Section 80HH computation must reflect set-off losses, while SIPCOT subsidy does not reduce asset cost

For deduction under section 80HH, profits of the industrial undertaking must be computed after setting off losses from other units, because section 80AB governs the manner of deduction computation. By contrast, SIPCOT subsidy was not required to be reduced from the actual cost of assets under section 43(1) for depreciation, investment allowance, or section 80J relief, as the controlling principle treats such subsidy as not diminishing capital cost unless it is meant to meet the asset cost. The note therefore distinguishes deduction computation from capital cost adjustment in income-tax calculations.

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Issues: (i) Whether the profits eligible for deduction under section 80HH of the Income-tax Act, 1961 were required to be computed after setting off losses from other units; (ii) whether subsidy received from SIPCOT was liable to be reduced from the actual cost of assets for depreciation, investment allowance and relief under section 80J.

Issue (i): Whether the profits eligible for deduction under section 80HH of the Income-tax Act, 1961 were required to be computed after setting off losses from other units.

Analysis: The deduction under section 80HH had to be worked out on the profits of the industrial undertaking after first setting off the losses of the other units, in view of the mandate of section 80AB of the Income-tax Act, 1961. The earlier binding view applied that the profit eligible for deduction cannot be isolated without accounting for the overall losses relevant to the computation.

Conclusion: The issue was decided against the assessee and in favour of the Revenue.

Issue (ii): Whether subsidy received from SIPCOT was liable to be reduced from the actual cost of assets for depreciation, investment allowance and relief under section 80J.

Analysis: The subsidy received by the assessee did not go to reduce the actual cost of the assets under section 43(1) of the Income-tax Act, 1961 for the purpose of computing depreciation and allied reliefs, following the controlling Supreme Court principle on subsidy treatment in capital cost computation.

Conclusion: The issue was decided against the Revenue and in favour of the assessee.

Final Conclusion: The reference was answered partly in favour of the Revenue: the deduction under section 80HH had to be computed after set-off of losses from other units, while the SIPCOT subsidy was not to be deducted from the actual cost of assets for depreciation and related reliefs.

Ratio Decidendi: For computing deduction under section 80HH, the profits of the industrial undertaking must be determined after set-off of relevant losses in accordance with section 80AB, whereas subsidy not intended to meet the cost of assets does not reduce the actual cost under section 43(1).

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