Subsidy for setting up industries in backward areas not required to be allocated to specific assets; depreciation allowed on full asset cost.

Subsidy granted for setting up industries in backward areas is a percentage measure of fixed capital investment and, absent a direct or indirect nexus to a specific capital asset, cannot be allocated against that asset to reduce its actual cost for depreciation. The court reasoned the scheme neither prescribes utilisation of the grant nor ties it to particular assets, and the subsidy may legitimately fund nondepreciable items, working capital, or loan repayment. Consequently the subsidy need not be deducted from asset cost and depreciation is allowable on the assessee's claimed asset cost; view affirmed in favour of the assessee.

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Issues involved: Interpretation of the expression "actual cost" under section 43(1) of the Income-tax Act, 1961 regarding allocation of subsidy received from the Central Government for setting up industries in backward areas for depreciation purposes.

Summary:

The High Court of Karnataka was presented with a reference under section 256(1) of the Income-tax Act, 1961, by the Income-tax Appellate Tribunal, Bangalore Bench, regarding the allocation of a subsidy received for setting up an industrial unit in a backward area. The main question was whether the subsidy could be allocated towards any particular asset for depreciation purposes.

During the assessment year 1977-78, the assessee received a subsidy from the Central Government for setting up an industrial unit in a backward area. The Income-tax Officer allocated the subsidy between different assets, reducing the written down value of the assets and allowing depreciation on the reduced cost. The Tribunal, following a previous decision, held that the subsidy cannot be allocated to any specific asset and does not reduce the cost of the assets under section 43(1) of the Act.

The scheme for granting the subsidy aimed to encourage industrial units in selected backward areas, defining "new industrial unit" and "fixed capital investment." The subsidy was a percentage of the total fixed capital investment, with restrictions and obligations for proper utilization.

The main contention was the interpretation of "actual cost" in section 43(1) of the Act. The Revenue argued that the subsidy reduces the actual cost of assets, while the assessee's counsel contended that the subsidy is a measure for granting subsidy and cannot be allocated to specific assets for depreciation.

The Court analyzed the scheme and found that the subsidy amount was a measure based on total fixed capital investment, including various assets. Without specific allocation instructions, the subsidy could be used for different purposes unrelated to specific assets. Referring to a previous case, the Court agreed that the subsidy was not meant to reduce the actual cost of assets for depreciation purposes.

In conclusion, the Court answered the question in favor of the assessee, stating that unless the subsidy directly or indirectly relates to meeting the actual cost of a specific asset, it cannot be deducted from the actual cost for depreciation purposes.

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