I received a government grant towards building a cold chain facility. Must I reduce it from the cost of the assets before claiming depreciation?
Yes, where the grant was given towards the cost of specified assets. The Chandigarh Bench held that actual cost under s.43(1) is the cost to the assessee reduced by so much of it as has been met directly or indirectly by any other person or authority, and upheld the reduction of a Rs. 2.5 crore grant-in-aid from the Ministry of Food Processing Industries from the cost of the assets on which depreciation was claimed. The appeal was dismissed.
Decided by the ITAT (Shri Vikram Singh Yadav, Accountant Member and Shri Paresh M. Joshi, Judicial Member) on 2024-07-31, reported as ITA No. 1076/Chd/2018 (ITAT Chandigarh 'B' Bench); assessment year 2014-15. It bears on section 43(1), section 32 of the Income Tax Act 1961, in Deductions & Disallowances and Assessment & Scrutiny matters.
This is the live rule after Explanation 10 to s.43(1), which was inserted by the Finance (No. 2) Act 1998 and displaced the earlier position under CIT v. P.J. Chemicals Ltd. that a subsidy given as an incentive did not reduce actual cost. The question now is not the motive of the grant but whether it was met, directly or indirectly, towards the cost of the asset. The scheme guidelines decide it: where the grant may be spent only on technical civil works and plant and machinery, as here, it goes to reduce the cost of those assets, and the argument that the receipt is a capital receipt not chargeable to tax does not answer the depreciation point at all — the two are separate questions. Where the grant is not related to any specific asset, the proviso to Explanation 10 apportions it over the assets in the proportion the cost of each bears to the total cost. Note also that for AY 2016-17 and later s.2(24)(xviii) brings a subsidy into income unless it has been taken into account in the actual cost under Explanation 10, so the two provisions have to be read together.
Binding on the AO and CIT(A) within the Tribunal's jurisdiction. Persuasive elsewhere.
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The assessee received grant-in-aid from the Ministry of Food Processing Industries under the scheme for Cold Chain, Value Addition and Preservation Infrastructure, towards setting up an integrated cold chain and a frozen vegetable processing facility. The Assessing Officer reduced the grant from the cost of the assets and disallowed the depreciation referable to it, relying on Explanation 10 to s.43(1). The CIT(A) confirmed the disallowance. Before the Tribunal the assessee argued that the grant was a capital receipt not chargeable to tax and that it should not go to reduce the cost of the assets.
The appeal was dismissed and the disallowance sustained. The actual cost of assets for the purpose of depreciation under s.32 has to be determined under s.43(1), which expressly provides that actual cost shall be reduced by that portion of the cost met directly or indirectly by any other person or authority; the Assessing Officer and the CIT(A) had rightly reduced the grant-in-aid in arriving at the actual cost of the assets on which depreciation was claimed (para 28.26).
The Tribunal held that the starting point is the express definition of actual cost in s.43(1), which requires the cost to the assessee to be reduced by so much of it as has been met directly or indirectly by any other person or authority. Reading the scheme guidelines, it found that the grant-in-aid was to be spent only on technical civil works and plant and machinery for the project, so that it was met towards the cost of those very assets and went to reduce their cost of acquisition. It also held against the assessee on the record: the material particulars and the accounting treatment required by the scheme and by the Act had not been furnished. The result would otherwise be a double benefit, the grant on the one hand and full depreciation on the assets it paid for on the other.
Therefore in the present case the Ld. AO and the Ld.CIT(A) has rightly reduced the amount of grant in aid of Government of India amounting to Rs. 2.5 Crores and 35 lakhs in arriving at actual cost of assets over which depreciation is claimed.
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Handle my notice → Ask a CA on WhatsAppYes, where the grant was given towards the cost of specified assets. The Chandigarh Bench held that actual cost under s.43(1) is the cost to the assessee reduced by so much of it as has been met directly or indirectly by any other person or authority, and upheld the reduction of a Rs. 2.5 crore grant-in-aid from the Ministry of Food Processing Industries from the cost of the assets on which depreciation was claimed. The appeal was dismissed. This was decided by the ITAT (Shri Vikram Singh Yadav, Accountant Member and Shri Paresh M. Joshi, Judicial Member) and bears on section 43(1), section 32 of the Income Tax Act 1961. It is reported as ITA No. 1076/Chd/2018 (ITAT Chandigarh 'B' Bench); assessment year 2014-15. This is the live rule after Explanation 10 to s.43(1), which was inserted by the Finance (No. 2) Act 1998 and displaced the earlier position under CIT v. P.J. Chemicals Ltd. that a subsidy given as an incentive did not reduce actual cost. The question now is not the motive of the grant but whether it was met, directly or indirectly, towards the cost of the asset. The scheme guidelines decide it: where the grant may be spent only on technical civil works and plant and machinery, as here, it goes to reduce the cost of those assets, and the argument that the receipt is a capital receipt not chargeable to tax does not answer the depreciation point at all — the two are separate questions. Where the grant is not related to any specific asset, the proviso to Explanation 10 apportions it over the assets in the proportion the cost of each bears to the total cost. Note also that for AY 2016-17 and later s.2(24)(xviii) brings a subsidy into income unless it has been taken into account in the actual cost under Explanation 10, so the two provisions have to be read together. If it applies to you, the first step is this: Read the sanction letter and the scheme guidelines first: what the grant may be spent on determines whether and how far Explanation 10 applies.
The assessee received grant-in-aid from the Ministry of Food Processing Industries under the scheme for Cold Chain, Value Addition and Preservation Infrastructure, towards setting up an integrated cold chain and a frozen vegetable processing facility. The Assessing Officer reduced the grant from the cost of the assets and disallowed the depreciation referable to it, relying on Explanation 10 to s.43(1). The CIT(A) confirmed the disallowance. Before the Tribunal the assessee argued that the grant was a capital receipt not chargeable to tax and that it should not go to reduce the cost of the assets. The matter was decided on 2024-07-31 by the ITAT (Shri Vikram Singh Yadav, Accountant Member and Shri Paresh M. Joshi, Judicial Member). On those facts the ITAT held as follows. The appeal was dismissed and the disallowance sustained. The actual cost of assets for the purpose of depreciation under s.32 has to be determined under s.43(1), which expressly provides that actual cost shall be reduced by that portion of the cost met directly or indirectly by any other person or authority; the Assessing Officer and the CIT(A) had rightly reduced the grant-in-aid in arriving at the actual cost of the assets on which depreciation was claimed (para 28.26).
The Tribunal held that the starting point is the express definition of actual cost in s.43(1), which requires the cost to the assessee to be reduced by so much of it as has been met directly or indirectly by any other person or authority. Reading the scheme guidelines, it found that the grant-in-aid was to be spent only on technical civil works and plant and machinery for the project, so that it was met towards the cost of those very assets and went to reduce their cost of acquisition. It also held against the assessee on the record: the material particulars and the accounting treatment required by the scheme and by the Act had not been furnished. The result would otherwise be a double benefit, the grant on the one hand and full depreciation on the assets it paid for on the other. In the words reproduced by the source cited on this page: "Therefore in the present case the Ld. AO and the Ld.CIT(A) has rightly reduced the amount of grant in aid of Government of India amounting to Rs. 2.5 Crores and 35 lakhs in arriving at actual cost of assets over which depreciation is claimed."
It was decided by the ITAT on 2024-07-31 and is reported as ITA No. 1076/Chd/2018 (ITAT Chandigarh 'B' Bench); assessment year 2014-15. Binding on the AO and CIT(A) within the Tribunal's jurisdiction. Persuasive elsewhere. A Tribunal decision binds the assessing officer and the Commissioner (Appeals) within that Tribunal's jurisdiction, and is persuasive before other benches. It is not binding on a High Court, and a contrary co-ordinate bench decision will be argued against you, so check whether the point has been taken the other way before you build a reply around it. On section 43(1), section 32, the practical question is whether the facts of your own notice match the facts of this case closely enough for the same rule to apply.
It helps the department, and it appears in this library for that reason — you need to know what the Assessing Officer will cite against you. The appeal was dismissed and the disallowance sustained. The actual cost of assets for the purpose of depreciation under s.32 has to be determined under s.43(1), which expressly provides that actual cost shall be reduced by that portion of the cost met directly or indirectly by any other person or authority; the Assessing Officer and the CIT(A) had rightly reduced the grant-in-aid in arriving at the actual cost of the assets on which depreciation was claimed (para 28.26). It arises in Deductions & Disallowances and Assessment & Scrutiny matters, on section 43(1), section 32 of the Income Tax Act 1961, and was decided by Shri Vikram Singh Yadav, Accountant Member and Shri Paresh M. Joshi, Judicial Member. Before relying on it, read the source linked on this page and check whether it has since been distinguished, overruled or overtaken by an amendment to the Income Tax Act. In practice the steps that follow from it are these. Where the grant is asset-specific, reduce it from the actual cost of those assets and recompute the block before filing; a claim made on the gross cost invites both a disallowance and a penalty exposure. Where the grant is general, apply the proviso to Explanation 10 and apportion it over the assets in the ratio of their costs, and show the working. Do not argue the point as a capital receipt question — that the grant is not taxable as income says nothing about actual cost. For AY 2016-17 and later, check s.2(24)(xviii) as well: a subsidy not taken into account in the actual cost may be taxable as income. Keep the accounting straight: the Tribunal held against this assessee partly because the material particulars and the accounting treatment were not furnished.
Searched for later treatment; none was found. That is not the same as a source affirming it. Nothing has been found applying or doubting the holding that a government grant-in-aid towards plant reduces the actual cost under s.43(1), and no appeal against this order has been traced. A caution about searching for it. Documents carrying the same name are not income-tax matters at all: four Bombay High Court admiralty proceedings against the vessel M.V. KMTC Manila, a Punjab and Haryana High Court banking ombudsman matter of 15 January 2024, and two NCLAT orders. None of them is later treatment of this order, and none should be cited as such. So the order stands untested. That is less of a weakness than it usually is, because the proposition it applies is the express language of s.43(1) read with Explanation 10, which was inserted by the Finance (No. 2) Act 1998 precisely to displace the earlier position under CIT v. P.J. Chemicals Ltd. The construction is not controversial; what is fact-specific is whether the grant was met towards the cost of particular assets, and that turns on the scheme guidelines in each case. What would displace it: a decision holding that a grant-in-aid disbursed against project milestones rather than against identified assets falls outside Explanation 10 altogether, or one reading the words 'met directly or indirectly' as requiring a payment referable to a specific invoice. Neither has been located. One practical point. The order is a Tribunal order in a long appeal on many grounds, and the s.43(1) finding occupies a single sub-numbered paragraph. Cite it for the proposition and take the reasoning from the Explanation itself. No source could be cited for that finding. Checking whether an authority still stands matters as much as knowing what it held: a decision may be overruled on one point and survive on another, or the provision it interprets may have been amended since. Read the source and the editor's note on this page before relying on it in a reply to an Assessing Officer or in an appeal.
The order is long and sub-numbered, and this entry uses one paragraph of it. The operative finding is at paragraph 28.26, which is the Tribunal speaking in its own voice — it opens 'We hold that...' — and it has been confirmed word for word. Nothing else in the order is quoted here. Sentences that appear in circulating accounts as paragraphs 28.24 and 28.27 have not been confirmed and are deliberately not quoted; a reader who wants the Tribunal's fuller reasoning will have to go to the order itself. The figures need care. Paragraph 28.26 refers to Rs. 2.5 crores and Rs. 35 lakhs, and those are the figures this entry relies on. Narrative accounts describe the grant as the first instalment of an approved Rs. 10 crore grant and the depreciation disallowed as Rs. 42,75,000; those figures have not been separately verified and should not be quoted from this page. Two things about the shape of the decision. It is a Tribunal order and the s.43(1) point is one issue among many in a long order on several grounds; the sub-numbering running into the twenties is the sign of that. And the Tribunal decided against the assessee partly on the record rather than purely on construction: it held that the material particulars and the accounting treatment required by the scheme and by the Act had not been furnished. An assessee who has documented the treatment properly is not in the same position, though the construction of Explanation 10 would still be against him where the grant is asset-specific. One limit on how far the order carries. It decides that a grant which under the scheme guidelines may be spent only on technical civil works and plant and machinery is met towards the cost of those assets and reduces actual cost under s.43(1). It does not decide what happens to a grant tied to no particular asset — that is the proviso to Explanation 10, which apportions the grant over the assets in the ratio of their costs, and which the Tribunal did not have to apply. Nor does it decide anything about s.2(24)(xviii), which for AY 2016-17 and later brings a subsidy into income unless it has been taken into account in the actual cost. One final point on how the argument should be framed. The assessee here ran the case as a capital-receipt point — that the grant was not chargeable to tax — and lost, because the chargeability of the receipt and the computation of actual cost are separate questions. Section 43(1) operates whether or not the grant is income in the recipient's hands. This library shows the verification state of every entry openly. This entry has not yet been read in full by a chartered accountant. The summary reflects the sources listed on this page. Read the source before you rely on it in a reply to an Assessing Officer or in an appeal before the Commissioner (Appeals) or the Income Tax Appellate Tribunal.
The appeal was dismissed and the disallowance sustained. The actual cost of assets for the purpose of depreciation under s.32 has to be determined under s.43(1), which expressly provides that actual cost shall be reduced by that portion of the cost met directly or indirectly by any other person or authority; the Assessing Officer and the CIT(A) had rightly reduced the grant-in-aid in arriving at the actual cost of the assets on which depreciation was claimed (para 28.26).
TaxSphere, “Pagro Frozen Foods Pvt Ltd v ITO — a government grant-in-aid towards plant reduces the actual cost under Explanation 10 to s.43(1)”, https://taxnotice.vittsphere.com/caselaw/case/pagro-frozen-foods-explanation-10-grant-in-aid-reduces-actual-cost/ (validity last checked 2026-09-08)
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