Backward-area subsidy and section 80HH computation: plant cost unaffected, but depreciation must be deducted first.

A general subsidy for setting up an industry in a backward area was not required to be deducted from the cost of plant and machinery for depreciation, investment allowance or capital employed under section 80J, so the issue was decided in favour of the assessee. By contrast, relief under section 80HH had to be computed only after first giving effect to unabsorbed losses and depreciation, because income of the relevant nature must be determined under the Act before Chapter VI-A deduction, so this issue was decided in favour of the Revenue. The reference thus produced a mixed outcome.

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Issues: (i) Whether subsidy received for setting up an industry in a backward area was required to be deducted from the cost of plant and machinery while computing depreciation, investment allowance and capital employed under section 80J of the Income-tax Act, 1961. (ii) Whether initial depreciation had to be deducted while computing relief under section 80HH of the Income-tax Act, 1961.

Issue (i): Whether subsidy received for setting up an industry in a backward area was required to be deducted from the cost of plant and machinery while computing depreciation, investment allowance and capital employed under section 80J of the Income-tax Act, 1961.

Analysis: The subsidy was treated as a general incentive for establishment of industry in a backward area. On that footing, the subsidy did not reduce the actual cost of the plant and machinery for the relevant computations.

Conclusion: The question was answered in the affirmative in favour of the assessee and against the Revenue.

Issue (ii): Whether initial depreciation had to be deducted while computing relief under section 80HH of the Income-tax Act, 1961.

Analysis: The computation of deduction under section 80HH had to proceed after first deducting unabsorbed losses and depreciation. The insertion of section 80AB reinforced that the income of the relevant nature had to be computed in accordance with the Act before making any deduction under Chapter VI-A.

Conclusion: The question was answered in the affirmative in favour of the Revenue and against the assessee.

Final Conclusion: The reference was disposed of by answering the first question for the assessee and the second question for the Revenue, resulting in a mixed outcome on the tax reference.

Ratio Decidendi: A general subsidy for setting up an industry in a backward area does not reduce the cost of plant and machinery for section 80J purposes, while deductions under section 80HH must be computed on income as first determined under the Act, after giving effect to depreciation and other pre-deduction adjustments.

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