Circular No. 190 — Section 43(1): Actual Cost

What this is

Circular No. 190 was issued by the Central Board of Direct Taxes on 1 March 1976. Its subject is Section 43(1) l Actual Cost.

This is a clarification. The Board is stating how it reads a provision. That reading binds the department; it does not bind a court, and where the section says otherwise the section wins.

What it does

Requires the backward area subsidy to be deducted from the cost of assets. Circular No. 142 dated 1 August 1974 had clarified that subsidy received under the '10 per cent Central Outright Grant of Subsidy Scheme, 1971' for industrial units in certain selected backward districts and areas is a capital receipt in the recipient's hands. The question then was whether it must be taken off the actual cost for development rebate and depreciation. Since section 43(1) defines actual cost as 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 the subsidy is related to the various assets, the Board is advised that section 43(1) is attracted and the subsidy is to be deducted from the cost of the assets for allowing development rebate and depreciation.

Why it was issued

The earlier circular had settled that the subsidy is a capital receipt; the consequential question of its effect on the actual cost of the assets then arose for consideration.

Who it reaches

Industrial units that received subsidy under the 1971 backward area scheme
Assessees claiming depreciation and development rebate on subsidised plant
Assessing Officers computing written down value
Auditors capitalising subsidised assets in the books

The provisions it speaks to

Left, the provision of the Income-tax Act, 1961 as the instrument itself names it. Right, the section of the Income-tax Act, 2025 that the department’s own concordance maps it to — which is where the same ground is now covered.

Under the 1961 Act	Now
s.43	s.2, s.39, s.41, s.66

The instrument, as the Board published it

The words below are the department’s own, reproduced from its published text. Where the department’s copy carried a publisher’s notes after the instrument, those are not reproduced.

SECTION 43(1) l ACTUAL COST
392. Subsidy received under "10 per cent Central Outright Grant of Subsidy Scheme, 1971" - Whether liable to be deducted from cost of asset for the purposes of allowing depreciation, etc., on such assets
1. Reference is invited to the Board’s Circular No. 142 [F. No. 204/25/74-IT-(A-II)], dated 1-8-1974, whereby the Board had issued clarification 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 would constitute capital receipt in the hands of the recipient.
2. A question has arisen for consideration whether the amount of subsidy is to be deducted from the actual cost of the assets for purposes of allowing development rebate and depreciation on such assets. Under section 43(1), "actual cost" means the actual cost of the assets to the assessee reduced by that portion of cost thereof, if any, as has been met directly or indirectly by any other person or authority. The Board has, therefore, been advised that since the subsidy is related to various assets, provisions of section 43(1) are attracted. The amount of subsidy will accordingly, be deducted from the cost of assets for purposes of allowing development rebate and depreciation on such assets.
Circular : No. 190 [F. No. 204/52/75-IT(A-II)], dated 1-3-1976.

What to watch

Treating the subsidy as a capital receipt does not put it beyond reach — it comes off the cost instead, and so reduces the allowance year after year through the written down value.
The reasoning turns on the subsidy being related to the assets; a grant not so related would not answer the words of section 43(1) in the same way.
The reduction applies for both development rebate and depreciation, so the reserve computation for development rebate is affected as well.
The scheme, the rate of subsidy and the development rebate provision described are those of that period.

Where you meet it

In an assessment where depreciation or development rebate is recomputed on a cost reduced by the subsidy received.

On the same provision

Other instruments in this library that name the same provision of the 1961 Act. They are not necessarily still operative, and a later one may have replaced an earlier one without saying so.

Circular No. 13/2021 — Circular No. 13 of 2021 30 June 2021
Circular No. 17/2020 — Guidelines under section 194 o 4 and section 206C 1 i of the income tax act 1961 29 September 2020
Notification No. 17/2020 [F.No.173/10/2014-ITA-I] / SO 1057(E) — Ministry of Finance 13 March 2020
Notification No. 8/2019 [F.No. 225/344/2018-ITA-II] / SO 772(E) — Ministry of Finance 31 January 2019
Notification No. Notification No. 76/2018 [F. No. 225/261/2018 ITA-II] — [To BE Published in the Gazette of INDIA, Extraordinary, Part II, section 3, Sub-section (ii)] 31 October 2018
Notification No. 35/2018 [F.No. 225/111/2018-1TA-II] — Government of India 31 July 2018

← Circular No. 191 · Circular No. 189 →

A circular binds the department, not you and not a court. The Board issues a circular to its own officers. An assessee may hold the department to a circular that helps him; the department cannot hold an assessee to one that hurts him, and the Tribunal and the courts decide the law for themselves.

Source: the Income Tax Department’s own published text — its page for this instrument.