Supreme Court: Subsidy not deductible for depreciation

The Supreme Court held that the central subsidy received by the assessee is an incentive and not a payment to meet the actual cost of the asset. Therefore, the subsidy should not be deducted from the cost of the asset for depreciation purposes. The Court ruled in favor of the assessee and against the Revenue, concluding that the subsidy should not be reduced from the cost of the assets for depreciation. The reference was disposed of with no order as to costs.

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Issues Involved:
1. Whether the amount of central subsidy received by the assessee should be reduced from the cost of the assets for the purpose of allowing depreciation.

Issue-wise Detailed Analysis:

1. Central Subsidy and Cost of Assets for Depreciation:
The primary issue addressed in this judgment is whether the central subsidy received by the assessee should be deducted from the cost of the plant and machinery for calculating depreciation under the Income Tax Act, 1961.

Material Facts:
The assessee, a registered firm, received a central subsidy during the relevant assessment years (1985-86 and 1986-87). The Assessing Officer (AO) reduced the cost of the plant and machinery by the amount of the subsidy when determining the actual cost for depreciation purposes. The assessee appealed to the Commissioner of Income Tax (Appeals) [CIT(A)], who held that the subsidy should not be deducted from the cost of the plant and machinery. The CIT(A) relied on the decision of the Andhra Pradesh High Court in CIT vs. Godavari Plywoods Ltd. The Revenue's appeal to the Tribunal was dismissed, with the Tribunal relying on the decisions of various High Courts, including the Bombay High Court in CIT vs. Elys Plastics (P) Ltd.

Supreme Court's Decision in CIT vs. P.J. Chemicals Ltd.:
The Supreme Court in CIT vs. P.J. Chemicals Ltd. addressed whether the subsidy received by the assessee was a payment to meet any portion of the actual cost of the asset. The Court noted the divergence of judicial opinion, with most High Courts supporting the assessee's claim that the subsidy should not be deducted. The Supreme Court observed that the subsidy was intended as an incentive for entrepreneurs to move to backward areas and establish industries, rather than a payment to meet the actual cost of the asset. The Court held that such subsidies do not partake of the character of a payment intended to meet the actual cost and should not be deducted from the cost of the asset for depreciation purposes.

Supreme Court's Decision in Sahney Steel & Press Works Ltd. vs. CIT:
The Revenue argued that the decision in CIT vs. P.J. Chemicals Ltd. should not be followed in light of the Supreme Court's later decision in Sahney Steel & Press Works Ltd. vs. CIT. However, it was clarified that the issues in the two cases were different. In Sahney Steel, the issue was whether the subsidy was taxable as a revenue receipt, not whether it should be deducted from the cost of the asset for depreciation. The Supreme Court in Sahney Steel held that subsidies given to assist in carrying out business operations are revenue receipts, whereas those given to set up business or complete a project are capital receipts.

Conclusion:
The Court concluded that there is no conflict between the decisions in CIT vs. P.J. Chemicals Ltd. and Sahney Steel & Press Works Ltd. vs. CIT. The issue in the present case is covered by the decision in CIT vs. P.J. Chemicals Ltd., which held that the central subsidy received by the assessee is an incentive and not a payment to meet the actual cost of the asset. Therefore, the subsidy should not be deducted from the cost of the asset for depreciation purposes. The Court answered the question in the affirmative, in favor of the assessee and against the Revenue.

Disposition:
The reference was disposed of with no order as to costs, and the Court expressed appreciation for the assistance rendered by the amicus curiae.

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