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Citation Codes
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citation codes
Case Number
Advocates
  • C. Subramanyam
Judges
  • D. ManmohanK.K. Gupta
Acts
  • provisions of section 43(1) of the Income-tax Act,
  • provision of section 43 (1)
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Cites
Cited by
Citation Codes
Equivalent Citations
citation codes
Case Number
Advocates
  • C. Subramanyam
Judges
  • D. ManmohanK.K. Gupta
Acts
  • provisions of section 43(1) of the Income-tax Act,
  • provision of section 43 (1)
See more information ...
Smart Summary

Tribunal Order Summary (per D. Manmohan, Judicial Member)

Factual and Procedural Background

The assessee is a company engaged in the manufacturing/processing of edible oils. For the previous year relevant to assessment year 2003-04 the assessee received an investment subsidy of Rs. 20,00,000 under an Andhra Pradesh State Government scheme called "Target 2000". The assessee did not declare this subsidy as income for the year.

During assessment proceedings the Assessing Officer (AO) treated the subsidy as linked to fixed capital investment, concluded it was reimbursement of part of capital investment and applied section 43(1) of the Income-tax Act (and Explanation 10 thereto) to reduce the cost of assets, resulting in an addition of Rs. 3,24,166. The Commissioner of Income-tax (Appeals) [CIT(A)] confirmed the AO's action. The assessee appealed to the Tribunal against the CIT(A)'s order dated 13-11-2006.

Legal Issues Presented

  1. Whether the investment subsidy of Rs. 20,00,000 received under the "Target 2000" scheme is a payment that is "met directly or indirectly" to meet a portion of the actual cost of capital assets and therefore must be reduced from the cost of the assets for computing depreciation under section 43(1) (including Explanation 10) of the Income-tax Act?
  2. Whether the decisions cited by the assessee (P.J. Chemicals Ltd. and Godavari Plywoods Ltd.) remain applicable after insertion of Explanation 10 to section 43(1) of the Act and, if so, whether those decisions support the assessee's claim that the subsidy is an incentive (not a reimbursement of capital cost) and therefore not to be excluded from asset cost for depreciation purposes?

Arguments of the Parties

Assessee's Arguments (Appellant)

  • The subsidy was capital in nature as it was given for establishing an eligible industrial unit, but it was not given specifically to acquire any asset directly or indirectly; therefore it need not be reduced from the cost of assets for depreciation purposes.
  • The "Target 2000" scheme does not indicate that subsidy must be used to offset the cost of capital assets; the subsidy amount was linked to fixed capital investment only as a measure to quantify aid and there was an outer ceiling of Rs. 20,00,000, showing the subsidy was not intended to subsidise actual asset cost.
  • Reliance on precedent decisions — Commissioner of Income-tax v. Godavari Plywoods Ltd. and Commissioner of Income Tax v. P.J. Chemicals Ltd. — which, the assessee submitted, are applicable in the present facts and support the view that such incentive subsidies are not payments intended to meet part of the actual cost of assets.
  • Submission that Explanation 10 to section 43(1) does not materially change the requirement (that the portion of cost must be met directly or indirectly) and that the primary test remains whether the subsidy was intended to meet a portion of the actual cost.

Revenue's Arguments (Respondent)

  • The Assessing Officer and Departmental Representative submitted that the "Target 2000" scheme is conceptually different from the schemes considered in the precedents cited by the assessee; the earlier cases involved inducement to establish units in backward areas, whereas "Target 2000" was targeted to accelerate industrial development across the State and all districts were eligible.
  • The AO emphasized that the subsidy was calculated at 20% of fixed capital investment as per Government Orders and noted that the subsidy amount was paid to the assessee's banker for repayment of a term loan taken for the purchase of capital assets, which in the AO's view indicates the subsidy reduced the capital cost.
  • It was submitted that Explanation 10 (inserted w.e.f. 1-4-1999) alters or clarifies the statutory position such that amounts met directly or indirectly by any authority (including subsidies) must be reduced from the asset cost, thus distinguishing the earlier case law.

Table of Precedents Cited

Precedent Rule or Principle Cited For Application by the Court
Commissioner Of Income Tax, Hyderabad v. P.J. Chemicals Ltd. [1994] 210 ITR 830 (SC) The Apex Court analyzed the phrase "met directly or indirectly" and held that the real question is whether a subsidy was intended to subsidise the cost of the capital or intended merely as an incentive to encourage entrepreneurs; if a subsidy is an incentive to encourage industries (even though quantified by reference to fixed capital cost), it does not partake of the character of a payment intended to meet the 'actual cost'. The opinion contains the observations quoted at pages 839 and 841 of the report. The Tribunal applied the core principle from P.J. Chemicals, holding that the basic principle still holds after insertion of Explanation 10 to section 43(1): subsidies intended to accelerate industrial development and serving as incentives, even if quantified with reference to fixed capital cost, are not payments made specifically to meet a portion of the actual cost and therefore fall outside Explanation 10.
Commissioner Of Income-Tax v. Godavari Plywoods Ltd. [1987] 168 ITR 632 (AP) Cited as a decision of the Andhra Pradesh High Court which considered a Government incentive scheme; the assessee relied on it to show similarity between that scheme and the "Target 2000" scheme and to support the view that the subsidy was an incentive and not a payment to meet capital cost. The Tribunal accepted the assessee's submission that the schemes considered in Godavari Plywoods Ltd.'s case and the present "Target 2000" scheme were, for relevant purposes, identical in being incentives to establish industry; this supported the conclusion that the subsidy was not intended to meet a portion of actual asset cost.

Court's Reasoning and Analysis

The Tribunal considered the rival submissions and the record. It began by examining the legal import of section 43(1) and Explanation 10 (inserted from 1-4-1999), which refer to excluding from "actual cost" any portion of cost "met directly or indirectly" by any authority (including by way of subsidy, grant or reimbursement).

The Tribunal then analyzed the Apex Court's reasoning in P.J. Chemicals, focusing on the test articulated there: the decisive inquiry is whether the subsidy was "really intended to subsidise the cost of the capital" or whether it was intended as an incentive to encourage entrepreneurs to set up industries, with the percentage of fixed capital cost being only a measure to quantify the aid. The Tribunal noted the Supreme Court's observations that a subsidy intended merely as an incentive does not "partake of the character of a payment intended either directly or indirectly to meet the 'actual cost'".

Applying that analysis, the Tribunal examined the "Target 2000" scheme's terms (as reflected in the record and the assessee's paper book). The Tribunal observed that the objective of "Target 2000" was to accelerate industrial development of the State and to incentivise setting up industries in Andhra Pradesh, and that while fixed capital investment was used as the basis for determining the subsidy amount, there was also an outer ceiling (Rs. 20,00,000). The Tribunal concluded that these features indicate the subsidy was not specifically intended to subsidise the actual cost of assets.

Consequently, the Tribunal found that even after insertion of Explanation 10, the principle from P.J. Chemicals remains applicable: a subsidy granted as an incentive to encourage industrial establishment (even if quantified with reference to fixed capital cost) is not a payment "met directly or indirectly" to meet the asset's actual cost. Therefore, such a subsidy falls outside the scope of Explanation 10 to section 43(1) and need not be reduced from the cost of assets for computing depreciation. On that basis the Tribunal directed the Assessing Officer not to reduce the subsidy from the asset cost when computing depreciation.

Holding and Implications

APPEAL ALLOWED

Holding: The Tribunal allowed the assessee's appeal and held that the Rs. 20,00,000 subsidy received under the "Target 2000" scheme was an incentive to accelerate industrial development and was not a payment made specifically to meet any portion of the actual cost of capital assets. Therefore, the subsidy does not fall within Explanation 10 to section 43(1) and should not be reduced from the asset cost for the purpose of computing depreciation. The Assessing Officer was directed accordingly.

Implications: The direct consequence is that the addition of Rs. 3,24,166 (made by reducing the asset cost on account of the subsidy) is reversed for depreciation computation in the assessment year 2003-04. The Tribunal's decision applies the principles in existing case law (notably P.J. Chemicals) to the facts and does not purport to lay down a new rule of law beyond the application of those principles to the "Target 2000" scheme.

Show full summary ...

    Sasisri Extractions Limited v. Assistant Commissioner of Income-tax, Circle 2(1), Guntur

    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.

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    Comments

    Sasisri Extractions Limited v. Assistant Commissioner of Income-tax, Circle 2(1), Guntur
    (Jan 7, 2008)