TaxTMI 
TaxTMI 
1994 (9) TMI 1
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....as taken a contrary view against the assessee and where the assessee has come up in appeal. There is thus a divergence of judicial opinion on this question. We may refer to the facts of one case on either side to place the controversy in perspective. In Civil Appeal No. 2474 of 1991, the Commissioner of Income-tax, Andhra Pradesh-I, Hyderabad, has questioned the correctness of the order dated November 28, 1990, of the Division Bench of the Andhra Pradesh High Court in Income-tax Case No. 267 of 1989. The respondent-assessee, Messrs. P. J. Chemicals Ltd., filed its return of income for the assessment year 1983-84 declaring a net loss of Rs. 6,90,643. In the course of its return, the assessee had capitalised the entire pre-operative expenditure amounting to Rs. 25,64,395 and claimed depreciation thereon. There were, however, some disallowances of the items in this capitalisation and a ratio of 80:20 was accepted as the formula for ascertaining the capital. That, however, is not the controversy in this appeal. The point is as to the deductibility of a Central subsidy of Rs. 9,97,085, which the assessee had received, from the "actual cost" for the purposes of calculation of depre....
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.... appeal. The appellant, Messrs. Janak Steel Tubes P. Ltd., filed returns of income for the assessment year 1978-79 declaring a loss. Some time thereafter the appellant revised its returns. It claimed that the subsidy of Rs. 7,58,000 received by it should not be deducted while computing depreciation on the "actual cost". The Income-tax Officer, by his order dated May 27, 1980, rejected the claim of the appellant and reduced the "actual cost" by the amount of the subsidy. The appeal preferred by the appellant before the Commissioner of Income-tax (Appeals) was dismissed on October 9, 1980. The appellant filed a second appeal in Income-tax Appeal No. 4810/(Del.) of 1980 before the Income-tax Appellate Tribunal, Jabalpur Bench, Camp at New Delhi. The Tribunal has discussed this point in paragraph 4 of the appellate order. It allowed the appellant-assessee's claim. On the motion of the Revenue under section 256(1) of the Income-tax Act, 1961, the Tribunal referred the following question of law for the opinion of the High Court (see [1989] 179 ITR 536 (P & H)) (along with another question not relevant for this case) (at page 537) : "(2) Whether, on the facts and in the circumstance....
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....nt turns on the definition of "actual cost" in section 43(1) of the Income-tax Act, 1961. Section 43(1) provides definitions of certain terms and, inter alia, stipulates that for purposes of section 28 to 41 and 43, "actual cost" means "the 'actual cost' of the assets to the assessee, reduced by that portion of the cost thereof, if any, as has been met directly or indirectly by any other person or authority." Thus, if a portion of the cost is met directly or indirectly by any person or authority, the "actual cost" would, for the purposes of the aforesaid sections, be the cost minus the subsidies. The "actual cost" of an asset which should be given a meaning in a commercial sense, logically includes whatever even any other person or authority has met ; but the legislative intent is that the assessee should not have the benefit of depreciation on the cost which he did not himself pay. Indeed, the provision for wastage of capital in the earning of income by way of depreciation was not an initially recognised concept. The Millard Tucker Committee in the United Kingdom said : "For more than a generation after the imposition of the present income tax, no relief whatever was given to t....
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....Corporation might conceivably have said : 'Well, the tramway cost us pound 54,752, but, having regard to the fact that that was repaid to us by the Dunlop Rubber Co., the actual cost to us was nil.' I find, like Lord Justice Slesser, the words in sub-rule (6) too strong to enable me to say that the only object and effect of the section is to correct the anomaly that was pointed out in Richman's case [1906] 1 KB 311). For these reasons, I think the appeal should be allowed and the decision of the Commissioners restored." Disagreeing with the said observations, Lord Atkin said : ".....I myself should not have thought the answer of Birmingham Corporation to the question put by Lord Justice Romer would have been what he suggests. On the hypothesis that the Dunlop Company had recouped the Corporation the whole of the cost of the first tramway I should have thought the answer to 'What did it cost you ?' or 'What did it actually cost you ?" would have been 'It actually cost us pound 54,752 but none of the burden of that cost will fall on the Corporation, for the Dunlop Company have paid us the full amount.'........" The view of Lord Atkin was followed by the Bombay High Court in ....
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.... adopted under the scheme to quantify the financial aid. The contention is that it is not a payment, directly or indirectly, to meet any portion of the "actual cost" but intended as an incentive to entrepreneurs, its quantification determined at a percentage of the fixed capital cost. In Godavari Plywoods' case [1987] 168 ITR 632, the Andhra Pradesh High Court, adopting this view, observed : "Nowhere had the scheme provided as to how the subsidy should be utilised and for which assets. It was open to the assessee to legitimately reduce the cost of land in its books of account to the full extent of the subsidy, in which case the cost of plant and machinery would remain at invoice price uninfluenced by the amount of subsidy. The amount received by way of subsidy could be utilised for any purpose such as acquiring land on which no depreciation was admissible or on plant and machinery or for erection of buildings or for working capital or for repaying the loans already borrowed. Hence, unless the subsidy received had a nexus, direct or indirect, to meet a portion of the actual cost of any specific capital asset, it could not be brought within the purview of section 43(l) of the A....