Milk dairy industry is expanding their business & starting new chilling plant. They have purchased Land & Building, Plant & Machinery & other assets & for that Subsidy has been sanctioned to them from NABARD.
I just want to ask that whether the subsidy is to be treated as indirect income & what will be the accounting treatment of subsidy.
Taxation of subsidy is dependent upon the various clause and conditions given in the scheme under which the subsidy has been given By the GovT agency.Subsidy in the nature of Capital receipt is not taxable as such however revenue nature subsidy is taxable.Your case ,prima facie is a case of capital receipt subsidy as the subsidy has been granted to acquire the assets .
As per section 43(1) of the Income Tax Act the Cost Of Fixed assets should be reduced by the amount as directly or indirectly met by Govt or by Govt Institution .
So in your case ,as the subsidy is being given to acquire the capital/Fixed assets it will not be treated as Revenue receipt and not chargeable to income Tax .however Cost of Related fixed assets will be reduced by the amount of subsidy and depreciation is also being allowed on reduced amount.
Accounting Treatment for Capital subsidy for Fixed Assets By Nabard
Accounting standard 12 "Accounting for Govt Grants " deals with this issue and as per theAS -12.As per AS-12 two methods has been recommended ,one which is same as Given above ,reduce the amount of subsidy from cost of Capital/Fixed asset and second is to treat the subsidy amount as deferred income which should be recognised as income in P&L over a useful period of Fixed asset ,if asset is depreciable and if not a depreciable asset then grands should be credited to capital reserve.(detail is given below)
Government grants should not be recognised until there is reasonable assurance that (i) the enterprise will comply with the conditions attached to them, and (ii) the grants will be received.
Government grants related to specific fixed assets should be presented in the balance sheet by showing the grant as a deduction from the gross value of the assets concerned in arriving at their book value. Where the grant related to a specific fixed asset equals the whole,or virtually the whole, of the cost of the asset, the asset should be shown in the balance sheet at a nominal value.
Alternatively, government grants related to depreciable fixed assets may be treated as deferred income which should be recognised in the profit and loss statement on a systematic and rational basis over the useful life of the asset, i.e., such grants should be allocated to income over the periods and in the proportions in which depreciation on those assets is charged. Grants related to non-depreciable assets should be credited to capital reserve under this method. However, if a grant related to a non-depreciable asset requires the fulfillment of certain obligations, the grant should be credited to income over the same period over which the cost of meeting such obligations is charged to income. The deferred income balance should be separately disclosed in the financial statements.
Disclosures In financial statements
The following should be disclosed:
the accounting policy adopted for government grants, including the methods of presentation in the financial statements;
the nature and extent of government grants recognised in the financial statements, including grants of non-monetary assets given at a concessional rate or free of cost.
On the basis of above ,In my opinion you should go far First method i.e reduce the amount of subsidy from the cost of the Fixed assets.