Capital subsidy received by msme is exempted from income tax

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Talada Venkat Rao (Querist)
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08 August 2018 The capital subsidy which is given by State / Central Govt. is exempted from Income tax on what section under Income Tax Act.

CA Ashish Joshi

CA Ashish Joshi (Expert)
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08 August 2018 In the Income Tax Act, there is no direct exemption given to the capital subsidy. From various provisions, we can make out that there would be two cases for capital subsidy.

Option 1) The asset is shown at Actually Incurred Cost
Option 2) The asset is shown at Full Cost including Subsidy amount

E.g.
Asset full cost price Rs.100
Subsidy Rs.40
Incurred Cost Rs.60

Here the tax treatment would be at the discretion of the assessee.
If he opts for Option 1) then depreciation would be charged on Rs.60
If he opts for Option 2) then depreciation would be charged on Rs.100

For further details, please refer following link
https://taxindiaupdates.in/taxation-of-subsidy-under-income-tax-law/

Bhaskaran Chackrapani Warrier

Bhaskaran Chackrapani Warrier (Expert)
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08 August 2018

1. Should apply purpose test to decide whether it is a capital receipt (tax free)
or revenue receipt (taxable) per decision in CIT V Ponni Sugars & Chemicals Ltd
(2009) 208 Taxation 59 (SC).

2. Taxability or otherwise of the subsidy would depend on the terms of the scheme
per Mepco Industries Ltd. v CIT (2009) 319 ITR 208 (SC).

Bhaskaran Chackrapani Warrier

Bhaskaran Chackrapani Warrier (Expert)
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08 August 2018 If you judge it as a capital subsidy, follow explanation 10 to section 43(1) of the
Income tax Act,1961.

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