80HH

ITA 1961 · Section 80HH

Section 80HH — Industrial Undertaking in Backward Areas (Legacy)

Chapter VI-A — Deductions To Be Made in Computing Total IncomeITA 1961Up to AY 2026-27

STATUTORY ARCHITECTURE — 18-ROW MAP

Statutory text — Income-tax Act, 1961

Deduction in respect of profits and gains from newly established industrial undertakings or hotel business in backward areas.

80HH. (1) Where the gross total income of an assessee includes any profits andgains derived from an

industrial undertaking, or the business of a hotel, to which this section applies, there shall, in accordance

with and subject to the provisions of this section, be allowed, in computing the total income of the assessee,

a deduction from such profits and gains of an amount equal to twenty per cent thereof.

(2) This section applies to any industrial undertaking which fulfils all the following conditions, namely :—

(i) it has begun or begins to manufacture or produce articles after the 31st day of December, 1970 but

before the 1st day of April, 1990, in any backward area;

(ii) it is not formed by the splitting up, or the reconstruction, of a business already in existence in any

backward area :

Provided that this condition shall not apply in respect of any industrial undertaking which is

formed as a result of the re-establishment, reconstruction or revival by the assessee of the business

of any such industrial undertaking as is referred to in section 33B, in the circumstances and within

the period specified in that section;

(iii) it is not formed by the transfer to a new business of machinery or plant previously used for any

purpose in any backward area;

(iv) it employs ten or more workers in a manufacturing process carried on with the aid of power, or

employs twenty or more workers in a manufacturing process carried on without the aid of power.

Explanation.—Where any machinery or plant or any part thereof previously used for any purpose in any

backward area is transferred to a new business in that area or in any other backward area and the total value

of the machinery or plant or part so transferred does not exceed twenty per cent of the total value of the

machinery or plant used in the business, then, for the purposes of clause (iii) of this sub-section, the

condition specified therein shall be deemed to have been fulfilled.

(3) This section applies to the business of any hotel, where all the following conditions are fulfilled, namely

:—

(i) the business of the hotel has started or starts functioning after the 31st day of December, 1970 but

before the 1st day of April, 1990, in any backward area;

(ii) the business of the hotel is not formed by the splitting up, or the reconstruction, of a business

already in existence;

(iii) the hotel is for the time being approved for the purposes of this sub-section by the Central

Government.

(4) The deduction specified in sub-section (1) shall be allowed in computing the total income in respect of

each of the ten assessment years beginning with the assessment year relevant to the previous year in which

the industrial undertaking begins to manufacture or produce articles or the business of the hotel starts

functioning :

Provided that,—

(i) in the case of an industrial undertaking which has begun to manufacture or produce articles, and

(ii) in the case of the business of a hotel which has started functioning,

after the 31st day of December, 1970, but before the 1st day of April, 1973, this sub-section shall have

effect as if the reference to ten assessment years were a reference to ten assessment years as reduced by the

number of assessment years which expired before the 1st day of April, 1974.

(5) Where the assessee is a person other than a company or a co-operative society, the deduction under

sub-section (1) shall not be admissible unless the accounts of the industrial undertaking or the business of the

hotel for the previous year relevant to the assessment year for which the deduction is claimed have been

audited by an accountant as defined in the Explanation below sub-section (2) of section 288 and the

assessee furnishes, along with his return of income, the report of such audit in the prescribed form duly

signed and verified by such accountant.

(6) Where any goods held for the purposes of the business of the industrial undertaking or the hotel are

transferred to any other business carried on by the assessee, or where any goods held for the purposes of any

other business carried on by the assessee are transferred to the business of the industrial undertaking or the

hotel and, in either case, the consideration, if any, for such transfer as recorded in the accounts of the

business of the industrial undertaking or the hotel does not correspond to the market value of such goods as

on the date of the transfer, then, for the purposes of the deduction under this section, the profits and gains of

the industrial undertaking or the business of the hotel shall be computed as if the transfer, in either case, had

been made at the market value of such goods as on that date :

Provided that where, in the opinion of the Assessing Officer, the computation of the profits and gains of the

industrial undertaking or the business of the hotel in the manner hereinbefore specified presents exceptional

difficulties, the Assessing Officer may compute such profits and gains on such reasonable basis as he may

deem fit.

Explanation.—In this sub-section, "market value" in relation to any goods means the price that such goods

would ordinarily fetch on sale in the open market.

(7) Where it appears to the Assessing Officer that, owing to the close connection between the assessee

carrying on the business of the industrial undertaking or the hotel to which this section applies and any other

person, or for any other reason, the course of business between them is so arranged that the business

transacted between them produces to the assessee more than the ordinary profits which might be expected

to arise in the business of the industrial undertaking or the hotel, the Assessing Officer shall, in computing

the profits and gains of the industrial undertaking or the hotel for the purposes of the deduction under this

section, take the amount of profits as may be reasonably deemed to have been derived therefrom.

(8) [***]

(9) In a case where the assessee is entitled also to the deduction under section 80-I or section 80J in relation

to the profits and gains of an industrial undertaking or the business of a hotel to which this section applies,

effect shall first be given to the provisions of this section.

(9A) Where a deduction in relation to the profits and gains of a small-scale industrial undertaking to which

section 80HHA applies is claimed and allowed under that section for any assessment year, deduction in

relation to such profits and gains shall not be allowed under this section for the same or any other assessment

year.

(10) Nothing contained in this section shall apply in relation to any undertaking engaged in mining.

(11) For the purposes of this section, "backward area" means such area as the Central Government may,

having regard to the stage of development of that area, by notification in the Official Gazette, specify in this

behalf :

Provided that any notification under this sub-section may be issued so as to have retrospective effect to a

date not earlier than the 1st day of April, 1983.

Function in the statutory architecture

Section 80HH allowed a deduction of twenty per cent of the profits and gains derived from an industrial undertaking, or the business of a hotel, in a backward area notified by the Central Government. The undertaking had to begin manufacture or production after 31 December 1970 but before 1 April 1990, not be formed by splitting up, reconstruction or transfer of used machinery (subject to a twenty per cent tolerance), and employ ten or more workers with power or twenty or more without. A hotel had to start functioning in the same period and be approved by the Central Government. Mining undertakings were excluded.

Operative consequences

The deduction ran for ten assessment years from the year of commencement (s. 80HH(4)).
A non-corporate, non-co-operative assessee needed an audit report in the prescribed form with the return (s. 80HH(5)).
Where s. 80-I or s. 80J also applied, s. 80HH was given effect first; and the same profits could not be relieved under both s. 80HH and s. 80HHA (s. 80HH(9), (9A)).

Status

Expired. The section has no bracketed note of omission, but the latest start date is before 1 April 1990 and the period is ten years, so it does not reach assessment year 2026-27. The Finance Act, 2026 does not amend s. 80HH.

The Income-tax Act, 1961 governs assessment year 2026-27 and earlier years; the Income-tax Act, 2025 governs tax year 2026-27 onwards. For this subject, there is no corresponding provision.

Case Laws & Commentary

SECTION 80HH — DEDUCTION IN RESPECT OF PROFITS AND GAINS FROM NEWLY ESTABLISHED INDUSTRIAL UNDERTAKINGS, ETC. IN BACKWARD AREAS

Case Laws & Commentary (Income-tax Act, 1961 as amended by Finance Act, 2026)

STATUTORY SCHEME (editorial summary — verbatim bare-Act text in the companion Block-1 file)

Marginal heading: Deduction in respect of profits and gains from newly established industrial undertakings or hotel business in backward areas.

Section 80HH allowed a deduction of 20 per cent of the profits and gains derived from a newly established industrial undertaking or hotel business begun in a notified backward area, for ten assessment years from the year of commencement, subject to the conditions in sub-sections (2) to (9) (new undertaking not formed by splitting up or reconstruction, manufacture or production of articles, employment conditions, audit, etc.). The deduction is computed on the profits 'derived from' the eligible undertaking. The provision is spent for new undertakings but generated extensive jurisprudence on the meaning of 'derived from' and on the quantum of the deduction.

A. SECTION COMMENTARY

A.1 Structural position

Section 80HH was the first of the area-based industrial incentives in heading 'C' of Chapter VIA, the successor to the omitted section 80H. It granted a 20-per-cent deduction on profits 'derived from' a backward-area undertaking. Though spent (the backward-area regime was succeeded by sections 80-IA / 80-IB), its case law on the phrases 'derived from' and 'profits and gains' is foundational for the whole profit-linked family.

A.2 Provision taxonomy

A percentage (20 per cent) deduction, time-limited (ten years), conditioned on a genuinely new undertaking in a notified backward area, with the usual no-splitting/no-reconstruction, manufacture, employment and audit conditions, computed on profits 'derived from' the undertaking.

A.3 Core doctrinal themes

Two themes dominate. (i) 'Derived from': the deduction reaches only profits with a direct and immediate nexus to the industrial undertaking — the first-degree source — so that ancillary receipts (sale of import entitlements, interest on deposits) are excluded (Sterling Foods; Pandian Chemicals). (ii) The quantum: the deduction is computed on the 'profits and gains' of the undertaking, and the Supreme Court has held (for the pre-section-80AB years) that this means the gross profits and gains before deduction of depreciation and investment allowance, distinguishing 'profits and gains' from 'income' (Vijay Industries, which held section 80AB prospective and overruled Motilal Pesticides).

A.4 Legislative evolution / FA amendment trail

Inserted by the Direct Taxes (Amendment) Act, 1974 with effect from 1 April 1974, succeeding the omitted section 80H. The backward-area incentive was carried forward and recast through the section 80-IA / 80-IB regime; no fresh section 80HH claim survives for new undertakings. The Finance Act, 2026 makes no change to the (spent) provision.

A.5 CA practitioner pointers

(1) Test every receipt for the 'derived from' nexus — only first-degree industrial profits qualify; duty-drawback, DEPB, interest and licence-sale receipts fail. (2) For the pre-80AB years, the deduction is on gross profits and gains before depreciation/investment allowance (Vijay Industries). (3) The deduction remains subject to the gross-total-income base and the section 80A(2) ceiling (Synco Industries). (4) Relevant today only for open legacy assessments and as a guide to the successor sections.

B. FA 2026 IMPACT NOTE

Section 80HH is NOT amended by the Finance Act, 2026 and is spent for new undertakings; its 'derived from' and 'profits and gains' jurisprudence continues to inform the surviving profit-linked deductions.

C. CASE LAW — CLUSTERED BY ISSUE

Cluster C-1 : The meaning of 'derived from' — direct nexus required

CIT v. Sterling Foods (1999) 237 ITR 579 (SC)

Facts: The assessee, engaged in processing and exporting sea food from an eligible undertaking, earned income by selling import entitlements (import licences) granted under an export-promotion scheme and claimed the deduction on that income too.

Issue: Whether profit on the sale of import entitlements is profit 'derived from' the industrial undertaking for the purpose of the deduction.

Held: The Supreme Court held that the source of the import-entitlement profit was the export-promotion scheme of the Government, not the industrial undertaking; the nexus was not direct enough. Such profit is not 'derived from' the undertaking and does not qualify.

Ratio: 'Derived from' is narrower than 'attributable to'; it requires a direct, first-degree nexus between the profit and the industrial undertaking; ancillary or scheme-generated receipts are excluded.

Relevance: The foundational 'derived from' authority, applied across sections 80HH, 80-I, 80-IA and 80-IB; decisive on the exclusion of export-incentive receipts.

Pandian Chemicals Ltd. v. CIT (2003) 262 ITR 278 (SC)

Facts: The assessee earned interest on a deposit made with the State Electricity Board as a condition of obtaining power supply for its industrial undertaking and claimed the deduction on that interest.

Issue: Whether interest on the electricity deposit is profit 'derived from' the industrial undertaking.

Held: The Supreme Court held that the immediate source of the interest was the deposit, not the industrial undertaking; the words 'derived from' must be given a restricted meaning and the interest is not derived from the undertaking.

Ratio: 'Derived from' confines the deduction to profits whose effective and immediate source is the undertaking itself; one step removed is enough to take a receipt outside the deduction.

Relevance: The companion authority to Sterling Foods; the standard reference for excluding interest and similar ancillary income from profit-linked deductions.

Cluster C-2 : Quantum — 'profits and gains' versus 'income'

Vijay Industries v. CIT (2019) 412 ITR 1 (SC)

Facts: For assessment years before section 80AB came into force, the dispute was whether the 20-per-cent deduction under section 80HH (and the cognate section 80-I) is computed on profits before, or after, deduction of depreciation and investment allowance.

Issue: Whether 'profits and gains' in section 80HH means the gross profits and gains, or the 'income' computed under the Act after depreciation and investment allowance, and whether section 80AB is clarificatory or prospective.

Held: The Supreme Court held that there is a difference between 'income' (referred to in section 80AB) and 'profits and gains' (referred to in sections 80HH and 80-I); the deduction is to be computed on the gross profits and gains, without first deducting depreciation and investment allowance. It held section 80AB to be prospective (not clarificatory) and so inapplicable to the years in question, and overruled Motilal Pesticides (I) (P) Ltd. v. CIT as erroneous.

Ratio: For sections 80HH/80-I, and for the pre-section-80AB years, the deduction is on gross profits and gains before depreciation/investment allowance; 'profits and gains' is not to be read down to 'income'.

Relevance: The leading modern authority on the quantum of the section 80HH/80-I deduction and on the prospective character of section 80AB; it expressly overruled Motilal Pesticides.

Cluster C-3 : The deduction base and ceiling (cross-reference)

Synco Industries Ltd. v. Assessing Officer (2008) 299 ITR 444 (SC)

Facts: A multi-division assessee claimed sections 80HH and 80-I deductions while losses and unabsorbed depreciation remained to be set off.

Issue: Whether the section 80HH deduction can be allowed where the gross total income, after set-off of losses and unabsorbed depreciation, is nil.

Held: The Supreme Court held that gross total income must first be computed after set-off; where it is nil, no Chapter VIA deduction, including section 80HH, is allowable.

Ratio: Section 80HH is subject to the section 80B(5) / 80A(2) base and ceiling; a positive gross total income is a precondition.

Relevance: Confirms that the section 80HH deduction, however computed, cannot exceed (and presupposes) a positive gross total income.

Editorial note on sourcing

Editorial scheme summary prepared from the Income-tax Act, 1961 as amended by the Finance Act, 2025, read with the Finance Act, 2026; verbatim bare-Act text is carried in the companion Block-1 treatise file. These sections are spent / phased out for current assessment years but carry heavy legacy litigation; the digested authorities are reported Supreme Court / High Court decisions verified against standard law reports (ITR/Taxman/CTR) and remain the governing law for the open assessments and for the cognate 'derived from' / netting principles applied across Chapter VIA.

Case law on Section 80HH

ITAT, High Court and Supreme Court judgments applying this section, on BharatTax.net, our income tax case law search.

Section 80HH case laws

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Income-tax Act, 1961	Income-tax Act, 2025
s. 80HH — industrial undertakings and hotels in backward areas begun 1971 to before 1 April 1990	No corresponding provision in the Income-tax Act, 2025