Section 80-IA deduction must reflect depreciation, even if not claimed under Section 32, to compute eligible profits correctly.

While computing deduction under Section 80-IA of the Income-tax Act, depreciation under Section 32 must be reduced from eligible business profits even if the assessee did not claim it in the return or computation of income. Section 80-IA is a self-contained profit-linked deduction provision and requires profits to be determined after allowing all deductions under Sections 30 to 43D, including depreciation. The optional treatment of depreciation under Mahendra Mills does not govern this computation, because allowing its omission would improperly inflate eligible profits by deferring the allowance to a later year. The result was that depreciation had to be taken into account and the appeals failed.

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Issues: Whether, while computing deduction under Section 80-IA of the Income-tax Act, 1961, depreciation allowable under Section 32 had to be deducted even if the assessee had not claimed it in the return or computation of business income.

Analysis: Section 80-IA is a special deduction provision in Chapter VI-A and operates as a code by itself for computing profits of eligible business. The deduction is profit linked and is to be computed on profits of the eligible undertaking after taking into account all deductions allowable under Sections 30 to 43D, including depreciation. The rule in Mahendra Mills, dealing with the optional nature of depreciation under Section 32 in the computation of business income, does not govern computation under Section 80-IA. A contrary view would permit an assessee to inflate eligible profits by withholding depreciation for one year and claiming it later, which is impermissible under the scheme of the provision.

Conclusion: Depreciation had to be reduced while computing deduction under Section 80-IA, irrespective of whether the assessee had claimed it under Section 32; the appeals failed.

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