Facts of the Case

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

A dispute arose regarding whether the subsidy amount received by the assessee should be deducted from the actual cost of the assets while computing depreciation under the Income-tax Act.

The Income Tax Appellate Tribunal held that the subsidy amount should not be reduced from the total cost of the assets and that depreciation was allowable on the entire cost of the assets.

Aggrieved by the Tribunal's decision, the Revenue 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 the amount of 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 that depreciation should be allowed on the entire cost of the assets?

 

Petitioner’s Arguments (Revenue)

The Revenue contended that:

  • The subsidy received by the assessee was directly connected with the acquisition of assets.
  • Consequently, such subsidy should reduce the actual cost of the assets.
  • Depreciation should therefore be calculated only on the reduced cost after deducting the subsidy amount.
  • The Tribunal erred in allowing depreciation on the full cost of the assets despite receipt of the Government subsidy.

 

Respondent’s Arguments (Assessee)

The assessee maintained that:

  • The subsidy was granted as an incentive for industrial development in backward areas.
  • The subsidy was not intended to directly meet any part of the cost of acquiring assets.
  • Therefore, 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 examined the question referred to it and observed that an almost identical issue had already been decided by the Supreme Court in CIT v. P.J. Chemicals Ltd. [1994] 210 ITR 830 (SC).

The High Court noted that the Supreme Court had held that a subsidy granted for industrial development or promotion in backward areas does not automatically reduce the actual cost of assets for the purpose of computing depreciation unless the subsidy is intended specifically to meet a portion of the cost of the asset.

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 Tribunal's view was upheld and depreciation remained allowable on the full cost of the assets without reducing the subsidy amount.

 

Important Clarification

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

  • A capital subsidy granted to encourage industrial growth in backward areas is not necessarily a payment towards the cost of an asset.
  • Unless the subsidy is specifically intended to reimburse or meet a portion of the asset cost, it cannot be deducted from the actual cost of the asset.
  • Depreciation is therefore allowable on the full cost incurred by the assessee.

This decision strengthened the settled law that industrial incentive subsidies generally do not reduce the depreciation base unless the scheme expressly links the subsidy to the cost of acquisition of specific assets.

Sections Involved

  • Section 256(1), Income-tax Act, 1961
  • Provisions relating to Actual Cost of Assets and Depreciation Allowance
  • Capital Subsidy under Government Incentive Schemes

 

Link to download the order -https://delhihighcourt.nic.in/app/case_number_pdf/2006:DHC:25465-DB/61324032006ITR2241992_161515.pdf

 

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