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CASE NO.:

Appeal (civil) 2474 of 1991

PETITIONER:

COMMISSIONER OF INCOME TAX, HYDERABAD

RESPONDENT:

P.J. CHEMICALS LTD. ETC.

DATE OF JUDGMENT: 14/09/1994

BENCH:

M.N. VENKATACHALIAH, CJ. & S.C. AGRAWAL

JUDGMENT:

JUDGMENT

1994 SUPPL. (3) SCR 561

The Judgment of the Court was delivered by

VENKATACHALIAH, CJI. The first batch of cases consists of both civil

appeals and petitions for grant of special leave preferred by the Revenue

assailing the correctness of the opinion pronounced by several High Courts

on a question of law referred to them for opinion on cases stated under

Section 256 of the Income Tax Act, 1961. In some of the cases, there are

some delays in filing them. We condone the delays. In the special leave

petitions, we grant special leave. These are cases in which the High Courts

have held that subsidies granted to industries on a percentage of the

capital cost are not deductible from the "actual cost" under Section 43(1)

of the Act for purpose of calculation of depreciation etc.

2. The second batch consists of matters in which the High Court has taken a

contrary view against the assessee and where the assessee has come up in

appeal. There is thus a divergence of judicial opinion on this question.

3. We may refer to the facts of one case on either side to place the

controversy in perspective.

In Civil Appeal No. 2474 of 1991, the Commissioner of Income-tax, Andhra

Pradesh-I, Hyderabad has questioned the correctness of the order dated

28.11.90 of the Division Bench of the Andhra Pradesh High Court in Income

Tax Case No. 267 of 1989, The respondent-assessee, M/s PJ. Chemicals Ltd.,

filed its return of income for the assessment year 1983-84 declaring a net

loss of Rs. 6,90,643. In the course of its return, the assessee had

capitalised the entire pre-operative expenditure amounting to Rs. 25,64,395

and claimed depreciation thereon. There were, however, some disallowances

of the items in this capitalisation and .a ratio of 80:20 was accepted as

the formula for ascertaining the capital. That, however, is not the

controversy in this appeal. The point is as to the deductibility of a

central subsidy of Rs. 9,97,085 which the assessee had received from the

"actual cost" for purposes of calculation of depreciation etc. The Income

Tax Officer was of the opinion that the statutory concept of "actual cost"

in Section 43(1) compelled the deduction of this sum of Rs. 9,97,085. He

did so accordingly. In the appeal preferred by the assessee before the

Commissioner of Income Tax (Appeals)-II, Hyderabad, the appellate authority

following the Board's Circular No. 190 dated 1.3.76 upheld the order of the

Income Tax Officer and affirmed the deduction. Before the Appellate

Commissioner, the assessee had placed reliance on the decision of the

Andhra Pradesh High Court in Commissioner of Income Tax v. Godavari

Plywoods Ltd., (168) ITR 632; but the appellate authority was not

persuaded.

In the second appeal before the Income Tax Appellate Tribunal, Hyderabad

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Bench in I.TA. No. 1507/Hyd./87, the Tribunal reversed the authorities

below and allowed the assessee's appeal. The Tribunal said :

"In this short appeal preferred by the assessee for assessment year

1983-84, the only substantial ground take pertains to the deduction of the

sum of Rs. 9,97,085 being the Central Subsidy from the cost of the relevant

asset resulting in the slashing of allowance admissible under the income-

tax Act.

2, We have heard the learned representative on both sides. On behalf of the

assessee reliance has been placed on a decision of the A.P. High Court in

Commissioner of Income-Tax v, Godavari Plywood Ltd., (169) ITR 632 wherein

it has been held that a subsidy like the case in made cannot be deducted in

computing the actual cost and the depreciation will have to be calculated

on the cost without deducting therefrom the subsidy amount."

4. At the instance of the Revenue, the Income Tax Appellate Tribunal

stated a case and referred the following question of law for the opinion of

the High Court:

"Whether on the facts and in the circumstances of the case, the Income-tax

Appellate Tribunal is justified in holding that Central Subsidy should not

be deducted from the actual cost of assets for purpose of allowing

depreciation?"

5. On a consideration of the matter the High Court following its earlier

view in Godavari Plywoods' case (supra) answered the question in the

affirmative and against the Revenue. The Revenue has now come up in appeal.

6. Civil Appeal No, 3699 of 1990 is a case typical of the opposite point

of view where the assessee has come up in appeal. The appellant, M/s Jank

Steel Tubes Pvt. Ltd., filed returns of income for the assessment year

1978-79 declaring a loss. Some time thereafter the appellant revised its

returns. It claimed that the subsidy of Rs. 7,58,000 received by it should

not be deducted while computing depreciation on the "actual cost". The

Income Tax Officer by his order dated 27.5.1980 rejected the claim of the

appellant and reduced the "actual cost" by the amount of the subsidy. The

appeal preferred by the appellant before the Commissioner of Income Tax

(Appeals) was dismissed on 9,10,1980. The appellant filed a second appeal

in I.TA. No, 4810 (Del.)/80 before the Income Tax Appellate Tribunal,

Jabalpur Bench, Camp at New Delhi. The Tribunal has discussed this point in

Para 4 of the appellate order. It allowed the appellant- assessee's claim,

7. On the motion of the Revenue under Section 256(1) of the Income Tax Act,

1961 the Tribunal referred the following question of law for the opinion of

the High Court (along with another question not relevant for this case) :

"(2) Whether, on (he facts and in the circumstances of the case, the

capital subsidy of Rs, 7,58,000 received by the assessee should be deducted

from the value of the plant and machinery and building and sheds while

working out the written down value for allowing depreciation to the

assessee under Section 32 of the Act for the accounting period relevant to

the assessment year 1978-79?"

The High Court answered this question in the affirmative and in favour of

the Revenue observing:

"Turning now to the next question raised, which is with regard to capital

subsidy, it has been held by us in our earlier decision in I.T.R. 22 of

1986 Commissioner of Income Tax v, Jindal Brothers, decided on March 14,

1989, that the amount of subsidy received by the assessee has to be

deducted from the value of the assets while working out its written down

value for purposes of depreciation. In terms thereof, this question is

answered in the affirmative in favour of revenue and against the assessee."

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The assessee has come now up in appeal.

8. The pronouncements of the various High Courts on this point indicate a

sharp divergence of judicial opinion. The High Courts of Allahabad, Andhra

Pradesh, Bombay, Calcutta, Gauhati, Gujarat, Karnataka, Kerala, Madras,

Madhya Pradesh, Orissa and Rajasthan have taken a view upholding the

assessees' claim. (See ; Lucknow Producers Co-opera-tive Milk Union Ltd. v.

Commissioner of Income-Tax, (143) ITR 60; Godavari Plywoods' case (supra)

Commissioner of Income-tax v, Elys Plas-tics Pvt. Ltd., (188) ITR 11;

Commissioner of Income-Tax v. Dewas Synthetics (P) Ltd., (188) ITR 16;

Commissioner of Income-Tax v. Meghalaya Plywood Ltd., (202) ITR 343;

Commissioner of Income-Tax v. Grace Paper Industries Pvt. Ltd. and Ors.,

(183) ITR 591; Commissioner of Income-Tax v. Diamond Dies Manufacturing

Corporation Ltd., (172) ITR 655; Commissioner of Income-Tax v. Kerala State

Drugs and Pharmaceuticals Ltd., (184) ITR 424; Srinivas Industries v.

Commissioner of Income-Tax, (188) ITR 22; Commissioner of Income-Tax v.

Steel Tubes of India Ltd., (181) ITR 90; Commissioner of Income-Tax v.

Kalinga Jute Products Pvt. Ltd., (196) ITR 633 and Commissioner of Income-

Tax v. Ambica Electrolytic Capacitors Pvt. Ltd. and Ors., (191) ITR 494.

The nature and incidents of the subsidies in the present batch of cases are

broadly similar to the subsidies which came up for consideration in the

above cases.

9. The Punjab and Haryana High Court's judgments under appeal have taken

the opposite view.

10. Such rebate as obtains on the point turns on the definition of "actual

cost", in Section 43(1) of the Income Tax Act, 1961. Section 43(1) provides

definitions of certain terms and inter-alia stipulates that for pur-poses

of Sections 28 to 41 and 43, "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." Thus, if a portion of the cost is met directly or indirectly by

any person or authority, the "actual cost" would, for the purposes of the

aforesaid sec-tions, be cost minus the subsidies. The "actual cost" of an

asset which should be given meaning in a commercial sense, logically

includes whatever even any other person or authority has met; but the

legislative intent is that the assessee should not have the benefit of a

depreciation on a cost which he did not himself pay.

11. Indeed, provision for wastage of capital in the earning of income by

way of depreciation was not an initially recognised concept. The Millard

Tucker Committee in United Kingdom said : "For more than a generation after

the imposition of the present income tax, no relief whatever was given to

the using up, in the course of carrying on a business, of any kind of fixed

assets."

12. In Corporation of Birmingham V. Barnes, (19) Tax Cases 195, the House

of Lords took the view that it was not right to deduct any sums received

from any outside source from the "actual cost". Lord Atkin said :

"the actual cost to the person 'by whom the trade is carried on' used in

this context have no relation to the source from which that person has

received the money which he has expended on the plant.........

But it is said that the words 'to that person' in the phrase 'actual cost

to that person' plainly indicate that the Section is intending to confine

the relief to an aggregate equal to the sum of money which the person has

defrayed out of his own resources, the cost of the burden which has

ultimately fallen upon him. My Lords, I confess I do not think that this is

the natural meaning of the words. What a man pays for construction or for

the purchase of a work seems to me to be the cost to him; and that whether

someone has given him the money to construct or purchase for himself, or

before the event has promised to give him the money after he has paid for

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the work, or after the event has promised or given the money which recoups

him what he has spent." (pp.215-17)

In the Court of Appeal, Romer L,J. had observed :

"Is it possible to say that, in view of those words, when a trader has had

given to him as a present Us plant and machinery, there has been any

'actual cost' to him in respect of that plant and machinery? The question

to be put to the trader is this: 'What did the plant and machinery actually

cost you?' Supposing, in this case, that the Dunlop Rubber Company, for

their own purposes, had constructed a tramway at a cost of o 54,752 and had

then presented it to the Birmingham Corporation, is it possible that the

Birmingham Corporation could say that the tramway had cost them any-thing?

Surely not. Instead of themselves constructing the tramway and then

presenting it to the Corporation, the gift might have been effected in

another way. The Dunlop Company might have said to the Corporation : 'You

construct the tramway and then we will repay to you the cost to which you

have been put.' What would be the answer of the corporation to the question

: 'What did that tramway cost you in the end?' I should have thought the

Corpora-tion might conceivably have said : 'Well, the tramway cost us f

54,752, but, having regard to the fact that, that was repaid to us by the

Dunlop Rubber Co., the actual 'cost to us was nil.' I find, like Lord

Justice Slesser, the words in Sub-rule (6)too strong to enable me to say

that the only object and effect of the section is to correct the anomaly

that was pointed out in Rickman's case (1906) 1 K.B. 311. For these

reasons, I think the appeal should be allowed and the decision of the

Commissioner's restored." [P.213]

Disagreeing with said observations, Lord Atkin said :

".......1 myself should not have thought the answer of Birmingham

Corporation to the question put by Lord Justice Romer would have been what

he suggests. On the hypothesis that the Dunlop Company had recouped the

Corporation the whole of the cost of the first tramway I should have

thought the answer to "What did it cost "you?" or "What did it actually

cost you?" would have been "It actually cost us o 54,752 but none of the

burden of that cost "will fall on the Corporation, for the Dunlop Company

have paid "us the full amount......" [P. 217]

The view of Lord Atkin was followed by the Bombay High Court in

Commissioner of Income Tax v. Poona Electric Supply Co. Ltd., (14) ITR 622

and in Commissioner of Income Tax, Bombay City-I v. Bombay Subur-ban

Electric Supply Co. Pvt. Ltd., (106) ITR 752 etc. arising under the 1922

Act. It is urged by Dr, Gauri Shanker, learned Senior Counsel for the

Revenue, that as the intention of the legislature was that depreciation

should be allowed only on the "actual cost" to the assessee, i.e. what is

spent by the assessee from his own resources - (otherwise the expression

would have been "cost" and not "actual cost") - the legislature intervened

by proposing an amendment to nullify the effect of the decision. The Income

Tax (Amendment) Bill contained an amendment proposal but it lapsed because

the Parliament was dissolved. It was reintroduced in 1952 and passed as

Income Tax (Amendment) Act, 1953. Explaining this change, this Court in

Calcutta Electric Supply Co. Ltd v. Commissioner of Income Tax, (194) ITR

296 at 302 stated that : "The 1922 Act was amended by the Income-tax

(Amendment) Act, 1953, with effect from April 1,1952, in this respect."

This amendment was introducted as an Explanation to the definition of

"actual cost" in Section 10(5) of the Income-tax Act, 1922, to nullify the

effect of the judicial interpretations to the contrary. Though, at the

stage of the Bill, the proposal was to exclude from the concept of "actual

cost", any moneys reimbursed to the assessee in this regard by any outside

source, the amendment, as finally effected, permitted only a limited

exclusion. The Explanation reads as follows:

For the purposes of this sub-section, the expression 'actual cost' means

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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

Government or by any public or local authority........"

13. The question in the present context is not whether if a portion of the

costs 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 subsidies 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 not a 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.

In Godavary Plywoods' case (supra), the Andhra Pradesh High Court, adopting

this view, observed.

"Nowhere had the scheme provided as to how the subsidy should be utilised

and for which assets. It was open to the assessee to legitimately reduce

the cost of land in its books of account to the full extent of the subsidy,

in which case the cost of plant and machinery would remain at invoice price

uninfluenced by the amount of subsidy. The amount received by way of

subsidy could be utilised for any purpose such as acquiring land on which

no depreciation was admissible or on plant and machinery or for erection of

buildings or for working capital or for repaying the loans already

borrowed. Hence, unless the subsidy received had a nexus, direct or

indirect, to meet a portion of the actual cost of any specific capital

asset, it could not be brought within the purview of section 43(1) of the

Act. Therefore, the subsidy could not be deducted from the actual cost of

the assets to the assessee and depreciation should be allowed without

reducing the same by the amount of subsidy granted."

In Commissioner of Income Tax v. Grace Paper Industries Pvt. Ltd. (supra),

the Gujarat High Court said :

The dictionary meaning of 'subsidy' is 'a grant of money from a Government

to a private enterprise considered as beneficial to the public'. The

Government, in order to determine the amount of cash subsidy, decided to

follow one of the recongnised 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 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 the subsidy was not given for the specific

purpose of meeting any portion of the cost of the fixed assets.

Consequently, the subsidy did not form part of the actual cost of plant and

machinery within the meaning of section 43 of the Income-tax Act, 1961. It

cannot be deducted from the cost of assets in computing depreciation,

development rebate and invest-ment allowance."

14. On the contrary in Commissioner of Income Tax v. Jindal Brothers Rice

Mills, (179) ITR 470, the Punjab & Haryana High Court has said :

"When it is specified in the incentive policy that 15 per cent of the cost

of plant, machinery and building would be provided by the State Government,

the underlying object is to reduce the value of the plant, machinery and

building by 15 per cent of the actual cost. The actual cost would so stand

reduced within the meaning of section 43(1) of the Act......We are equally

not impressed by the reasoning that the basis adopted for determining the

cash subsidy with reference to the fixed capital cost is only a measure

adopted and cannot make the subsidy as given only for the specific purpose

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of meeting any portion of the fixed capital cost..........

The incentive by way of subsidy is given for each item separately and it

would not be open to the assessee to appropriate the subsidy for a purpose

other than for which it was given to him. Even if the assessee wrongly

maintains the account books and utilises the entire subsidy against the

value of the land to reduce its cost, the Income-tax Officer would not

overlook the matter and would appropriate the subsidy b reducing the cost

of the machinery, plant and building for which the subsidy was specifically

granted. There is a nexus between the cost of each item and the subsidy

under each head."

15. On a consideration of the matter the view that commends itself as

acceptable is the one which has commended itself to the majority of the

High Courts, It is, of course, not the numerical strength that prevails-

though the fact that a particular view has commended itself to a majority

of the High Courts in the country is a matter for consideration-but the

tensile strength of the acceptable logic in those decisions. It is aptly

said that "a Judge who announces a decision must be able to demonstrate

that he began from recognized legal principles and reasoned in an

intellectually coherent and politically neutral way to his result". In the

present case the reasoning underlying, and implicit in, the conclusion

reached by the majority of the High Courts cannot be said to be an

unreasonable view and on a preponderance of preferability that view

commends itself particularly in the context of a taxing statute. The

expression "actual cost" needs to be interpreted liberally, The subsidy of

the nature, we are concerned with, does not partake of the incidents which

attract the conditions for their deducibility from "actual cost".

Government subsidy, it is not unreasonable 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". We should prefer the reasoning of the

majority of the High Courts to the one found acceptable by the High Court

of Punjab and Haryana.

16. In the result, we affirm the judgments of the High Courts which have

answered the question against the Revenue and dismiss the first batch of

appeals and allow the second batch preferred by the assessee and in

reversal of the opinion of the High Court, answer the question referred

against the Revenue.

In the circumstances, there will be no order as to costs.