TMI Blog2010 (7) TMI 26X X X X Extracts X X X X X X X X Extracts X X X X ..... of clause (iv) of Explanation 1, the extent of the reduction in respect of the deduction available under Section 80HHC has to be computed strictly in accordance with the provisions of Section 80HHC - Tribunal was not justified – decided in favor of revenue - 2619 OF 2010 - - - Dated:- 9-7-2010 - Mr. Suresh Kumar with Mr.P.S. Sahadevan i/b Mr.Vimal Gupta for the Appellant. Mr. R. Murlidhar with Mr. Balasaheb G. Yewale with Mr. Rajesh Shah i/b Rajesh Shah Co. for the Respondent. CORAM: DR.D.Y.CHANDRACHUD J.P.DEVADHAR, JJ. ORAL JUDGMENT (Per. DR.D.Y.CHANDRACHUD, J.): The question of law 1. This appeal arises out of an order of the Income Tax Appellate Tribunal dated 21 October 2009 for Assessment Year 2003-04. The Revenue which is in appeal under Section 260A of the Income Tax Act, 1961 has raised the following substantial question of law: "A. Whether on the facts and in the circumstances of the case and in law the Tribunal was justified in holding that the deduction admissible vide Explanation (iv) to section 115JB(2) of the Income Tax Act towards profit exempt u/s. 80HHC has to be quantified with reference to the profits as per accounts duly adjuste ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he net profits in the Profit and Loss Account of the assessee and not in accordance with the profits as computed under the head of profits and gains of business or profession. Hence, for the purpose of computing profits eligible for deduction under clause (iv) of the Explanation to Section 115JB, the Commissioner took the view that the deduction had to be made on the basis of the net profits as disclosed in the Profit and Loss Account of the assessee and not as computed with reference to the provisions of the Act. In doing so, the Commissioner followed the decision in the case of the earlier assessment years. The Tribunal confirmed the order of the Commissioner, following its own decision in the case of the assessee for Assessment Years 1998-99 and 1999-2000. The statutory context 6. Before we set out the rival submissions that have been urged by the parties, a reference to the statutory context in which those submissions have been urged would need some elaboration. 7. Section 115JB provides inter alia that notwithstanding anything contained in any other provision of the Act, where an assessee is a company and the income tax payable on the total income as computed under the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... th exports. 10. In essence, the issue before the Court in the present case is about how the reduction factor in clause (iv) of the Explanation to Section 115JB is to be applied. The reduction is of the amount of profits eligible for deduction under Section 80HHC computed under clauses (a), (b) or (c) of subsection (3) or sub section 3A and subject to the conditions as specified therein. The stand point of the assessee is that the expression "amount of profits eligible for deduction under Section 80HHC" must be based on the net profits of the assessee as reflected in the Profit and Loss account. According to the Revenue, in computing the deduction under Section 80HHC, which is to be reduced from the net profits for arriving at the book profits of the assessee, both the quantum and the manner of the deduction must be taken as prescribed by Section 80HHC. Consequently, consistent with the contention of the Revenue the Assessing Officer adopted the figure of Rs.4,00,75,199/as the adjusted profits of the business while applying the formula under sub section 3(a) of Section 80HHC. This figure was arrived at by the Assessing Officer by computing the profits of the business in accordanc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hand, it was urged on behalf of the assessee that (i) Section 115JB is a selfcontained provision which creates a deeming fiction in which the book profits constitute the total income of an assessee. The reference point is the net profit which is shown in the Profit and Loss account; (ii) In the net profits of the assessee in the Profit and Loss Account, there are profits from export and those profits are eligible for deduction under Section 80HHC; (iii) The assessee satisfies the first part of clause (iv) of the Explanation since it has profits in its books from exports and which are eligible for deduction; (iv) The expression "amount of profits eligible for deduction under Section 80HHC" would mean profits of the business of the assessee of export, which qualify for deduction. Embedded in the net profits are profits from export which have to be reduced from the net profit by applying the computation in subsection (3) of Section 80HHC; (v) The normal method of computation is bypassed under Section 115JB. The plain consequence is that the expression "profits of business" in the formula prescribed by subsection (3) of Section 80HHC would have to be substituted by the expression 'boo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e jurisdiction to go behind the net profits shown in the profit and loss account except to the extent provided in the Explanation to Section 115J. Consequently, the Supreme Court made it clear that while the net profit as shown in the profit and loss account duly certified could not be reopened, the Assessing Officer did have the jurisdiction to effect the increases and the reductions as provided in the Explanation. Section 115J 15. In Section 115J as it originally stood, Parliament had not provided for a reduction from the book profits, of the deduction which was made available under Section 80HHC to exporting companies covered by Chapter XII B. Such a provision was brought into force by the Direct Tax Laws (Amendment) Act with effect from 1 April 1989. By the amendment, clause (iii) came to be inserted as a result of which the following reduction was envisaged from the net profits as shown in the profit and loss account: "(iii) the amounts as arrived at after increasing the net profit by the amounts referred to in clauses (a) to (f) and reducing the net profit by the amounts referred to in clauses (i) and (ii) attributable to the business, the profits from which are elig ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 1); and (ii) If the income as computed under the Act in respect of the relevant previous year is less than the stipulated percentage of its book profit (ten percent at the relevant time) then the book profit is to be the total income of the assessee and the tax payable by the assessee on such total income shall be income tax computed at the rate prescribed in subsection (1). Explanation 1 to Section 115JB provides that for the purposes of the Section book profit shall mean the net profit as shown in the profit and loss account for the relevant previous year as increased by the amounts referred to in clauses (a) to (i) and as reduced by the amounts reflected in clauses (i) to (viii). Clause (iv) refers to "the amount of profits eligible for deduction under Section 80HHC computed under clause (a) or clause (b) or clause (c) of subsection (3) or subsection (3A), as the case may be, of that section and subject to the conditions specified in that section". Interpretation of Section 115JB 20. Now in interpreting the provisions of Clause (iv) of the Explanation the legislative intent underlying the introduction of Section 115JB and its precursors, Sections 115J and 115JA must be bor ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Explanation 1. Clause (iv), however, makes it clear that the amount of profits eligible for deduction under Section 80HHC would have to be computed under subsections (3) or (3A), as the case may be, and would be subject to all the conditions specified in that section. The "amount of profits eligible for deduction under Section 80HHC" has to be computed in accordance with subsection (3), or as the case may be, (3A) of that section. For the purposes of arriving at that amount, the provisions of Section 80HHC have to be followed and the computation has to be arrived at in accordance with the provisions of subsection (3) or subsection (3A). Now as we have noted earlier, clause (a) of subsection (3) of Section 80HHC postulates that the export profits shall be deduced by applying the proportion of the export turnover to the total turnover to the profits of the business. The profits of the business have to be determined under Explanation (baa) and are defined to mean the profits of the business as computed under the head of profits and gains of business or profession and as reduced under clauses (i) and (ii) thereto. 23. The submission of the assessee is that in applying the formula wh ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t of export profits and watered down the encouragement which was to be provided to such foreign exchange earning activities. The circular states that since the intention was that 100 percent of such profits should be exempt, it was decided that the profits which are exempt under Sections 80HHC and 80HHD, should be excluded from the purview of Section 115J. While construing the provisions of clause (iii) of the Explanation, the circular provided that the net profit to be excluded shall be computed in the same manner as provided for in subsections (3) and (3A) of Section 80HHC. The circular states that "the profits exempt under Sections 80HHC and 80HHD have been excluded from the purview of section 115J". 25. The subsequent circular dated 21 February 1994 notes that a doubt had been expressed as to whether the amount quantified under Section 80HHC(3) or 3(A) itself should be deducted under Explanation (iii) to Section 115J or whether only the manner of computation specified in those sections should be followed to quantify the amount of deduction. According to the circular, it is only the manner of computation specified in Section 80HHC(3) or (3A) and not the amounts themselves that ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... gh Court in Commissioner of Income Tax v. Rajanikant Schnelder and Associates Pvt. Ltd.{(2008) 302 ITR 22 (Mad)} similarly construed the provisions of clause (iii) of the Explanation to Section 115J. The question before the Madras High Court was whether the Tribunal was right in holding that an assessee having no profit from export was eligible for deduction under Section 80HHC on its book profits under Section 115J. The Division Bench of the Madras High Court held that the Assessing Officer was not entitled to touch the profit and loss account prepared by the assessee and the book profits so arrived at should be the basis for taxation. Since the case before the Madras High Court related to the construction of Section 115J, it is not necessary to dwell on this aspect of the case any further. Though the Madras High Court has observed that the provisions of Section 115J and 115JA are similar, that is in the context of the applicability of the principles laid down in Apollo Tyres (supra) as regards the account prepared by the assessee under Parts II and III of Schedule VI to the Companies Act 1956. From the judgment of the Madras High Court it appears that though the question that was ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ch creates the fiction. Under Section 115JB the deeming fiction is for equating the book profits with the total income of the assessee and for determining the tax payable by the assessee on such total income at the rate as provided therein. For the purposes of computing the book profits every assessee has to maintain its profit and loss account in accordance with the provisions of Parts II and III of Schedule VI of the Companies Act 1956. The Assessing Officer has to accept the validity and correctness of an account duly certified in accordance with law and is not entitled to enquire into the correctness of the account maintained by the assessee. The Assessing Officer thereafter has the power to make increases and reductions from the net profits as maintained in the profit and loss account of the assessee in terms as provided in Explanation 1 to Section 115JB. While the Assessing Officer does not have the jurisdiction to scrutinize once again or to go behind the net profit shown in the profit and loss account, he is well within his jurisdiction in effecting the increases and reductions as warranted by Explanation 1 to Section 115JB. As a matter of fact, the Assessing Officer is dut ..... 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