Rectification under income tax law permits consequential recomputation of business deduction after set-off of losses and depreciation.

In rectification proceedings under section 154 of the Income-tax Act, the Assessing Officer could grant carry forward and set-off of earlier losses and unabsorbed depreciation and also make the consequential recomputation of deduction under section 80HHC(3) on the adjusted business profits. Once the taxable income was being corrected through that adjustment, the Chapter VI-A deduction had to be recalculated on the same basis to arrive at the correct income. The Court treated the omission to adjust the deduction as leading to escapement of income and held that section 154 permitted such consequential correction. The rectification order was therefore valid, and recomputation of the deduction was permissible.

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Issues: Whether, in proceedings under section 154 of the Income-tax Act, 1961, the Assessing Officer could not only give effect to the carry forward and set-off of earlier losses and unabsorbed depreciation but also recompute the deduction under section 80HHC(3) by reducing such set-off from the profits of business.

Analysis: The application for rectification was moved by the assessee and was entertained to grant the benefit of carry forward and set-off of earlier losses and unabsorbed depreciation. Once that adjustment was made, the correct taxable income could be arrived at only if the deduction under section 80HHC(3) was also recomputed on the adjusted business profits. Section 154, falling within the procedural scheme for assessment and recomputation, was held to permit such consequential correction where necessary to determine the correct taxable income. The Court rejected the attempt to split the rectification order into two separate parts and held that omission to make the corresponding adjustment in Chapter VI-A deduction would lead to escapement of income.

Conclusion: The rectification order under section 154 was valid, and the recomputation of deduction under section 80HHC(3) was permissible. The appeal was accordingly against the assessee.

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