Section 80-IA deduction cannot reopen earlier absorbed losses when computing eligible business profits.

Deduction under section 80-IA is available on the eligible business profits, but the deeming fiction in section 80-IA(5) is confined to computing those profits for the relevant years. Earlier losses of the eligible undertaking that had already been set off against other income cannot be notionally brought forward and re-absorbed while calculating the deduction. The Revenue cannot reopen settled pre-initial assessment year losses for this purpose, and the assessee remains entitled to the section 80-IA deduction on the computed eligible profits.

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Issues: Whether deduction under section 80-IA of the Income-tax Act, 1961 is available to the assessee when earlier losses of the eligible undertaking had already been set off against other income, or whether such earlier losses can be notionally brought forward and deducted again while computing the eligible business profits.

Analysis: The deduction under Chapter VI-A is in the nature of a profit-linked incentive and section 80-IA(5) creates a limited deeming fiction for computing the profits of the eligible business as if that business were the only source of income for the relevant years. That fiction cannot be extended to reopen losses or deductions of years prior to the initial assessment year once they have already been absorbed against other income. The Court followed the earlier binding view that the Revenue cannot notionally carry forward and rework such already-settled losses for the purpose of section 80-IA deduction.

Conclusion: The assessee is entitled to deduction under section 80-IA, and the earlier set-off losses cannot be notionally brought forward against the eligible business profits.

Final Conclusion: The appeal was rejected and the Tribunal's order in favour of the assessee was confirmed, with the legal position on section 80-IA settled against reopening of previously absorbed losses.

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