1.10     Query

Treatment of government grants

1.A company engaged in the manufacture of electronic items viz., Milk Analysers, in its efforts to diversify, has undertaken programme of rural electrification based on Solar Cell, at a village near Jaipur, where the factory of the company is situated. The company incurred Rs. 75,000/- on the project directly and also received stores, materials etc. from Government of India worth Rs. 2.0 Lakhs free of cost. Similarly, the State Government has given a grant of Rs. 75,000/- towards this project. This project has been dedicated to the Panchayat Samiti of the village at a function held for this purpose and as per the querist, the ownership of assets therefore vests with the Samiti. The company attends to any problem, free of cost, in the distribution of electricity.

2.The querist has sought the opinion of the Expert Advisory Committee on the following issues arising from the above facts of the query:

(i)         Whether the company can claim Rs. 75,000/- (received from State Government) and Rs. 2.0 Lakhs (received from Central Government) as revenue expenditure being social cost/ research and development expenditure or under any other head for the computation of business income for the purpose of income-tax as well as for purpose of their booking under the correct head in the books of the company.

(ii)        Whether the company can treat the said amounts of Rs. 75,000/- and Rs. 2.0 Lakhs as capital grants.

                                                    Opinion                                                  April 25, 1986

1.The Committee notes from the facts of the query that the grants received from the Central Government and the State Government are for the specific project of providing electricity to the village and not for the purpose of the business of the company. The Committee is therefore of the view that the amounts received in respect of the said grants should be credited to the said project account and any expenditure incurred out of such grants should be debited to that account.

2.On the basis of the above, the opinion of the Committee on the issues raised by the querist is as follows:

(i)         The company cannot claim Rs. 75,000/- (received from the State Government) and Rs. 2 lakhs (received from the Central Government) as a revenue expenditure for the purpose of computation of taxable income and for the purpose of preparation of its accounts.

(ii)        The said grants cannot be treated as capital based grants since no asset of capital nature has been created for the business of the company.

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