Capital subsidy impact on asset 'actual cost' u/s 43(1) for depreciation; subsidy held excluded, non-deductible

Whether a capital subsidy reduces the "actual cost" under section 43(1) for depreciation and investment allowance: the Tribunal found the subsidy was not granted specifically to defray part of the plant and machinery cost, contrary to the Commissioner's finding. On that factual and legal basis the Tribunal correctly excluded the subsidy from the asset's actual cost for computing depreciation and investment allowance. HC affirms the Tribunal's conclusion, holding the subsidy non-deductible for section 43(1) purposes; reference answered against Revenue and parties to bear their own costs.

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Issues: Whether the capital subsidy of Rs. 1,28,616 received by the assessee is deductible from the actual cost of the asset as defined in section 43(1) of the Income-tax Act, 1961 for computing depreciation and investment allowance.

Analysis: The question requires examination of the purpose and scheme of the subsidy to determine whether it was granted specifically to meet a portion of the fixed capital cost of plant and machinery. The Tribunal found that the subsidy scheme quantified cash assistance as a percentage of fixed capital cost only as a measure of quantification and that the subsidy was not granted for the specific purpose of meeting any portion of the asset cost. The court considered and adopted the reasoning in CIT v. Godavari Plywoods Ltd., which held that where a subsidy is granted as recompense for hardships in setting up industry in backward areas and is quantified by reference to fixed capital cost, such quantification does not convert the subsidy into an amount specifically intended to meet a portion of fixed capital cost. Having regard to the Tribunal's factual finding that the subsidy was not for the specific purpose of paying for plant and machinery, the legal test under section 43(1) is not satisfied for reducing actual cost by the subsidy amount.

Conclusion: The capital subsidy of Rs. 1,28,616 is not deductible from the actual cost of the asset for the purposes of computing depreciation and investment allowance; the question is answered in the affirmative and against the Revenue (i.e., in favour of the assessee).

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