Capital subsidy does not reduce fixed asset cost for depreciation calculation.

The High Court of Madhya Pradesh held that the capital subsidy received by the assessee should not reduce the cost of fixed assets for depreciation calculation under section 43(1) of the Income-tax Act, 1961. This decision favored the assessee, a private limited company engaged in oil extraction, in a dispute arising from subsidy received from the M.P. Financial Corporation. The Court's ruling aligned with a previous decision and rejected the Revenue's argument, directing each party to bear their own costs.

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Issues involved: Interpretation of section 43(1) of the Income-tax Act, 1961 regarding the treatment of capital subsidy received by the assessee from the Government in reducing the cost of fixed assets for the purpose of allowing depreciation.

Summary:
The High Court of Madhya Pradesh, in response to a reference under section 256(1) of the Income-tax Act, 1961, addressed the question of whether the capital subsidy received by the assessee should reduce the cost of assets for depreciation calculation. The assessee, a private limited company engaged in oil extraction, received capital subsidy from the M.P. Financial Corporation under a government scheme aimed at industrialization and employment generation. The Inspecting Assistant Commissioner initially reduced the cost of fixed assets by the subsidy amount for depreciation calculation, which was upheld by the Commissioner of Income-tax (Appeals) but challenged by the assessee before the Tribunal.

The Tribunal ruled that the subsidy amount should not reduce the cost of fixed assets for depreciation purposes, leading to the Revenue seeking a reference to the High Court. During the hearing, it was acknowledged that a previous decision of the court in CIT v. Bhandari Capacitors Pvt. Ltd. was relevant to the current case. Following the precedent set in the mentioned case, the High Court affirmed the Tribunal's decision, stating that the capital subsidy was not deductible in computing the actual cost of the asset as defined by section 43(1) of the Act for depreciation calculation.

Therefore, the High Court's answer to the question referred by the Tribunal was in favor of the assessee and against the Revenue. The parties were directed to bear their own costs in relation to this reference.

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