Tribunal denies revenue's appeal on depreciation deduction, citing subsidy not linked to capital assets.

The appeals by the revenue were dismissed as the Tribunal upheld the Dy. Commissioner (Appeals)'s decision to grant depreciation without deducting the subsidy received from the cost of assets. The Tribunal found that the subsidy did not need to be utilized for acquiring specific capital assets and therefore could not be reduced for the purpose of granting depreciation. The Karnataka High Court's judgment in Diamond Dies Mfg. Corpn. Ltd. was relied upon to support this conclusion, and the revenue's grounds were rejected.

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Issues Involved:

1. Whether depreciation should be reduced by the amount of subsidy received.
2. Validity of the Dy. Commissioner (Appeals)'s reliance on the Karnataka High Court's judgment in the case of CIT v. Diamond Dies Mfg. Corpn. Ltd.

Issue-wise Detailed Analysis:

1. Whether depreciation should be reduced by the amount of subsidy received:

The appeals by the revenue relate to the assessment years 1984-85, 1985-86, and 1986-87, contesting the Dy. Commissioner (Appeals)'s order directing the ITO to compute depreciation without deducting the subsidy received. The Tribunal initially set aside the assessments for these years, directing the ITO to examine the nature and purpose of the subsidy before making fresh assessments. The ITO's fresh orders concluded that the subsidy was an "investment subsidy" based on zones declared as industrially backward areas by the Central and State Governments, and thus adjusted the subsidy from the cost of fixed assets.

On appeal, the Dy. Commissioner (Appeals) held that there is no difference between the Central Subsidy and State Subsidy as both share common objectives. Following the Karnataka High Court's decision in Diamond Dies Mfg. Corpn. Ltd., he directed the ITO to grant depreciation without deducting the subsidy from the cost of assets.

During the hearing, the departmental representative acknowledged that the issue is covered by the Karnataka High Court's judgment in Diamond Dies Mfg. Corpn. Ltd., though the judgment had not become final. The Tribunal noted that the ITO failed to bring on record the salient features of the said subsidy and considered the scope and purpose of the subsidy as per the Andhra Pradesh High Court's decision in CIT v. Godavari Plywoods Ltd., which examined both the Central Subsidy Scheme 1971 and the Andhra Pradesh State Incentive Scheme 1976.

The Andhra Pradesh High Court ruled that the subsidy granted cannot be related to meeting a portion of the cost of the assets under section 43(1) of the IT Act, 1961. The Karnataka High Court in Diamond Dies Mfg. Corpn. Ltd. and the Bombay High Court in CIT v. Elys Plastics (P.) Ltd. also held that there is no provision in the subsidy schemes requiring the subsidy to be utilized towards meeting the cost of fixed assets. The Madras High Court in Srinivas Industries v. CIT similarly held that the subsidy partakes the character of a cash grant expendable for any purpose.

2. Validity of the Dy. Commissioner (Appeals)'s reliance on the Karnataka High Court's judgment in the case of CIT v. Diamond Dies Mfg. Corpn. Ltd.:

The Tribunal upheld the Dy. Commissioner (Appeals)'s reliance on the Karnataka High Court's judgment in Diamond Dies Mfg. Corpn. Ltd., noting that the ratio decidendi of the Andhra Pradesh High Court in Godavari Plywoods Ltd. is applicable as it dealt with both State and Central Schemes of subsidy. The Karnataka High Court pointed out that the subsidy received should be utilized for any purpose and not necessarily for acquiring specific capital assets, thus it cannot be brought within the purview of section 43(1) of the IT Act.

The Tribunal concluded that there is no justification for reducing the subsidy for the purpose of granting depreciation on fixed capital assets, as there is no warrant in the schemes of both the Central and State Governments to this effect. Therefore, the orders of the Dy. Commissioner (Appeals) were upheld, and the grounds taken by the revenue were rejected.

Conclusion:

In the result, the appeals by the revenue were dismissed.

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