Unabsorbed depreciation must be set off before section 80HH relief is computed from gross total income.

Unabsorbed depreciation of earlier years must be merged with current year depreciation under section 32(2) before computing relief under section 80HH. The text explains that gross total income under section 80B(5) has to be determined in the normal computation process first, and only then can Chapter VI-A deductions be applied. On that basis, brought-forward depreciation is not a separate deduction to be ignored for section 80HH purposes; it reduces income before the relief is calculated. The assessment approach following this sequence is stated to be correct, and the assessee's attempt to claim section 80HH relief first is rejected.

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Issues: Whether unabsorbed depreciation of earlier years had to be aggregated with current year depreciation and deducted before computing relief under section 80HH, or whether such relief was to be granted first.

Analysis: The applicable framework required the total income to be computed in the normal course before Chapter VI-A deductions were allowed. For that purpose, section 32(2) treated unabsorbed depreciation of earlier years as part of the depreciation of the succeeding year, so it did not remain a separate deduction to be set off independently from total income. Since section 80HH operated on gross total income as defined by section 80B(5), the assessee's income had first to be determined after aggregating current depreciation with brought forward depreciation, and only thereafter could the deduction under section 80HH be computed.

Conclusion: The earlier years' unabsorbed depreciation had to be merged with current depreciation before calculating relief under section 80HH, and the assessee's challenge failed.

Final Conclusion: The assessment approach adopted by the revenue authorities was upheld and the assessee was not entitled to compute section 80HH relief before giving effect to brought forward depreciation.

Ratio Decidendi: For Chapter VI-A deductions, gross total income must first be determined in accordance with the Act, and unabsorbed depreciation under section 32(2) is to be treated as part of current year depreciation before computing the deduction.

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