Section 80-IA deduction applies on eligible business profits without reopening losses already absorbed against other income.

Section 80-IA deduction is a profit-linked incentive computed by treating the eligible business as the only source of income for the relevant period. The deeming fiction used for this computation is confined to that purpose and does not authorise reopening earlier losses that have already been set off and absorbed against other income. Accordingly, such absorbed losses cannot be notionally carried forward again to reduce current eligible profits. On that basis, the assessee was entitled to the deduction under section 80-IA and the Revenue's challenge failed.

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Issues: Whether the assessee was entitled to deduction under section 80-IA of the Income-tax Act, 1961 when the losses of earlier years had already been set off and absorbed against other income.

Analysis: The deduction under Chapter VI-A is in the nature of a profit-linked incentive and section 80-IA has to be applied on the basis of the eligible business being treated as the only source of income for the relevant period. The provision governing computation of deduction operates through a deeming fiction, but that fiction is confined to the purpose for which it is created and does not permit reopening losses of years already set off against other income. Once earlier losses have been absorbed, they cannot be notionally carried forward again for reducing the current year's eligible profits.

Conclusion: The assessee was entitled to claim deduction under section 80-IA, and the Revenue's challenge failed.

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