1990 (3) TMI 9 - HC - Income Tax

High Court rules subsidy post-fixed asset acquisition not deductible for depreciation. Decision aligns with previous rulings.

The High Court ruled in favor of the assessee, holding that the subsidy received should not be deducted from the cost of capital assets for depreciation ... Actual Cost, Depreciation Issues: Interpretation of section 43(1) of the Income-tax Act, 1961 regarding deduction of subsidy received by the assessee from the cost of capital assets for the purpose of allowing depreciation.Analysis:The case involved a question of law referred to the High Court under section 256(1) of the Income-tax Act, 1961, regarding the treatment of a subsidy received by the assessee under the 'Central Outright Grant or Subsidy Scheme, 1971.' The Tribunal had to determine whether the sum of Rs. 11,22,102 received as subsidy should be deducted from the cost of capital assets, specifically plant and machinery and factory building, for the purpose of allowing depreciation. The assessment year in question was 1980-81, with the relevant accounting year ending on June 30, 1979.The facts of the case revealed that the assessee, a private limited company engaged in the manufacture and sale of raw silk fabrics, received a subsidy under the Central Outright Grant or Subsidy Scheme, 1971, for establishing an industry in a backward area. The Income-tax Officer initially deducted the subsidy amount from the cost of fixed assets, leading to depreciation being allowed only on the balance value of those assets. The Commissioner (Appeals) later ruled in favor of the assessee, directing that depreciation should be allowed on the full cost of the fixed assets without deducting the subsidy amount.Upon appeal by the Department, the Tribunal considered the arguments of both parties and a previous decision by a Special Bench in a related case. The Special Bench had held that if a subsidy is received after the fixed assets are purchased and can be used for purposes other than acquiring those assets, it should not reduce the cost of the fixed assets for depreciation purposes. The Tribunal, following this precedent, upheld the Commissioner (Appeals) decision, stating that since the subsidy was received after the industrial unit was established and could be utilized for any business purpose, it should not be deducted from the cost of capital assets for depreciation.The High Court concurred with the Tribunal's decision, emphasizing that if the subsidy was not used to acquire the capital assets and was received after the industrial unit had commenced operations, it should not reduce the cost of those assets for depreciation purposes. The Court noted that the subsidy was not intended to help acquire capital assets and, therefore, should not be deducted from their cost. By following the Special Bench decision and considering the facts of the case, the Tribunal correctly determined that the subsidy should not be deducted from the cost of the capital assets, leading to a ruling in favor of the assessee.In conclusion, the High Court affirmed the Tribunal's decision, answering the question in the affirmative and in favor of the assessee, with no order as to costs. Judge Suhas Chandra Sen concurred with the judgment.