1. The question which arises for our consideration in these references is whether the subsidy received by an assessee from the Central Government/State Government under the Central Government/ State Government Assistance Scheme for the development of backward areas should be deducted from the cost of its/his assets for the purpose of allowing depreciation, investment allowance and relief under section 80J of the Income-tax Act, 1961 (

"the Act"

2. A detailed study was undertaken to examine the question as to what measures were required to be taken to ensure balanced development of industries in different regions of the State of Gujarat. This study broadly revealed that while entrepreneurs rapidly accepted business environment in the State, industrial peace, the stable and adequate power position and responsiveness and efficiency of the State administration, these plus points were not found fully adequate and there was need for cash incentives for the balanced growth of industries in the State. There was also a need for dispersal and location of industries keeping in view the rapid urbanisation that had been taking place in the metropolitan cities, especially Baroda, Ahmedabad and Surat and the growing strain on the municipal services on account of rapid growth of industries in these sectors. Several problems as a result of urbanisation such as pollution, growth of slums, etc., had also arisen. Simultaneously, judicious locational balance was required to be maintained keeping in view the availability of infrastructure and the hazards of considerable health problems to residential neighbourhoods located downstream of the river into which industrial effluents were discharged. It was, therefore, felt that while a package of incentives could be evolved, it should be used as an effective lever to assist in identifying the right location for industries based on infrastructure and the requirements of water, drainage, effluent treatment, etc. The package was also to be used as an effective instrument for promoting balanced, orderly and sustained industrial growth throughout the State. The Government of Gujarat, in its Industries, Mines and Power Department, therefore, by Resolution No. MSC-1076-7637(1)-J, dated December 22, 1977, decided that the objectives of the new industrial incentives policy should be as follows: -

(a) Development of small, medium and large scale industries in rural areas and backward areas to achieve a more balanced growth.

(b) Decongestion of industries from developed areas and cities like Ahmedabad, Baroda and Surat.

3. In the light of this policy, the Government announced a scheme called "State Cash Subsidy Scheme for Industries" ("the Scheme", for short). This scheme was to come into effect from November, 1977, and was to remain in force for a period of five years. The scheme was made applicable to new industrial units in "developing areas" indicated in annexure-I to the said resolution. Those incentives, however, were not made applicable to industrial units located in towns having a population of more than one lakh on the basis of the 1971 census. The scheme defined "industrial unit", "new industrial units", "expansion" and fixed capital investment". Definition of "fixed capital investment" is relevant for our purpose and it reads as under:

"Fixed capital investment' means investment in land, building, plant and machinery."

4. The scheme also provided for the assessment of total fixed capital investment. So far as land and building were concerned, it was laid down that the actual price paid for the land/building including development charges to the extent needed for the purposes of the industrial unit was to be computed for claiming the cash subsidy. Where land and/or building were already owned by the industrial units, the market value thereof as assessed by the district level committee was to be taken for the purpose of computation of capital investment. As regards plant and machinery, the scheme provided that, in calculating the value of plant and machinery, the cost of plant and machinery, as erected at the site, was to be taken into account which was to include the cost of productive equipment such as tools, jigs, dies and moulds. Transport charges, insurance premium, erection costs, balancing equipment, accessories, etc., were also to be taken into account while computing the value of plant and machinery. Value of investment in second-hand machinery purchased by an industrial unit in the selected areas was also to be counted for claiming cash subsidy subject to the conditions laid down in the scheme. An industrial unit undertaking modernisation of its plant and machinery was also eligible for being considered for grant of cash subsidy on the value of plant and machinery purchased by the industrial unit as a part of the modernisation programme reduced by the sale value, written down value or market value of the old machinery, whichever was the highest value of the machinery so arrived at as might be certified by a chartered accountant. The scheme also provided that investment on plant and machinery shifted to "developing areas" from other non-eligible areas was also eligible for disbursement of cash subsidy. Value of such machinery, was to be assessed subject to certain conditions laid down in the scheme.

5. Uniform cash subsidy of 10 per cent. of the fixed capital investment was given to all new small scale industries set up in Zones II and III as well as at growth centres outside Zones I, II, and III. The growth centres were given in annexure -"II". The industries located in Zone I were eligible for subsidy of 5 per cent. of fixed capital investment or Rs. 5 lakhs, whichever was less. This subsidy was available for substantial expansion and diversification also. For medium and large scale industries, cash subsidy at the following rate was available provided they were set up in growth centres other than Zone I.

(a) 8 per cent. of the fixed assets or Rs. 15 lakhs, whichever was less, in grade A growth centres.

(b) 10 per cent. of the fixed assets or Rs. 20 lakhs, whichever was less, in grade B growth centres.

(c) 15 per cent. of the fixed assets or Rs. 25 lakhs, whichever was less, in grade C growth centres.

6. In Zone I, medium and large scale industries were eligible for a cash subsidy of 5 per cent. of the fixed assets or Rs. 5 lakhs, whichever was less. The subsidy was also available for substantial expansion and diversification. Rest of the provisions of this scheme are not relevant for our purposes.

7. A similar scheme for industrial development in backward areas was framed by the Central Government. Relevant part of the Notification dated January 6, 1972, issued by the Central Government in that connection as reproduced in the assessment order for the assessment year 1977-78 in the case of Whitco Limited (I. T. R. No. 32 of 1985) reads as follows:

"In respect of an industrial unit to be assisted by the State Government /Union Territory Administration concerned, the 10 per cent. of the estimated fixed capital investment as assessed by the committee referred to under paras 6 and 7 above will be disbursed to the unit by the State Government/Union Territory/Administration concerned, in as many instalments as the loan is disbursed by the State Government/Union Territory Administration concerned and simultaneously claimed from the Central Ministry of Industrial Development. In such cases, the contract to be drawn up between the State Government/Union Territory Administration concerned and the unit concerned may cover mortgage/ pledge/hypothecation of the assets up to the amount of loans to be advanced by the State Government/Union Territory Administration concerned and the 10 per cent. grant of subsidy.

Where the industrial units obtained their loan from the State Government /Financial Corporation or the Industrial Development Corporation as their agent for the dispersal of the subsidy subject to the conditions enumerated above being fulfilled. However, in all such cases, the claim for reimbursement from the Central Ministry of Industrial Development will only be made by the State Government/Union Territory Administration concerned."

8. It would thus appear that, as part of the measure to ensure balanced development of industries in different regions, the State Government and the Central Government announced certain financial incentives for industries established in areas and districts which were indentified as backward. Backward areas were clearly specified under the scheme. All industrial units having fixed capital investment in land, building and machinery were eligible for subsidy. Existing units could also claim subsidy for effective substantial expansion as provided in the scheme. The quantum of subsidy was also specified in the scheme.

9. In I. T. R.No. 8 of 1985, the assessee is a private limited company. In the course of assessment for the year 1978-79, it claimed investment allowance of Rs. 4,47,033, depreciation of Rs. 2,88,276 and relief of Rs. 3,01,380 under section 80j of "the act". The assessee had received cash subsidy under the aforesaid scheme for backward areas. However, while claiming investment allowance and depreciation as stated above, it did not reduce the cost of plant and machinery to the extent of the subsidy received by it. In other words, the assessee did not deduct the subsidy received by it from the cost of plant and machinery. Similarly, subsidy received by it was not deducted for the purpose of working out capital employed for claiming relief under section 80j of "the act". The Income-tax Officer took the view that since under the scheme, cash subsidy had been worked out on the basis of cost of plant and machinery, the "actual cost" for the purpose of depreciation and investment allowance had to be adjusted after set off of the amount of the subsidy granted by the State Government for installation of plant and machinery. The Income-tax Officer was of the view that the cash subside received by the assessee was also required to be deducted for the purpose of claiming relief under section 80j of "the act". In this view of the matter, the assessee's claim for investment allowance, depreciation and relief under section 80j of "the act" without reducing the cost of plant and machinery to the extent of the cash subsidy received by it was rejected.

10. In the appeal preferred by the assessee, the Commissioner of Income-tax (Appeals), following the decisions of the Income-tax Appellate Tribunal ("the Tribunal" for short), held that the subsidy received by the assessee could not go to reduce the "actual cost" of the assets within the meaning of section 43(1) of "the act". He, therefore, directed the Income-tax Officer to allow the admissible further relief of investment allowance, depreciation and relief under section 80j of "the act" in accordance with law, without deducting the subsidy from the cost of the assets. Being aggrieved by the order passed by the Commissioner of Income-tax, the Revenue preferred an appeal before the Tribunal. The Tribunal, however, following its earlier decisions, confirmed the view taken by the Commissioner of Income-tax and dismissed the Revenue's appeal.

11. It is in the background of the above facts that the Tribunal has referred to us for our opinion the following question of law under section 256(1) of "the Act":

"Whether, on the facts and the circumstances of the case, the Appellate Tribunal has been right in law in holding that subsidies received from the Government should not be deducted from the cost of the assets for the purpose of allowing depreciation, investment allowance and relief under section 80J of the Income-tax Act, 1961?"

12. In I. T. R. No. 32 of 1985, the assessee is a public limited company. The factory of the assessee is situated at Kalol in Panchmahal District, a backward area. The assessee received cash subsidy of Rs. 14,55,132 during the previous year relevant to the assessment year 1977-78 for establishing a factory in a notified backward area. The subsidy was worked out on the basis of 15% of the cost of plant and machinery. It was contended on behalf of the assessee that the subsidy which was given to it by the Central Government was not to meet the cost of plant and machinery but as an incentive to establish a factory in a backward area and, therefore, the cost of the plant and machinery was not required to be reduced by the amount of subsidy for the purpose of working out depreciation and development rebate. The Income-tax Officer, however, rejected the claim made by the assessee holding that since the subsidy had been granted on the basis of cost of installation of plant and machinery, it was directly related to the installation of plant and machinery. The Income-tax Officer did not accept the assessee's contention that subsidy was an incentive not directly or indirectly connected with the cost of installation of plant and machinery. The Income-tax Officer, after referring to the definition of ""actual cost"" contained in section 43(1) of "the act", held that "actual cost" for the purpose of initial depreciation and development rebate was to be adjusted after set off of the amount of subsidy granted by the Central Government of installation of plant and machinery. For the same reasons, the Income-tax Officer held that the cost of the assets had to be reduced to the extent of the subsidy received by the assessee for the purpose of relief under section 80j of "the act".

13. In the appeal preferred by the assessee, the Commissioner of Income-tax (Appeals), following the decisions of the Tribunal, held that the subsidy received by the assessee could not be set off against the cost of the assets so as to reduce the value thereof for the purpose of allowing depreciation and other allowances. He, therefore, directed the Income-tax Officer not to adjust the subsidy amount against the cost of assets and to work out depreciation and development rebate accordingly. Since the commissioner had directed the Income-tax Officer not to adjust the subsidy amount against the cost of assets, he further held that while arriving at the "actual cost" of the plant and machinery for the computation of the capital employed, the aforesaid amount of subsidy could not be deducted from the value of such plant and machinery. The Revenue, being aggrieved by the order of the Commissioner of Income-tax, went up in appeal before the Tribunal. The Tribunal, however, confirmed the view taken by the Commissioner of Income-tax (Appeals).

14. It is in the background of the above facts that the Tribunal has referred to us for our opinion the following questions of law under section 256(1) of "the Act":

"(i) Whether the Appellate Tribunal has been right in law in holding that, for arriving at the "actual cost" of plant and machinery, etc., for the purpose of depreciation and development rebate, the subsidy amount of Rs. 14,58,408 received from the Government should not be deducted from the cost of such plant and machinery?

(ii) Whether the Appellate Tribunal has not erred in law and on facts in holding that, for arriving at the capital employed under section 80j of "the act", the subsidy of Rs. 14,58,408 received from the Government could not be deducted from the value of the plant and machinery?"

15. In I. T. R. No. 256 of 1985, the assessee is a partnership firm. In thee year of account relevant to the assessment year 1982-83, the assessee received subsidy of Rs. 34,617 from the District Industries Center, Government of Gujarat, Valsad, under the aforesaid cash subsidy scheme. The assessee contended that the said subsidy could not be taken into account in computing the "actual cost" of machinery under the provisions of section 43(1) of "the act" because the object and purpose of granting the subsidy was to give encouragement for development of industries in the specified backward area. According to the assessee, the subsidy was not granted to meet the cost of machinery purchased by it. The assessee, therefore, claimed that depreciation and investment allowance should be worked out on the basis of the "actual cost" of machinery without deduction of the subsidy. The Income-tax Officer rejected the claim made by the assessee holding that subsidy was granted to the assessee at a specified percentage of the cost of the fixed assets of the industrial unit. The assessee had received as subsidy 15% of the cost of the plant and machinery. He was of the view that the object of the subsidy scheme was to encourage entrepreneurs to seat up industries in backward or specified rural areas, but it would not be correct to say that the object was not achieved by meeting part of the cost of the fixed assets by way of grant. In the view of the income-tax Officer, the subsidy received by the assessee should be treated as part of the cost received directly or indirectly from the Government and consequently, the "actual cost" of the plant and machinery should be reduced to the extent of the subsidy. The Income-tax Officer, therefore, deducted the subsidy from the cost of plant and machinery while allowing the assessee's claim for depreciation and investment allowance.

16. In the appeal preferred by the assessee, the Appellate Assistant Commissioner of Income-tax held that subsidy received by the assessee was directly related to the cost of plant and machinery. It was, therefore, apparent that the cost of machinery to the extent of the subsidy granted to the assessee was met by the Government. The Appellate Assistant Commissioner, therefore, held that the Income-tax Officer was fully justified in deducting the amount of subsidy from the cost of the machinery. In the further appeal by the assessee, the Tribunal, following its earlier decisions, allowed the aforesaid claim of the assessee.

17. It is in the background of the above facts that the Tribunal has referred to us for our opinion the following question of law under section 256(1) of "the Act":

"Whether, on the facts and in the circumstances of the case, the Tribunal was right in law in holding that the amount of subsidy received in the year could not be treated as part of the cost of the fixed assets met by the Government and, therefore, the assessee would be entitled to benefits of depreciation, additional depreciation and investment allowance on the cost of these assets without deduction of the subsidy amounts received?"

18. In I. T. R. No. 163 of 1986, the cases is a partnership firm. In the year of account relevant to the assessment year 1981-82, the assessee received subsidy of Rs. 5,36,997 from the Government for its industrial undertaking in a specified backward area at Ankleshwar. It was claimed by the assessee that this subsidy, which it had received from the Government, was for growth of industry in a backward area and that it could not be deducted from the cost of its assets. After referring to section 43(1) Act and the provisions of the scheme, the Income-tax held that the assessee had become entitled to the subsidy on account of the investment in the fixed assets. The subsidy had been determined with reference to the fixed assets of the assessee in the form of land, building, plant and machinery. The scheme itself showed that there was a nexus between the investment in the fixed assets and the amount of subsidy received. According to the Income-tax Officer, the cost of the fixed assets had been met directly or indirectly from the so subsidy and, consequently the cost of such assets had to be reduced to the extent of the subsidy to determine the "actual cost" of the assets.

19. The assessee carried the matter in appeal before the Commissioner of Income-tax (Appeals) contending that the value of the subsidy should not be applied for reducing the "actual cost"/written value of various items of assets as was done by the Income-tax Officer. The Commissioner, however, upheld the action of the Icome-tax Officer. On further appeal by the assessee, the Tribunal held that the subsidy granted under the Central Government/State Government Assistance Scheme for backward areas could not reduce the "actual cost"/written down value of the assets belonging to the assessee directly or indirectly. In taking this view, the Tribunal followed its earlier decision.

20. It is in the background of the above facts that the Tribunal has referred to us for our opinion the following question of law under section 256(1) of "the Act":

"Whether, on the facts and in the circumstances of the case, the Tribunal was right in coming to the conclusion that the so subsidy should not be reduced from the value of the assets for the purpose of determining depreciation?"

21. section 43(1) of "the act" defines ""actual cost"" for the purposes of sections 28 to 41 and that section, in so far as is relevant, reads as under:

"43. In sections 28 to 41 and in this section, unless the context otherwise requires -

(1) '"actual cost"' 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:"

22. Section 32 deals with depreciation, section 32A with investment allowance and section 33 with development rebate. All these three sections fall within the group of sections, i.e., sections 28 to 41 mentioned in section 43. Therefore, for the purpose of working out depreciation, investment allowance and development rebate, the definition of ""actual cost"" give in section 43(1) of "the act" will apply. section 80J is not one of the sections for the purpose of which the definition of ""actual cost"" given in section 43(1) is made applicable. The basis for relief under section 80J is Capital employed and not the "actual cost" as defined in section 43(1) of "the act".

23. It is argued on behalf of the Revenue that the amount of subsidy paid to each of the assessees had a direct nexus with and is based on the "actual cost" of the fixed assets. Therefore, to the extent of the subsidy, the "actual cost" of the fixed assets would stand reduced. It is urged that even that is assumed that link up with the cost of the assets is a measure for the determining the subsidy, the amount of subsidy will have an indirect contribution towards "actual cost" of assets and consequently "actual cost" of assets would stand reduced to the extent of subsidy. On the other hand, it was argued on behalf of the assessees that the subside granted to the assessee was not to meet the cost of the assets directly or indirectly. It was granted by way of incentive for setting up industry in backward area. The entrepreneurs were not willing to set up industries in backward area because of the several difficulties they has to face in setting up industries in such areas. It was with a view to attract entrepreneurs to set up industries in backward area and to achieve balanced growth of industries in different regions that the Government decided to grant subsidy. The Government had to adopt some standard or measure for granting such subsidy and it was for this reason that it decided to adopt the cost of the fixed assets as a basis for grant of subsidy. Cost of the fixed assets was taken as a basis to work out the investment made by the entrepreneurs in the backward area. It was to encourage the entrepreneurs to make investment in backward areas that subsidy was granted and to compute the amount of subsidy payable to the entrepreneurs, the measure adopted was she cost of the fixed assets. However, the scheme nowhere says that the Government was guaranting subsidy to meet the cost of the fixed assets or part thereof. The assessee was granted the subsidy in a lump sum which was worked out according to the provisions of the scheme. Further, the maximum limit of subsidy was also provided. In other words, the entrepreneurs was not entitled to subsidy beyond a certain limit even if he had spent large amount entitling him to more subsidy on the prescribed percentage basis. Again, the subsidy was not with reference to any particular fixed asset. It would, therefore, be difficult to apportion the subsidy to different assets. There is no uniform rate of depreciation for different assets and, therefore, to work out the "actual cost" of each asset for the purpose of depreciation after making adjustment for subsidy would make the task, if not impossible, a difficult one. Further, under the scheme, if the investment was not used for productive purposes, the subsidy was capable of being withdrawn. It would, therefore, not be correct to deduct subsidy while working out the "actual cost" of assets. It was argued on behalf of the Revenue that it would be necessary to work out some formula or give directions for apportioning the amount of subsidy towards the cost of each assets. However, for that reason, it could not be said that such apportioning is not possible at all. So far as the argument that the sbsidy was capable of being withdrawn, advanced on behalf of the assesses was concerned, it was urged on behalf of the Revenue that withdrawal of subsidy would not pose any difficulty since the cost of the asset was to be determined from year to year. Change in the cost of the assest as a result of withdrawal of subsidy could be taken in to consideration for working out the "actual cost" of the asset. In other words, withdrawal of subsidy could be given effect to when it was withdrawn to work out the "actual cost" of the asset.

24. One of the meanings of the word "subsidy" given in the New Oxford IIlustrated Dictionary is "financial aid given by Government towards expenses of an undertaking or institution held to be of public utility, or to producers of commodity, etc., to enable goods or services to be provided at low (er) cost to consumer". In Webster's New Twentieth Century Dictionary Unabridged, Second Edition, one of the meanings of the word "subsidy" is "a grant of money from a Government to a private enterprise considered as beneficial to the public". In Random House Dictionary of the English Language, Unbridged Edition, one of the meanings of the word "subsidy" is "a direct pecuniary aid furnished by a Government to a private industrial undertaking, charity organisation: or the like. " We have to bear in mind these dictionary meanings of the word "subsidy" while proceeding to consider the schemes for cash subsidy of the Central Government and the State Government and the purpose for which the said schemes were framed.

25. We have carefully considered the provisions relating to the grant of cash subsidy under the schemes framed by the Central Government and the State Government. The Central Government as well as the State Government noticed that areas specified as backward areas and tribunal areas were undeveloped or under-developed. Entrepreneurs were not willing to set up industries in such undeveloped or under-developed areas. The industries were concentrating only in urban areas. In other words, rapid urbanisation was taking place. So far as the State of Gujarat is concerned, there was a rapid industrial growth in cities like Baroda, Ahmedabad and Surat resulting in strain on municipal services. Urbanisation created several problems such as pollution, growth of slums, etc. It was also necessary to have balanced growth of industry in different regions. However, as pointed out above, entrepreneurs were reluctant to set up industries in backward areas. These areas were identified as backward because there was undevelopment or under-development of industries in these areas. It was, therefore, that the Government decided to given financial incentives to encourage and induce entrepreneurs to move to backward areas and establish industries there so that the region may develop and promote the welfare of the people living in that region. One of the incentives which the Government decided to grant was cash subsidy so that entrepreneurs could utilise such case subsidy for any purpose connected with the establishment of industries in the backward areas. Once the decision to give cash subsidy was taken, the Government had to work out some method to determine the quantum of such subsidy. In other words, the question as to how the amount of cash subsidy should be determined had to be considered by the Government. The Government, in order to deter determine the amount of cash subsidy, decided to follow one of the recognised methods of working it out on the basis of the amount invested by an entrepreneur in acquiring capital assets and specified a certain percentage of the amount so invested in the capital assets as cash subsidy. The scheme does not say as to in which at manner the subsidy granted is to be utilied. In other words, the entrepreneur to whom the subsidy was granted was free to utilise it in any manner he liked. It would, therefore, appear that quantification of subsidy on the basis of investment was a measure adopted by the Government for convenience to work out the subsidy. If subsidy could be utilised by the entrepreneur in any manner he liked, could it be said that it was granted for meeting the cost of the capital assets? In our opinion, taking an overall view of the various provisions of the scheme, it is difficult to hold that cash subsidy was granted to the entrepreneur to meet the cost of the fixed assets or part thereof. The cost of the fixed assets was merely adopted as a measure for working out subsidy. In fact, a careful examination of the scheme reveals that it is the value of the fixed assets and not its cost which is adopted as the basis for computing the amount of the subsidy. Emphasis on value and not the cost is evident from the fact that land and building already owned by an industrial unit, cost of tools, jigs, dies and moulds, transport charges, insurance premium, erection cost, value of second-hand machinery purchased by an industrial unit, etc., were to be taken into account while computing the value of fixed assets for the purposes of subsidy. In other words, it was the value of the fixed assets which formed the basis for computation of subsidy to be granted under the scheme. Subsidy, in our opinion, did not meet the cost of the fixed assets directly or indirectly. Under the scheme of the Central Government or the scheme of the State Government, cash subsidy was quantified by determining the same at a specified percentage of the value/cost of the fixed assets. Therefore, as observed above, the basis adopted for determining the cash subsidy with reference to the cost or value of fixed assets was only a measure for quantifying the subsidy and it could not be said that the subsidy was given for the specific purpose of meeting any portion of the cost of the fixed assets. The subsidy was granted top compensate the entrepreneur for the hardship and inconvenience which be might encounter while setting up industries in backward areas.

26. In Senairam Doongarmall v. CIT [1961] 42 ITR 392 (SC), the assessee, which owned a tea estate consisting of tea gardens, factories and other buildings, carried on the business of growing and manufacturing tea. The factory and other buildings on the estate were requestioned for defence purposes by the military authorities. Though the assessee continued to be in possession of the tea gardens and tended them to preserve the plants, the manufacture of tea was stopped completely. The assessee was paid compensation for the years 1944 and 1945 under the defence of india rules calculated on the basis of the out-turn of tea that would have been manufactured by the assessee during that period. The question which came up for consideration before the Supreme Court was whether the amount of compensation was a revenue receipt taxable in the hands of the assessee. The Supreme Court held that where an assessee did not carry on business at all, section 10 of the India an Income-tax Act, 1922, which dealt with profits and gains of business, could not made applicable and any compensation for requisition of assets that he received could not not bear the character of profits of a business. The Supreme Court observed that "business" denoted an activity with the object of earning profit. To say that a business was being carried on meant no more than that profit was to be earned by a process of production. The business of a tea-grower and manufacturer was not merely to grow tea plants but to collect tea leaves and render them fit for sale. The tending of his tea gardens to preserve the plants was not a continuation of the business of the assessee which had come to an end for the time being. So far as the character, mode or method of payment of compensation to the assessee was concerned, the Supreme Court observed as follows (at p. 407):

"Now, when the payment was made to compensate the assessee, not doubt the measure was the out-turn of tea which would have been manufactured; but that has little relevance. The assessee was not compensated taken for loss or destruction of or injury to a capital asset. The buildings were taken of the time being, but the injury was not so much to the fixed capital as to the business ask a whole. The entire structure of business was affected to such an extent that no business was left or was done in the two years... Where an assessee does not carry on business at all, the section cannot be made applicable, and the compensation that he receives cannot bears the character of profits of a business."

27. In the case before the Supreme Court, the measure for working out compensation payable to the assessee was the out-turn of tea that would have been manufactured by the assessee during the relevant period. However, for that reason, payment made to the assessee could not be said to bear the character of profits of a business. In the instant case, in order to quantify the subsidy payable to an entrepreneur, the Government adopted a certain percentage of the cost of fixed assets as the basis. In other words, this percentage of cost of fixed assets was adopted as a measure for determining the amount of subsidy payable to the entrepreneur. However, that would not make the amount of subsidy granted part of the cost of fixed assets.

28. In CIT v. Godavari Plywoods Ltd. [1987] 168 ITR 632 (AP), a question similar to the one which arises in this case arose for our consideration before the Andhra Pradesh High Court. We may refer with advantage of the following observations made by the Division Bench of the Andhra Pradesh High Court (at p. 640):

"We have examined the subsidy for schemes under consideration bearing the above principles in mind. We do not find any provision either in the Central Subsidy Scheme, 1971, or in the State Incentive Scheme that the entrepreneurs are granted the subsidy for the specific purpose of meeting a portion of the cost of the assets. Under both the schemes, the cash subsidy is quantified by determining the same at a specified percentage of the fixed capital cost. The basis adopted for determining cash subsidy with reference to the fixed capital costly is only a measure (of quantification) adopted and cannot, in our opinion, be considered to be for the specific purpose of meeting any portion of the fixed capital cost. We have, therefore, no hesitation in coming to the conclusion, on a careful examination of the schemes under consideration, that the subsidy granted to the assessee cannot be related to meeting a portion of the cost of the assets so that, for purposes of section 43(1) of "the act", such subsidy can be reduced from the amount of "actual cost" of the assets to the assessee. It seems to us that the specified percentage of the fixed capital cost taken as the basis for determining the subsidy under the scheme is only a measure (of quantification). The subsidy is granted more as a recompense for the hardships and inconveniences which the entrepreneur may encounter while setting up industries in backward areas. In that view of the matter, we uphold the decision of the Special Bench of the Tribunal that the subsidy granted to the entrepreneurs cannot be reduced from the "actual cost" of the assets to the assessee."

29. We respectfully agree with the view taken by the Andhra Pradesh High Court. The above decision of the Andhra Pradesh High Court was followed by the Madhya Pradesh High Court in CIT v. Bhandari Capacitors P. Ltd. [1987] 168 ITR 647. The decision in CIT v. Bhandari Capacitors P. Ltd. was followed by the same High Court in CIT v. Premier Extraction (P) Ltd. [1989] 175 ITR 22. A similiar question had also came up for consideration before the Karnataka High Court in CIT v. Diamond Dies Mfg. Corpn. Ltd. [1988] 172 ITR 655. The Division Bench of the Karnataka HIGH Court, after considering the scheme of cash subsidy of the Central Government for setting up industrial units in backward areas, observed as follows (at p. 658):

The scheme for the grant of the subsidy, as states earlier, is to develop industries in selected backward areas. On a perusal of the scheme, it is clear that the subsidy amount granted is a percentage of the total fixed capital investment, which is only taken as a measure for quantifying the subsidy. In the pro forma prescribed under the scheme to find out the total fixed capital investment, it can be seen that in addition to the land, building, plant and machinery, other assets on which depreciation is not admissible, such as tools, goods carrier, promotional and pre-operative expenses capitalised or to be capitalised and margin money for working capital are also included. Nowhere has the scheme provided as to how the subsidy should be utilised and for which assets. For instance, it is open to the full assessee to legitimately reduce the cost of land in its book of account to the full extent of the subsidy, in which case the cost of plant and machinery will remain at invoice price uninfluenced by the amount of subsidy. In the circumstances, it appears that the amount received by way of subsidy could be utilised for any purpose such as acquiring land on which no description is admissible or on plant and machinery or for erection of buildings or for working capital or for repaying the lands already taken. Hence, unless the subsidy received has a nexus, direct or indirect, with meeting a portion of the "actual cost" of any specific capital asset, it cannot be brought within the purview of section 43(1) of "the act".

30. The Division Bench agreed with the view taken by the Andhra Pradesh High Court in CIT v. Godavari Plywoods Ltd. [1987] 168 ITR 632.

31. In CIT v. Relish Foods [1989] 180 ITR 454, the Kerala High Court held that subsidy received from the Government for setting up industry in a backward area is really an incentive. It has nothing to do with the cost of a particular asset. The subsidy cannot, therefore, be deducted from the cost of assets for the purpose of allowing depreciation and development rebate on such assets or for computation of relief under section 80j of "the act". After referring to the decision of the Andhra Pradesh High Court in CIT v. Godavari Plywoods Ltd. [1987] 168 ITR 632 and other decisions, the Kerala High Court observed (at p. 456):

In the light of these decisions, it is idle to contend that the subsidy received by the respondent-assessee should be deducted from the cost of the assets for the purpose of allowing development rebate and depreciation on such assets and computation of relief under section 80j of "the act".

32. We agree with the view taken by the Kerala High Court.

33. We may point out that the Punjab and Haryana High Court has in CIT v. Jindal Brothers Rice Mills [1989] 179 ITR 470 taken a contrary view. In that case also, a question similar to the one which arises in this case, arose before the Division Bench of the Punjab and Haryana High Court. The Division Bench held that there was a naxus between the cost of each item and the subsidy under it. The "actual cost" stood reduced by the percentage allowed as subsidy and section 43(1) of "the act" was clearly attracted. It was held that depreciation was allowable on the cost of machinery and plant reduced by the amount of the subsidy. With utmost respect to the Division Bench of the Punjab and Haryana High Court, we find ourselves unable to agree with the view taken by it. With respect, the provisions of the scheme and the underlying objects have not been properly appreciated by the High Court.

34. The Revenue strongly relied on the decision of the Punjab and Haryana High Court in Ludhiana Central Co-operative Consumers' Stores Ltd. v. CIT [1980] 122 ITR 942 in support of its contention that subsidy received by the assessee would go to reduce the cost. In that case, the assessee-co-operative society did not succeed in its venture and approached the Government for subsidy which was given in the sum of Rs. 15,719 (Rs. 2,500 for delivery van, Rs. 1,250 for equipment and Rs. 11,969 for managerial and rental expenses) for the assessment year 1965-66, and Rs. 12,815 on account of managerial expenses for the assessment year 1967-68. The assessee's case for both the years in question was that the subsidy was a receipt of casual and non-recurring nature and was hence exempted from tax. The Income-tax Officer did not accept this contention. But, on appeal, the Appellate Assistant Commissioner upheld that claim. The Tribunal agreed with the Income-tax Officer and held that the receipts were revenue receipts. The Punjab and Haryana High Court held that it is the character of the receipt that has to be considered. If a subsidy is given to recoup revenue expenditure, it will take the same colour and will be deemed to be a revenue receipt in the hands of the assessee. It is the purpose for which it is given which is material and is the determining factor. Since the subsidy was given to meet the managerial and rental expenses, the subsidy receipt would be due to the actual expensed of the assessee. The assessee being a trading concern, the amount paid in the form of subsidy by the Government, though as an incentive to the co-operative movement, would be a revenue receipt and would be liable to tax. Relying on this decision, it was urged on behalf of the Revenue that, in the instant case also, the subsidy which the assessee received was towards the cost of the fixed assets. The character of the receipt will take the same colour for which it was given. Therefore, since the subsidy was given towards the cost, it would take the colour of the cost of the fixed assets. It should therefore, be held that the subsidy which the assessee received was to meet the cost of the fixed assets or portion thereof. We are afraid we cannot accept this sub mission. We have already held above that the cost of the fixed assets was only a measure to quantify the subsidy payable to the assessee. The subsidy was not given to meet the cost of the fixed assets or a portion thereof. It was granted as an incentive to establish industry in a backward area for balanced growth of industries in the regions of the State. Since the subsidy was not granted to meet the cost of fixed assets or a portion thereof, there is no question of it taking the colour of the cost of the fixed assets. It is the character of the receipts that has to be considered. Here, the subsidy, though based on the cost of the fixed assets, was not to meet the cost of the fixed assets, but was given as an incentive, cost being only a measure to quantify it. In our opinion, therefore, the said decision of the Punjab and Haryana High Court is of no assistance to the Revenue.

35. In the view which we are taking, we do not consider it necessary to refer to or deal with the following decisions cited on behalf of the Revenue in the context of the expression

"actual cost"

(1) CIT v. J. K. Cotton Spg. and Wvg. Mills Ltd. [1975] 98 ITR 153 (All), (2) CIT v. Dalmia Dadri Cement Ltd. [1980] 125 ITR 510 (Delhi), and (3) Rohtak and Hissar Districts Electric Supply Co. (P.) Ltd. v. CIT [1981] 128 ITR 52 (Delhi).

36. In the light of the above discussion, we hold that no portion of the cost of the fixed a sets has been met directly or indirectly by the Government as urged on behalf of the Revenue. Consequently, the question of reduction of the "actual cost" of the assets to the assessee dose not arise. Computation of the depreciation, investment allowance and development rebate has to be made on the basis of the "actual cost" of the assets to the assessee without any such reduction.

37. Now, so far as relief u under section 80J is concerned, the basis for working it out is the capital employed in an industrial undertaking and not the "actual cost" of the assets to an assessee. In other words, to compute relief allowable under section 80j of "the act", what is to be considered is the capital employed. It may be that to work out the capital employed, one may have to take into consideration the cost of various assets to the assessee. However, it cannot be gainsaid that the relief under section 80J is not directly linked with the cost of the assets to the assessee. But, apart from that, for the purpose of computation of relief under section 80j of "the act", the definition of ""actual cost"" in section 43(1) is not relevant. This definition is relevant only for the purposes of sections 28 to 41 of "the act". Therefore, even if a portion of the cost of the assets to the assessee is said to have been met directly or indirectly by the Government, as urged on behalf of the Revenue, the capital employed cannot be reduced by the extent of such portion of the cost. However, in the view which we are taking, subsidy which is granted under the aforesaid schemes is not to meet the cost of the assets or any portions thereof to the assessee. Therefore, the question of reducing the "actual cost" of the assets the assessee to the extent of the subsidy received by them for the purpose of working out the capital employed does note arise. In other words, the assessees are entitled to the relief under section on 80J of "the Act" without deduction of the cost of the extent of subsidy as urged on behalf of the Revenue.

38. Reliance was sought to be placed by the Revenue on the decision of the Gujarat High Court in CIT v. Kaira Dist. Co-operative Milk Producers' Union Ltd. [1979] 116 ITR 319. That was a case in which the assessee was a co-operative milk producers' society registered under the Co-operative Societies Act. In the course of the assessment for the year corresponding to the previous year ending on March 31, 1963, in connection with the computation of capital employed by the society for purposes of tax holiday under section 84 (now section 80j) of "the act" and rule 19 of the income-tax rules, 1962, one of the claims which was made on behalf of the assessee-society was that the entire amount of grant-in-aid given by the Goverment of Gujarat and utilised for the purchase of certain machinery for baby food unit and chees unit of the assessee-society must be added to the other capital employed by the assessee-society in those undertaking for purposes of relife under section 84 of "the act" read with rule 19(1)(d) of the aforesaid Rules. This claim was rejected by the Income-tax Officer and the Tribunal as the grant-in-aid were not given by the Gujarat Government for the specific purpose of acquiring plant and machinery for the said two factories, but were more in the nature of general grants not specifically relatable to plant and machinery. The claim was negative for the subsequent two years also. It was contended on behalf of the assessee that, if the Government itself had purchased some equipment and machinery and donated it to the assessee-society, it could not have been held that the assets so acquired were the assets by purchase by the assessee-society and its value would certainly have gone in to computation of capital for purposes of working out tax benefit, and that, merely because the Government, instead of granting machinery or equipment in specie, aided by grant in cash with the avowed and specific object of purchase of equipment and machinery, the form of the transaction should not at all be relevant and material for purposes of determining whether it was an asset acquired by purchase by assessee-society or any other mind of asset. This court held that it was not possible to agree with the assessee that this was in effect and substance a gift of machinery and, therefore, would come within the scope of clause (a) of rule 19(1) prescribing the capital value of the assets acquired by purchase. This court further held that the grants-in-aid were not given by the Government for the specific purpose of acquiring plant and machinery for the two projects, but they were general grants, not specifically relatable to the plant and machinery. The basis of the argument for the assessee for taking out the particular assets from the category prescribed in rule 19(1)(a), therefore, disappears. The contention of the assessee that the assets in question should be considered to be assets acquired otherwise than by purchase and, therefore, fall within clause (d) of rule 19(1) was also not well-founded. The emphasis is not on the source of acquisition but it is on its characteristic, namely, whether it is subject to depreciation or not. It is in that context that this court read clause (d) which prescribed the valuation of assets other than those mentioned in clauses (a), (b) and (c). It was, therefore, held that the assets in question being assets acquired by purchase and entitled to depreciation, would come within the terms of clause (a) of rule 19(1). The necessary result of treating the assets in question as falling within clause (a) would be that the valuation would be on the basis of its written down value as defined in clause (iv) of sub-rule (a) of rule 19. This court, therefore, upheld the view taken by the Tribunal that the assessee was not entitled to take into account the amount of the grant-in-aid given by the Government in the computation of the capital employed by the assessee in the purchase of machinery for baby food it and cheese unit. We fail to see how this decision can be of any assistance to the Revenue. This court has taken the view to the effect that what is important to consider is for what purpose the grant-in-aid was given. In that case, it was found that the grants-in-aid were not given by the Government for the specific purpose of acquiring plant and machinery for the two projects in question, but they were general grants, not specifically relatable to the plant and machinery. In the instant case also, the position is not different. Subsidy is a general subsidy. It is not for the specific purposes of meeting the cost of the fixed assets. Cost of fixed assets, as already observed, is only a measure to determine or quantify the subsidy. Subsidy is a general subsidy given by the Government by way of an incentive for establishment of industries in backward areas. Therefore, it is not relatable to plant and machinery or any fixed assets. That being the portion, it cannot go to reduce the cost of the fixed assets and thereby result in the reduction of capital employed for the purpose of section 80J (originally section 84) of "the act".

39. In the result, we answer the questions referred to us in these references in the affirmative and against the Revenue.

40. Each of the references is answered accordingly with no order as to costs.