Section 80-IA deduction cannot be reduced by reopening earlier set-off losses already absorbed in prior years.

The Madras HC explained that section 80-IA is a profit-linked deduction for an eligible business and that sub-section (5) creates a limited fiction for computing that deduction as if the eligible business were the only source of income. That fiction cannot be extended to reopen losses or depreciation already absorbed and set off in earlier years. Where the assessee had exercised the section 80-IA(2) option and the earlier losses stood adjusted, those losses could not be notionally carried forward again to reduce the deduction. The assessee was therefore entitled to the deduction, and the Revenue could not rework the prior set-off losses under section 80-IA(5).

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Issues: Whether the assessee was entitled to deduction under section 80-IA of the Income-tax Act for the relevant assessment years, and whether losses already set off in earlier years could be notionally brought forward and recomputed for the purpose of section 80-IA(5).

Analysis: The deduction under section 80-IA is a profit-linked incentive intended for an eligible business, and sub-section (5) requires the profits of such business to be computed as if it were the only source of income during the relevant period. The fiction in sub-section (5) is limited to the computation of deduction and cannot be extended to reopen losses or depreciation that had already been absorbed and set off against other income in earlier years. Since the assessee had already exercised the option under section 80-IA(2) and the earlier losses stood adjusted, there was no basis to notionally carry them forward again for reducing the deduction.

Conclusion: The assessee was entitled to the deduction under section 80-IA, and the Revenue could not rework earlier set-off losses for the purpose of section 80-IA(5). The appeal failed.

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