Section 80HH deduction must be computed on net income, not gross profit, under Chapter VI-A principles.

Deduction under section 80HH was required to be computed on net income of the industrial undertaking, not on gross profit, because section 80B(5) defines gross total income as income computed under the Act before Chapter VI-A deductions. The earlier broad approach in Cloth Traders was no longer applicable after the Constitution Bench in Distributors (Baroda), and the same net-income principle was reiterated in P. K. Jhaveri. Cambay Electric Supply was treated as supporting the view that similar deduction provisions operate on a computed net figure rather than gross receipts. The issue was therefore resolved in favour of the Revenue.

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Issues: Whether deduction under section 80HH of the Income-tax Act, 1961, was allowable on the gross profit of the industrial undertaking or only on its net income.

Analysis: The provision had to be read with section 80B(5), under which gross total income means the total income computed in accordance with the Act before making any deduction under Chapter VI-A. The earlier view based on Cloth Traders no longer governed the field, since it stood overruled by the Constitution Bench in Distributors (Baroda), and the principle was later reiterated in P. K. Jhaveri. The reasoning in Cambay Electric Supply was also applicable, as the relevant deduction provisions were similarly worded and required computation on the net figure rather than on the gross receipt.

Conclusion: Deduction under section 80HH was not allowable on the gross profit and had to be computed only on the net income; the question was answered in favour of the Revenue.

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