suppose "A" purchased plant and machinery- year-1 for 400lakh and dep is charged on the same amount. later, suppose in year-3 subsidy from govt of Rs 150lac is received. in books, A reduces amt of subsidy from block of asset and charged dep on it. also he adjusted the dep of earlier year.
now question is whether subsidy should be charged to tax as receipt or accrual basis i.e it should be reduced in year 1 or year 3.
secondly whether excess dep can be called escaped income. can assessment is possible u/s 263 or 148.
26 July 2025
You've raised a nuanced and important issue concerning **treatment of subsidy and depreciation** under the **Income Tax Act, 1961**, along with the **implications under Sections 263 and 148**.
Let's break it down clearly:
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## 🧾 **Scenario Recap:**
* **Year 1**: Plant & machinery purchased for ₹400 lakh → Depreciation claimed on full amount. * **Year 3**: Received **government subsidy of ₹150 lakh** related to the asset. * Company **adjusts block value and depreciation**, including **revising prior years’ depreciation**.
Now the questions are:
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## ❓ **1. When should the subsidy be recognized for income tax purposes — Year 1 or Year 3?**
### ✅ **Answer**: It depends on **accrual vs receipt** and **purpose of subsidy**.
### A. **Subsidy Purpose — Capital or Revenue?**
* If the subsidy is given **to reduce cost of a capital asset** (like P\&M), it is treated as a **capital subsidy**. * Per **Explanation 10 to Section 43(1)** (inserted w\.e.f. 01.04.1999):
> "Where a portion of the cost of an asset acquired by the assessee has been met directly or indirectly by any other person... in the form of a subsidy... the cost of the asset shall be reduced to the extent of such subsidy."
➡️ Therefore, the **WDV (block) must be reduced** by ₹150 lakh.
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### B. **Year of Reduction: Year 3 (when subsidy is received)**
* **You reduce the block of asset in Year 3**, **not retrospectively**. * **Past depreciation should NOT be revised**. * You only reduce the block **prospectively**, and claim lower depreciation from Year 3 onwards.
> ❌ Retrospective adjustment of earlier depreciation is **not permitted**.
So, the depreciation allowed in **Year 1 and Year 2 is valid**, because the **subsidy was not received or accrued** at that time.
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## ❓ **2. Is subsidy taxable as income?**
No, **capital subsidy is not taxable** if it's meant to reduce the cost of the asset.
* It's **not a revenue receipt** under section 2(24). * It is **adjusted against the cost** of the asset as per Section 43(1) Explanation 10.
Only **revenue subsidies** (like for working capital, production incentives) are taxable as income.
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## ❓ **3. Can excess depreciation be considered escaped income? Can action be taken under Section 263 or 148?**
### A. **Section 148 – Reassessment**
* Section 148 applies when **income has escaped assessment**. * In your case:
* Depreciation in Year 1 and Year 2 was claimed correctly **based on facts known at the time**. * The subsidy **did not exist then**, so there’s **no escapement of income**.
➡️ So **Section 148 cannot be invoked** merely because subsidy was received later.
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### B. **Section 263 – Revision by CIT**
* Under Section 263, the **CIT can revise** an order if it is:
* **Erroneous**, and * **Prejudicial to the interests of the revenue**. * However, for Years 1 and 2:
* The AO’s assessment was **not erroneous** based on facts available at that time.
➡️ Unless it can be shown that the **subsidy had accrued in Year 1**, **263 cannot apply**.
> ⚠️ **Caution**: If subsidy had **accrued earlier** and company deferred recognition wrongly, then it **can** be reopened.
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## ✅ **Final Conclusion / Summary**
| Question | Answer | | -------------------------------------------- | ---------------------------------------------------------- | | When to reduce subsidy from asset cost? | Year **3**, when received | | Should earlier depreciation be revised? | ❌ **No**, only future depreciation is reduced | | Is capital subsidy taxable? | ❌ **No**, it reduces asset cost u/s 43(1) Explanation 10 | | Can excess depreciation be "escaped income"? | ❌ **No**, if subsidy wasn’t known earlier | | Can Section 263 or 148 apply? | ❌ Not unless subsidy had accrued earlier and was concealed |
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Would you like a sample journal entry or computation format to show the block adjustment from Year 3 onwards?
CAclubindia
