1981 (2) TMI 134 - AT - Income Tax

Subsidy not to reduce asset cost for depreciation per Income-tax Act

The Tribunal held that the subsidy received from SIPCOT should not reduce the cost of assets for depreciation purposes under section 43(1) of the ... Actual Cost, Backward Area Issues Involved:1. Whether the subsidy received from SIPCOT reduces the cost of assets for depreciation purposes under section 43(1) of the Income-tax Act.2. The timing of the reduction in the cost of assets due to subsidy receipt.3. The nature and purpose of the subsidy and its impact on the cost of depreciable assets.Detailed Analysis:Issue 1: Reduction of Asset Cost by SubsidyThe primary issue addressed was whether the subsidy received from the State Industries Promotion Corporation of Tamilnadu Ltd. (SIPCOT) should reduce the cost of assets for depreciation purposes under section 43(1) of the Income-tax Act. The Tribunal examined the definition of 'actual cost' under section 43(1), which states that the actual cost of an asset to the assessee should be reduced by any portion of the cost met directly or indirectly by any other person or authority.The Tribunal noted that the subsidy was part of a scheme by the Government of India to promote industrialization in backward areas by providing financial assistance. The subsidy was calculated as a percentage of the fixed capital investment, which included land, building, plant, and machinery. However, the Tribunal concluded that the subsidy was intended to promote industrial development as a whole and not to meet the cost of specific depreciable assets.The Tribunal emphasized that for a subsidy to reduce the cost of an asset under section 43(1), it must directly or indirectly meet the cost of the asset. Since the subsidy was given as a lump sum for the overall investment in the industry and not specifically for depreciable assets, it did not meet the cost of the assets directly or indirectly. Therefore, the subsidy should not reduce the cost of the assets for depreciation purposes.Issue 2: Timing of Cost ReductionThe Tribunal also addressed the timing of the cost reduction due to the subsidy receipt. In some cases, the subsidy was received after the assets were put into use. The Tribunal noted that the subsidy should not be considered to relate back to the date of installation of the assets. The subsidy was granted after the unit had gone into production, and it was intended for the overall development of the industry, not specifically for the cost of depreciable assets.Issue 3: Nature and Purpose of the SubsidyThe Tribunal examined the nature and purpose of the subsidy, noting that it was intended to promote industrialization in backward areas by providing financial assistance to entrepreneurs. The subsidy was calculated based on the total fixed capital investment, which included various assets, not just depreciable ones. The Tribunal concluded that the subsidy was an incentive to attract entrepreneurs to set up industries in backward areas and was not intended to meet the cost of specific depreciable assets.The Tribunal referred to the legislative history and the definition of 'actual cost' under the Income-tax Act, emphasizing that the subsidy must have a direct or indirect connection to the cost of the depreciable assets to reduce their cost. Since the subsidy was given as a lump sum for the overall investment in the industry, it did not meet this requirement.Conclusion:The Tribunal concluded that the subsidy received from SIPCOT should not reduce the cost of the assets for depreciation purposes under section 43(1) of the Income-tax Act. The subsidy was intended to promote industrial development as a whole and not to meet the cost of specific depreciable assets. Therefore, the assessees' appeals were allowed, and the decisions of the lower authorities were reversed. The Tribunal did not address other issues raised, as the primary issue was resolved in favor of the assessees.