What is actual cost and how it is computed for tax deduction ?

Section 43(1) provides that ‘actual cost’ means the actual cost of the asset to the assessee as reduced by that portion of the cost, as has been met directly or indirectly by any other person or authority. Thus where tenements have been constructed under the subsidized industrial housing scheme whereby 25 per cent of the admissible cost of con­struction has been received from Government as subsidy, the original cost of construction would be reduced by the subsidy amount for purposes of calculating depreciation.

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  • Circular No. 190, dated 1st March, 1976 clarifies that the amount of subsidy received under “10 per cent Central Outright Grant of Subsidy Scheme, 1971” for industrial units to be set up in certain selected backward districts/areas is to be deducted from the cost of the assets for purposes of allowing development rebate and depreciation on such assets.
  • However it was held in CIT v Godavary Plywoods Ltd, (1986) 168 ITR 632 (AP) that the subsidy, either under the Central Subsidy Scheme or any State incentive’ scheme, is granted more as recompense for the hardships and inconveniences which the entrepreneur may encounter while setting up industries in backward areas. There is no provision in either of the schemes to show that the subsidy is granted for the specific purpose of meeting a portion of the cost of the assets. The subsidy, therefore, cannot be deducted from the actual cost of the assets to the assessee for the purpose of allowing depreciation.
  • Similarly it was held in CIT v Premier Extraction [1989] 175 ITR 22 that the amount of capital subsidy received by the assessee from the Government to industrialize backward areas and provide employment will not go to reduce the cost of the assets and the subsidy cannot be deducted in computing the actual cost for purposes of calculating depreciation.
  • It is not the cost of the asset alone that is included in the term ‘actual cost’ but ex­penses incurred in obtaining and installing etc. of the plant and machinery etc. are also included therein.
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