these question may be eventually answered in view of the peculiar Scheme of section 256(2) of the Act, there is no escape from the conclusion that the question sought to be referred is a question of construction and does arise on the facts and circumstances of the case.
8. We would, thereforee, accept these petitions and direct the Tribunal to state a case and refer the following question to this court :
'(1) Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that the subsidy as received as received by the assessed-company under '10 per cent. Central Outright Grant or Subsidy Scheme, 1971', was not to be reduced from the cost of the assets owned by the assessed-company under section 43 of the Income-tax Act, 1961
(2) Whether, on the facts and in the circumstances of the case, the Tribunal was justified in adjudicating upon the nature of the subsidy without obtaining from the assessed the relevant documents constituting the basis of the subsidy ?'