Section 80-O deduction must be computed on net income, not gross fees received, under the Chapter VI-A scheme.

Deduction under section 80-O was required to be computed with reference to the income actually included in gross total income, not on gross fees received. The Bombay High Court noted that "gross total income" under section 80B(5) means total income computed under the Act before Chapter VI-A deductions, and that the statutory scheme, reinforced by section 80AB, links such deductions to income computed under the Act. Gross receipts could not form the basis of the deduction, so the net income approach prevailed and the issue was answered in favour of the Department.

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Issues: Whether deduction under section 80-O of the Income-tax Act, 1961 was to be computed on gross fees received or on the net income after deducting expenditure.

Analysis: The expression "gross total income" under section 80B(5) means total income computed in accordance with the Act before making deductions under Chapter VI-A. Read with section 80-O, the statutory scheme showed that the relevant deduction had to be related to the income actually included in gross total income, namely the quantum of income of the specified category and not merely the category itself. The later legislative position under section 80AB reinforced that deductions under Chapter VI-A are linked to the income computed under the Act, and gross receipts could not form the basis for the deduction.

Conclusion: Deduction under section 80-O had to be computed on net income and not on gross fees; the question was answered in the negative, in favour of the Department and against the assessee.

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