Commissioner of Income Tax vs Assam Caffeine Pvt. Ltd.

A.K. Patnaik, J.—This is a reference u/s 256(1) of the Income Tax Act, 1961, at the instance of the Commissioner of Income Tax, Shillong, by the Income Tax Appellate Tribunal, Gauhati Bench, on two questions of law which have arisen out of the consolidated order of the Tribunal in I.T.A. Nos. 548 and 349 (Gau) of 1984.

The brief facts of the case, as stated in the statement of the case drawn up by the Appellate Tribunal, are that the assessee is a limited company deriving income from manufacture and sale of caffeine. For setting up the plant for manufacture of caffeine, the assessee received a certain amount of subsidy under the Central Investment Subsidy Scheme and one of the conditions of the said scheme was that in case the assessee closed down the business within five years, the said subsidy received by the assessee will have to be refunded. In the course of assessment years 1981-82 and 1982-83, the Assessing Officer deducted the said subsidy from the coat of plant and machinery for the purpose of determining the actual cost u/s 43(1) of the Income Tax Act, 1961 (for short "the Act"), and allowed depreciation only on the cost of plant and machinery less the subsidy. Aggrieved, the assessee carried an appeal before the Commissioner of Income Tax (Appeals) who accepted the claim of the assessee and directed the Assessing Officer to allow depreciation on the full cost of plant and machinery without deducting the subsidy received by the assessee. Before the Commissioner of Income Tax (Appeals) it was also claimed by the assessee that the said subsidy cannot be deducted while determining the capital employed u/s 80J of the Act and the Commissioner of Income Tax (Appeals) accepted the said contention of the assessee. It was further contended before the Commissioner of Income Tax (Appeals) that the assessee had incurred some pre-operative expenses the value of which has to be added in the assets and included in the capital employed by the assessee for the purpose of determining the relief u/s 80J of the Act and the said contention was also accepted by the Commissioner of Income Tax (Appeals).

Against the order of the Commissioner of Income Tax (Appeals), the Department preferred an appeal before the Income Tax Appellate Tribunal, Gauhati Bench, and the Appellate Tribunal by a common order in I.T.A. Nos. 348 and 349 (Gau) of 1984 for the assessment years 1981-82 and 1982-83 dismissed the appeal of the Department and upheld the order of the Commissioner of Income Tax (Appeals) on both the points (i) that the subsidy received by the assessee was not to be deducted from the cost of plant and machinery while determining the actual cost for the purpose of allowance of depreciation u/s 43 of the Act, and (ii) pre-operative expenses and subsidy were to be included in the capital employed by the assessee for the purpose of determining the relief u/s 80J of the Act. Thereafter, at the instance of the Revenue, the Income Tax Appellate Tribunal, Gauhati Bench, has referred the following two questions of law arising out of the aforesaid common order of the Tribunal in the appeal :

" (1) Whether, on the facts and in the circumstances of the case the Tribunal was justified in deciding that the Government subsidy received by the assessee was not deductible from the cost of the assets on which depreciation is allowable, as provided in Section 43(1) of the Income Tax Act, 1961 ?

(2) Whether, on the facts and in the circumstances of the case, the Tribunal was justified in deciding that preliminary expenses and the Government subsidy granted to the assessee were includible in the computation of the capital employed for the purpose of relief u/s 80J of the Income Tax. Act, 1961 ? "

So far as the first question is concerned, this court has already held that subsidy received by the assessee was not to be deducted from the cost of the assets on which depreciation was allowable u/s 43 of the Act in the case of Commissioner of Income Tax Vs. Meghalaya Plywood Ltd., Accordingly, we answer the first question referred to us in the affirmative.

The second question has two parts, one relates to preliminary expenses and the other relates to subsidy and the question referred to us is as to whether these two items are to be included in the computation of the capital employed for the purpose of relief u/s 80J of the Income- tax Act 1961.

Sub-section (1A) of Section 80J of the Act provides the manner in which the capital employed in an industrial undertaking is to be computed for the purpose of relief to be granted under Sub-section (1) of Section 80J of the Act. Clause (II) of the said Sub-section (1A) states that the aggregate of the amounts representing the value of the assets of the undertaking shall first be ascertained in the manner indicated therein, and one of the assets stated in the said Clause (II) is an asset which is acquired otherwise than by purchase and not entitled to depreciation. It is now a settled principle of accountancy that preliminary or project expenses incurred by an assessee before starting a business can be capitalised and treated as an asset of the assessee and we have no doubt in mind that the value of such preliminary or project expenses would fall into the said category of assets acquired by an assessee otherwise than by purchase and not entitled to depreciation and would thus have to be included in the aggregate of the value of the assets as per the aforesaid Clause (II) of Sub-section (1A) of Section 80J of the Act as part of the capital employed on which relief under Sub-section (1) of Section 80J is to be allowed.

Regarding the subsidy received by the assessee from the Government, Clause (III) of Sub-section (1A) of Section 80J of the Act provides that from the aggregate of the amounts representing the value of the assets as ascertained under Clause (II) of the said Sub-section (1A), the aggregate of the amounts of "borrowed moneys and debts owed by the assessee" would be deducted for the purpose of computing the capital employed in an industrial undertaking. In the present case, a condition of the Central Investment Subsidy Scheme was that the subsidy would be refunded in case the assessee closes down its business within five years. Hence, the liability of the assessee to refund the subsidy would arise only if the assessee closes down the business within five years but so long as the assessee docs not close down the business, there is no liability on the assessee to refund the subsidy. Since as a matter of fact the assessee has not closed down its business, there was no liability on the assessee as yet to refund the subsidy to the Government and hence the subsidy amount cannot be held to be "borrowed money" or a "debt owed by the assessee". We are, therefore, of the opinion that so long as the assessee continues his business and is not liable to refund the subsidy received from the Government under the Central Investment Subsidy Scheme as has happened in the present case, the subsidy amount cannot be deducted from the assets of the assessee while computing the capital employed in the industrial undertaking of the assessee under Sub-section (1A) of Section 80J of the Act for the purpose of relief to be granted on the capital employed under Sub-section (1) of Section 80J.

In the result, our answer to the second question referred to us above is also in the affirmative and we hold that the Tribunal was justified in deciding that preliminary expenses and Government subsidy granted to the, assessee were includible in the computation of the capital amount for the purpose of relief u/s 80J of the Income Tax Act, 1961.

In the result both the questions referred to us are, answered in favour of the assessee and against the Revenue.

There shall be no order as to costs.