Set-off of carried forward losses must precede Chapter VIA deductions; rectification for mistaken 80MM allowance was upheld.

For deduction under Chapter VIA, gross total income must first be computed under section 80B(5), including mandatory set-off of carried forward losses under section 72 before any deduction under section 80MM is allowed. Applying that settled principle, the assessee could not claim the deduction before such set-off, and the error in allowing it was treated as a mistake apparent from the record. Rectification under section 154 was therefore valid, and the disallowance of deduction under section 80MM was restored.

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Issues: Whether the rectification under section 154 of the Income-tax Act, 1961 was valid in respect of deduction under section 80MM, when carried forward losses had to be set off before computing gross total income.

Analysis: The computation of deduction under section 80MM depends on the gross total income as defined in section 80B(5) of the Income-tax Act, 1961. Gross total income must be computed in accordance with the Act before making deductions under Chapter VIA, and that computation includes the operation of section 72 relating to carry forward and set-off of previous losses. On that basis, carried forward losses had to be adjusted first, and the assessee could not claim the deduction before such set-off. The Court also held that the position was settled by the principle laid down in Cambay Electric Supply Industrial Co., and the issue was not debatable.

Conclusion: The rectification order under section 154 was valid and the view taken by the first appellate authority was incorrect.

Final Conclusion: The appeal by the Revenue was allowed and the rectification restoring the disallowance of deduction under section 80MM was sustained.

Ratio Decidendi: For computing deduction under Chapter VIA, carried forward losses under section 72 must first be set off in determining gross total income under section 80B(5), and an error on that issue is a mistake apparent from the record amenable to rectification under section 154.

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