We received a government subsidy worked out as a percentage of our capital cost. Must it be deducted from the actual cost of the plant before we claim depreciation?
No. The Supreme Court held that a government subsidy of this kind is an incentive to set up industry, not a payment intended to meet a portion of the cost of the assets, even though it is quantified as or geared to a percentage of that cost. It therefore does not go to reduce 'actual cost' under section 43(1), and depreciation is computed on the cost without deducting the subsidy. Resolving a sharp conflict among the High Courts, the Court preferred the majority view taken by twelve High Courts to that of the Punjab and Haryana High Court, dismissed the Revenue's appeals and allowed the assessees' appeals.
Decided by the Supreme Court (Supreme Court of India - M.N. Venkatachaliah CJ and S.C. Agrawal J; judgment delivered by Venkatachaliah CJ) on 1994-09-14, reported as (1994) 208 ITR 465; 1994 Supp (3) SCC 535; AIR 1994 SC 2727; (1994) 6 JT 330 (SC); 1994 AIR SCW 4352. It bears on section 43(1), section 32 of the Income Tax Act 1961, in Deductions & Disallowances matters.
This is the leading decision on subsidy and actual cost, and the test it lays down is one of purpose, not of arithmetic. The subsidy is outside section 43(1) unless it was given for the specific purpose of meeting a portion of the cost of a particular asset; the fact that the amount was computed as a percentage of fixed capital cost is only the measure of quantification. That reasoning matters far beyond depreciation, because 'actual cost' governs the written down value and the allowances that flow from it. Practitioners should also read the Court's account of why the words in section 43(1) are there at all - the 1953 amendment to the 1922 Act, which reversed the House of Lords in Corporation of Birmingham v Barnes but only to a limited extent.
Binding on every court and authority in India.
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Two batches of matters were heard together. In the first, the Revenue challenged the opinions of several High Courts that subsidies granted to industries on a percentage of capital cost are not deductible from actual cost under section 43(1) for computing depreciation. The lead case was Civil Appeal No. 2474 of 1991, where P.J. Chemicals Ltd, for assessment year 1983-84, had received a central subsidy of Rs 9,97,085. The Income Tax Officer deducted it from actual cost, the Commissioner (Appeals) upheld that following a Board circular of 1976, and the Tribunal reversed, following the Andhra Pradesh High Court in Godavari Plywoods. The High Court answered the reference against the Revenue. In the second batch the assessees appealed against the contrary view: in Civil Appeal No. 3699 of 1990 Jank Steel Tubes Pvt Ltd had received a subsidy of Rs 7,58,000 for assessment year 1978-79, and the Punjab and Haryana High Court, following its decision in Jindal Brothers, held it must be deducted in working out the written down value. Twelve High Courts had taken the assessees' view and the Punjab and Haryana High Court the opposite one.
The Court affirmed the judgments of the High Courts which had answered the question against the Revenue and dismissed the first batch of appeals; it allowed the second batch filed by the assessees and, reversing the High Court's opinion, answered the question against the Revenue. There was no order as to costs. The reasoning it adopted was that of the majority of the High Courts: the expression 'actual cost' needs to be interpreted liberally, and a subsidy of this nature does not have the incidents that attract the condition for deduction from actual cost. Government subsidy is an incentive, not a payment for the specific purpose of meeting a portion of the cost of the assets, even though it is quantified as or geared to a percentage of that cost. It therefore does not partake of the character of a payment intended directly or indirectly to meet the actual cost, and is not to be deducted in computing depreciation.
Section 43(1) defines actual cost as the actual cost of the assets to the assessee reduced by that portion of the cost, if any, met directly or indirectly by any other person or authority. The Court accepted that if a portion of the cost is so met it must be deducted; the plain meaning of the section requires it. The real question, it said, is the character and nature of the subsidy: was it intended to subsidise the cost of the capital, or was it an incentive to encourage entrepreneurs to move to backward areas, the percentage of fixed capital cost being only a measure adopted under the scheme to quantify the aid? The Court set out the history of the words. In Corporation of Birmingham v Barnes the House of Lords had held that sums received from an outside source are not to be deducted from actual cost, and the 1953 amendment to the 1922 Act introduced an Explanation to nullify that interpretation - but the amendment as enacted permitted only a limited exclusion, of amounts met by Government or a public or local authority, and not the wider exclusion originally proposed. Against that background the Court weighed the two lines of High Court authority: Godavari Plywoods and Grace Paper Industries, which held that unless the subsidy has a direct or indirect nexus to meeting a portion of the cost of a specific capital asset it is outside section 43(1), against Jindal Brothers, which held there is a nexus between each item and the subsidy granted for it. Saying that it is not numerical strength but the tensile strength of the logic that prevails, the Court preferred the majority reasoning, particularly in the context of a taxing statute.
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.
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Handle my notice → Ask a CA on WhatsAppNo. The Supreme Court held that a government subsidy of this kind is an incentive to set up industry, not a payment intended to meet a portion of the cost of the assets, even though it is quantified as or geared to a percentage of that cost. It therefore does not go to reduce 'actual cost' under section 43(1), and depreciation is computed on the cost without deducting the subsidy. Resolving a sharp conflict among the High Courts, the Court preferred the majority view taken by twelve High Courts to that of the Punjab and Haryana High Court, dismissed the Revenue's appeals and allowed the assessees' appeals. This was decided by the Supreme Court (Supreme Court of India - M.N. Venkatachaliah CJ and S.C. Agrawal J; judgment delivered by Venkatachaliah CJ) and bears on section 43(1), section 32 of the Income Tax Act 1961. It is reported as (1994) 208 ITR 465; 1994 Supp (3) SCC 535; AIR 1994 SC 2727; (1994) 6 JT 330 (SC); 1994 AIR SCW 4352. This is the leading decision on subsidy and actual cost, and the test it lays down is one of purpose, not of arithmetic. The subsidy is outside section 43(1) unless it was given for the specific purpose of meeting a portion of the cost of a particular asset; the fact that the amount was computed as a percentage of fixed capital cost is only the measure of quantification. That reasoning matters far beyond depreciation, because 'actual cost' governs the written down value and the allowances that flow from it. Practitioners should also read the Court's account of why the words in section 43(1) are there at all - the 1953 amendment to the 1922 Act, which reversed the House of Lords in Corporation of Birmingham v Barnes but only to a limited extent. If it applies to you, the first step is this: Read the subsidy scheme and show what the money was given for; if it is not tied to meeting the cost of a specific asset it does not reduce actual cost.
Two batches of matters were heard together. In the first, the Revenue challenged the opinions of several High Courts that subsidies granted to industries on a percentage of capital cost are not deductible from actual cost under section 43(1) for computing depreciation. The lead case was Civil Appeal No. 2474 of 1991, where P.J. Chemicals Ltd, for assessment year 1983-84, had received a central subsidy of Rs 9,97,085. The Income Tax Officer deducted it from actual cost, the Commissioner (Appeals) upheld that following a Board circular of 1976, and the Tribunal reversed, following the Andhra Pradesh High Court in Godavari Plywoods. The High Court answered the reference against the Revenue. In the second batch the assessees appealed against the contrary view: in Civil Appeal No. 3699 of 1990 Jank Steel Tubes Pvt Ltd had received a subsidy of Rs 7,58,000 for assessment year 1978-79, and the Punjab and Haryana High Court, following its decision in Jindal Brothers, held it must be deducted in working out the written down value. Twelve High Courts had taken the assessees' view and the Punjab and Haryana High Court the opposite one. The matter was decided on 1994-09-14 by the Supreme Court (Supreme Court of India - M.N. Venkatachaliah CJ and S.C. Agrawal J; judgment delivered by Venkatachaliah CJ). On those facts the Supreme Court held as follows. The Court affirmed the judgments of the High Courts which had answered the question against the Revenue and dismissed the first batch of appeals; it allowed the second batch filed by the assessees and, reversing the High Court's opinion, answered the question against the Revenue. There was no order as to costs. The reasoning it adopted was that of the majority of the High Courts: the expression 'actual cost' needs to be interpreted liberally, and a subsidy of this nature does not have the incidents that attract the condition for deduction from actual cost. Government subsidy is an incentive, not a payment for the specific purpose of meeting a portion of the cost of the assets, even though it is quantified as or geared to a percentage of that cost. It therefore does not partake of the character of a payment intended directly or indirectly to meet the actual cost, and is not to be deducted in computing depreciation.
Section 43(1) defines actual cost as the actual cost of the assets to the assessee reduced by that portion of the cost, if any, met directly or indirectly by any other person or authority. The Court accepted that if a portion of the cost is so met it must be deducted; the plain meaning of the section requires it. The real question, it said, is the character and nature of the subsidy: was it intended to subsidise the cost of the capital, or was it an incentive to encourage entrepreneurs to move to backward areas, the percentage of fixed capital cost being only a measure adopted under the scheme to quantify the aid? The Court set out the history of the words. In Corporation of Birmingham v Barnes the House of Lords had held that sums received from an outside source are not to be deducted from actual cost, and the 1953 amendment to the 1922 Act introduced an Explanation to nullify that interpretation - but the amendment as enacted permitted only a limited exclusion, of amounts met by Government or a public or local authority, and not the wider exclusion originally proposed. Against that background the Court weighed the two lines of High Court authority: Godavari Plywoods and Grace Paper Industries, which held that unless the subsidy has a direct or indirect nexus to meeting a portion of the cost of a specific capital asset it is outside section 43(1), against Jindal Brothers, which held there is a nexus between each item and the subsidy granted for it. Saying that it is not numerical strength but the tensile strength of the logic that prevails, the Court preferred the majority reasoning, particularly in the context of a taxing statute. In the words reproduced by the source cited on this page: "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."
It was decided by the Supreme Court on 1994-09-14 and is reported as (1994) 208 ITR 465; 1994 Supp (3) SCC 535; AIR 1994 SC 2727; (1994) 6 JT 330 (SC); 1994 AIR SCW 4352. Binding on every court and authority in India. A Supreme Court decision binds every assessing officer, every Commissioner (Appeals), every bench of the Income Tax Appellate Tribunal and every High Court in India. An officer who declines to follow it is acting contrary to law, and that refusal is itself a ground of appeal. On section 43(1), section 32, the practical question is whether the facts of your own notice match the facts of this case closely enough for the same rule to apply.
It helps the taxpayer. The Court affirmed the judgments of the High Courts which had answered the question against the Revenue and dismissed the first batch of appeals; it allowed the second batch filed by the assessees and, reversing the High Court's opinion, answered the question against the Revenue. There was no order as to costs. The reasoning it adopted was that of the majority of the High Courts: the expression 'actual cost' needs to be interpreted liberally, and a subsidy of this nature does not have the incidents that attract the condition for deduction from actual cost. Government subsidy is an incentive, not a payment for the specific purpose of meeting a portion of the cost of the assets, even though it is quantified as or geared to a percentage of that cost. It therefore does not partake of the character of a payment intended directly or indirectly to meet the actual cost, and is not to be deducted in computing depreciation. It arises in Deductions & Disallowances matters, on section 43(1), section 32 of the Income Tax Act 1961, and was decided by Supreme Court of India - M.N. Venkatachaliah CJ and S.C. Agrawal J; judgment delivered by Venkatachaliah CJ. Before relying on it, read the source linked on this page and check whether it has since been distinguished, overruled or overtaken by an amendment to the Income Tax Act. In practice the steps that follow from it are these. Point out that quantification as a percentage of fixed capital cost is only a measure, not evidence that the subsidy met the cost of the assets. Where a scheme does earmark the subsidy against particular assets, expect the opposite result and plan the depreciation claim accordingly. Check whether any later statutory change alters the position for your year before relying on this case; the decision turns on the words of section 43(1) as they then stood.
Validity check could not be completed. Read the judgment in full; later legislative and judicial history not checked. The decision construes section 43(1) as it stood for the years in question and does not consider any subsequent amendment. No source could be cited for that finding. Checking whether an authority still stands matters as much as knowing what it held: a decision may be overruled on one point and survive on another, or the provision it interprets may have been amended since. Read the source and the editor's note on this page before relying on it in a reply to an Assessing Officer or in an appeal.
The judgment turns on subsidies of the kind before it, described as broadly similar across the batch, and does not set out the terms of each scheme; a scheme that earmarks the subsidy against specific assets was recognised as a different case. The Court did not decide the position where the subsidy is given by a person other than Government, nor address development rebate or investment allowance separately. This library shows the verification state of every entry openly. This entry has not yet been read in full by a chartered accountant. The summary reflects the sources listed on this page. Read the source before you rely on it in a reply to an Assessing Officer or in an appeal before the Commissioner (Appeals) or the Income Tax Appellate Tribunal.
The Court affirmed the judgments of the High Courts which had answered the question against the Revenue and dismissed the first batch of appeals; it allowed the second batch filed by the assessees and, reversing the High Court's opinion, answered the question against the Revenue. There was no order as to costs. The reasoning it adopted was that of the majority of the High Courts: the expression 'actual cost' needs to be interpreted liberally, and a subsidy of this nature does not have the incidents that attract the condition for deduction from actual cost. Government subsidy is an incentive, not a payment for the specific purpose of meeting a portion of the cost of the assets, even though it is quantified as or geared to a percentage of that cost. It therefore does not partake of the character of a payment intended directly or indirectly to meet the actual cost, and is not to be deducted in computing depreciation.
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