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Answer: While no income-tax is payable on the quantum of subsidy, depreciation would be allowable on the actual cost of assets after claiming deduction for the amount of subsidy received. In C.I.T. v Himachal Engineering Company P. Ltd. and C.I.T. v H.P. Agro Industries Corporation Limited, the High Court decided that the subsidy received by the assessee could not go to reduce the actual cost, following the decision in C.I.T. v P.J. Chemicals Limited. Both the decisions of the High Court have not indicated the assessment year involved, so that the impact of Explanation 10 along with its proviso to Section 43(1) inserted by the Finance (No. 2) Act, 1998 with effect from the assessment year 1999-2000 do not find a place in the two judgments.

The explanation stipulates that a subsidy or grant or reimbursement by whatever name called will go to reduce the actual cost to the extent to which the cost is met directly or indirectly by the subsidy. The proviso enables pro rata allocation, where the subsidy does not directly relate to any particular asset. Hence, a factual finding is necessary for taking a decision one way or the other, if the subsidy relates to the assessment year 1999-2000 or a later year.

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