Judgment:
Y.R. Meena, J.
1. On an application under Section 256(2) of the Income-tax Act, 1$61, the Tribunal was directed to refer certain questions and in consequence of the direction, the Tribunal has referred the following questions for our opinion which are set out at pages 1, 2 and 3 of the application :
'Question in R. A. No. 580(Cal) of 1995, assessment year 1984-85 :
1. Whether, on the facts and in the circumstances of the case, the Tribunal was justified in holding that the assessee was entitled to deduction of entire premium of Rs. 10,00,000 payable on debenture in the computation of its total income in the year when the debentures are redeemed and not in the year of issue ?
2. Whether, on the facts and in the circumstances of the case, the Tribunal was justified in not allowing the assessee-company even proportionate deduction on account of premium payable by the company ?
3. Whether, on the facts and in the circumstances of the case, the Tribunal was justified in holding that cash subsidy of Rs. 5,72,000 received during the year on generator is deductible from its cost for the purpose of computing depreciation and investment allowance allowable to the asses-see-company during the year ?
Questions in R. A. No. 581(Cal) of 1985, assessment year 1985-86 :
1. Whether, oh the facts and in the circumstances of the case, the Tribunal was justified in not allowing the assessee-company even proportionate deduction during the year on account of premium payable on debentures issued by the company during the assessment year 1984-85 ?
2. Whether, on the facts and in the circumstances of the case, the Tribunal was justified in holding that cash subsidy of Rs. 5,72,000 received in earlier year on generator is deductible from its cost for the purpose of computing depreciation allowable to the assessee-company during the year ?
Question in R. A. No. 582(Cal) of 1995, assessment year 1984-85 : 1. Whether, on the facts and in the circumstances of the case, the Tribunal was justified in holding that the assessee was entitled to deduction of entire premium of Rs. 10,00,000 payable on debentures in computing of its total income in the year when the debentures are redeemed and not in the year of issue ?'
2. The assessee had filed a return on March 31, 1984, for the assessment year 1984-85, and thereafter he filed a revised return. Similarly, for the assessment year 1985-86, a return was filed on July 31, 1985, and thereafter a revised return was filed in 1985. In the questions referred, there are mainly two disputes--one is that the cash subsidy of Rs. 5,72,000 received by the assessee should be deducted from the cost of the assets for the purpose of depreciation and investment allowance and the other issue relates to the deduction of Rs. 10,00,000, being premium at the rate of five per cent. payable on redemption of loan convertible secured debentures issued during the year and whether that deduction should be allowed in the first year or last year or that should be spread over seven years.
3. At the outset, learned counsel for the assessee brought to our notice the decision of the apex court in the case of Madras Industrial Investment Corporation Ltd. v. CIT : [1997]225ITR802(SC) wherein their Lordships have taken the view that the discount written off should be allowed as deduction proportionately each year over the period for redemption.
4. Learned counsel for the Revenue, Mr. Agarwal, submits that it should be allowed only in the last year over the period of redemption. The second issue relates to whether the cash subsidy received by the assessee on the capital asset, that is, generator, should be deducted from the cost of the asset for the purpose of depreciation and investment allowance.
5. Mr. Khaitan, learned counsel for the assessee, again submits that this issue is already concluded by the apex court in the case of CIT v. P. J. Chemicals Ltd : [1994]210ITR830(SC) wherein the view has been taken that grant of subsidy by the Government as incentive for setting up industries in backward areas should not be deducted in computing actual cost of the asset for the purpose of depreciation.
6. Mr. Agarwal, learned counsel for the Revenue, submits that in Sahney Steel and Press Works Ltd. v. CIT : 1997ECR787(SC) , the apex court has taken the view that the subsidy received from the Government is a revenue receipt. Therefore, that should be taxed as revenue receipt.
7. In Madras Industrial Investment Corporation Limited's case : [1997]225ITR802(SC) , their Lordships observed as under :
'Issuing debentures at a discount is another such instance where, although the assessee has incurred the liability to pay the discount in the year of issue of debentures, the payment is to secure a benefit over a number of years. There is a continuing benefit to the business of the company over the entire period. The liability should, therefore, be spread over the period of the debentures.'
8. Following the view taken by the apex court, the liability should, therefore, be spread over the period of the debentures.
9. In case of P. ]. Chemicals Ltd. : [1994]210ITR830(SC) , their Lordships observed as under :
'The Government subsidy, it is not unreasonable to say, is an incentive not for the specific purpose of meeting a portion of the cost of the assets, though quantified as or geared to a percentage of such cost. If that be. so, it does not partake of the character of a payment intended either directly or indirectly to meet the 'actual cost'. We should prefer the reasoning of the majority of the High Courts to the one found acceptable by the High Court of Punjab and Haryana.'
10. The decision relied upon by learned counsel for the Revenue, Mr. Agar-wal, has no application, as in that case, the finding was that the subsidy received from the Government was to assist the assessee in carrying on trade or business. That is not the case of the Revenue in the case on hand. Therefore, that decision has no application.
11. In the result, in R. A. No. 580(Cal) of 1995, we answer questions Nos. 1 and 2--the deduction should be allowed on proportionate basis on account of premium payable by the company over the term of the debentures.
Question No. 3.--We answer in the negative, i.e., in favour of the asses-see and against the Revenue.
Question in R. A. No. 581(Cal) of 1995 : Question No. l~We answer that deduction should be allowed on proportionate basis during the years over the term of debentures.
Question No. 2.--We answer in the negative, i.e., in favour of the asses-see and against the Revenue.
Question in R. A. No. 582(Cal) of 1995.--We answer that assessee was entitled to deduction of premium of Rs. 10 lakhs payable on the debentures to be spread over the term of debentures.
12. The application is accordingly disposed of.
13. All parties are to act on an operative part of this judgment on the usual undertaking.