Income Tax Appellate Tribunal - Bangalore
Income-Tax Officer vs Katwa Plastics And Synthetics on 16 December, 1992
Equivalent citations: [1993]46ITD349(BANG)
ORDER
T.V.K. Natarajachandran, Accountant Member
1. These appeals by the revenue are consolidated and disposed of by a common order for the sake of convenience as they involve a common issue. These appeals relate to the assessment years 1984-85, 1985-86 and 1986-87 and arise out of the consolidated order of the Dy. Commissioner (Appeals), Belgaum, dated 6-3-1991 wherein he, following the judgment of the jurisdictional High Court of Karnataka in the case of CIT v. Diamond Dies Mfg. Corporation Ltd. [1988] 172 ITR 655 and thejudgments of some other High Courts, held that depreciation should not be reduced by the amount of subsidy and consequently directed the ITO to compute depreciation without deducting the subsidy received.
2. Aggrieved by the order of the Dy. Commissioner (Appeals) the revenue is in appeal before me contending that the order of the Dy. Commissioner (Appeals) is opposed to law and facts of the case, that he erred in directing the Assessing Officer to allow depreciation without reducing the cost or written down value of plant and machinery by the Central Subsidy and that he erred in relying on the decision of the Karnataka High Court in the case of Diamond Dies Mfg. Corpn. Ltd. (supra) because that decision has not become final.
3. The issue relating to the subsidy came up for consideration before the Tribunal in connection with the original assessments made for assessment years 1984-85, 1985-86 and 1986-87 and the Tribunal by its order dated 30-11-1990 set aside the assessments and restored the matter to the ITO in order to bring out the nature of the subsidy granted to the assessee and examine the scope and purpose of the subsidy granted before making fresh assessments adjusting the subsidy from the cost of the fixed assets.
4. In consequence of such a direction, the ITO passed fresh orders under Section 143(3) read with Section 251 of the I.T. Act, 1961, dated 8-2-199.1, for all these years on the same pattern. After considering the relevant sanction orders, the ITO gave a categorical finding that the grant of subsidy to the assessee is not under the "Central Outright Grant or Subisdy Scheme 1971". He observed that the subsidy in this case was granted as "investment subsidy" on the basis of zones declared as industrially backward areas by the Central and State Governments. On this basis, the ITO held that the facts of the case considered by the Andhra Pradesh High Court and the Karnataka High Court were quite different and therefore those decisions were not applicable to the case of the assessee. He, hence, proceeded to compute the income only after adjusting the subsidy received from the cost of the assets and determining the same total income as was done in the original assessment orders passed for these years.
5. On appeal before the Dy. Commissioner (Appeals), the learned counsel for the assessee submitted that there is no difference between the Central Subsidy and State Subsidy because the objects of both are common. A photostat copy of the certificate from the General Manager, Directorate of Industries & Commerce, Belgaum was also produced and reliance was also placed on the decisions of several High Courts on this point. Following the decision of the Karnataka High Court in the case of Diamond Dies Mfg. Corporation Ltd. (supra), the Dy. Commissioner (Appeals) directed the ITO to grant depreciation without deducting the subsidy received from the cost of assets.
6. At the time of hearing, the learned departmental representative has been duly heard while none appeared on behalf of the assessee. He fairly submitted that the issue involved in these appeals stand covered by the judgment of the Karnatka High Court in the case of Diamond Dies Mfg. Corporation Ltd. [supra). From the grounds taken by the revenue it appears that though this is the clear position but the judgment has not become final as yet. Therefore, it is clear that these appeals have been filed by the revenue only to keep the matter alive.
7. It is also necessary to consider the matter with reference to the finding given by the ITO. It would appear that the ITO found that the subsidy given to the assessee is investment subsidy on the basis of zones declared as industrially backward areas by the Central and State Governments. This, according to the ITO, made all the difference between the subsidy received by the assessee and the subsidy granted by the Central Government as "Central Outright Grant or Subsidy Scheme 1971". Therefore, it is necessary to see whether the conclusion reached by the ITO is warranted with reference to the decided case laws. Though the ITO has mentioned that what was received by the assessee was nothing but investment subsidy, he has not brought on record the salient features of the said subsidy. Therefore, the scope and purpose of the said investment subsidy is taken as the same as considered by the Courts in this regard. The Andhra Pradesh High Court in the case of CIT v. Godavari Plywoods Ltd. [1987] 168 ITR 632 had considered both the Central Subsidy Scheme 1971 as well as Andhra Pradesh State Incentive Scheme 1976. The Government of India in the year 1971 formulated what is known as "Central Outright Grant or Subsidy Scheme 1971" for the country as a whole. The backward areas under the Scheme were clearly specified. All the industrial units including servicing units having fixed capital investment in land, building and machinery, whether in public sector or private sector, are eligible for the subsidy. For claims relating to the period ending 28-2-1973 the subsidy is 10 per cent of the fixed capital investment or Rs. 5 lakhs, whichever is lower. For claims relating to the period commencing from 1-3-1973, the subsidy is 15 per cent of the fixed capital investment or Rs. 15 lakhs, whichever is lower. The subsidy is to be claimed from the State Governments which scrutinise the claims through State Level Committees and the claims should be submitted to the Director of Industries of the State concerned. These financial incentives offered by the Government of India are in addition to the facilities offered by the individual State Governments. The State Government of Andhra Pradesh has granted incentives in G.O. No. 1225 of the Industries Department, dated 31-12-1968 and also in G.O. No. 455 of the Industries & Commerce Department, dated 3-5-1971 which were in force till February 1976. The Government of India revised the scheme of incentives in favour of principles of selectiveness and gradation and approved the orders issued by the State Governments which were in force till February 1976. Government of India Order No. 224, dated 9-3-1976 superseded the aforesaid orders of the State Government and this is known as 1976 State Incentive Scheme under which new industries going into regular production on or after 1-1-1976 were offered certain incentives. Under the new scheme, entrepreneurs setting up new industrial units and/or effecting substantial expansion of the existing units are eligible for investment subsidy on the "fixed capital cost" at 10 per cent of the fixed capital cost subject to a ceiling of Rs. 10 lakhs in all the areas which had been declared as backward under the six-point formula by the Government and excluding those areas covered by the Central Subsidy Scheme. In respect of industrial units set up, or where substantial expansion of the existing unit is effected, in Scheduled (Tribal) areas, investment subsidy is granted on the fixed capital cost at 20 per cent subject to a ceiling of Rs. 15 lakhs. In such Scheduled (Tribal) areas where Central subsidy is admissible, the balance to make up the total of 20 per cent of the investment/subsidy will be given by the State Governments. No investment subsidy is admissible in the areas not declared as backward by the Central or under the six-point formula. The investment subsidy is admissible provided the fixed capital cost on land, buildings, plant and machinery does not exceed Rs. 1 crore. Thus, it could be seen that both the Centre as well as the States are unanimous in providing increased rate of financial incentives to promote accelerated development of backward areas and are complementary in nature.
8. The Andhra Pradesh High Court considered the scheme of investment subsidy which is granted at a specified percentage of fixed capital cost. The expression "investment subsidy" is defined as the subsidy given at the specified percentage on the fixed capital cost. The phrase "fixed capital asset" is defined as investment in land, buildings, plant and machinery including jigs and fixutres. At page 635 of the judgment the Hon'ble High Court considered the question of grant of depreciation on the actual cost of land, buildings, plant and machinery in the context of Central Outright Grant or Subsidy Scheme 1971 and the State Incentive Scheme explained above. In that case, the subsidy received was adjusted by revenue authorities from the cost of the fixed assets under Section 43(J) of the IT Act, 1961 pertaining to actual cost. Though several cases were in appeal, the case of Godavari Plywoods Ltd. (supra) was taken as a representative case and therefore, the Andhra Pradesh High Court dealt with the material facts relating to that case. After considering the pros and cons and the contentions of both the parties and the relevant statutory provisions, the Andhra Pradesh High Court, at page 639 of the judgment, held that the financial incentives granted by the Central Government as well as the State Government are basically directed to encourage and induce the entrepreneurs to move to backward areas and establish industries there so that the region may develop in promoting the welfare of the people living in that region. When grant of cash assistance which is one of the several amentities and facilities made available to the entrepreneurs to set up industries in backward areas, the quantification was required to be fixed. One of the accepted methods of quantification is to find out the total amount invested by an entrepreneur in acquiring capital assets and grant specified percentage of the amount so invested in the capital asset as cash subsidy. The Andhra Pradesh High Court has pointed out that the entrepreneur will be at liberty to utilise the subsidy granted in whatever manner he likes. The quantification of cash subsidy in such cases is done by adopting a convenient measure. Thereafter, the Andhra Pradesh High Court proceeded to consider whether there is any provision in the said scheme to show that the subsidy should be utilised for the purpose of meeting a portion of the cost of the fixed assets. At pages 640 and 641 of its judgments, the Hon'ble High Court has categorically held as under :
We do not find any provision either in the Central Subsidy Scheme, 1971, or in the State Incentive Scheme that the entrepreneurs are granted the subsidy for the specific purpose of meeting a portion of the cost of the assets. Under both the schemes, the cash subsidy is quantified by determining the same at a specified percentage of the fixed capital cost. The basis adopted for determining cash subsidy with reference to the fixed capital cost is only a measure (of quantification) adopted and cannot, in our opinion, be considered to be for the specific purpose of meeting any portion of the fixed capital cost. We have, therefore, no hesitation in coming to the conclusion, on a careful examination of the schemes under consideration, that the subsidy granted to the assessee cannot be related to meeting a portion of the cost of the assets so that for the purpose of Section 43(1) of the Act, such subsidy can be reduced from the amount of actual cost of the assets to the assessee.
Thus, the Andhra Pradesh High Court has specifically ruled out the case of the department, namely, the subsidy goes to reduce the actual cost of the assets in terms of Section 43(1) of the IT Act, 1961. It is also clear from the aforesaid judgment that the so-called investment subsidy as differentiated and distinguished by the ITO was duly considered by the Andhra Pradesh High Court vis-a-vis the Central Outright Grant or Subsidy Scheme to come to the conclusion that the subsidy cannot go to reduce the cost of fixed assets in terms of Section 43(1) of the IT Act. On the other hand, both the Schemes of the Central and State Governments act together for the same objective and purpose. The High Court has clearly pointed out that under both the schemes there is no provision or condition that the subsidy granted should go to meet the cost of any fixed asset as sought to be made out by the revenue.
9. The Karnataka High Court in the case of Diamond Dies Mfg. Corpn. Ltd. (supra) considered the subsidy granted by the Central Government only. But the ratio decidendi of the Andhra Pradesh High Court in the case of Godavari Plywoods Ltd. (supra) was valid inasmuch as that High Court has dealt with both the State and Central Schemes of subsidy and that decision would be applicable to the case considered by the Karnataka High Court also. The Karnataka High Court at page 658 of its judgment has pointed out the salient features of the Central Subsidy Scheme and has held that nowhere has the scheme provided as to how the subsidy should be utilised and for which assets. The Karnataka High Court has also pointed out that the amount received by way of subsidy should be utilised for any purpose such as acquiring land on which no depreciation is admissible or on plant and machinery or for erection of buildings or for working capital or for repaying the loans already borrowed. It has also pointed out that unless the subsidy received has a nexus, direct or indirect, with meeting a portion of the actual cost of any specific capital asset, It cannot be brought within the purview of Section 43(1) of the Act.
10. The Bombay High Court in the case of CIT v. Elys Plastics (P.) Ltd. [1991] 188 ITR 11 considered the cash subsidy granted under the schemes of Gujarat State Government as well as Central Government and held that there is nothing in this scheme which requires the subsidy to be utilised towards meeting the cost of land, building, plant or machinery though the quantum of subsidy is calculated on the basis of fixed capital invested in land, building, plant and machinery and that by itself does not lead to the conclusion that the subsidy is to meet the cost of land, building, plant and machinery. The Madras High Court in the case of Srinivas Industries v. CTT [1991] 188 ITR 22 though considered the Central Outright Grant or Subsidy Scheme 1971, held that there is nothing in the Scheme which compels a person receiving subsidy to spend it in the acquisition of machinery, land or building. It also pointed out that the subsidy actually partakes the character of cash grant expendable for any purpose and not necessarily to be utilised only for the purchase of a particular capital asset.
11. Thus, the ratio decidendi of the aforesaid Courts clearly bring out the salient features of the Central Subsidy Scheme or the State Subsidy Scheme and whatever be the nomenclature of these schemes they are essentially one and the same and these provisions do not contain any condition or obligation to spend the subsidy for acquiring any fixed capital asset so as to reduce the cost of the fixed capital asset by the amount of subsidy relating to it. Therefore, the ITO in the fresh order passed has made only a distinction without there being any difference in the provisions of the State Subsidy Scheme vis-a-vis the Central Subsidy Scheme. In view of the decisions of the Courts relied upon by the Dy. Commissioner (Appeals) and also the cases cited, the logical conclusion that emerges is that there is no justification for reducing the subsidy for the purpose of granting depreciation on the fixed capital assets because there is no warrant in the Schemes of both the Central and State Governments to this effect. In view of the aforesaid reasons, the orders of the Dy. Commissioner (Appeals) are upheld and the grounds taken by the revenue are rejected.
12. In the result, the appeals are dismissed.