Statutory contribution, depreciation on grant-funded assets, and capital employed under section 80J clarified for tax computation.

A statutory contribution paid out of profits under the Gujarat Co-operative Societies Act was treated as allowable business expenditure and deductible in computing total income. Depreciation on plant and machinery funded by a 30 percent grant was allowed on the full actual cost because the grant did not directly or indirectly meet the cost of the asset for section 43(1) purposes. The same grant amount, however, was excluded from capital employed for relief under section 80J, as grant assistance does not form part of that computation. The assessee succeeded on the deduction and depreciation questions, while the Revenue succeeded on the section 80J issue.

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Issues: (i) Whether contribution paid under section 69 of the Gujarat Co-operative Societies Act, 1961, read with rule 31 of the Gujarat Co-operative Societies Rules, 1965, was deductible in computing total income; (ii) Whether depreciation was admissible on the portion of plant and machinery received from Indian Dairy Corporation representing 30 percent grant assistance; (iii) Whether that 30 percent grant amount was to be included in the capital employed for relief under section 80J of the Income-tax Act, 1961.

Issue (i): Whether contribution paid under section 69 of the Gujarat Co-operative Societies Act, 1961, read with rule 31 of the Gujarat Co-operative Societies Rules, 1965, was deductible in computing total income.

Analysis: The contribution was a statutory outgoing linked to the society's profits and had earlier been treated by the court as an allowable business expenditure. It was not to be disallowed merely because it arose from a statutory obligation to contribute out of profits. The amount was therefore treated as a legitimate business deduction.

Conclusion: The issue was answered in favour of the assessee and against the Revenue.

Issue (ii): Whether depreciation was admissible on the portion of plant and machinery received from Indian Dairy Corporation representing 30 percent grant assistance.

Analysis: The governing principle under section 43(1) of the Income-tax Act, 1961, is that actual cost is not to be reduced by a subsidy of the kind that does not directly or indirectly meet the cost of the asset. The grant assistance received for the machinery did not alter the actual cost for depreciation purposes, and depreciation had to be computed on that actual cost.

Conclusion: The issue was answered in favour of the assessee and against the Revenue.

Issue (iii): Whether that 30 percent grant amount was to be included in the capital employed for relief under section 80J of the Income-tax Act, 1961.

Analysis: For section 80J purposes, the amount received as grant could not be treated as capital employed, while the treatment of loan assistance stood on a different footing. Since the 30 percent amount in the present case was expressly treated as grant, it was excluded from the capital employed computation.

Conclusion: The issue was answered in favour of the Revenue and against the assessee.

Final Conclusion: The reference was disposed of by holding that the assessee succeeded on the deduction and depreciation questions, while the Revenue succeeded on the section 80J capital-employment question.

Ratio Decidendi: A statutory contribution out of profits can constitute allowable business expenditure, a grant that does not meet the actual cost of an asset does not reduce that cost for depreciation, and grant amounts are excluded from capital employed under section 80J.

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