Income from business and profession is computed under section 29 of the Income Tax Act, 1961.

Depreciation u/s 32 is required to be deducted to calculate income from Business and to arrive at the Gross Total Income.

But, whether unabsorbed depreciation is also required to be deducted first to arrive at the correct Gross Total Income and to claim deduction under section 80HHC or Chapter VI A?

In the present case, assessee claimed deduction under section 80HHC before setting off the unabsorbed depreciation loss resulting into higher deduction under chapter VI-A.

AO, reopened the assessment and disallowed the higher deduction. He allowed the deduction in re-assessment proceedings after setting off the unabsorbed depreciation.

But, ITAT accepted the arguments of the assessee and allowed the deduction under Chapter VI-A before allowance of unabsorbed depreciation.

Now, Madras High Court has rejected the view of ITAT and accepted the department plea that deduction under Chapter VI-A is available from Gross Total Income only after setting off of unabsorbed depreciation of earlier years.

(For full text of judgment - visit 2008 -TMI - 30564 - MADRAS HIGH COURT)

Unabsorbed depreciation set-off required before Chapter VI-A deductions, altering entitlement timing for claimants' income-tax exemptions. The issue is whether unabsorbed depreciation must be set off against business income before computing Chapter VI-A deductions. The court held that unabsorbed depreciation is to be adjusted against income first, and Chapter VI-A deductions are allowable only from the Gross Total Income remaining after such set-off, reversing the tribunal's approach that had permitted Chapter VI-A relief prior to the depreciation set-off.