Commissioner of Income-tax Vs. Ravindra Tubes Ltd. - Court Judgment

Excerpt:
income tax act 1961 - section 43--actual cost of assets-as reduced by the amount paid by other person would not include the amount of subside granted by central govt.--which amount is not to be deducted from the amount of cost of assets.central outright grant of subsidy scheme 1971 - subsidy under--meaning of discussed. - - under paragraph 10 of the scheme, if the authority granting the subsidy is satisfied that there was some misrepresentation as to any essential fact or furnishing of false information or if the unit went out of production within five years after commencement, the authority could even claim refund of the subsidy. in this case, the court was of the view that the subsidy was separately allowable towards cost of the machinery, plant and building under the incentive scheme, and that it reduced the 'actual cost' thereof and section 43(1) of the act was clearly attracted.d.p. wadhwa, j. 1. the income-tax appellate tribunal, delhi bench 'c', delhi, has referred to this court the following two questions for its opinion : '1. 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 of 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 ?' 2. for the purpose of answering these questions it may be necessary to refer to some relevant facts. 3. the assessment years involved are 1977-78 and 1978-79, with respective accounting years ending on december 31, 1976, and december 31, 1977. the assessed-company set up an industrial unit in the backward areas becoming entitled to '10 per cent. central outright grant of subsidy scheme, 1971'. during the previous years corresponding to the assessment years 1977-78, the assessed-company received an amount of rs. 3,91,275, and for the assessment year 1978-79, the amount of subsidy received by the assessed-company was rs. 3,57,907. the subsidy was received as per the scheme. 4. the income-tax officer reduced the amount of subsidy from the cost of the assets before allowing depreciation/development rebate. the assessed appealed. the commissioner of income-tax (appeals) allowed the appeal. he was of the opinion that there was nothing to substantiate the income-tax officer's view that the subsidy was utilised to create the assessed company's fixed assets, and that, thereforee, to that extent the assessed company's actual cost was liable to be reduced. the revenue appealed to the income-tax appellate tribunal. the tribunal dismissed the appeal and confirmed the order of the commissioner of income-tax (appeals). the tribunal was of the view 'that the subsidy granted by the government for the 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 of the assessed directly or indirectly that the assessed had incurred in acquiring the assets'. 5. under section 43, in relevant part, '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. the simple question before us is if the subsidy forms any part of the element of actual cost for the purpose of granting depreciation/ development rebate. for this purpose, it may be relevant to refer to the provisions of the subsidy and what subsidy would mean in ordinary parlance as it is not legally defined otherwise. 6. the government of india made schemes of 10 per cent. (later increased to 15 per cent.) central grant or subsidy for industrial units to be set up in certain selected backward districts/areas with a view to promoting the growth of industries there. the scheme fixed the period under which it was to remain in operation ; its applicability to industrial units as defined in the scheme; how the fixed capital investment was to be assessed for the purpose of calculating the subsidy; and then the procedure for claiming and disbursement of the grant or subsidy. it is quite a detailed scheme and require submission of the annual progress report by each industrial unit receiving the grant or subsidy. under paragraph 10 of the scheme, if the authority granting the subsidy is satisfied that there was some misrepresentation as to any essential fact or furnishing of false information or if the unit went out of production within five years after commencement, the authority could even claim refund of the subsidy. no owner of an industrial unit after receiving a part or the whole of the subsidy could change the location of the industrial unit, again within a period of five years after its going into production. the scheme also requires furnishing of a certificate that the subsidy was utilised for the purposes for which it was given a mortgage deed is required to be executed under the scheme for complying with the terms thereof. it has been brought on record that the assessed's balance-sheet showed that the subsidy was secured as a second charge on the assets and guaranteed by give directors for the fulfilllment of the requirements laid down in the scheme for a period of five years. 7. it would be, thus, seen that the scheme fixes a parameter for calculating the amount of subset to be given, which is the value of 'fixed capital investment' which in terms means investment in land, building and plant and machinery. the purpose of the scheme, as is evident, is that it is for giving encouragement to entrepreneurs for setting up industrial units in selected backward districts/areas with a view to promoting the growth of industries there, and, thus, the development of those areas. the subsidy is not meant to form part of the cost of the assets of the assessed establishing the industrial unit and becoming entitled to the subsidy under the scheme. 8. the word 'subsidy' has not been defined either in the scheme or under the act. we have, thereforee, to give it the ordinary meaning or the meaning that is understood in commercial parlance. in black's law dictionary (sixth edition), 'subsidy' is defined as under : 'a grant of money made by government in aid of the promoters of any enterprise, work, or improvement in which the government desires to participate, or which is considered a proper subject for government aid, because such purpose is likely to be of benefit to the public.' 9. in the concise oxford dictionary, 'subsidy' has been define as 'money contributed by state to keep down price of commodities, etc., or to expenses of commercial undertaking, charitable institution, etc., held to be of public utility'. according to collins co build english language. dictionary, a subsidy is money that is paid by a government or other authority in order to help a company financially or to make something cheaper for the public. in new webster's dictionary, 'subsidy' has been defined as 'a sum of money granted by a government to an organisation institution, or industry, especially one benefiting the health and welfare of the country, as a charity, hospital, or public service; a gift of money grant'. 10. it is, thereforee, clear that the subsidy has no bearing on the cost of the assets. mr. gupta, learned counsel for the revenue, referred to the decision of the punjab and haryana high court in cit v. jindal brothers rice mills , in support of his contention that the actual cost would stand reduced by the amount of subsidy, and that the tribunal went wrong in holding otherwise that total investment in the venture could not have been reduced. in this case, the court was of the view that the subsidy was separately allowable towards cost of the machinery, plant and building under the incentive scheme, and that it reduced the 'actual cost' thereof and section 43(1) of the act was clearly attracted. on the other hand, mr. aggarwal, learned counsel for the assessed, said that there was a string of judgments of almost all the courts in the country taking a contrary view and that it was only the punjab and haryana high court which struck a discordant note. the judgments of the high courts which mr. aggarwal referred to were of the gauhati, madras, bombay, calcutta, gujarat, andhra pradesh, karnataka, madhya pradesh, kerala and orissa high courts. it is not necessary to burden our judgment will all these judgments and we will note only three of these. in cit v. grace paper industries pvt. ltd. : [1990]183itr591(guj) , the court held that the subsidy granted by the government for development of industries in backward areas was not part of the 'actual cost' of plant and machinery and could not be deducted from the cost of assets in computing depreciation, development rebate and investment allowance. the court observed that the government had noticed that (at page 602) : 'area specified as backward areas and tribal areas were undeveloped or underdeveloped and entrepreneurs we not wiling to set up industries in such undeveloped or underdeveloped areas. the government, thereforee, decided to give financial incentives to encourage and induce entrepreneurs to move to backward areas and establish industries there so that the region may develop and promote the welfare of the people living in that region. one of the incentives which the government decided to grant was cash subsidy'. in cit v. ambica electrolytic capacitors pvt. ltd. , the court took note of all the judgments of various courts in the country and also of the punjab and haryana high court aforesaid. the court also referred to the meaning of the term 'subsidy' as given in the dictionaries and held that it appeared that subsidy was in the nature of pecuniary assistance from the government to entrepreneurs so as to encourage the establishment of industries in all backward areas, and, thereforee, such subsidy could not be excluded from the actual cost for giving the benefit subsidy could not be excluded from the actual cost for giving the benefit of depreciation. the court dissented from the view expressed by the punjab and haryana high court in jindal brothers rice mills' case . the latest judgment on this point would appear to be that of the orissa high court in cit v. orissa industries ltd. : [1992]198itr251(orissa) . here also the court took the view that subsidy was not paid to meet the cost of any asset of the assessed and that it was given as an incentive for setting up industrial units in backward areas. the court also observed that the formula contained for grant of subsidy was merely a measure for determining the amount of subsidy. sub-section (1) of section 43 of the act which defines 'actual cost' was held to be not applicable. the punjab and haryana high court, to our mind, did not take the correct view of the matter and we are in respectful disagreement with the same. what was subsidy in common parlance was not adverted to. 11. we are, thereforee, of the view that the tribunal was correct in its view that subsidy was not to be reduced from the cost of the assets of the assessed. we answer both the questions in favor of the assessed and against the revenue. the respondent will be entitled to costs. counsel fee rs. 1,000.