Deduction under section 36(1)(viii) to be computed on total income before the deduction itself is applied

The deduction under section 36(1)(viii) was held to be computed on total income before allowing that very deduction, not on the reduced income after the deduction. The interpretation was based on the statutory scheme, the definition of total income, and a consistent line of High Court authority that treated the 1985 amendment as a legislative recognition of the existing position rather than a change in law. The contrary view was rejected as inconsistent with the provision's context and structure, and the issue was answered in favour of the assessee.

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Issues: Whether, for computing the deduction under section 36(1)(viii) of the Income-tax Act, 1961, the percentage limit is to be applied on the total income before the deduction under that clause or on the reduced total income after such deduction.

Analysis: The provision, as it stood before the Finance Act, 1985 amendment, was construed in the light of its scheme, the definition of total income, and the prior judicial view of several High Courts. The consistent line of authority held that the deduction was to be calculated on the total income as computed after normal additions and deductions, but before making the deduction under section 36(1)(viii) itself. The 1985 amendment was treated as giving statutory recognition to that interpretation rather than changing the law, and the contrary construction was rejected as inconsistent with the context and scheme of the provision.

Conclusion: The deduction under section 36(1)(viii) has to be computed on the total income before allowing the deduction under that clause. The question was answered in the affirmative and in favour of the assessee.

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