I suppose one reason for the hooded CDS might have been to add information to the cancellation, as in this example:


where it specifies that the post office was in Jind State, as opposed to elsewhere in British India. That information could have been placed in the bottom arc of the cancellation, of course, and it often was.
The hooded cancellations seem to date from around the same period as the squared circles, and I suppose they fell out of use for much the same sorts of reasons: too cumbersome to make and use.