Section 80HHC deduction must follow set-off rules, with brought-forward depreciation and business losses deducted first.

For computing deduction under Section 80HHC, business profits had to be determined after giving effect to the statutory scheme of set-off and carry forward. Section 80AB required income of the relevant nature to be computed before Chapter VI-A relief, so unabsorbed depreciation and carried forward business losses from earlier years could not be ignored in arriving at profits of business. The Court followed its earlier view and the Supreme Court's affirmation of the same principle, resulting in the relief being reduced by such brought-forward losses.

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Issues: Whether, for computing deduction under Section 80HHC, business profits must be worked out after setting off unabsorbed depreciation brought forward from earlier years.

Analysis: Deduction under Section 80HHC falls within Chapter VI-A and has to be computed in accordance with the income actually determined under the Act. Section 80AB governs such computation and requires the income of the relevant nature to be calculated before Chapter VI-A deduction. Applying that principle, the profits of business for Section 80HHC cannot be isolated from the statutory scheme of set off and carry forward. Earlier decisions of the Court had already followed this approach, and the subsequent Supreme Court ruling affirmed that unabsorbed business losses of earlier years must be set off while determining the profits for Section 80HHC relief.

Conclusion: The unabsorbed depreciation and carried forward business losses had to be deducted before granting relief under Section 80HHC. The question was answered against the assessee and in favour of the Revenue.

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