Capital subsidy and actual cost under income tax law: subsidy for backward area development did not reduce asset cost.

Capital subsidy under a scheme to promote industrial units in backward areas was not intended to meet the actual cost of specific assets, so it did not reduce actual cost under section 43(1) of the Income-tax Act. The Court treated the subsidy's computation by reference to a percentage of fixed capital cost as only a method of quantification, not proof of a direct or indirect nexus with acquisition cost. Additional material did not alter that construction of the scheme, and the assessee's position was upheld.

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Issues: Whether capital subsidy granted under the Central Subsidy Scheme was intended to meet the actual cost of the assessee's assets within the meaning of section 43(1) of the Income-tax Act, 1961, and whether there was any direct or indirect nexus between the subsidy and the cost of acquisition of the capital assets.

Analysis: The Court followed the earlier view that the subsidy scheme was designed to encourage industrial units to locate in backward areas and that the subsidy was not granted for the specific purpose of meeting any part of the cost of the assets. The fact that the subsidy was quantified by reference to a percentage of fixed capital cost was treated only as a method of computation and not as evidence that the subsidy was meant to offset actual cost. The additional material relied upon did not displace that interpretation of the scheme.

Conclusion: The subsidy could not be deducted from the actual cost of the assets under section 43(1), and the reference raised by the Revenue did not call for any answer in its favour.

Final Conclusion: The Court declined to refer the suggested questions and upheld the assessee's position that the capital subsidy did not reduce the actual cost of the assets.

Ratio Decidendi: A subsidy granted to promote industrial development in backward areas, when not intended as a contribution towards the cost of specific assets, does not form part of the actual cost adjustment under section 43(1) merely because it is quantified with reference to capital cost.

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