COMMISSIONER OF INCOME-TAX VS MENEZES FARMACO, 2000 PTD-BOMBAY-HIGH-COURT-INDIA 2315 (1998)

Income-tax---

----Subsidy---Actual cost---Depreciation---Central subsidy received by assessee---Is not a payment directly or indirectly to meet any portion of "actual cost" but intended as an incentive to entrepreneurs---Not to be deducted from "actual cost" for calculating depreciation---Indian Income Tax Act, 1961, Ss.32 & 43(1).

The Central subsidy received by the assessee is not a payment, directly or indirectly, to meet any portion of the "actual cost" but intended as an incentive to the entrepreneurs. The fact that its quantification is determined as a percentage of the fixed capital cost does not change the nature and character of the subsidy. The amount of Central subsidy, therefore, cannot be deducted from the actual cost for calculating depreciation.

CIT v. P. J. Chemicals Ltd. (1994) 210 ITR 830 (SC) fol.

CIT v. Bhandari Capacitors (Pvt.) Ltd. (1987) 168 ITR 647 (MP); CIT v. Diamond Dies Mfg. Corporation Ltd. (1988) 172 ITR 655 (Kar.); CIT v. Elys Plastics (Pvt.) Ltd. (1991) 188 ITR 11 (Bom.); CIT v. Godavari Plywoods Limited (1987) 168 ITR 632 (AP); CIT v. Jindal Bros. Rice Mills (1989) 179 ITR 470 (P&H); CIT v. Premier Extraction (P.) Ltd. (1989) 175 ITR 22 (MP); CIT v. Sun Engineering Works (P.) Ltd. (1992) 198 ITR 297 (SC); Sahney Steel and Press Works Ltd. v. CIT (1997) 228 ITR 253 (SC) and Seaham Harbour Dock Co. v. Crook (1931) 16 TC 333 (HL) ref.

R. V. Desai with B. M. Chatterjee for the Commissioner.

G. S. Jetley: Amicus curiae.

JUDGMENT

DR. B. P. SARAF, J.---By this reference under section 256(1) of the Income Tax Act, 1961, the Income-tax Appellate Tribunal has referred the following question of law to this Court for opinion at the instance of the Revenue:

"Whether, on the facts and in the circumstances of the case, the 'Appellate Tribunal is right in .law in upholding the decision of the Commissioner of Income-tax (Appeals) that the amount of Central subsidy received by the assessee should not be reduced from the cost of the assets for the purpose of allowing depreciation?'

The material facts of the case-are as under:

The assessee is a registered firm. During the previous years relevant to the assessment years 1985-86 and 1986-87, the assessee received Central subsidy. The Assessing Officer reduced the cost of the plant and machinery for the purpose of determining the actual cost thereof for allowance of depreciation on the ground that the amount of subsidy would go to reduce the cost of plant and machinery in the hands of the assessee. The assessee appealed to the Commissioner of Income-tax (Appeals). The Commissioner of Income-tax (Appeals) held that the Central subsidy received by the assessee need not be deducted from the cost of the plant and machinery for the purpose of determining actual cost for allowance of depreciation. To arrive at this conclusion, he relied upon the decision of the Andhra Pradesh High Court in CIT v. Godavari Plywood Ltd. (1987) 168 ITR 632. The Revenue appealed against the above order of the Commissioner of Income tax (Appeals) to the Income-tax Appellate Tribunal ("the Tribunal"). The Tribunal, relying upon the decision of this Court in CIT v. Elys Plastics (Pvt.) Ltd. (1991) 188 ITR 11, wherein following the decision of the Andhra Pradesh High Court. in CIT v. Godavari plywoods Limited (1987) 168 ITR 632, the decisions of the Madhya Pradesh High Court in CIT v. Bhandari Capacitors (Pvt.) Ltd. (1987) 168 ITR 647 and CIT v. Premier Extraction (P.) Ltd. (1989) 175 ITR 22 and the decision of the Karnataka High Court in CIT v. Diamond Dies Mfg. Corporation Ltd. (1988) 172 ITR 655, this Court had held that the subsidies granted on the fixed capital investment of the assessee were not deductible in computing the cost of plant arid machinery for the allowance of depreciation, dismissed the appeal of the Revenue. The Revenue applied for reference under section 256(1) of the Act on the ground that there was divergence of opinion on this point and that the Punjab and Haryana High Courts has taken a contrary view in CIT v. Jindal Bros. Rice Mills (1989).179 ITR 470. In view of the fact that the Punjab and Haryana High Court had taken a view contrary to that of the Andhra Pradesh and Bombay High Courts and the controversy in regard to, the deductibility of the amount of subsidy from the cost of the asset was pending before the Supreme Court for decision, the Tribunal referred the question set out above to this Court for opinion.

We have heard Mr. R. V. Desai, learned counsel for the Revenue, who fairly stated that the controversy in this case is now covered by the recent decision of the Supreme Court in CIT v. P. J. Chemicals Ltd. (1994) 210 ITR 830. He, however, submitted that the said decision need not be followed in view of a later decision of the Supreme Court in Sahney Steel and Press Works Ltd. v. CIT (1997) 228 ITR 253. In view of the above stance of Mr. Desai. Learned counsel for the Revenue, we requested Mr. G. S. Jetley, senior counsel, to assist the Court as amicus curiae. Mr. Jetley accepted the request and addressed the Court as amicus curiae. Mr. Jetley stated that there was no conflict between the decision of the Supreme Court in CIT v. P. J. Chemicals Ltd. (1994) 210 ITR 830 and Sahney Steel and Press Works Ltd. v. CIT (1997) 228 ITR 253. He stated that the points at issue in these two cases were completely different. Mr. Jetley submitted that the issue before the Supreme Court in CIT v. P. J. Chemicals Ltd. (1994) 210 ITR 830 was whether the Capital subsidy received by the assessee was a payment, directly or indirectly, to meet any portion of the actual cost of the asset, whereas, the controversy in Shaney Steel and Press Works Ltd. v. CIT (1997) 228 ITR 253 was whether the subsidy received by the assessee ?company from the Andhra Pradesh Government in that case was taxable as revenue receipt or not. Thus, the nature of controversy in both the eases, according to Mr. Jetley, was totally different. He, therefore, submitted that there is no conflict whatsoever between the two decisions of the Supreme Court and each deals with a different controversy. He, therefore, submitted that the decision of the Supreme Court in CIT v. P. J. Chemicals Ltd. (1994) 210 ITR 830 squarely applies to the present case. In support of this contention, reliance was placed by Mr. Jetley on the following passage from the decision of the Supreme Court in CIT v. Sun Engineering Works (P.) Ltd. (1992) 198 ITR 297 (page 320):

"The judgment must be read as a whole and the observations from the judgment have to be considered in the light of the questions which were before this Court. A decision of this Court takes its colour from the questions involved in the case in which it is rendered and, while applying the decision to a later case, the Courts must carefully try to ascertain the true principle laid down by the decision of this Court and not to pick out words or sentences from the judgment, divorced from the context of the questions under consideration by this Court, to support their reasonings. "

We have carefully considered the rival submissions and perused the two decisions of the Supreme Court referred to above. In CIT v. P. J. Chemicals Ltd. (1994) 210 ITR 830 (SC), the controversy before the Supreme Court was whether the subsidy received by the assessee could be deducted in computing the actual cost for calculating depreciation. The Supreme Court took note of the sharp divergence of judicial opinion on this point. The High Courts of Andhra Pradesh, Bombay, Allahabad, Calcutta, Gauhati, Gujarat, Karnataka, Kerala, Madras, Madhya Pradesh, Orissa and Rajasthan had taken a view upholding the assessee's claim and held that the Central subsidy should not be deducted from the actual cost of the asset for allowing depreciation. The only dissenting view was of the Punjab and Haryana High Courts in CIT v. Jindal Bros. Rice Mills (1989) 179 ITR 470. The apex Court in CIT v. P. J. Chemicals Ltd. (1994) 210 ITR 830 (SC) had held that Central subsidy should not be deducted from the actual cost of the asset for the purpose of allowance of depreciation. While coming to this conclusion, it was observed (page 839):

"The question in the present context is not whether if a portion of the cost is met directly or indirectly by any other person or authority, it should be deducted or not. Quite obviously, the plain meaning of the section is that it shall be. But the real question is as to the character and- nature of a subsidy whether it was really intended to subsidies the cost of the capital or was intended as an incentive to encourage entrepreneurs to move to backward areas and establish industries, the specified percentage of the fixed capital cost which is the basis for determining the subsidy being only a measure 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 CIT v. Elys Plastics (Pvt.) Ltd. (1991) 188 ITR 11, this Court held that the subsidies were not deductible in computing the cost of plant and machinery for purposes of allowing depreciation. Speaking for the Bench Mrs. Justice Sujata V. Manohar, J. (as she then was). observed (page 14):

In the first place, the subsidy is, in terms, for the purpose of encouraging industries being set up in certain selected backward districts or areas, or for the purpose of shifting industrial units to such backward districts or areas. It is true that the quantum of subsidy is calculated on the basis of the fixed capital investment of the company in land, building, plant and machinery. But this by itself does not lead to the conclusion that the subsidy is to meet the cost of land, building, plant or machinery. There is nothing in this scheme which requires the subsidy to be utilised towards meeting the cost of land, building, plant or machinery."

It was further observed (Page 14):

"Under section 43(1) of the Income-tax Act, '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. The subsidy in question is not paid by the Central or State Government to meet the cost of any, assets of the assessee. It is given as an incentive for setting up or shifting industrial units in a backward area. The subsidy goes to augment the capital resources of the industry in question. "

The decision of -the Andhra Pradesh High Court in CIT v. Godavari Plywoods Ltd. (1987) 168 ITR 632 was' referred to with approval in the above decision. The decision of the Punjab and Haryana High Courts in CIT v. Jindal Bros. Rice Mills (1989] 179 ITR 470 did not find favour with this Court.

The Supreme Court in CIT v. P. J. Chemicals Ltd. (1994) 210 ITR 830 examined the character and nature of the subsidy to decide whether it was for the specific purpose of meeting a portion of the cost of the asset. It was observed (page 839):

"The question in the present context is not whether if a portion of the cost is met, directly or indirectly- by any other person or authority, it should be deducted or not. Quite obviously, the plain meaning of the section is that it shall be. But the real question is as to the character and nature of a subsidy whether it was really intended to subsidise the cost of the capital or was intended as an incentive to encourage entrepreneurs to move to backward areas and establish industries, the specified percentage of the fixed capital cost which is the basis for determining the subsidy being only a measure 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. " .

The Supreme Court accepted the reasoning. of the majority of the High Courts including the Andhra Pradesh High Court in CIT v. Godavari Plywoods Ltd. (1987) ITR 632 and the Bombay High Court in CITY. Elys Plastics (Pvt.) Ltd. (1991) 188. ITR 11 and did not approve the decision of the Punjab and Haryana High Courts in CIT v. Jindal Bros. Rice Mills (1989) 179 ITR 470. The Supreme Court held (page 841):

"The expression 'actual cost' needs to be interpreted liberally. The' subsidy of the nature we are concerned with, does not partake of the incidents which attract the conditions for their deductibility from ' actual cost'. "

It was observed (page 841):

"The Government subsidy, it is not unreasonable to say, is an incentive not for the specific purpose of meeting a portion of the cost of the assets, though quantified as or geared to a percentage of such cost. If that be so, it does not partake of the character of a payment intended either directly or indirectly to meet the 'actual cost'. We should prefer the reasoning of the majority of the High Courts to the one found acceptable by the High Courts of Punjab and Haryana."

It is clear from the above decision of the Supreme Court that in the case of Government subsidy which is intended to encourage entrepreneurs to move to backward areas and establish industries, the specified percentage of the fixed capital cost, which is the basis .for determining the subsidy, being only a measure adopted under the scheme to quantify the financial aid, is not a payment, directly or indirectly, to meet any portion of the "actual cost".

The issue before the- Supreme Court in Sahney Steel and Press Works Ltd v. CIT (.1997) 228 ITR 253, on the other hand, was whether the subsidy received by the assessee-company from the Andhra Pradesh Government was taxable as revenue receipts or not. The question whether the amount of subsidy would be deductible from the cost of the asset for finding out the actual cost for the purpose of allowance of depreciation did not even arise for consideration before the Supreme Court in that case at any stage. The earlier decision in CIT v. P. J. Chemicals Ltd. (1994) 210 ITR 830 was not referred to because that was no relevant for deciding the point in issue in that case. The only issue in that case was whether the subsidy received in the hands of the recipient was a p revenue receipt or a capital receipt. The incentives in that case were given by way of refund of sales tax and also by subsidy on power consumed for production to the extent stated in the notification. Exemption was given also from payment of water rate. Refund was also provided for water rate in respect of water drawn from Government sources. The contention of the assessee was that the subsidies received by it were of capital nature and hence not taxable under the Act. The case of the Revenue, on the other hand, was that the subsidy was of a revenue nature. The Supreme Court held (page 262):

"By no stretch of imagination can the subsidies whether by way of refund of sales tax or relief of electricity charges or water charges be treated as an aid to the setting up of the industry of the assessee."

It was further held (page 262):

"If any subsidy is given, the character of the subsidy in the hands of the recipient-whether revenue or capital-will have to be determined by having regard to the purpose for which the subsidy is given. If it is given by way of assistance to the assessee in carrying on of his trade or business, it has to be treated as trading receipt. The source of the fund is quite immaterial.

For example, if the scheme was that. the assessee will be given refund of sales 'tax on purchase of machinery as well as on raw materials to enable the-assessee to acquire new plant and machinery for further expansion of its manufacturing capacity in a backward area, the entire subsidy must be held to be a capital receipt in the hands of the assessee. It will not be open to the Revenue to contend that the refund of sales tax paid on raw materials or finished products must be treated as revenue receipt in the hands of the assessee. 1n both the cases, the Government is paying out of public funds to the assessee for a definite purpose. If the purpose is to help the assessee to set up its business or complete a project as in Seaham Harbour Dock Co.'s case (1931) 16 TC 333 (HL), the monies must be treated as having been received for a capital purpose. But if monies are given to the assessee for assisting him in carrying out the business operation and the money is given only after and conditional upon commencement of production, such subsidies must be treated as assistance for the purpose of the trade. "

It is clear from the above discussion that there is no conflict between the decisions of the Supreme Court in CIT v. P. J. Chemicals Ltd. (1994) 210 ITR 830 and Sahney Steel and Press Works Ltd. v. CIT (1997) 228 ITR 253. The controversy in both those cases was completely different. There is no dispute that the question referred in this case is covered by the decision of the Supreme Court in CIT v. P. J. Chemicals Ltd. (1994) 210 ITR 830.

For the reasons set out above, we hold that the Central subsidy received by the assessee is not a payment, directly or indirectly, to meet any portion of the "actual cost" but is intended as an incentive to the entrepreneurs. The fact that its quantification is determined as a percentage of the fixed capital cost does not change the nature and character of the subsidy. The amount of Central subsidy, therefore, cannot be deducted from the "actual cost". Accordingly; we answer the question referred to us in the affirmative, i.e., in favour of the assessee and against the Revenue.

Before parting with this case, we want to put on record our appreciation of the valuable assistance rendered to us in this case by Shri G. S. Jetley, learned senior advocate, as amicus curiae.

This reference is disposed of accordingly with no order as to costs.

M.B.A./4165/FC???????????????????????????????????????????????????????????????????????????????? Reference disposed.