Industrial development subsidy treated as capital receipt and not reduced from asset cost for depreciation

A subsidy granted for setting up industrial units and accelerating industrial development was held to be capital in nature because its character depended on the object of the scheme, not its form. As the subsidy was not a trading receipt, it was not taxable as revenue income. The subsidy also did not attract Explanation 10 to section 43(1), since that provision applies only where government assistance meets the cost of a specific asset directly or indirectly. On the facts stated, the subsidy was not required to be reduced from the actual cost of assets for depreciation purposes, and the assessee succeeded on both issues.

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Issues: (i) Whether the subsidy received by the assessee from the State Governments was capital in nature and not revenue receipt; (ii) Whether such subsidy was required to be reduced from the cost of the assets under Explanation 10 to section 43(1) for the purpose of depreciation.

Issue (i): Whether the subsidy received by the assessee from the State Governments was capital in nature and not revenue receipt.

Analysis: The subsidy was granted for setting up industrial units and for accelerating industrial development in the concerned States. Applying the purpose test, the character of the subsidy depended on the object of the scheme and not on its form. Since the object was industrial development and not payment towards trading receipts, the subsidy could not be treated as revenue in nature.

Conclusion: The subsidy was capital in nature and the finding was in favour of the assessee.

Issue (ii): Whether such subsidy was required to be reduced from the cost of the assets under Explanation 10 to section 43(1) for the purpose of depreciation.

Analysis: Explanation 10 applies only where a portion of the cost of an asset has been met directly or indirectly by the Government or other specified authority by way of subsidy, grant, or reimbursement. A subsidy granted for industrial development, and not for meeting the cost of a specific asset, does not fall within that provision. The subsequent amendments to the definition of income and the provision deeming receipt-based taxation were also noted, but they were not applicable to the year under consideration. Therefore, the subsidy could not be excluded from the actual cost of the assets under Explanation 10.

Conclusion: The subsidy was not required to be reduced from the cost of the assets for depreciation purposes, and the finding was in favour of the assessee.

Final Conclusion: The assessee succeeded on both substantive issues, and the Revenue's challenge failed. The subsidy remained a capital receipt and was not to be adjusted against the actual cost of the assets for the year in question.

Ratio Decidendi: A subsidy granted for industrial development, rather than to meet the cost of an asset, is a capital receipt and does not attract Explanation 10 to section 43(1) for reduction of actual cost.

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