Government subsidy and actual cost: subsidy not to be deducted from asset cost for depreciation

A government subsidy is not deductible from the cost of an assessee's assets under section 43(1) unless it is granted with the intention of meeting, directly or indirectly, that asset cost. Applying an earlier Division Bench view, the Rajasthan High Court noted that where the subsidy is not intended to defray the cost of the assets, it does not reduce actual cost for depreciation purposes. The stated conclusion was that the subsidy here was not so intended and therefore remained outside the asset cost base for depreciation.

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Issues: Whether subsidy granted by the Central Government was liable to be deducted from the cost of the assessee's assets under section 43(1) of the Income-tax Act, 1961, for the purpose of depreciation.

Analysis: The question turned on whether the subsidy was granted with the intention of meeting, directly or indirectly, the cost of the assessee's assets. The issue was considered in the light of the earlier Division Bench decision holding that a government subsidy of this nature was not deductible from the cost of assets.

Conclusion: The subsidy was not granted with the intention to meet the cost of the assessee's assets directly or indirectly and was not deductible from the cost of assets for depreciation purposes. The answer is in favour of the assessee and against the Revenue.

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