Actual cost for depreciation cannot be reduced by incentive subsidy; rectification notices based on that view fail.

Central subsidy received under an incentive scheme was treated as governed by the scheme terms and the Income-tax Act, and the settled principle applied to similar subsidies was that such receipt did not reduce the actual cost of assets for depreciation purposes. As the proposed rectification notices were founded on that incorrect reduction of actual cost, they could not be sustained and were held invalid.

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Issues: Whether central subsidy received under the incentive scheme was required to be reduced from the actual cost of assets while computing depreciation, and whether the proposed rectification notices based on such reduction were sustainable.

Analysis: The subsidy was held to be governed by the terms of the incentive scheme and the relevant provisions of the Income-tax Act. On the settled principle earlier applied to similar subsidy schemes, the actual cost of the assets could not be reduced by the amount of subsidy received for the purpose of depreciation. In consequence, the proposed rectification proceeded on a premise and could not be sustained.

Conclusion: The notices proposing rectification were invalid, and the petitioners succeeded.

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