The deduction under section 80HH of the Income-tax Act, 1961 should be computed after set-off of earlier losses, as per the procedure indicated in section 80B(5) of the Act.

N. V. BALASUBRAMANIAN J.

At the instance of the Revenue, the Appellate Tribunal has stated a case and referred the following common question of law for the assessment years 1979-80 and 1980-81 under section 256(1) of the Income-tax Act, 1961 (hereinafter to be referred to as "the Act"), for our consideration

"Whether, on the facts and in the circumstances of the case, the deduction under section 80HH has to be computed by taking a proportion of a gross profit from the new industrial undertaking in the backward area and should be given as a deduction from such gross income of the assessee similar to the deductions under other sections, viz., 30 to 43A, in computing the income from business under section 29 of the Income-tax Act, 1961 ?"

The assessee is a company engaged in the manufacture and sale of industrial belts. The assessee, admittedly, is a newly established industrial undertaking set up in a backward area. The assessee, in the course of assessment proceedings for the assessment year 1979-80 disclosed the income from the business of manufacture and sale of industrial belts as Rs. 8, 91, 590 and claimed the deduction under section 80HH of the Act at 20 per cent. thereof amounting to Rs. 1, 01, 582. The Income-tax Officer, however, held that the business loss, unabsorbed investment allowance and the depreciation carried forward from the earlier years should first be deducted and the deduction under section 80HH of the Act should be allowable only on the net income of the business. Consequently, the net income was arrived at Rs. 14, 284 and the result of the computation was that for the assessment year 1979-80, there was a net taxable income of Rs. 18, 650 as against net loss of Rs. 72, 662, and granted deduction under section 80HH of the Act on the net income. The Income-tax Officer also disallowed the carried forward loss of Rs. 72, 670 as claimed by the assesseeThe assessee preferred an appeal to the Commissioner of Income-tax (Appeals) and the Commissioner (Appeals) held that the set-off of earlier losses has necessarily to be made in the computation of income for the purpose of determining the relief under section 80HH of the Act and, therefore, the order of the Income-tax Officer was legally correct. The assessee preferred a further appeal before the Income-tax Appellate Tribunal, and the Tribunal following its earlier order in the case of Veeraraghava Textiles in I. T. A. Nos. 67 to 70 (Mds) of 1981, dated November 30, 1981, held that the priority according to which the allowance will be allowed is as under

1. First allow current depreciation and compute profit from business

2. Set-off current losses

3. Sections 80H, 80HH, 80HHA deductions, if any, if there is profit

4. Current section 80J if there is profit/section 80-I deduction whichever lapses first

5. Carried forward section 80J from profit if any for successive years

6. Carried forward development rebate under section 33(2)(ii) for successive years

7. Current development rebate under section 33(2)(ii)

8. Carried forward development allowance under section 33A(2)(ii) for successive years

9. Current development allowance under section 33A(2)(i)

10. Carried forward investment allowance under section 32A(3)(i) for successive years

11. Current investment allowance under section 32A(3)(i)

12, Carried forward business loss under sections 72 and 73

13. Unabsorbed depreciation under section 32(2)

14. Other deductions under Chapter VIA

The Appellate Tribunal further found that the object behind section 80HH of the Act is to encourage establishment of industries in backward areas and the object would be completely lost if the past losses were set off, because in a nascent industry, such a net result would be negative figure and it would lead to a situation that the assessee may not get any encouragement by way of tax deduction. The Tribunal after noticing the budget speech of the Finance Minister and also the fact that the deduction under section 80HH of the Act will be given