The subsidy received must have a direct or indirect nexus to meet the actual cost of a specific capital asset to be considered for allocation under Sec. 43(1) of the Income Tax Act, 1961.

( 1 ) BY this reference under Sec. 256 (1) of the Income tax Act, 1961 (the Act), the Income-tax Appellate Tribunal, bangalore Bench, has referred the following question of law for the opinion of this Court:"1. Whether on the facts and in the circumstances of the case, the Appellate tribunal is right in law in holding that the subsidy of Rs. 3,30,600/- received from the Central Government for setting up industries in backward areas cannot be allocated towards any particular asset or assets and the assessee is entitled to depreciation on the cost of assets as claimed by it ?"

( 2 ) THE brief facts of the case are as follows; during the previous year relevant for the assessment year 1977-78 the assessee received a subsidy of Rs. 3,30 600/- from the Central Government for setting up industrial unit a backward area. The income-tax Officer allocated the subsidy between land, building, electrical installations, plant and machinery holding that since it went to reduce the cost of the assets in terms of Sec. 43 (1) of the Act, he reduced the written down value of the assets and allowed depreciation on the reduced cost. The finding of the ITO was confirmed by the Commissioner of incoma-tax (Appeals ). On further appeal by the assessee, the Tribunal following the decision of the Special Bench of the tribunal in Poineer Match Works v. ITO (I. T. A. Nos. : 2899 and 2971/mds/77-78) held that the said subsidy cannot be allocated to any particular asset or assets and therefore it does not go to reduce the cost of the assets in terms of sec. 43 (1) of the Act. At the instance of the Revenue the Tribunal has referred the above question for our opinion.

( 3 ) IT cannot be disputed that the scheme for grant of subsidy was introduced to encourage setting up of industrial units in selected backward areas. Under the scheme a 'new industrial unit' means' the industrial unit which has made investment in land, building and plant and machinery during the operative period of the scheme. 'fixed Capital investment' means 'investment in land, building and plant and machinery'. The scheme also prescribes the method for assessing the total fixed capita! investment for the purpose of granting the subsidy. Certain restrictions are placed on grant of subsidy and certain obligations are imposed regarding proper utilisation of the subsidy for ensuring satisfactory production results for a period of at least five years from the date of commencement of production. Under the scheme the maximum central investment subsidy admissible to an eligible industrial unit is 15% of the fixed capital investment made on or after 1-3-1973 or rs. 15,00,000/- whichever is less.

( 4 ) THE main contention of Sri k Srinivasan, learned counsel for the revenue is based on the interpretation of the expression 'actual cost' occuring in sec. 43 (1) of the Act, which 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 ' (Emphasis added ). It is urged that the central subsidy for acquisition of the capital assets goes to reduce the actual cost thereof. On the contrary it is urged by Sri Sarangan, learned counsel for the assessee that the actual cost of the assets is only a measure for the purpose of arriving at the quantum of subsidy to be granted under the scheme and in the absence of any particular allocation it cannot be allocated to various assets for the purpose of deduction envisaged under Sec. 43 (1) of the Act.

( 5 ) THE scheme for the grant of the subsidy, as stated earlier, is to develop industries in the selected backward areas. On perusal of the scheme it is clear that the subsidy amount granted is a percen- tage of the total fixed capital investment, which is only taken as a measure for quantifying the subsidy. In the proforma prescribed under the scheme to find out the total fixed capital investment it can be seen that in addition to the land,