ORDER

Per D. Manmohan, Judicial Member. - This appeal, filed at the instance of the assessee-company, is directed against the order dated 13-11-2006 passed by the Commissioner of Income-tax (Appeals), Guntur, and it pertains to the assessment year 2003-04. Addition of Rs. 3,24,166 made by the Assessing Officer and confirmed by the CIT (A) by applying the provisions of section 43(1) of the Income-tax Act, is the subject-matter of dispute before the Tribunal.

2. The facts of the case, in brief, are as follows: The assessee is engaged in the business of manufacturing/processing of edible oils. During the previous year relevant to the assessment year under consideration, the assessee received an amount of Rs. 20,00,000 as investment subsidy under a scheme floated by Andhra Pradesh State Government known as 'Target 2000'. The assessee has not declared the receipt as income of the year under consideration. During the course of assessment proceedings, it was contended that the subsidy was given to the unit because of the fact that it has established an eligible industrial unit in the notified area and, thus, the receipt was capital in nature and not taxable. The Assessing Officer called upon the assessee to clarify as to why the subsidy received should not be reduced from the cost of the assets so that the assessee would get lesser depreciation than what was claimed in the return. The case of the assessee was that the subsidy was not given to acquire any asset either directly or indirectly and, thus, it need not be considered for calculation of depreciation. He further contended that subsidy was calculated based on the investment made by the assessee for establishing the unit and there is no embargo on the utilization of the subsidy in which event it cannot be said that the subsidy was directly relatable to the cost of the assets.

3. The Assessing Officer was, however, of the opinion that G.O.Ms.Nos.117 and 118, dated 17-3-1993 and 20-5-1996 respectively, issued by the A.P. State Government provides subsidy calculated at 20 per cent of the fixed capital investment and, thus, it was clearly linked to the fixed capital cost of the assessee. Therefore, it is nothing but reimbursement of part of the capital investment in which event, it affects the actual cost of the fixed assets on which the eligible depreciation was claimed under section 32 of the Act. The Assessing Officer thereupon considered the provisions of section 43 (1) of the Act and Explanation 10 thereto (inserted with effect from 1-4-1999) to conclude that an investment subsidy calculated at a percentage of the fixed capital investment has to necessarily be reduced from the cost of the assets for the purpose of granting depreciation on such assets. It may be noticed that the assessee relied upon the following decisions in support of his contention that the impugned subsidy is not directly or indirectly connected to the assets and in the absence of clear mention that the subsidy was given to meet a portion of the cost of the asset, the same need not be considered for inclusion of actual cost of the assets :

1. Commissioner Of Income-Tax v. Godavari Plywoods Ltd. [1987] 168 ITR 632 (AP).
2. Commissioner Of Income Tax, Hyderabad v. P.J Chemicals Ltd.. [1994] 210 ITR 830 (SC).

4. The learned Assessing Officer was of the view that the case-law cited by the assessee are distinguishable on facts inasmuch as the said decisions were rendered prior to insertion of Explanation 10 to section 43 (1) of the Act. In other words, the Explanation makes it clear that any amount met directly or indirectly by the Government in the form of a subsidy, then, so much of the cost as is relatable to the subsidy, shall not be included in the capital cost of the asset. He further noticed that the amount received in the form of subsidy was paid to the banker for repayment of term 'loan' taken by the company on the purchase of the capital assets which makes it further clear that the subsidy given by the Government was used to offset the capital costs and, thus, the same has to be reduced from the cost of the fixed assets. He, accordingly, apportioned the subsidy amount against the opening WDV of the assets of the assessee and calculated the eligible depreciation.

5. Aggrieved, it was contended before the CIT (A) that the incentive scheme which was considered by the Andhra Pradesh High Court in the decision cited supra and the 'Target 2000' scheme are identical and meant for the purpose of encouraging the entrepreneurs to establish new industry. In both the schemes, the amount of subsidy was linked to fixed capital costs for determination of the amount of subsidy without any direction as to how the subsidy amount has to be utilized. It was further contended that the decision of the Apex Court in the case of P.J. Chemicals (supra) and the decision of the Andhra Pradesh High Court in Godavari Plywoods Ltd.'s case (supra) are applicable mutatis mutandis to the facts of the instant case.

6. The learned CIT (A) was, however, of the opinion that Explanation 10 to section 43 (1) inserted with effect from 1-4-1999, enlarges the scope of the expression 'actual cost'. Though in the present case, the subsidy is not given directly to meet the cost of the asset, indirect motive of the State Government in giving subsidy was to bring down the cost of the investment of the assessee and, therefore, it can be said that the State Government has met the cost indirectly. He, accordingly, affirmed the action of the Assessing Officer. Further aggrieved, the assessee is in appeal before us.

7. Learned counsel appearing on behalf of the assessee filed a paper book containing sixty pages and by adverting our attention to pages 12, 18, 35, 46 and 47 of the paper book, it was submitted that the scheme under which subsidy was granted to the assessee does not indicate that it was specifically meant to offset the cost of the capital assets purchased by the assessee. On the other hand, the scheme under which the assessee was granted subsidy and the schemes which were considered by the Supreme Court as well as the Andhra Pradesh High Court in the cases cited supra were identical and the main purpose under both the schemes was to give a fillip to the entrepreneurs who establish new industrial units in eligible notified areas and for the purpose of working out the amount of subsidy to be given fixed capital investment was considered, but the fact remains that there is an outer ceiling of Rs. 20,00,000 irrespective of the capital investment which only goes to show that the subsidy was not meant to offset the cost of the assets. He has adverted our attention to pages 35 to 37 of the paper book, i.e., abstract of the 'Target 2000' industrial policy.

8. The learned counsel adverted our attention to Explanation 10 to section 43 (1) to submit that there is no material difference in the language of Explanation 10 to section 43 (1) of the Act and also the language used in section 43 (1). Both define actual cost stating that a portion of the cost MET DIRECTLY OR INDIRECTLY by any authority has to be reduced from the cost of the asset. Explanation 10 to section 43 (1) of the Act does not materially differ from the language used in section 43 (1) but merely clarifies that the cost met by the authority in the form of subsidy or grant or reimbursement (by whatever name called) has to be reduced from the cost of the asset. Thus, Explanation 10 to section 43 (1) as well as the main provision of section 43 (1) are couched in an identical manner stressing upon the fact that only the cost which is 'met directly or indirectly' has to be reduced from the cost of the asset. Section 43 (1) of the Act was the subject- matter of consideration by the Apex Court in the case of P.J. Chemicals Ltd. (supra), wherein Their Lordships observed at page 839 of the report as under :

"The question in the present context is not whether if a portion of the cost is met directly or indirectly by any other person or authority, it should be deducted or not. Quite obviously, the plain meaning of the section is that it shall be. But the real question is as to the character and nature of a subsidy whether it was really intended to subsidise the cost of the capital or was intended as an incentive to encourage entrepreneurs to move to backward areas and establish industries, the specified percentage of the fixed capital cost which is the basis for determining the subsidy being only a measure adopted under the scheme to quantify the financial aid. The contention is that it is only payment, directly or indirectly, to meet any portion of the actual cost but intended as an incentive to entrepreneurs, its quantification determined at a percentage of the fixed capital cost."

At page 841 of the report, Their Lordships further observed as under :

"The Government subsidy, it is not reasonable to say, is an incentive not for the specific purpose of meeting a portion of the cost of the assets, though quantified as or geared to a percentage of such cost. If that be so, it does not partake of the character of a payment intended either directly or indirectly to meet the 'actual cost'".

9. The learned counsel, therefore, submitted that even after introduction of Explanation 10 to section 43 (1) of the Act, there is no change in the basic concept and the first test to be satisfied is that portion of the cost of the asset should be met either directly or indirectly by an authority either in the form of a subsidy or otherwise. So long as the subsidy was intended to encourage entrepreneurs to establish industries, the mere fact that a specified percentage of the fixed capital cost was taken as the basis for determining the subsidy should not be mistaken as a payment intended to subsidise the cost of capital of the new industry. He, thus, strongly relied upon the afore-cited decisions.

10. On the other hand, learned Departmental Representative relied upon the orders of the tax authorities and submitted that 'Target 2000' scheme is a different concept from the schemes considered by the Apex Court in the case of P.J. Chemicals Ltd. (supra) and Andhra Pradesh High Court in the case of Godavari Plywoods Ltd. (supra). In the afore-cited decisions, the intention of the Government was to induce the entrepreneurs to move to backward areas, whereas in the instant case, 'Target 2000' scheme is merely to accelerate industrial development of the State and all the Districts in the State have been categorized as eligible areas. Further, the utilization of the subsidy amount for the purpose of repayment of term 'loan' is also a pointer in support of the contention of the revenue that the subsidy amount has helped in reduction of the cost of the assets. He, thus, submitted that the decisions cited supra are not applicable to the facts of the case.

11. We have carefully considered the rival submissions and perused the record. In our considered opinion, even after insertion of Explanation 10 to section 43 (1) of the Act, the basic principle underlying in the decision of the Apex Court in the case of P.J. Chemicals Ltd. (supra) still holds the field. Their Lordships analyzed the expression "met directly or indirectly" to come to the conclusion that only in a case where a subsidy or other grant was given to offset the cost of an asset, such payment/grant would fall within the expression 'met', whereas the subsidy received merely to accelerate the industrial development of the State cannot be considered as payments made specifically to meet a portion of the cost of the assets.

12. A careful perusal of 'Target 2000' scheme shows that the scheme was intended to accelerate industrial development of the State and the incentive was given for setting up of industries in Andhra Pradesh and for the purpose of determining the amount of subsidy to be given, cost of eligible investment was taken as the basis, though it was not specifically intended to subsidise the cost of the capital. Under the circumstances, we are of the view that the incentive in the form of subsidy cannot be considered as a payment directly or indirectly to meet any portion of the actual cost and, thus, it falls outside the ken of Explanation 10 to section 43 (1) of the Act. In the light of the above discussion, we are of the view that for the purpose of computing depreciation allowable to the assessee, the subsidy amount cannot be reduced from the cost of the capital asset. The Assessing Officer is directed accordingly.

13. In the result, the appeal filed by the assessee is allowed.