Section 80HH deduction must be computed on net income under the Act after adjusting losses and depreciation.

Section 80HH relief must be computed by reading it with section 80AB, so the eligible deduction is based on net income computed under the Income-tax Act rather than the profit and loss account figure alone. Unabsorbed losses and unabsorbed depreciation must first be adjusted while working out gross total income, and related items such as depreciation, development rebate and investment allowance cannot be ignored for this purpose. On that basis, deduction under section 80HH is not available on an unadjusted accounts figure and is calculated only on income determined in accordance with the Act.

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Issues: Whether deduction under section 80HH of the Income-tax Act, 1961 is to be computed with reference to the profit and loss account without adjusting unabsorbed losses, unabsorbed depreciation, depreciation, development rebate, investment allowance and similar items, or with reference to the net income computed in accordance with the Act.

Analysis: Section 80HH has to be read with section 80AB of the Income-tax Act, 1961. For determining relief under section 80HH, the gross total income must be worked out after deducting unabsorbed losses and unabsorbed depreciation, and the eligible income is the net income computed in accordance with the provisions of the Act, not the gross income or the figure shown in the profit and loss account alone.

Conclusion: Deduction under section 80HH is to be computed on the net income as computed under the Act, after adjusting the relevant losses and depreciation, and not on the unadjusted profit and loss account figure. The issue is answered in favour of the Revenue.

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