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PUNJAB & HARYANA HIGH COURT
Gokal Chand Mital and S.S.Sodhi JJ.
Commissioner Of Income-tax
Versus
Jindal Brothers Rice Mills
Income tax Reference No. 22 of 1986,
Decided On : MARCH 14, 1989
INCOME TAX - Depreciation - Actual cost of machinery, plant and building - Subsidy received from State Government - Whether to be deducted from actual cost for calculating depreciation - Section 43(1) of the Income-tax Act, 1961.
Fact of the Case:
The assessee, Jindal Brothers, received a subsidy of 15% on plant, machinery, land, and building under the Punjab Industrial Incentives Code. The Income-tax Officer reduced the actual cost of the assets by the amount of subsidy received and allowed depreciation on the reduced cost. The assessee challenged this decision, and the Commissioner of Income-tax (Appeals) and the Income-tax Appellate Tribunal ruled in favor of the assessee.
Finding of the Court:
The court held that the subsidy of 15% allowed on the cost of machinery, plant, and building clearly comes within the ambit of Section 43(1) of the Income-tax Act, 1961, and the "actual cost" of these items means the actual cost to the assessee reduced by the amount of subsidy for the purposes of granting depreciation allowance under Section 32 of the Act.
Issues: Whether the subsidy received by the assessee from the State Government under the Punjab Industrial Incentives Code is to be deducted from the actual cost of machinery, plant, and building for determining their actual cost for the purposes of depreciation allowance under Section 32 of the Income-tax Act, 1961.
Ratio Decidendi: The court interpreted Section 43(1) of the Income-tax Act, 1961, and held that the subsidy received by the assessee is directly or indirectly met by the State Government and, therefore, the actual cost of the assets has to be reduced by the amount of the subsidy. The court distinguished the judgments cited by the assessee and held that the subsidy is specifically granted for each item and it reduces the "actual cost" thereof.
Final Decision: The court answered the question referred to it in favor of the Revenue, holding that the subsidy received by the assessee is to be deducted from the actual cost of machinery, plant, and building for determining their actual cost for the purposes of depreciation allowance under Section 32 of the Income-tax Act, 1961.
Gokal Chand Mital, J.
1. Here, we are called upon to decide an interesting and important question of law, namely, whether in calculating the actual cost of building, machinery and plant, the amount received by way of subsidy has to be deducted from the actual cost for the purposes of allowing depreciation under Section 32 of the Income-tax Act, 1961 (for short "the Act").
2. In order to give an incentive for setting up new industries, the Central Government and State Governments have been notifying policies from time to time. Here, we are concerned with such a policy notified by the Government of Punjab, vide Notification No. 28/35/78/51 B1-79/1464, dated March 21, 1979, under the Rules made by the Governor of Punjab known as "The Punjab Industrial Incentives Code under the Industrial Policy Statement, 1978". Rule 2 defines certain words and phrases. Rule 3 provides for registration of a unit with a District Officer for seeking benefit of the industrial incentives. "Unit" is defined in Rule 2.7 to mean a new industrial unit or manufacturing undertaking which has taken effective steps to set up industry on or after April 1, 1978, with new plant and machinery or part thereof. Rule 4 deals with the grant of interest-free loans and the procedure for doing so. Rule 5 provides for subsidy on electricity tariff for power-based industries and the procedure for securing the benefit. Rule 6 provides for exemption from electricity duty and the procedure for getting the exemption. Rule 7 provides for exemption, refund of octroi/terminal tax and the procedure. Rule 8 provides for capital subsidy and the procedure for getting the subsidy at the rate of 15 per cent. on the fixed capital investment made by the unit in certain specified areas, and on the specified industries and the conditions for eligibility and allied matters. "Fixed capital investment" is defined in Rule 2.19 to mean investment on land/building, plant and machinery. Rule 8.3(1) provides the mode of computation of the entitlement of subsidy and is important for consideration of the point and thus deserves to be reproduced :
"8.3 (1) The amount of subsidy shall be 15% of the fixed capital investment to be assessed as follows :-
- Land and building : Actual price paid for land and building including development charges to the extent needed for the purpose of the unit. Where land and/ or building is held on premium lease arrangements, the premium paid by the lease-holder will be eligible for claiming subsidy. Where land and/or building are already owned by the unit, the market value thereof assessed by the authority competent to sanction the subsidy will also be taken for the purpose of computation of the fixed capital investment. Rent of a hired building will not be taken into account.
Plant and machinery :
The cost of plant and machinery as erected at site will be taken into account which will include the cost of productive equipment such as tools, jigs, dies and moulds, transport charges, insurance premium, erection cost, etc., will also be included. Balancing accessories, etc., added to the main plant and machinery for modernisation, diversification, etc., would also be taken into account while computing the value of plant and machinery."
3. Jindal Brothers, the assessee, obtained the benefit of the aforesaid incentive policy of the Government of Punjab and set up a new industry and got a subsidy of 15 per cent. on plant, machinery, land and building. In the income-tax returns filed for the assessment year 1977-78, it claimed depreciation on the actual cost of machinery, plant and building under Section 32 of the Act, but the Income-tax Officer took notice of the subsidy of 15 per cent received by the assessee under these heads and reduced the actual cost of the plant, machinery and building by the amount of subsidy received under the respective heads and on the cost so found allowed the depreciation. The assessee took the matter in appeal and the Commissioner of In
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