1983 (3) TMI 67 - AT - Income Tax

Appellate Tribunal rules subsidy affects depreciation cost, allows development rebate on current & carried forward reserves.

The Appellate Tribunal upheld the Income Tax Officer's decision to deduct the subsidy received for a generator from the 'actual cost' for depreciation and ... Actual cost under section 43(1) of the Income-tax Act, 1961 - effect of subsidy on actual cost - depreciation and development rebate - carried forward development rebate reserve - benefit of subsidy relating back to installationActual cost under section 43(1) of the Income-tax Act, 1961 - effect of subsidy on actual cost - benefit of subsidy relating back to installation - depreciation and development rebate - Subsidy received towards the cost of an asset reduces the 'actual cost' of the asset for the purpose of allowing depreciation and development rebate even if the subsidy was received subsequent to installation. - HELD THAT: - The definition of 'actual cost' in section 43(1) requires reduction of the cost by any portion met directly or indirectly by another person or authority. The assessee had received a subsidy from U.P. Financial Corporation towards the installation cost of the generator; therefore the actual cost to the assessee is reduced by that subsidy. The fact that the subsidy was granted after installation is immaterial where the subsidy relates back to the installation. The Tribunal applied this principle and followed earlier decisions of the Allahabad High Court in CIT v. Saharanpur Electric Supply Co. Ltd. and the Supreme Court in Maharana Mills (P.) Ltd. v. ITO which support determining actual cost in each assessment year in accordance with section 43(1). Consequently depreciation and development rebate were to be allowed only on the net cost after deducting the subsidy. [Paras 4]The ITO was correct in reducing the asset's actual cost by the subsidy and allowing depreciation and development rebate only on the balance.Carried forward development rebate reserve - development rebate - Carried forward development rebate reserve created in an earlier year may be taken into account for allowing development rebate in the year under appeal. - HELD THAT: - The Tribunal held that the assessee could utilise the carried forward development rebate reserve created in 1969 in computing development rebate for the year under appeal. This conclusion was reached by following the observations of the Allahabad High Court in Addl. CIT v. Vishnu Industrial Enterprises , which recognised that the full reserve may not be created in a single year and that it may take more than one year to create the reserve to the full extent of the allowable development rebate. Respectfully following those observations, the Tribunal directed the ITO to allow development rebate with reference to both the reserve created in the year under appeal and the carried forward reserve. [Paras 6]The carried forward development rebate reserve is allowable and the ITO is directed to allow development rebate with reference to both the current year's reserve and the carried forward reserve.Final Conclusion: Departmental appeal allowed on the question of reducing asset cost by the subsidy; assessee's appeal allowed on the question of utilising carried forward development rebate reserve; both appeals disposed accordingly. Issues:1. Treatment of subsidy received towards the cost of a generator for determining 'actual cost' under section 43(1) of the Income-tax Act, 1961.2. Allowance of development rebate based on the creation of development rebate reserve.Analysis:Issue 1: Treatment of Subsidy for Determining 'Actual Cost'The case involved the question of whether a subsidy received towards the cost of a generator should be deducted from the 'actual cost' of the asset for the purpose of allowing depreciation and development rebate under section 43(1) of the Income-tax Act, 1961. The Income Tax Officer (ITO) deducted the subsidy amount from the actual cost, resulting in a lower amount eligible for depreciation and development rebate. The Commissioner (Appeals) disagreed, stating that the subsidy was received after the installation of the generator and should not be deducted from the actual cost. However, the Appellate Tribunal upheld the ITO's decision, emphasizing that the subsidy, even if received subsequently, related back to the date of installation. The Tribunal relied on legal precedents, including a decision of the Allahabad High Court, to support the view that the actual cost to the assessee was reduced by the subsidy amount received, regardless of the timing of receipt. Therefore, depreciation and development rebate were allowed only on the balance after deducting the subsidy amount.Issue 2: Allowance of Development Rebate based on Reserve CreationThe second issue pertained to the allowance of development rebate based on the creation of a development rebate reserve. The ITO had allowed the development rebate only to the extent of the reserve created in the assessment year under appeal. The assessee contended that the unutilized development rebate reserve from a prior accounting year should also be considered. The Commissioner (Appeals) rejected this claim, but the Appellate Tribunal disagreed. Citing a decision of the Allahabad High Court, the Tribunal held that the carried forward development rebate reserve could be taken into account for allowing the development rebate in the year under appeal. The Tribunal emphasized that the observations of the Court supported the assessee's position, even though the specific case cited involved a reverse situation. Consequently, the Tribunal directed the ITO to allow the development rebate not only based on the reserve created in the current year but also considering the carried forward reserve from a prior year.In conclusion, the Appellate Tribunal upheld the ITO's treatment of the subsidy received towards the generator's cost for determining 'actual cost' and allowed the development rebate based on both the current year's reserve creation and the carried forward reserve from a prior year. As a result, both appeals were allowed in favor of the department.