Deduction under sections 80IA/80IB depends on actual allowable profits, notional depreciation, and direct nexus of receipts with the undertaking.

For deduction under sections 80IA/80IB, profits must be computed after giving effect to all allowable deductions under the Act, including depreciation, whether or not it was actually claimed in earlier years; the Tribunal upheld the revenue's notional depreciation approach. Amounts written back on cessation of liabilities may retain business nexus where the related expenditure was earlier allowed, but the matter was remanded for verification of that factual position under section 41(1). Insurance receipts were held not to be profits derived from the industrial undertaking because the immediate source was the insurer, so deduction was denied on that item.

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Issues: (i) Whether depreciation for computing deduction under section 80IA/80IB could be worked out by notionally reducing depreciation not actually claimed in earlier years; (ii) whether amounts written back on cessation of liabilities were eligible for deduction under section 80IA/80IB; (iii) whether insurance receipt was eligible for deduction under section 80IA/80IB.

Issue (i): Whether depreciation for computing deduction under section 80IA/80IB could be worked out by notionally reducing depreciation not actually claimed in earlier years.

Analysis: Deduction under sections 80IA and 80IB was treated as a special deduction linked to profits and required computation of business income after allowing all deductions under sections 28 to 43D. The Tribunal relied on the principle that any device adopted to inflate or reduce eligible profits must be rejected. It held that whether depreciation was actually claimed in earlier years or not, the allowable depreciation had to be taken into account while working out the written down value for the current year.

Conclusion: Decided against the assessee. The notional depreciation method adopted by the revenue authorities was upheld.

Issue (ii): Whether amounts written back on cessation of liabilities were eligible for deduction under section 80IA/80IB.

Analysis: The Tribunal held that if the corresponding expenditure had been allowed in earlier years, then the remission or cessation of liability would form part of business profits under section 41(1). Such profits would retain nexus with the industrial undertaking because the underlying transactions arose in the course of business. As the factual verification whether the earlier deductions had in fact been allowed was still necessary, the matter required re-examination by the Assessing Officer.

Conclusion: Decided partly in favour of the assessee. The issue was restored to the Assessing Officer for verification and fresh decision.

Issue (iii): Whether insurance receipt was eligible for deduction under section 80IA/80IB.

Analysis: The Tribunal held that the immediate source of the receipt was the insurance company and not the industrial undertaking. The receipt was therefore not treated as profit derived from the business of the undertaking, even though it may have arisen in connection with business loss or reimbursement.

Conclusion: Decided against the assessee. The insurance receipt was held not eligible for deduction.

Final Conclusion: The appeal succeeded only to a limited extent on the written-back liability issue, while the depreciation and insurance-claim disallowances were sustained.

Ratio Decidendi: For deduction under sections 80IA and 80IB, profits must be computed after giving effect to all allowable deductions under the Act, and receipts are eligible only if they have a direct nexus with the industrial undertaking.

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