A. Pasayat, J.:— At the instance of the Revenue, the following ques tion has been referred to this court by the Income-tax Appellate Tribunal, Cuttack Bench (in short “the Tribunal”), under section 256(1) of the Income-tax Act, 1961 (in short “the Act”)

“Whether, on the facts and in the circumstances of the case, the Income-tax Appellate Tribunal is correct in law in holding that the sub sidy received by the assessee-company should not be deducted from the value of the assets to arrive at the actual cost for the purpose of allowing depreciation and investment allowance?”

2. The background facts are that Messrs. Orissa Industries Limited (in short” the assessee”) is a public limited company carrying on the business of manufacture and sale of refractories, fire bricks, ceramics, etc., at Barang and Latikata. During the assessment year 1982–83, the petitioner claiined depreciation including extra shift allowance at Rs. 24,61,011. The Assessing Officer found that the assessee had received State investment subsidy amounting to Rs. 3,97,500 from the Government of Orissa. He was of, the view that, while computing the allowable depreciation, the amount of subsidy was to be reduced from the cost of fixed assets. Accordingly, he completed the assessment. In appeal, the Commissioner of Income-Tax (Appeals), Orissa, following the decision of the Madras Bench of the Tribunal, in the case of Pioneer Match Works v. ITO, 3 ITD 714, accepted the contention of the assessee that the amount of subsidy received under the State Investment Subsidy Scheme was not available to be deducted while computing the actual cost of plant and machinery and directed the Assessing Officer to allow depreciation without making the deduction. The Revenue carried the matter in appeal before the Tribunal and submitted that the subsidy received ought to have been considered as contribution towards the actual cost of the plant and machinery and, therefore, the direction of the Corhmissioner of Income-tax (Appeals) to allow depreciation without deducting the amount of subsidy is not sustainable. The Tribunal referred to one of its earlier decisions in I.T.A No. 47/(CTK) of 1985 in the case of Kalinga Engineers Ltd., and held that the subsidy which was quantified at ten per cent, of the cost of fixed assets was not granted for the specific purpose of meeting a portion of the cost of the assets and, accordingly, upheld the decision of the Commissioner of Income-Tax (Appeals). The Revenue sought for a reference to this court and, as stated above, the question has been referred to this court for adjudication. Mr. A.K Ray, learned standing counsel for the Revenue, submitted that a bare look at clause (1) of section 43 makes it clear that in sections 28 to 41 and in section 43, unless the context otherwise requires, “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. According to him, the receipt of subsidy has not been disputed and it is also not in dispute that the same was quantified at 10 per cent, of the fixed assets and, therefore, the Tribunal went wrong in holding that the cost was not partially met by the subsidy granting authority.

3. Mr. Arjun Agarwala, learned counsel for the assessee, however, submitted that there is nothing on record to show that the subsidy was granted for the specific purpose of meeting a portion of the cost of the plant and machinery. The parties produced before us a copy of the relevant State Investment Subsidy Scheme.

4. The accepted position is that, keeping in line with the provision of subsidy on fixed assets for industries by the Central Government, in the identified special backward districts of the State, the State Government have declared a commensurate grant of 15 per cent, subsidy on fixed assets. These related to non-special backward districts of Balasore, Phulbani, Cuttack, Puri, Sambalpur, Sundargarh and Ganjam. This was considered essential by the State Government, since the whole State can be regarded as industrially backward. It was felt essential to provide capital investment subsidy to increase the equity base of the project and make the entrepreneur viable to implement the project in a shorter period. The Government of Orissa, in their Industrial Policy Resolution for 1977–79, had declared a number of incentives and concessions, and one of such incentives was the grant of a ten per cent. investment subsidy to entrepreneurs for setting up new industries and for expansion of the existing industries in some of the districts of the State of Orissa. The Government of Orissa announced their new Industrial Policy (1980) wherein the rate of subsidy has been revised from ten per cent. to fifteen per cent. of the fixed capital investment made by new industrial units and existing units going in for expansion, where production was started after August 1, 1980, subject to a limit of Rs. 15 lakhs in the specified districts, The set of rules called “Rules for Sanction of State Investment Subsidy” (hereinafter referred to as “the Subsidy Rules”) were framed for the purpose. On facts, we find that the subsidy in question was not paid by the State Government to meet the cost of any assets of the assessee. It was given as an incentive for setting up industrial units in backward areas. The subsidy was intended to augment the capital resources of the industry. As is evident from the above policy, it was essential to provide capital investment subsidy to increase the equity base of the project and make the entrepreneur viable to implement the project in a short period. Investment subsidy is determined at a specified percentage on the fixed capital cost. The scheme has defined the expression “fixed assets”. According to the definition, “fixed assets” means investment on land including development cost and building including office building, plant and machinery. It is made clear that the cost of installation of plant and machinery can be also taken into account for calculation of the subsidy claim. The mode of assessment of fixed assets is indicated in rule 7. The basis for calculation of plant and machinery and other fixed assets has been detailed in the said rule. The procedure for claiming subsidy is laid down in rule 8 and the application to be submitted for the purpose of disbursement is required to be made in the form as per annexure A to the Subsidy Rules.

5. Under section 32 of the Act, depreciation is allowable on buildings, machinery, plant or furniture. The expression “actual cost” occurring in section 32 is to be understood in the light of the definition of that expression as contained in section 43, clause (1). Unless it can be definitely held that subsidy is granted for the specific purpose of enabling the assessee to meet a part of the cost of any asset, it is not permissible to reduce the actual cost of the assets by the amount of the subsidy granted. The object for which the subsidy is granted is available to be culled out: from the scheme itself. It was basically granted for increase of the equity; base of the project and make the entrepreneur viable to implement the: project in a short period. The grant was for expansion of industrial units in the non-specified backward districts of the State. Since the subsidy is; granted for this basic purpose, it does not appear reasonable to construe that the same was intended to enable the entrepreneur to meet a part of the cost of the assets. The payment of subsidy at a specified percentage of the fixed assets is a measure adopted under the scheme to quantify the subsidy and there appears to be no justifiable reason to hold that the subsidy was intended to meet a part of the cost of fixed assets. Merely because the application form for disbursement of subsidy posits furnishing of details of financial structure of the unit in respect of fixed assets acquired, including plant and machinery, it cannot be construed, as suggested by learned standing counsel, that the subsidy was intended to meet a portion of the cost.

6. Various methods are available to be adopted by the Government to determine the quantum of subsidy. One of the accepted methods is to find out the total amount invested by an entrepreneur in acquiring capital assets and grant a specified percentage of the amount so invested in the capital assets as subsidy. There is no restriction on the utilisation of the amount granted as subsidy. The crucial question that emerges for consideration is whether the subsidy is granted for any specific purpose or without any restriction. The recipient of the subsidy can utilise the subsidy in any manner it considered expedient for establishing and promoting the industry. From an elaborate reading of the scheme, it is clear that the mode of utilisation of the scheme is not restricted and no specific purpose has been indicated.

7. The subsidy in question was not paid to meet the cost of any asset of the assessee. It was given as an incentive for setting up industrial units in a backward areas. The subsidy went to augment the capital resources of the industry in question. Clause (1) of section 43 has no application to the subsidy. The inevitable conclusion is that the formula contained for grant of subsidy is merely a measure for determining the amount of subsidy. After all, some measure was required to be adopted for determining the amount of subsidy and the cost of fixed asset was taken for the purpose of determining the amount at a particular percentage thereof. The Tribunal has, therefore, rightly held that the subsidy received by the assessee-company should not be deducted from the value of the assets to arrive at the actual cost for the purpose of allowing depreciation and investment allowance.

8. The question referred to us is answered in the affirmative, in favour of the assessee and against the Revenue. No costs.

S.K Mohanty, J.:— I agree.