Capital receipt treatment and depreciation cost basis for Government contributions toward supply line expansion

Contributions received from Government to meet the cost of extending supply lines were held to be capital receipts because they were non-recurring, applied to capital expenditure, and did not form part of ordinary trading receipts or profits. Their character depended on purpose and substance, not accounting treatment, so they were not assessable as trading income. For depreciation, the entire expenditure on the new supply lines constituted the assessee's actual cost, even though part of the outlay was met by Government, and the contributions were not excluded from the cost base. The ratio is that a contribution toward capital outlay is capital in nature, while actual cost for depreciation is the full construction cost.

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Issues: (i) Whether contributions received from Government towards the cost of extending supply lines were trading receipts assessable to tax; (ii) whether, if such contributions were capital receipts, they were to be deducted in computing the actual cost of the assets for depreciation purposes.

Issue (i): Whether contributions received from Government towards the cost of extending supply lines were trading receipts assessable to tax.

Analysis: The contributions were made only to enable the company to incur capital expenditure for new supply lines which it would not otherwise have undertaken. They were non-recurring, were applied towards the creation of a capital asset, and did not represent part of the company's ordinary trading receipts or profits. The true nature of the receipt was determined by its purpose and character, not by the manner in which it was entered in the accounts.

Conclusion: The contributions were capital receipts and were not assessable as trading receipts.

Issue (ii): Whether, if such contributions were capital receipts, they were to be deducted in computing the actual cost of the assets for depreciation purposes.

Analysis: For depreciation, the expression actual cost to the assessee refers to the total cost of the asset, not merely the amount borne from the assessee's own resources. The fact that part of the capital outlay was met by Government did not alter the actual cost of the new supply lines to the company.

Conclusion: The contributions did form part of the actual cost to the assessee and were not to be excluded in computing depreciation.

Final Conclusion: The reference was answered by holding that the receipts were capital in nature, but that the entire expenditure incurred on the new supply lines constituted the actual cost for depreciation.

Ratio Decidendi: A non-recurring contribution made to meet capital expenditure for acquiring or extending a capital asset is a capital receipt, and for depreciation the actual cost of the asset is the full cost of construction irrespective of the source from which that cost was met.

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