X Ltd. has two units, unit 'N' and unit 'Y'. Unit 'N' engaged in the business of power generation installed a windmill in March, 2019 and had a profit of ₹ 100 lakh (before depreciation) in Assessment Year 2019-20. X Ltd

Set-off of unabsorbed depreciation of eligible business against profit of non-eligible business The Karnataka High Court in CIT vs. Swarnagiri Wire Insulations Pvt. Ltd. (2012) 349 ITR 245 , observed that it is a generally accepted principle that the deeming provision of a particular section cannot be breathed into another section. Therefore, the deeming provision contained in section 80-IA(5) cannot override the provisions of section 70(1) of the Income Tax Act, 1961. In this case, X Ltd. had incurred loss in eligible business (power generation) on account of claiming depreciation of ₹ 120 lakhs. Hence, section 80-IA becomes insignificant, since there is no profit from which this deduction can be claimed. It is, thereafter, that section 70(1) comes into play, whereby an assessee is entitled to set off the losses from one source against income from another source under the same head of income. Accordingly, X Ltd. is entitled to the benefit of set off of loss of ₹ 20 lakhs (representing business depreciation not set-off) pertaining to Unit N engaged in eligible business of power generation against profit of ₹ 70 lakhs of unit Y carrying on non-eligible business. Therefore, the net profit of ₹ 50 lakhs would be taxable in the A.Y. 2019-20. However, once set-off is allowed under section 70(1) against income from another source under the same head, a deduction to such extent is not possible in any subsequent assessment year i.e. the loss (arising on account of balance depreciation of eligible business) so set-off under section 70(1) has to be first deducted while computing profits eligible for deduction under section 80-IA in the subsequent year. Accordingly, in the A.Y. 2020-21, the net profits of unit N has to be reduced by ₹ 20 lakhs for computing the profits eligible for deduction under section 80-IA in that year. The view of the Assessing Officer in 'not permitting set-off of depreciation of eligible business against profits of non-eligible business in this case, therefore, not correct .