Subsidy for backward-area development not deducted from asset cost under income-tax law, preserving depreciation and investment allowance.

Central Government subsidy received to encourage entrepreneurs in backward areas was not treated as a reduction from the actual cost of plant, machinery and building under section 43(1) of the Income-tax Act. Applying the earlier principle that such subsidy is not part of the asset cost, the amount could not be deducted from original cost for computing depreciation or investment allowance. The issue was answered against the Revenue and in favour of the assessee.

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Issues: Whether Central Government subsidy received by the assessee was deductible from the cost of plant, machinery and building while computing the original cost under section 43(1) of the Income-tax Act, 1961 for the purpose of depreciation and investment allowance.

Analysis: The question was concluded by the earlier decision holding that a subsidy granted to encourage entrepreneurs to develop backward areas is not a reduction from the cost of the assets acquired by the assessee. On that principle, the subsidy could not be deducted from the actual cost of the assets for denying depreciation or investment allowance.

Conclusion: The subsidy was not deductible from the cost of the assets and the question was answered against the Revenue and in favour of the assessee.

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