ORDER
R. Rangayya, Accountant Member
1. These are appeals by the assessee against the orders of the Commissioner of Income-tax passed under Section 263 of the IT Act, 1961 for the asst. years 1981-82 and 1982-83. The assessee, the Tamilnadu Electricity Board during the asst. years under consideration was in the process of erection of Tuticorin Thermal Power Project (hereinafter referred to as the ‘project’). For execution of the above project, the Government of Tamilnadu from time to time granted substantial funds either by way of loans or by way of grants. For purpose of claiming depreciation in various assets, the assessee did not deduct the value of the grants received by it from the State Government from the cost of the various assets. The ITO while making the assessments for these years also did not notice this feature and allowed depreciation at the cost of various assets without reducing it by the capital grant received from the Government. The Commissioner on perusing the records of the assessee, came to the conclusion that the capital grant of Rs. 22.50 crores and Rs. 97.25 crores respectively for the asst. years 1981-82 and 1982-83 received by the assessee from the Government should have been reduced from the cost of the assets in order to arrive at the cost to the asseseee on which depreciation is to be allowed. After hearing the assessee, the Commissioner directed the ITO to recompute the depreciation and investment allowance allowable to the assessee, after taking into account the capital subsidy of Rs. 22.50 crores and Rs. 97.25 crores, it is against these orders of the Commissioner, that the present appeals are directed.
2. It is contended by Shri Suresh Rao, the learned representative for the assessee, that the Commissioner is not correct in directing the ITO to reduce from the cost of the various assets the amount of capital grant received by the assessee amounting to Rs. 22.50 crores (1981-82) and Rs. 97.25 crores (1982-83). It is contended that the capital grant was not received for purpose of acquiring any-particular asset but to enable the assessee to execute the project. Since the grants were not for purpose of acquiring any particular asset, it is contended that the Commissioner was not correct in holding that the grant should be reduced from the cost of the assets in order to find out the actual cost on which depreciation and investment allowance are allowable.
3. Shri Suresh Rao has also produced before us various Government Orders (G.O. Nos. 1016 dt. 29-5-80, 1128 dt. 15-6-80, 1235 dt. 8-7-80, 1314 dt. 24-7-80, 1474 dt. 3-9-80, 1692 dt. 13-10-80, 1752 dt. 15-10-80 and 1805 dt. 18-11-80 sanctioning the grant of Rs. 22.50 crores for the asst. year 1981-82 and G.O. Nos. 687 dt. 12-5-81, 760 dt. 27-5-81, 894 dt. 16-6-1981, 998 dt. 1-7-81, 1063 dt. 8-7-81, 1096 dt. 13-7-81, 1212 dt. 28-7-81 and 1354 dt. 13-8-81 for the asst. years 1982-83) issued by the PWD on different dates sanctioning the aforesaid sums of Rs. 22.50 crores and Rs. 20.00 crores as grants for the above project. Shri Rao contends that the grants have been given for the execution of the project and it was for financing the project as a whole and not for acquisition of any particular asset. In the circumstances, it is contended that the grants should not be reduced from the actual cost of the assets in order to find out the amount on which depreciation is allowable. Reliance in this connection was sought to be placed on the decision of the Andhra Pradesh High Court in the case of CIT v. Godawari Plywoods Ltd. [1987] 168 ITR 632.
4. The departmental representative, on the other hand, relies on the orders of the Commissioner. He points out that the various G.Os. issued by the Government of Tamilnadu show that the above grants were given to the assessee to meet the capital expenditure on the aforesaid project. The assessee in fact had incurred capital expenditure during these years by way of acquisition of various assets and so, the amounts received from the Government should be reduced from the cost of such assets in order to find out the actual cost on which depreciation is allowable. He refers to us the definition of the words “actual cost” in Section 43(1) of the Act, according to which actual cost of an asset to the assessee 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. In this case, the State Government had met part of the cost of the assets and the assessee had acquired the assets from out of the capital grants from the Government. ‘In the circumstances, the assessee will be entitled to depreciation only on the actual cost which is arrived at after deducting the capital grants received from the Government from the cost of the assets of the assessee.
5. We have heard the rival submissions. In our opinion, the Commissioner is correct in coming to the conclusion that the grants received from the Tamilnadu Government by the assessee for incurring the capital expenditure in the execution of the project should be reduced from the cost of the assets to the assessee in order to find out their actual cost on which depreciation could be allowed. There is no dispute that the assessee will be entitled to depreciation on the actual cost of the various assets. The words “actual cost” are denned in Section 43(1) of the Act as meaning 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. The assessee has during these years executed the above project which is one of the plant schemes of the Government of Tamilnadu. For execution of this project and for incurring capital expenditure on the project, the assessee obtained certain amounts by way of loans from the Government or by way of capital grants, in addition to the resources generated internally. The amounts of Rs. 22.50 crores and Rs. 20.00 crores were given by the State Government during these years under various G.Os bearing different dates mentioned above, clearly specifying that the sums granted under each of the G.O. as a grant given to the assessee to meet the capital expenditure of the above project. This is in addition to the loans which were given from time to time by the Government for execution of the said project. Thus there could be no dispute that the amounts of Rs. 22.50 crores and Rs. 20.00 crores were given by the Government of Tamilnadu to meet the capital expenditure incurred by the assessee on the said project. The capital expenditure incurred by the assessee in execution of the project includes purchase of machinery, erection cost of buildings and plant, etc. It is specifically for the purpose of incurring these various capital expenditures that the grants were given by the State Government. When the grants were specifically given by the Government to meet a portion of the cost of the creation of capital assets, we are of the opinion that such grants should be reduced from the cost of assets to the assessee, in order to find out the actual cost of the assets to the assessee on which depreciation and investment allowance could be given. The very purpose of the provisions of Section 43(1) is to see that the assessee will begetting depreciation only on that portion of the cost as is actually incurred by it and it will not be entitled to depreciation on the portion of the cost, which is met by some other person. The argument of Shri Rao, the learned representative for the assessee, is that the grant is not given specifically to meet the cost of any particular asset but it is given to meet the capital expenditure of the project as a whole. As it is not possible to distribute it over different assets, his contention is that such a grant should not be reduced from the cost of the assets to the assessee. We do not agree. If for instance the entire cost of the capital asset of the project is met by the Government, certainly the assessee will not be entitled to any depreciation on any of the assets inasmuch as it had not incurred any expenditure for acquiring the capital assets. Simply because a portion of the cost had been met by the Government in a lump sum, not by way of specific amount given for each separate asset, it cannot be said that the amount of grant given is not for meeting the cost of the capital assets. In fact, the wordings of various G.Os clearly show that the grants were given by the State Government to specifically meet the capital expenditure on the project. There is no dispute that the sums of Rs. 22.50 crores and Rs. 20.00 crores have been used by the assessee for acquiring the various capital assets of the project. In the light of the above, we are of the opinion that the amounts of grant received by the assessee from the State Government require to be reduced from the cost of the assets to the assessee, in order to find out their actual cost on which depreciation can be allowed.
6. The fact that there could be some difficulty in distributing the amount of grants on various items of capital assets, does not take away the effect of Section 43(1). For that reason the assessee cannot be allowed depreciation on expenditure which has not been incurred by it. We are of the opinion that the difficulty of apportionment of grants received from the Government towards the cost of different assets, some of which entitled to higher and some lower depreciation, cannot be the basis for rejecting the claims either of Revenue or the assessee. In the case of CIT v. Best & Co. (P.) Ltd. [1966] 60 ITR 11, the Supreme Court held that the difficulty in apportionment cannot be a good ground for rejecting the claims either of the Revenue or of the assessee. In that case a composite amount was received by the assessee which was held to be partly of Revenue and partly of capital nature. While upholding that a part of the amount is of revenue nature, the Court held that there is no principle which prevented its apportionment between the two heads on a reasonable basis. The Calcutta High Court in CIT v. Dunlop Rubber Co. (I) Ltd. [1977] 107 ITR 182 held that the fact that the assessee maintained a composite account for new and old industrial undertakings cannot be the basis for rejecting the assessee’s claim for deduction Under Section 80J. It is also not uncommon that during the period of construction and erection of a factory before the actual production starts, substantial expenditure is incurred by way of interest on capital borrowed and on account of various charges for erection, for staff and erection engineers. All these expenses are capitalised and in fact the Supreme Court had approved capitalisation of such expenditure in the case of Challapalli Sugars Ltd. v. CIT [1975] 98 ITR 167. In such cases, questions do arise as to how these common expenses are to be allocated to different items of assets. A fair and reasonable apportionment consistent with principles of commercial accounting has to be evolved for distribution of such expenditure. Similarly, if a lump sum amount is received, as in this case for acquisition of various assets, in our opinion it will not be correct to refuse to give effect to the express provisions of the statute on the ground that the amount received is in lump sum. As held by the Courts a fair and reasonable apportionment consistent with principles of commercial accounting has to be made, to distribute the amount over different assets like land, building and different items of plant and machinery acquired during the year.
7. Reliance sought to be placed in the case of Godavari Plywoods Ltd. (supra), in our opinion, is misplaced. That was a case where a subsidy was given by the Central Government under Central Subsidy Scheme to various entrepreneurs specifically for the purpose of meeting a portion of the cost of the assets. The Court in that case held that the financial incentives granted by the Central Government as well as the State Government are basically directed to encourage and induce the entrepreneurs to move to backward areas and establish industries there so that the region may develop in promoting the welfare of the people, living in that region. It was held that the basis adopted for determining cash subsidy with reference to the fixed capital cost is only a measure (of quantification) adopted and cannot be considered for the specific purpose of meeting any portion of the fixed capital cost. The Court further held that the subsidy is granted more as a recompense for the hardships and inconveniences which the entrepreneur may encounter while setting up industries in backward areas, and that the subsidy granted to the entrepreneurs cannot be reduced from the actual cost of the assets to the assessee on which depreciation could be allowed.
8. The facts in the present case are entirely different, in that the grants were specifically given by the State Government to meet the capital cost incurred by the assessee in execution of the project. When the grants were specifically given to meet the capital cost incurred by the assessee, in our opinion the provisions of Section 43(1) would come into play and the actual cost, on which depreciation is to be allowed, has to be worked out after reducing the grants received by the assessee during these years from the cost of the various assets. In view of what is stated above, we are of the opinion that the Commissioner was perfectly justified in directing the ITG to reduce the capital grants of Rs. 22.50 crores and Rs. 20.00 crores received by the assessee for the assessment years 1981-82 and 1982-83 respectively, from the cost of the various assets to the assessee, on which depreciation and investment allowance are allowable.
9. For the assessment year 1981-82 the actual amount of capital grant received by the assessee is Rs. 22.50 crores and not Rs. 22.52 crores as mentioned by the Commissioner. Similarly, the grant received for the year 1982-88 seems to be Rs. 20 crores and not Rs. 97.25 crores as mentioned by the Commissioner. Possibly the Commissioner had taken the loans received also as part of the grant. We direct the ITO to verify the correct amount of capital grants received by the assessee and reduce those amounts only from the cost of the assets for the above purpose. We also clarify that loans received by the assessee should not be reduced from the cost of the assets for allowing the depreciation and investment allowance.
10. In the result, the appeals are dismissed.