Initial depreciation and subsidy treatment clarified: accessories do not qualify, while general SIPCOT subsidy does not reduce actual cost.

Initial depreciation was denied because the assessee manufactured paper cones and paper tubes, which were treated as accessories or parts of textile machinery, and the benefit was confined to cases where the assessee manufactured machinery itself. Subsidy received from SIPCOT was not deducted from the actual cost of assets under section 43(1) because it was not intended to meet the cost of any specific asset, so it did not reduce depreciation base. The reference was thus answered partly for each side, with the assessee failing on initial depreciation but succeeding on the subsidy issue.

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Issues: (i) Whether the assessee was entitled to initial depreciation in respect of machinery installed during the year; (ii) whether subsidy received from SIPCOT was to be excluded from the actual cost of assets while computing depreciation under section 43(1).

Issue (i): Whether the assessee was entitled to initial depreciation in respect of machinery installed during the year.

Analysis: The assessee manufactured paper cones and paper tubes, which were treated as accessories of textile machinery under the relevant schedule. The governing principle applied was that initial depreciation was available only where the assessee was manufacturing machinery and not merely accessories or parts of machinery.

Conclusion: The assessee was not entitled to initial depreciation. The issue was answered in favour of the Department and against the assessee.

Issue (ii): Whether subsidy received from SIPCOT was to be excluded from the actual cost of assets while computing depreciation under section 43(1).

Analysis: The controlling rule applied was that subsidy which is not intended to meet the cost of a specific asset is not deductible from the actual cost for depreciation purposes. The issue was governed by the settled principle that such subsidy does not reduce actual cost under section 43(1).

Conclusion: The subsidy was not required to be deducted from the actual cost. The issue was answered in favour of the assessee and against the Department.

Final Conclusion: The reference was answered partly in favour of each side: the assessee failed on initial depreciation, but succeeded on the treatment of SIPCOT subsidy for depreciation computation.

Ratio Decidendi: Initial depreciation is not available where the assessee manufactures only accessories or parts of machinery, and subsidy not specifically intended to meet the cost of the asset does not form a deduction from actual cost for depreciation purposes.

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