Section 43(1) of the Income Tax Act
Income-tax Act, 2025: ss.39, 41
Section 43(1) falls under section 43 of the Income-tax Act, 1961, which corresponds to section 39 (Computation of actual cost) and section 41 (Written down value of depreciable asset) of the Income-tax Act, 2025.
Read section 39 of the 2025 ActRead section 41 of the 2025 Act
Correspondence checked against the ICAI tabular mapping of the two Acts and the BharatTax.co section commentary.
The decision most relied on for Section 43(1) is CIT v. Ponni Sugars & Chemicals Ltd. (306 ITR 392), cited in 577 of the 613 judgments on BharatTax that turn on this section.
Leading authorities on Section 43(1)
The "Purpose Test" determines whether an incentive or subsidy is a capital or revenue receipt for income tax purposes. If the incentive's purpose is to enable an assessee to set up a new industry or make investments in capital assets, it is a capital receipt and not taxable.
Goodwill, whether arising from an amalgamation or a slump sale, is an intangible asset eligible for depreciation under Section 32(1) of the Income-tax Act. While the assessee must prove the existence and valuation of such goodwill, it is recognized as a depreciable asset.
A subsidy is treated as a revenue receipt if the assessee is free to use the money in its business as it likes and is not obligated to spend it for a specific capital purpose, such as acquiring assets or repaying loans.
This Supreme Court decision clarifies the conditions under which a capital subsidy received by an assessee should be reduced from the 'actual cost' of an asset for computing depreciation under Section 43(1) of the Income-tax Act, depending on whether the subsidy directly meets the cost of the asset.
Club entrance fees, if incurred wholly and exclusively for business purposes, are allowable as revenue expenditure under Section 37(1). Furthermore, an order holding a deductor liable for TDS defaults under Section 201 must be preceded by an inquiry into the deductee's actual tax payment.
Subsidies granted under a Government Industrial Scheme to accelerate industrial development and generate employment are capital in nature, determined by the 'purpose test', regardless of the timing, source, or form of the subsidy.
Income tax law intends to avoid double taxation, and where an item is brought to tax in one form, appropriate relief or adjustment should be provided to prevent its taxation again in another form. This principle is applicable when considering government grants or subsidies included in income and their impact on the actual cost of assets for depreciation.
The actual cost of an asset is distinct from the cost of borrowing money for its purchase. Foreign exchange fluctuations on loan repayment do not alter the asset's actual cost and are not covered by Section 43A.
Payments made to meet any portion of the actual cost, as contemplated under Explanation 10 to Section 43(1) of the Income Tax Act, are eligible for consideration.
Depreciation is allowable on goodwill acquired through the slump sale of a business. When an assessee claims depreciation on the enhanced cost of an asset supported by a registered valuer's report, tax authorities must produce countervailing evidence, such as a departmental valuation report, to challenge it, rather than simply disregarding the expert opinion.
