High Court rules subsidy not deductible from plant cost for depreciation calculation

The High Court held that the subsidy received by the assessee should not be deducted from the cost of plant and machinery for calculating depreciation. The Court emphasized that the subsidy was a monetary incentive to promote industries, not specifically to subsidize asset costs. Therefore, the subsidy did not reduce the actual cost borne by the assessee for the assets. The Court ruled in favor of the assessee, aligning with the view of various High Courts in similar cases, and transmitted the judgment to the Appellate Tribunal without cost directions.

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Issues:
1. Deductibility of subsidy received by the assessee from the government for calculating depreciation on plant and machinery.

Analysis:
The case involved a reference under section 256(1) of the Income-tax Act, 1961, where the Appellate Tribunal referred a question to the High Court regarding the deductibility of a subsidy received by the assessee for calculating depreciation on plant and machinery. The respondent, a public limited company, received a subsidy under the Central Subsidy Scheme, 1971, against the investment made for purchasing plant and machinery. The dispute arose when the Inspecting Assistant Commissioner deducted the subsidy amount from the capital cost to calculate depreciation, which was challenged by the assessee. The Commissioner of Income-tax held that the subsidy amount should not be deducted for depreciation calculation, leading to appeals by both parties before the Tribunal. The Tribunal upheld the Commissioner's decision, resulting in the current reference before the High Court.

The High Court examined the nature of the subsidy scheme, emphasizing that it aims to promote industries in backward areas by providing incentives to entrepreneurs. The scheme does not dictate how the subsidy amount should be spent, allowing the beneficiary to utilize it for any industry-related purpose. The quantification of the subsidy is based on the cost of assets, such as plant and machinery, and is a percentage of such cost. The Court analyzed relevant provisions of the Income-tax Act, particularly sections 2(45), 5, 28, 29, and 32, which govern the computation of total income, profits from business, and depreciation on assets used for business or profession.

Regarding the computation of depreciation, the Court referred to section 43 of the Act, which defines terms related to asset costs and written down value. It highlighted that the actual cost of an asset to the assessee should be reduced by any portion met by another person or authority. The Revenue argued that the subsidy, being a part of the cost met by the government, should be deducted to determine the actual cost for depreciation calculation. In contrast, the assessee contended that the subsidy is unrelated to the asset cost and hence should not be deducted.

The Court aligned with the view of various High Courts in similar cases, emphasizing that the purpose of the subsidy scheme is to incentivize entrepreneurs and not specifically subsidize the cost of assets like plant and machinery. It concluded that the subsidy is a monetary incentive that does not reduce the actual cost borne by the assessee for the assets. Therefore, the Court ruled in favor of the assessee, holding that the subsidy received should not be deductible from the cost of plant and machinery for calculating depreciation. The judgment was transmitted to the Appellate Tribunal without any cost directions.

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