Facts of the Case

The assessee, M/s Rathi Gases Ltd., had received a cash subsidy under the 10% Central Outright Grant Scheme, 1971 applicable to backward districts/areas through the Rajasthan Financial Corporation. The subsidy was granted as an incentive under a government scheme.

During assessment proceedings, the Revenue contended that the amount of subsidy received should be deducted from the actual cost of the assets acquired by the assessee. Consequently, depreciation should be allowed only on the reduced cost of the assets.

The Income Tax Appellate Tribunal held in favour of the assessee and concluded that the subsidy amount was not required to be reduced from the cost of assets while computing depreciation. The Revenue therefore sought a reference before the Delhi High Court under Section 256(1) of the Income-tax Act.

Issues Involved

Whether, on the facts and circumstances of the case, the Income Tax Appellate Tribunal was correct in law in holding that:

  1. The cash subsidy received by the assessee under the 10% Central Outright Grant Scheme, 1971 for backward districts/areas should not be deducted from the total cost of the assets, and
  2. Depreciation was allowable on the entire cost of the assets without reducing the subsidy amount.

Petitioner’s Arguments (Revenue)

The Commissioner of Income Tax argued that:

  • The subsidy effectively reduced the cost incurred by the assessee in acquiring the assets.
  • Therefore, the subsidy amount ought to be deducted from the actual cost of the assets.
  • Depreciation should be computed only on the net cost after adjusting the subsidy amount.
  • The Tribunal erred in allowing depreciation on the full cost of the assets.

Respondent’s Arguments (Assessee)

The assessee contended that:

  • The subsidy was an incentive granted under a government scheme for industrial development in backward areas.
  • The subsidy was not directly intended to meet the cost of any specific asset.
  • Accordingly, the subsidy could not be deducted from the actual cost of the assets.
  • Depreciation was rightly allowable on the entire cost incurred by the assessee.

Court Order / Findings

The Delhi High Court noted that the issue raised in the reference was substantially identical to the issue decided by the Supreme Court in:

CIT v. P.J. Chemicals Ltd.

Reported in (1994) 210 ITR 830 (SC)

The Supreme Court had already held that a subsidy granted for industrial development and not specifically intended to meet the cost of assets cannot be deducted from the actual cost of assets for depreciation purposes.

Relying upon the binding decision of the Supreme Court, the Delhi High Court answered the reference:

  • In favour of the assessee, and
  • Against the Revenue.

The Court upheld the Tribunal's view that the subsidy amount was not required to be reduced from the cost of assets and depreciation was allowable on the full cost.

Important Clarification

This judgment reiterates the principle laid down by the Supreme Court in CIT v. P.J. Chemicals Ltd. (1994) 210 ITR 830 (SC) that:

  • A government subsidy does not automatically reduce the actual cost of an asset.
  • The decisive test is the purpose of the subsidy.
  • If the subsidy is intended to promote industrialization, regional development, or economic growth and is not directly linked to meeting the cost of a specific asset, it cannot be deducted from the actual cost for depreciation purposes.
  • Depreciation remains allowable on the full cost of the asset.

Sections Involved

  • Section 256(1), Income-tax Act, 1961 – Reference to High Court on question of law.
  • Section 43(1), Income-tax Act, 1961 – Definition of "Actual Cost" of assets.
  • Depreciation provisions under the Income-tax Act, 1961.

Link to Download the Order

https://delhihighcourt.nic.in/app/case_number_pdf/2006:DHC:26024-DB/MBL28072006ITR2251992_160249.pdf 

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