Depreciation allowed on factory roads as part of building; interest on external deposit not deductible under section 80HH

HC held the assessee is entitled to claim depreciation on factory roads, treating roads within the factory as part of the building in line with SC precedent, and answered that question against the Revenue. However, HC ruled that interest earned on a deposit made with the Tamil Nadu Electricity Board is not "profits and gains derived from the industrial undertaking" for purposes of section 80HH, since the undertaking must be the immediate source of income; the Appellate Tribunal erred in treating that interest as eligible for deduction.

---

---

Issues Involved:
1. Depreciation on factory roads as 'building'.
2. Subsidy received from SIPCOT and its effect on the cost of assets for depreciation.
3. Eligibility for deduction u/s 80HH on interest earned from deposits with the Tamil Nadu Electricity Board.

Summary:

Issue 1: Depreciation on Factory Roads as 'Building'
The first issue was whether factory roads qualify for depreciation as 'building' in the computation of business profits. The Tribunal upheld the assessee's claim, following the precedent set in CIT v. Lucas TVS Ltd. (No.2) [1977] 110 ITR 346. The High Court affirmed this decision, referencing the Supreme Court's ruling in CIT v. Gwalior Rayon Silk Mfg. Co. Ltd. [1992] 196 ITR 149, which held that roads within a factory should be treated as part of the buildings, thus eligible for depreciation. The first question was answered in the affirmative and against the Revenue.

Issue 2: Subsidy from SIPCOT and Cost of Assets for Depreciation
The second issue concerned whether the subsidy received from SIPCOT should reduce the cost of assets for depreciation purposes. The Income-tax Officer had deducted the subsidy from the asset cost, but both the Commissioner (Appeals) and the Tribunal disagreed. The High Court, following the Supreme Court's decision in CIT v. P. J. Chemicals Ltd. [1994] 210 ITR 830, ruled that the subsidy should not reduce the asset cost for depreciation. The second question was answered in the affirmative and against the Revenue.

Issue 3: Deduction u/s 80HH on Interest from Deposits with Tamil Nadu Electricity Board
The third issue was whether interest earned on deposits with the Tamil Nadu Electricity Board qualifies for deduction u/s 80HH as income derived from an industrial undertaking. The Tribunal had ruled in favor of the assessee, but the High Court disagreed. The Court emphasized the restricted meaning of "derived from" as established in Cambay Electric Supply Industrial Co. Ltd. v. CIT [1978] 113 ITR 84 and Ashok Leyland Ltd. v. CIT [1997] 224 ITR 122. The Court concluded that the interest income, being derived from the deposit rather than directly from the industrial undertaking, does not qualify for deduction u/s 80HH. The third question was answered in the negative and in favor of the Revenue.

Conclusion:
(i) The first question of law was answered in the affirmative and against the Revenue.
(ii) The second question of law was answered in the affirmative and against the Revenue.
(iii) The third question of law was answered in the negative and in favor of the Revenue.

There was no order as to costs due to the divided success.

---