1984 (9) TMI 147 - AT - Income Tax

Subsidy not deductible from asset costs for tax deductions

The Tribunal held that the subsidy received by the assessee should not be deducted from the cost of assets for computing deductions under sections 32, ... Actual Cost, Fixed Assets, Revenue Receipt Issues Involved:1. Whether the subsidy received by the assessee should be deducted from the cost of the assets for computing deductions under sections 32, 32A, and 80J of the Income-tax Act, 1961.Detailed Analysis:1. Department's Appeal and ITO's Action:The Income Tax Officer (ITO) reduced the subsidy amount from the actual cost of the fixed assets for determining deductions under sections 32, 32A, and 80J, based on the definition of 'actual cost' in section 43(1) of the Income-tax Act, 1961. The ITO's stance was that the subsidy was directly linked to the cost of capital assets, thus necessitating its reduction from the actual cost.2. Commissioner's (Appeals) Decision:The Commissioner (Appeals) reversed the ITO's decision, relying on the Special Bench decision in Pioneer Match Works v. ITO [1982] 1 SOT 331 (SB), which held that the subsidy should not be deducted from the actual cost of assets. The Commissioner also followed the Madras High Court's decision in CIT v. Simpson & Co. [1980] 122 ITR 283, which allowed the full deduction under section 80J based on the capital employed, without proportionate reduction for the period of productive operation.3. Department's Argument:The department contended that the subsidy should reduce the cost of assets, citing the Allahabad High Court's decision in Lucknow Producers' Co-operative Milk Union Ltd. v. CIT [1983] 143 ITR 60 (All.), which held that grants for purchasing capital assets should reduce the cost of those assets for depreciation purposes. The department emphasized the direct link between the subsidy and the cost of assets, as evidenced by the conditions in the subsidy sanction letter and the engineer's certificate.4. Assessee's Argument:The assessee argued that the subsidy was intended to promote industrial development in backward areas and was not specifically for the cost of assets. The assessee relied on the practice of the Madras Tribunal to follow its own decisions and cited CIT v. L.G. Ramamurthi [1977] 110 ITR 453 (Mad.) to argue that the subsidy should not reduce the cost of assets.5. Tribunal's Decision:The Tribunal, considering the documentary evidence and the conditions of the subsidy, concluded that the subsidy was indeed linked to the cost of assets. The Tribunal held that the cost of assets should be reduced by the subsidy amount for computing deductions under sections 32, 32A, and 80J, thereby restoring the ITO's order and setting aside the Commissioner (Appeals)'s decision.6. Accountant Member's Dissent:The Accountant Member disagreed with the Judicial Member, arguing that the subsidy was meant to develop industries in backward areas and was not tied to any specific asset's cost. The Accountant Member cited the Special Bench decision in Pioneer Match Works, which held that the subsidy should not reduce the actual cost of assets.7. Third Member's Decision:The Third Member resolved the difference, agreeing with the Accountant Member. The Third Member emphasized that the subsidy was calculated based on fixed capital investment but was not directly tied to specific assets. The Special Bench decision in Pioneer Match Works was deemed applicable, and the subsidy was not to be deducted from the cost of assets for sections 32, 32A, and 80J deductions.Conclusion:The Tribunal ultimately decided that the subsidy received by the assessee should not be deducted from the cost of the assets for computing deductions under sections 32, 32A, and 80J. The decision of the Special Bench in Pioneer Match Works was upheld, and the departmental appeal was dismissed.