Government incentive subsidy did not reduce actual cost under section 43(1), preserving depreciation and excluding Explanation 10.

Government subsidy or grant used as an incentive for acquisition of fixed assets does not reduce the 'actual cost' under section 43(1) where it is not paid directly or indirectly to meet the asset cost. Explanation 10 to section 43(1), introduced from 1 April 1999, does not apply to assessment year 1991-92. On that basis, the subsidy was not to be deducted from actual cost for depreciation purposes, and depreciation remained available to the assessee.

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Issues: Whether the subsidy/grant received from the Government of India for acquisition of fixed assets reduced the 'actual cost' of the assets under section 43(1) of the Income-tax Act, 1961 so as to deny depreciation, and whether Explanation 10 to section 43(1) applied to the assessment year 1991-92.

Analysis: The grant was treated by the assessee as a corpus contribution intended for acquisition of fixed assets and other purposes, and not as a payment directly or indirectly to meet the cost of the assets. The governing principle was that Government subsidy meant as an incentive, and quantified with reference to fixed capital cost only as a measure under the scheme, does not constitute a meeting of any portion of the 'actual cost'. Explanation 10 to section 43(1) was introduced only with effect from 1 April 1999 and was therefore inapplicable to the assessment year in question.

Conclusion: The subsidy was not deductible from the actual cost for depreciation purposes, Explanation 10 did not apply, and the assessee was entitled to depreciation.

Ratio Decidendi: Government subsidy intended as an incentive, and not as a payment to meet the cost of assets, does not reduce the 'actual cost' under section 43(1) of the Income-tax Act, 1961 for depreciation purposes.

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