Deduction for priority industry profits affirmed: 8% deduction on attributable profits allowed, losses may be set off first

Deduction under section 80E applies only to profits and gains attributable to an activity listed in the Fifth Schedule; the deduction equals 8% of those attributable profits and must be allowed in computing total income. The assessing authority may first set off losses against profits of the specified priority industry, and an assessee cannot require that such losses be first set off against profits of other businesses. The tribunal's interpretation of the provision was upheld and the reference decided in favour of the assessee with costs.

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Issues: Whether, for the purpose of allowing a deduction under section 80E of the Income-tax Act, 1961, the phrase "such profits" means the profits and gains attributable to an activity specified in the Fifth Schedule computed before deducting any loss incurred in other business activities.

Analysis: Section 80E(1) provides for an allowance of an amount equal to eight per cent of "such profits and gains attributable to" specified activities in computing the total income. The statutory text does not state that the deduction must be made after allowing all deductions or after carrying forward or setting off losses from other businesses; instead it identifies the quantum as eight per cent of the profits and gains attributable to the specified activity. Reliance on an administrative circular urging set-off rules was examined and held not to alter the clear wording of the subsection. The provision's placement in Chapter VI-A as an "other deduction" and references to related provisions on computation and set-off do not require reading-in a proportionate or prior set-off of unrelated business losses against the specified activity's profits before applying the 8% deduction.

Conclusion: The deduction under section 80E is to be computed at eight per cent of the profits and gains attributable to the specified activity as such, before deducting losses incurred in other business activities; the Tribunal's allowance of the full deduction in favour of the assessee is correct.

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