We have SSI unit in Maharashtra manufacturing cotton bales. We have received Subsidy through District industrial centre from Central & state govt. Under Special capital incentive scheme P.S.I.2001.I want to know how I should account for the amount of incentive received. Praful Agrawal,khamgaon

The taxation of capital subsidy depends upon the nature and circumstances under which the subsidy is given by governments from public accounts money. This is one issue where no fixed rule is possible because the issue has to be settled first is -whether the subsidy is capital receipt or revenue receipt. The answer to this question entirely depends on the facts and circumstances of the case. Supreme Court's observed in the Sahney Steel and Press Works Ltd vs CIT (1997 228 ITR 253) case, that

If payments in the nature of subsidy from public funds are made to the assessee to assist him in carrying on his trade or business, they are trade receipts. The character of the subsidy in the hands of the recipient, whether revenue or capital, will have to be determined having regard to the purpose for which the subsidy is given.
"The source of fund is quite immaterial. However, if the purpose is to help the assessee to set up its business or complete a project the monies must be treated as having been received for capital purposes. But if monies are given to the assessee for assisting him in carrying out the business operations and the money is given only after and conditional upon commencement of production, such subsidies must be treated as assistance for the purpose of the trade."

In Commissioner of Income-tax vs Kanyakumari District Co-operative Spinning Mills Ltd (2003)[ 264 ITR 684], Madras High Court overruled the decision of Tribunal that the subsidy receipt for employee of particular caste in a business organisation is a capital receipt as the same is not provided to augment any profit of the business or reimburse any existing expenditure.

A ready reckoner? 

based on judgments of different courts , a ready reckoner has been given as under to given you hint what is capital; receipt and what is revenue receipt . But remember that the real test depends on the facts and circumstances of each subsidy scheme.

What happens if the receipt is capital receipt and intended for plant & machinery?

Section 43(1) of the I T Act states "In sections 28 to 41 and in this section, unless the context otherwise requires—
(1) “actual cost” means the actual cost of the assets to the assessee, reduced by that portion of the cost thereof, if any, as has been met directly or indirectly by any other person or authority:

Further Explanation 10 to Section 43(1) [ introduced by Finance Act 1998 with retrospective effect from Assessment Year 1994-05 , ]states as under

Where a portion of the cost of an asset acquired by the assessee has been met directly or indirectly by the Central Government or a State Government or anyauthority established under any law or by any other person, in the form of a subsidy or grant or reimbursement (by whatever name called), then, so much of the cost as is relatable to such subsidy or grant or reimbursement shall not be included in the actual cost of the asset to the assessee :

Provided that where such subsidy or grant or reimbursement is of such nature that it cannot be directly relatable to the asset acquired, so much of the amount which bears to the total subsidy or reimbursement or grant the same proportion as such asset bears to all the assets in respect of or with reference to which the subsidy or grant or reimbursement is so received, shall not be included in the actual cost of the asset to the assessee;

It means that any subsidy which is for assistance in buying or purchasing or meeting the cost of plant & machinery , may be capital receipt , but has to be deducted from the cost of plant and machinery and the depreciation computed u/s 32 is on the reduced amount of cost only.

Answer to your specific question

You have not stated the full condition and scheme under which such subsidy is given by Maharashtra government . But what I understand is that this subsidy is for setting up the Small Scale Industry in designated areas and grant is given for capital investment. As such, prima facie' , the receipt is capital receipt and accordingly the subsidy utilised for buying plant and machinery will have to be deducted from cost of plant and machinery for computing depreciation. Follow the decision of Apex Court in Sahaney Steel (Supra) .