2026 (2) TMI 318 - HC - Income Tax

Notional carry forward of depreciation losses and interaction of 80IA deductions - HC disallows notional carry forward; affirms aggregate cap

Notional carry forward of depreciation losses set off against other income cannot be treated as a notional loss for computing deduction under section ... Notional carry forward of losses already set off against other income for deduction u/s 80IA - whether notional loss of depreciation which was set off against other income of earlier years prior to initial assessment year could not be carried forward to set off in the initial assessment year for the purpose of working out the deduction u/s 80IA of the Act, when the same is permitted u/s 80IA(5) of the Act? - HELD THAT:- The first question of law is covered by a decision of this Court in Velayudhaswamy Spinning Mills (P.) Ltd [2010 (3) TMI 860 - MADRAS HIGH COURT] held that loss in the year earlier to the initial assessment year already absorbed against the profit of other business cannot be notionally brought forward and set off against the profits of the eligible business as no such mandate is provided in section 80-IA(5). Whether computing the deduction u/s 80IB, deduction u/s 80HHC need not be excluded when the intention behind Sec. 80IA(9) is that deduction should not be allowed twice in respect of the same profits? - The issue is covered by a judgment of Shital Fibers Ltd. [2025 (5) TMI 1599 - SUPREME COURT (LB)] in favour of the assessee following the ratio of the decision of Associated Capsules (P) Ltd. [2011 (1) TMI 787 - BOMBAY HIGH COURT] to hold that section 80-IA(9) does not affect the computability of deduction under various provisions under heading C of Chapter VI-A, but it affects the allowability of deductions computed under various provisions under heading C of Chapter VIA, so that the aggregate deduction under section 80-IA and other provisions under heading C of Chapter VI-A do not exceed 100 per cent. of the profits of the business of the assessee. Our above view is also supported by the Central Board of Direct Taxes Circular No. 772 dated December 23, 1998 ((1999) wherein it is stated that section 80-IA(9) has been introduced with a view to prevent the taxpayers from claiming repeated deductions in respect of the same amount of eligible income and that too in excess of the eligible profits. Issues: (i) Whether losses or notional depreciation set off against other income in years prior to the initial assessment year can be notionally carried forward and set off in the initial assessment year for computing deduction under section 80IA(5) of the Income-tax Act, 1961; (ii) Whether deduction under section 80HHC must be excluded while computing deduction under section 80IB because section 80IA(9) seeks to prevent double allowance of deductions.Issue (i): Whether losses/depreciation already set off against other income in years earlier to the initial assessment year can be notionally brought forward and set off in the initial assessment year for computing deduction under section 80IA(5) of the Income-tax Act, 1961.Analysis: The provision in section 80IA(5) and analogous precedents limit the statutory fiction to bringing forward losses only from the initial assessment year and subsequent years contemplated by the statute. Prior years' losses or depreciation that have been actually set off against other income are not left available for re-opening or notional carry forward for the purpose of computing deductions under section 80IA. Earlier High Court decisions applying similar wording (including interpretations of section 80-I/sub-section equivalents) hold that once such losses are absorbed in prior years they cannot be notionally reallocated to the initial assessment year for computing deductible profits under Chapter VI-A.Conclusion: Issue (i) answered in favour of the assessee; losses or depreciation already set off against other income in years prior to the initial assessment year cannot be notionally carried forward to compute deduction under section 80IA(5).Issue (ii): Whether section 80IA(9) requires exclusion of deductions computed under other provisions (such as section 80HHC) at the stage of computation under section 80IB, so as to prevent double allowance.Analysis: Section 80IA(9) addresses the aggregate allowability of deductions so that total deductions under section 80IA and other provisions under heading C of Chapter VI-A do not exceed the profits of the business. Binding precedent (including the Supreme Court in Shital Fibers Ltd.) clarifies that section 80IA(9) operates at the stage of allowance (restriction on aggregate allowed deductions) and does not alter the methods of computation prescribed under the individual sections. Illustrative application restricts allowable amounts at the allowance stage to avoid aggregate excess without disturbing separate statutory computation mechanisms.Conclusion: Issue (ii) answered in favour of the assessee; section 80IA(9) affects allowability of deductions and does not mandate exclusion at the stage of computation under other sections such as section 80IB.Final Conclusion: Both issues decided in favour of the assessee resulting in dismissal of the Revenue's appeal and upholding that prior-year losses already set off cannot be notionally carried forward for section 80IA computation and that section 80IA(9) limits aggregate allowance rather than computation methods under other Chapter VI-A provisions.Ratio Decidendi: Section 80IA(5) does not permit notionally bringing forward losses or depreciation already set off in prior years to compute deductions for the initial assessment year; section 80IA(9) restricts the allowability of aggregate deductions under Chapter VI-A and does not alter the statutory modes of computation under individual deduction provisions.