Commissioner of Income Tax vs General Industrial Society Ltd.

Ajit K. Sengupta, J.—In this reference u/s 256(2) of the income tax Act, 1961 (''the Act'') for the assessment year 1982-83 the following question of law has been referred to this Court:

Whether, on the facts and in the circumstances of the case, the Tribunal is justified in law in holding that it cannot be said that there was mistake apparent from records in not computing income u/s 41(1) of the income tax Act in respect of proportionate subsidy received during the period relevant to the assessment year 1982-83 against the cost of generator installed on 19-3-1980?

The facts briefly stated are that the assessee is a company. In this case, the ITO made rectification u/s 154 of the Act as, according to him, subsidy granted to the assessee by the Government to set up a generator was to be deducted while taking actual cost u/s 43 of the Act. As this was not done in the original assessment order, he rectified the order and allowed depreciation after deducting subsidy granted to the assessee.

On appeal, the Commissioner (Appeals) following the decision of the Tribunal, Hyderabad Bench, in the case of ITO v. S.V. Earths & Chemicals (P.) Ltd. [1986] 18 ITD 196 and his own order in the case of the assessee itself for the preceding assessment years, held that the subsidy could not be deducted while working out actual cost and assessment could not be rectified u/s 154.

The department being aggrieved came up in appeal before the Tribunal. Both the parties fairly conceded that an identical issue had come up before the Tribunal for consideration in the case of the assessee itself for the assessment year 1981-82 in IT Appeal No. 2149 (Cal.) of 1987 and the ''C'' Bench of the Tribunal, Calcutta vide its order dated 2-5-1989 held that similar mistake in not deducting subsidy was not a mistake apparent from the record and, therefore, the Commissioner (Appeals) was justified in cancelling rectification order passed by the ITO. The facts and the circumstances being identical, in line with the order dated 2-5-1989, the Tribunal upheld the action of the Commissioner (Appeals).

The order which was passed by the ITO on 16-1-1987 is, inter alia, to the following effect:

In this case the assessee-company has received capital subsidy of Rs. 3,57,000 on account of installation of Generator installed in 1980. The amount of subsidy was received in the previous year 1981 relevant to the assessment year 1982-83. It appears that the assessee-company installed 1 No. complete set of SKODA Generator with accessories (date of installation is 19-3-1980). The entire cost of acquisition amounting to Rs. 17,27,503.83 has been treated as revenue expenditure by Commissioner (A) -XII, in his order dated 26-11-1984.

As the entire amount of expenditure has already been treated as revenue expenditure, the proportionate amount of subsidy to the cost of acquisition should be chargeable as profit u/s 41(1).

The mistake being apparent from records, notice u/s 154 was issued on 17-4-1986. Sri B.D. Mundra, AIR appeared and stated that they did not utilise the amount of subsidy for installation of Generators. The submission of the AIR is not tenable inasmuch as the entire cost of the Generator was allowed as revenue expenditure in the assessment. Under the circumstances the proportionate subsidy in respect of the Generator as above became assessee''s income u/s 41(1). Moreover, due to allowance of depreciation, addl. depreciation and E.SA on the amount subsidy received on Generator in the assessment year 1981-82 there had also been excess allowance of depreciation and E.S.A. amounting to Rs. 27,010.

The ITO, accordingly, recomputed the income which was determined in terms of the order made u/s 154 dated 24-11-1986.

The Commissioner (Appeals) held as follows:

The appeal has been filed against the order passed u/s 154 of the IT Act by the ITO. In the grounds of appeal it has been contended that the subsidy received on Generator could not be charged as profit u/s 41 of the IT Act and secondly, the interest u/s 217 not charged by the ITO also could not be rectified u/s 154. Sri B.D. Mundra, Authorised Representative, has given written arguments supporting the above contentions. Copy of the decision of the ITAT Hyderabad Bench ''A'' in the case of ITO v. S.V. Earths & Chemicals (P.) Ltd. was also cited in their favour. I would like to refer to my decision in the appellant''s case in preceding year wherein the issue of the treatment of the subsidy has been discussed. In my opinion this was not an issue which could be rectified u/s 154 of the IT Act. On that ground alone the order of the ITO is hereby cancelled and the appeal stands allowed.

It may, however, be mentioned that interest was charged in the rectification order dated 24-11-1986 which is the subject matter of the IT Reference No. 4 of 1992. This Court by the judgment dated 8-2-1993 answered the said reference in favour of the assessee holding that no interest could be levied u/s 217.

The Tribunal held as follows:

After careful consideration I find that certain issues have been raised in the appellant case for this year as well as for the succeeding year, i.e., assessment year 1982-83, where divergent view has been advocated on the same point. The glaring example is regarding the nature of subsidy. On this basis of arguments before the CIT (Appeals) in his consolidated order dated 26-11-1984 not only the subsidy but the replacement of the entire machinery referred as SKODA Generator has been treated as revenue expenditure. Consequently, the subsidy was assessed by the ITO as income u/s 41 of the IT Act. On the other hand it has also been pleaded that the whole scheme of providing subsidy by the West Bengal Industrial Development Corporation amounting to about 15 per cent of the cost of SKODA Generator was for the purpose of better industrial development and if this is considered in proper perspective, it certainly amounts to reimbursement of the capital cost of SKODA Generator to the extent of 15 per cent.

From the orders as extracted from the records. It would be evident that the mistake sought to be rectified in this case cannot be held to be a mistake apparent from the record. Whether the subsidy received on generator could be taxed as profit u/s 41 of the Act or whether such subsidy should be deducted in computing the depreciation is a debatable issue which cannot be decided in a proceeding u/s 154. We are, therefore, of the view that the Tribunal came to a correct conclusion on the facts of this case. The question, in this reference, is therefore, answered in the affirmative and in favour of the assessee. There will be no order as to costs.

Chowdhury, J. -

I agree.