TMI Blog2005 (9) TMI 45X X X X Extracts X X X X X X X X Extracts X X X X ..... as framed at the time of admission of the appeal, are as under: "1. Whether, the bonus, the liability of which is not provided in the accounts, and which has not been incurred as an expenditure, can be deducted for the purposes of arriving at the total income under section 115J of the Income-tax Act? 2. Whether, the guidance note of the Institute of Chartered Accountants could override the provisions of the Income-tax Act so as to compute deduction claimed under section 80HHC?" The respondent-assessee is an Indian company and is engaged in the business of manufacturing pesticides. It also exports its products outside India amongst other business. In respect of profits of such export business section 80HHC applied. Prior to making assessment under section 143(3) for the assessment year 1990-91, the Assessing Officer had issued an intimation under section 143(1)(a) reducing the amount of claim under section 80HHC by the asses-see from Rs. 14,38,513 to Rs. 13,50,929. The intimation under section 143(1)(a) was set aside by the Tribunal on an application under section 154 moved by the assessee which was then the remedy provided against the adjustments made by the Assessing Of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the reserves specified in section 80HHD) or provisions, if any such amount is credited to the profit and loss account. (ii) The amount of income to which any of the provisions of Chapter III applies, if any such amount is credited to the profit arid loss account. In this connection, it may be noticed that Chapter III of the Income-tax Act, 1961, relates to the incomes which do not form part of the total taxable income. Thus, income which is not otherwise taxable was not to be included in the book profit; and (iii) Significantly, the adjusted amount of net profit so reduced by these two items noticed above is to be further reduced by such amount of profit attributable to the business, the profits from which are eligible to deduction under section 80HHC or section 80HHD. The amount so attributable to the businesses referred to in section 80HHC has to be computed in the same manner specified in sub-section (3) of section 80HHC or sub-section (3) of section 80HHD as the case may be. We are concerned in this case about computation of deduction under section 80HHC only. The assessee has filed a return showing its income at Rs. 53,33,080 being 30 per cent, of its books profit in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e amount of discount and commissions paid on sales by making entries in the profit and loss account and Rs. 40,76,73,018 ought to have been taken as the basis for working out the ratio of the profits of the export business and the total business so as to work out a deductible amount eligible under section 80HHC. This accounted for the reduced sum of deductible amount at Rs. 13,50,919. The assessee has originally claimed the deductible sum at Rs. 14,38,512. The Assessing Officer in his intimation under section 143(1)(a) had reduced it to Rs. 11,49,003. The reduction under section 143(1)(a) was set aside in the order under section 154 and the amount is to be recomputed. However, since the assessment did not rest at adjustments under section 143(1)(a) but was subjected to regular assessment under section 143(3) and making of adjustments under section 143(1)(a) is otherwise subject to regular assessment, whether resorted to at the request of the assessee by the Assessing Officer, the proceeding under section 143(1)(a) loses its significance. It may also be noticed in this connection that during the assessment proceedings, the assessee had laid claim to deduction of eligible amount at ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... held. There was no controversy about the question that the net taxable income to which the profit and loss account of business was maintained in terms of the Income-tax Act was less than 30 per cent, of the book profit and therefore, assessment could have been made under section 115J. In the aforesaid circumstances, the two questions referred to above arise for consideration in this appeal as substantial questions of law. So far as the increase made in the net profits on the basis of book profits as disclosed by the assessee in the books of account in terms of sub-section (1A) of section 115J is concerned, it must be noticed that the provisions of section 115J have been founded on an alternative basis for making companies liable to tax at a minimum level on the basis of the income admitted by the assessee and such liability is not founded on any computation to be made in accordance with the provisions relating to computation of taxable income under the Income-tax Act by alternative principles. Alternative to computation of taxable income of a company in accordance with the provision is to fall back on the profits disclosed by the assessee, with permissible adjustment detailed ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... any to maintain its books of account to give a fair and true picture of its business for the given period. In the aforesaid decision, the Tribunal was of the opinion that the Assessing Officer is required to probe into the profit and loss account of the company while considering the acceptability of the book profit shown in the profit and loss account while invoking section 115J(1). This court repelled this premise of the Tribunal in the following terms: "It may be noticed that section 115J is to be resorted to in the alternative to a regular assessment by computing the taxable income of a company in accordance with the provisions of the Income-tax Act. It is only where the result arrived at by regular assessment of the company by computing its income in accordance with the provisions of the Income-tax Act, if the assessee's total taxable income be less than 30 per cent, of the income admitted by the assessee through declaration of book profits in its profit and loss account presented before the A.G.M. for the purpose of distributing the dividends. This is with the object that the company is at least held liable to pay tax on 30 per cent, of such admitted profits, which has bee ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hich have been specified in the Explanation." The court further examining the effect of the amendment brought in section 115J stated: "Therefore, for the purpose of finding the book profit, in order to determine the 30 per cent, of its profits in terms of section 115J(1) as minimum income chargeable to tax in a particular assessment year, where the chargeable income assessed in accordance with the provisions of the Income-tax Act, 1961, is less than 30 per cent, of book profit so arrived at, the 30 per cent, of the book profit so arrived at under sub-section (1A) may be taken as the chargeable income to the tax by this deeming provision. Apparently, there is no room for redetermining the net profit as shown in the profit and loss account of the company containing relevant declarations as incorporated in the light of Part III of Schedule VI. The Assessing Officer had to accept the result shown in the profit and loss account as book profit subject to the adjustment by additions or reductions, as detailed in the Explanation. The enquiry by the Assessing Officer into the conceptual 'true and fair result' of the working of the company to be adverted to by the Tribunal is alien to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ccount to the annual general meeting which has approved the accounts and on filing of the same certified by the Registrar of Companies also. Additions in the net profit by disallowing the claim of deduction on account of company's liability which otherwise is relevant to the previous year relevant to the assessment year in question cannot be sustained. Coming to the second question also, we are of the opinion that the Tribunal's finding is in accordance with the provisions of the Act and the Central Board of Direct Taxes circular referred to above by the Tribunal and it also does not go to the contrary. From the narration of facts, it is apparent that the Assessing Officer was of the opinion that since in the books of account, the total turnover of the trading business of the assessee was shown to be Rs. 40,76,73,018 without taking into account the discount and commissions allowed to customers from sale bill or invoices amounting to Rs. 6,87,67,354 and if this is accounted for, the turnover comes to Rs. 33,89,05,664. While the computation by the assessee of the eligible profit for deductions under section 80HHC was on the premise of the total trading turnover for Rs. 33,89,05,6 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... trading goods. It reads as under: "Section 80HHC.(3)(b) Where the export out of India is of 'trading goods' the profits derived from such export shall be the 'export turnover' in respect of such trading goods as reduced by the direct costs and indirect costs attributable to such export." Similarly clause (c) of section 80HHC(3) deals with a case where the assessee company's business consists of export of goods or merchandise processed or manufactured by it as well as trading of goods simpliciter and the same distinction has been maintained. In the present case, the issue is about the turnover of sale of goods only. The turnover of sales for a period in the present case, the previous year relevant to the assessment year 1990-91, in its ordinary sense denotes the aggregate of price received or receivable by the company in respect of sale of goods transacted by it. No other specific meaning has been assigned to it. If sale of goods is to be understood as defined in the Sale of Goods Act, the price received/receivable becomes an integral part of the sale transaction. Where the sale is under invoice or bill and the price itself has been discounted in invoice on such transaction, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s, to the total turnover. These two definitions make it clear that while direct costs are those that are directly referable to trading of goods exported outside India, and have nothing to do with the total costs of business, the indirect costs refer to such costs which are incurred for carrying out the total business of the assessee including export trading, as a whole and are to be apportioned in terms of the ratio which the export turnover bears to the total turnover. Clause (c) of the Explanation to section 80HHC(3) defines "adjusted total turnover" to mean the total turnover of the business as reduced by the export turnover in respect of trading goods. In this aspect of the matter, it cannot be doubted and argued that the sale commission and sale discounts are not part of direct costs of the turnover attributable to business or attributable to export as the case may be. In that view of the matter, for computing the eligible profit in the manner as provided in section 80HHD accounted for the sale and discount while computing the total turnover of the business found an essential ingredient and that is what has been certified to be shown while arriving at the 30 per cent, of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ation on admitted book profits. Since at the relevant time, the entire profit of the export business and business from tourism were under the two relevant provisions to be deducted from gross profit, it carried with it 100 per cent, tax exemption. The circular makes it clear that since 30 per cent, of book profit as taxable income has to be arrived at by making adjustment provided under the Explanation to section 115J(1A) the starting point of computing eligible deductions under section 80HHC or section 80HHD also has to be the net profit shown in the profit and loss account of the company and not the other figure. While adopting the manner of computation, depreciation of eligible amount in respect of export profit must also be the eligible export profits or tourism profit to be related to the net profit disclosed in the profit and loss account for the purpose of finding the ratio between business profit and profit from export or tourism as the case may be. The relevant excerpts from the aforesaid circular of the Central Board of Direct Taxes are in consonance with what we have explained above (see [1994] 206 ITR (St.) 297): "It may be noted that while deductions under sections 8 ..... X X X X Extracts X X X X X X X X Extracts X X X X
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