Section 10A deduction applies before set-off of prior losses and unabsorbed depreciation, and is a deduction provision.

The Telangana HC held that section 10A deduction must be computed at the level of the eligible undertaking before applying set-off of brought forward losses and unabsorbed depreciation, because the deduction operates independently at that stage of computation. It also affirmed that section 10A, as amended, is a deduction provision and not an exemption provision. The assessee therefore succeeded, and entitlement to section 10A relief was upheld on the basis that prior losses and depreciation do not reduce the deduction before the undertaking's profits are computed.

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Issues: (i) Whether deduction under section 10A of the Income-tax Act, 1961 is to be allowed before setting off brought forward losses and unabsorbed depreciation. (ii) Whether income under section 10A of the Income-tax Act, 1961 is an exemption or a deduction.

Issue (i): Whether deduction under section 10A of the Income-tax Act, 1961 is to be allowed before setting off brought forward losses and unabsorbed depreciation.

Analysis: The Court applied the principle that the deduction under section 10A is to be computed at the stage of the eligible undertaking itself. At that stage, the set-off and carry forward provisions relating to other heads of income do not yet apply, because the deduction is to be worked out independently before the exercise of aggregation under the later stage of computation of total income.

Conclusion: The issue was answered in favour of the assessee. Deduction under section 10A is allowable before adjusting brought forward losses and unabsorbed depreciation.

Issue (ii): Whether income under section 10A of the Income-tax Act, 1961 is an exemption or a deduction.

Analysis: The Court followed the binding interpretation that section 10A, as amended, operates as a provision for deduction and not as an exemption. The computation is tied to the profits of the eligible undertaking and the deduction stage precedes the computation of total income under the later scheme.

Conclusion: The issue was answered against the revenue and in favour of the assessee. Section 10A is a deduction provision.

Final Conclusion: The appeal failed, and the assessee's entitlement to section 10A deduction was upheld on the basis that the deduction is to be computed at the undertaking stage before set-off of prior losses or depreciation.

Ratio Decidendi: Deduction under section 10A of the Income-tax Act, 1961 must be computed independently at the stage of the eligible undertaking before applying the set-off and carry forward provisions, and section 10A operates as a deduction provision rather than an exemption provision.

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