Section 80-IA computation cannot revive earlier set-off losses once absorbed, Madras HC holds for eligible business profits.

For deduction under section 80-IA, earlier years' losses and deductions that had already been set off against other income could not be notionally brought forward again to reduce the profits of the eligible business. The Madras HC treated section 80-IA(5) as a special computation provision creating a limited fiction for the initial assessment year and subsequent years, but not authorising recomputation of losses from years preceding the initial year after those losses had already been absorbed. The assessee was therefore entitled to claim the deduction without reintroducing those earlier set-off losses, and the Revenue's challenge failed.

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Issues: Whether, for deduction under section 80-IA of the Income-tax Act, losses and other deductions of earlier years, already set off against other income, can be notionally brought forward and reduced again while computing the profits of the eligible business.

Analysis: The deduction under Chapter VI-A was treated as a profit-linked incentive, and section 80-IA(5) was read as a special computation provision that deems the eligible business to be the only source of income for the relevant period. On that basis, the Court held that the fiction in section 80-IA(5) is limited to computing the deduction for the initial assessment year and subsequent years, and does not permit reopening losses of years earlier than the initial assessment year once those losses have already been absorbed against other income. The Court followed the earlier binding view that once set-off has taken place in prior years, the Revenue cannot again notionally bring those losses forward for recomputation under section 80-IA.

Conclusion: The assessee was entitled to claim deduction under section 80-IA without reintroducing earlier years' losses that had already been set off. The appeal was therefore decided in favour of the assessee and against the Revenue.

Ratio Decidendi: For computing deduction under section 80-IA(5), earlier years' losses already set off against other income cannot be notionally brought forward and again adjusted against the profits of the eligible business.

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