Chapter VI-A deduction applies only after tea income apportionment under Rule 8(1), not before statutory split.

Deduction under section 80HHC could be claimed only against the taxable 40% of composite tea income after apportionment under Rule 8(1), because the rule treats sale proceeds of tea grown and manufactured by the assessee as composite income with 60% deemed agricultural income outside the normal computation provisions. The legal fiction in Rule 8(1) was confined to splitting tea income and could not be extended to apply a Chapter VI-A deduction to the non-taxable agricultural component before apportionment. Section 80HHC, being a deduction from gross total income, therefore operated only on the income remaining after the statutory split.

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Issues: Whether deduction under section 80HHC of the Income-tax Act, 1961 was to be computed before or after apportionment of tea income under Rule 8(1) of the Income-tax Rules, 1962.

Analysis: Rule 8(1) treats income from sale of tea grown and manufactured by the assessee as composite income, of which only 40% is deemed liable to tax and the balance is agricultural income. Agricultural income is excluded from total income under section 10(1) of the Income-tax Act, 1961 and falls outside the normal computation provisions. By contrast, deduction under section 80HHC is a Chapter VI-A deduction allowed only from gross total income and not from a particular head of income. The legal fiction in Rule 8(1) is confined to the apportionment of tea income and cannot be extended to permit deduction under section 80HHC against the entire composite income. Section 80HHC therefore applies only to the taxable 40% portion after apportionment, and not to the 60% agricultural component.

Conclusion: Section 80HHC deduction was required to be allowed only after apportionment under Rule 8(1), not before it, and the issue was answered against the assessees.

Final Conclusion: The Department succeeded on the core question, the High Court judgment in favour of the assessees was set aside, and the appeals were disposed of accordingly.

Ratio Decidendi: A Chapter VI-A deduction that is allowable only from gross total income cannot be applied to the non-taxable agricultural component of composite tea income before the statutory apportionment under Rule 8(1).

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