Calculation of depreciation on actual cost of assets vs depreciation on amount after reducing amount of subsidy received
- The Assessee was a limited company engaged in manufacturing, trading and exporting fabrics. The return of income for the A.Y.2013-14 was filed by the Assessee on 21.09.2013 declaring total income of Rs.17.99 crore. The Assessing Officer on the perusal of schedule-2 of the balance sheet under the head ‘reserves and surplus’ observed that Assessee had shown capital reserve of Rs.3506.82 lakhs which included capital subsidy of Rs.4.54 lakhs received during the year. The capital subsidy of Rs.4.54 lakhs was granted to the Assessee under TUF scheme which was measured as a percentage of investment made in plant and machinery made by the Assessee and the said subsidy was not directly or indirectly linked with any particular asset purchased by the Assessee.
- Hence, it was pleaded by the Assessee that the receipt of capital subsidy need not be credited to the value of plant and machinery in accordance with Explanation-10 to Section 43(1) of the Act which would have a consequential impact on the depreciation claimed by the assessee. Accordingly, the Assessee submitted before the Assessing Officer that it was justified in crediting the receipt of capital subsidy of Rs.4.54 lakhs directly under the head ‘capital reserve’ in reserves and surplus in the balance sheet. The Assessing Officer did not heed to this contention of the Assessee and proceeded to reduce the capital subsidy of Rs.4.54 lakhs from the value of plant and machinery and correspondingly, reduced the claim of regular depreciation and additional depreciation claimed thereon in the assessment.
- Reliance was placed on the decision of the Hon’ble Supreme Court in the case of CIT vs. P.J. Chemicals Ltd., wherein it was concluded that where government subsidy was an incentive not for the specific purpose of meeting a portion of the cost of the assets, though quantified as or geared to a percentage of such cost, it does not partake of the character of a payment intended either directly or indirectly to meet the ‘actual cost’.
- It was clear that the objective of TUFS scheme was not to meet a portion of cost of asset directly or indirectly, but to sustain and improve competitiveness and overall long term viability of textile industry. Hence, even though the amount of subsidy to be given might be determined by taking the cost of eligible investment as the basis, the incentive in the form of subsidy could not be considered as a payment directly or indirectly to meet any portion of the actual cost.
- Hence, it was inferred that the amount of subsidy was not required to be reduced from the actual cost of the assets for the calculation of depreciation.