Facts of the Case

The assessee, M/s Rathi Gases Ltd., received a cash subsidy under the 10% Central Outright Grant Scheme, 1971 for setting up industrial activities in backward districts/areas through the Rajasthan Financial Corporation.

The dispute arose regarding the treatment of such subsidy for depreciation purposes. The Revenue contended that the subsidy amount should be deducted from the total cost of the assets, thereby reducing the actual cost on which depreciation was allowable. The Income Tax Appellate Tribunal, however, held that the subsidy was not required to be deducted from the cost of the assets and that depreciation was admissible on the full cost of the assets.

Issues Involved

Whether, on the facts and circumstances of the case, the Income Tax Appellate Tribunal was correct in law in holding that the cash subsidy received by the assessee under the 10% Central Outright Grant Scheme, 1971 for backward districts/areas should not be reduced from the total cost of the assets, and consequently depreciation should be allowed on the entire cost of the assets?

Petitioner’s Arguments (Revenue)

  • The Revenue argued that the subsidy received by the assessee effectively reduced the cost incurred for acquiring the assets.
  • Therefore, the subsidy amount ought to be deducted from the actual cost of the assets.
  • As a consequence, depreciation should be calculated only on the reduced cost of the assets and not on the gross cost.

Respondent’s Arguments (Assessee)

  • The assessee contended that the subsidy was granted as an incentive for industrial development in backward areas and was not intended to meet the cost of any specific asset.
  • Since the subsidy was not directly linked to the acquisition cost of the assets, it could not be deducted from the actual cost for depreciation purposes.
  • Accordingly, depreciation was rightly allowable on the full cost of the assets.

Court Order / Findings

The Delhi High Court noted that an almost identical question had already been examined by the Supreme Court in CIT vs P.J. Chemicals Ltd. (1994) 210 ITR 830 (SC).

The Supreme Court had held that where a Government subsidy is intended as an incentive for industrial growth and is not specifically meant to meet the cost of an asset, such subsidy does not reduce the "actual cost" of the asset 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.

Accordingly, the subsidy received under the Central Outright Grant Scheme was not required to be deducted from the cost of the assets, and depreciation was allowable on the entire cost of the assets.

Important Clarification

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

  • A capital subsidy granted as an industrial incentive does not automatically reduce the actual cost of an asset.
  • The determining factor is the purpose of the subsidy.
  • If the subsidy is intended to encourage industrialization or development in backward areas and is not specifically intended to meet the cost of assets, the subsidy cannot be deducted from the actual cost while computing depreciation.
  • Depreciation remains allowable on the full cost of the assets.

Sections Involved

  • Section 256(1), Income-tax Act, 1961 – Reference to the High Court on a question of law.
  • Section 32, Income-tax Act, 1961 – Depreciation allowance (implicated in the dispute regarding actual cost and depreciation computation).
  • Section 43(1), Income-tax Act, 1961 – Definition of "Actual Cost" (relevant to the controversy concerning reduction of subsidy from asset cost)

Link to Download the Order   https://delhihighcourt.nic.in/app/case_number_pdf/2006:DHC:26022-DB/MBL28072006ITR2241992_160101.pdf 

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