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TMI Blog2010 (7) TMI 26X X X X Extracts X X X X X X X X Extracts X X X X ..... he chapter 'Profits and Gains of Business or Profession'? 2. The appeal is admitted. With the consent of counsel appearing on behalf of the Revenue and the assessee and on their request the Appeal has been taken up for hearing and final disposal. The facts 3. The assessee engages in the manufacture and processing of meat and meat products and has an abattoir at Hyderabad. The assessee is both a manufacturer and an exporter. For Assessment Year 2003-04, the assessee filed its return of income on 28 November 2003 declaring a nil income, after setting off unabsorbed depreciation of the earlier years. The assessee computed its book profits for the purposes of Section 115JB at Rs. 55.41 lacs. While computing the profits eligible for deduction under Section 80HHC, in order to compute book profits, the assessee disclosed a total turnover of Rs.141.35 Crores; and a total export turnover of Rs.118.21 Crores. The adjusted turnover and adjusted export turnover was at Rs. 112.61 Crores and Rs.89.47 Crores. The eligible deduction under Section 80HHC was computed at Rs.2.14 Crores as follows: Adjusted profit of the business X Adjusted Export Turnover Adjusted Total Turnover 2,69,71,336 X 8 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s book profits, such book profits shall be deemed to be the total income of the assessee and the tax payable by the assessee on such total income shall be the amount of income tax at the rate of ten percent. Sub section (2) of Section 115JB requires an assessee which is a company to prepare for the purpose of the Section its profit and loss account for the relevant previous year in accordance with the provisions of Parts II and III of Schedule VI to the Companies Act 1956. The expression "book profit" for the purposes of the Section is defined by Explanation 1 to mean the net profit as shown in the profit and loss account for the relevant previous year, prepared under sub section (2), as increased by the amounts more particularly detailed in clauses (a) to (i) and as reduced by the amounts specified in clauses (i) to (viii). 8. The controversy in the present case revolves around clause (iv) of the Explanation. Under clause (iv) the net profits as shown in the profit and loss account have to be reduced by: "(iv) 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ng clause (iv) of the Explanation to Section 115JB the deduction of eligible profits must be computed with reference to the net profits of the assessee as shown in its Profit and Loss Account and not on the basis of the provisions of Section 80HHC. Submissions 11. Counsel appearing on behalf of the Revenue submitted that (i) In interpreting the provisions of clause (iv) of the Explanation to Section 115JB the emphasis is on the expression "computed". What the provision requires is that while computing the amount of profits eligible for deduction under Section 80HHC the computation has to be made under subsection (3); (ii) The deeming fiction under subsection (1) of Section 115JB applies in a situation where the income tax payable on the total income as computed under the Act in the case of a company is less than ten percent of its book profits. The consequence under the deeming fiction is that the book profit shall be deemed to be the total income and the tax payable thereon shall be at the rate of ten percent; (iii) Different criteria cannot be applied to a company in whose case the income tax payable is in excess of ten percent of its book profits and a company in whose case th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... from the statutory provision. In applying clause (iv) of the Explanation only the method of computation which is prescribed by subsection (3) of Section 80HHC has to be adopted. But a deduction is to be worked out not with reference to the profits of the business as stated therein, but with reference to the book profits. Legislative history 13. Parliament initially introduced the provisions of Section 115J by the Finance Act of 1987 with effect from 1 April 1988. Section 115J, forms a part of Chapter XIIB. Section 115J was brought on the statute book specifically with a view to deal with zero tax but highly profitable companies. These companies could not be brought within the net of income tax prior to the introduction of the provision because their accounts were being adjusted in such a manner as to attract no tax or negligible tax. A provision was therefore introduced whereby every company would have to pay a minimum corporate tax on the profits declared by it in its own accounts. Under Section 115J the income reflected in the books of account of a company became the deemed income for the purpose of assessing tax. As we have noted earlier, the Explanation to Section 115J provid ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... (3A) of section 80HHC or subsection (3) of section 80HHD, as the case may be;" 16. Section 115J held the field for previous years commencing from 1 April 1989 and ending on 31 March 1991. Section 115JA 17. Subsequently with effect from 1 April 1997 the provisions of Section 115JA were introduced by the Finance (No.2) Act, of 1996. When Section 115JA was introduced, there was no provision for reducing the profits eligible for deduction under Section 80HHC from the net profits. Such a provision was brought into effect by the Finance Act of 1997 with effect from 1 April 1998. As a result of the amendment, clause (viii) was inserted into the Explanation so as to provide for a reduction of the profits eligible for deduction under Section 80HHC in the following terms: "(viii) the amount of profits eligible for deduction under section 80HHC, computed under clause (a), (b) or (c) of subsection (3) or subsection (3A), as the case may be, of that section, and subject to the conditions specified in subsections (4) and (4A) of that section;" 18. Section 115JA applied in relation to previous years relevant to Assessment Years commencing from 1 April 1997 and until 31 March 2001. Eventually ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... x by virtue of the deductions and exemptions which were provided in the Act. It was in view of this regime that a change was brought about by Parliament by subjecting such companies to a Minimum Alternate Tax (MAT) under which the book profits would be deemed to be the total income of the assessee. Explanation 1 to Section 115JB stipulates that the net profits as contained in the profit and loss account would constitute the book profits, but that those profits would have to be increased and reduced in the manner provided in the Section. 21. The underlying object of Section 115JB is not to confer an additional benefit on companies which are governed by the MAT regime. As we have noted, when Sections 115J and 115JA were initially introduced, no provision was made for reducing from the net profits the deduction which is made available under Section 80HHC to exporters. Consequently, the provisions of Sections 115J and 115JA were amended subsequently so as to provide for a reduction from the net profits of the deduction available under Section 80HHC. Clause (iii) of the Explanation to Section 115J was not artistically worded. Under clause (iii) the reduction was of the amounts attribut ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... er the Act, but the net profits as reflected in the profit and loss account of the assessee that must be adopted. To accept the submission of the assessee, would be to rewrite the provisions of subsection (3) of Section 80HHC which is plainly impermissible for the Court to do. That it would be impermissible for the Court to carry out such an exercise is fortified by the fundamental principle that the object of Section 115JB was not to confer an additional benefit upon assessees governed by the MAT regime. What clause (iv) of the Explanation to Section 115JB provides is that the profits which would be eligible for deduction under Section 80HHC would be reduced from the net profits as part of the exercise of computing the book profits for the purposes of the section. The entirety of the profits which are eligible for deduction under Section 80HHC have to be computed and then reduced from the net profits as reflected in the books of account of the assessee. CBDT Circulars of 4 May 1990 and 21 February 1994 24. Counsel appearing on behalf of the assessee placed reliance on two circulars of the Central Board of Direct Taxes, the first of them being of 4 May 1990 and the second of 21 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e context of Section 115J, the provisions of which were materially altered by Parliament while enacting clause (viii) of the Explanation to Section 115JA and subsequently clause (iv) of Explanation 1 to Section 115JB. In these circumstances, the provisions made in these two circulars cannot control the meaning to be ascribed to clause (iv) of the Explanation to Section 115JB. The judgments of the Kerala and Madras High Courts 27. At this stage, it would be necessary to advert to the judgment of the Kerala High Court in Commissioner of Income Tax v. G.T.N. Textiles Ltd.{(2001) 248 ITR 372}. The question before the Kerala High Court was whether the manner and method of computing the deduction under Section 80HHC for the purposes of Section 115J, as urged by the assessee, was correct and whether the Tribunal was right in holding that the computation of net profits for the purpose of estimating the export profits under Section 80HHC, for allowing a deduction under Section 115J should not be made in the ordinary manner of computing the income from business or profession by applying the normal provisions of the Income Tax Act 1961. The Kerala High Court adverted to the circulars dated ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... er of Income Tax {(2002) 258 ITR 770} the Supreme Court held that Section 115J does not create any right nor does it serve to allow all the deductions taken into consideration for determining whether the total income should be quantified under Section 115J(1), to be carried forward under subsection (2) of Section 115J". The provision, held the Supreme Court, allowed only the unabsorbed losses, depreciation, investment allowance etc., "which otherwise could have been carried forward, to be carried forward". 29. A Division Bench of this Court in Commissioner of Income Tax v. Ajanta Pharma Ltd. {(2009) 23 DTR (Bom) 1} held that a company governed by the MAT regime is entitled to the same deduction of export profits under Section 80HHC as any other company involved in export and that consequently an assessee governed by the MAT regime would be subject to the restriction contained in subsection (1B) of Section 80HHC. The Division Bench held as follows: "Sec. 115JB also uses the expression "profits eligible for deduction". There really can be no difficulty in understanding what this means. Only those profits which are eligible and computed in terms of subs. (3) or (3A) and quantified i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he 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. We have not accepted the submission of the assessee that in applying the formula under subsection (3) of Section 80HHC, the expression profits of the business would need to be substituted by book profits. Our conclusion is that the acceptance of the submission would amount to rewriting a legislative provision which would not be permissible to the Court. 31. In the circumstances, while allowing the appeal, we answer the question of law by holding that the Tribunal was not justified in coming to the conclusion that the amount to be reduced under clause (iv) of Explanation 1 to Section 115JB in respect of the profits eligible for deduction under Section 80HHC has to be computed with reference to the net profits in the profit and loss account and not according to the profits of the business computed under the head of profits and gains of business or profession. The question of law is accordingly answered in favour of the Revenue and against the assessee in the aforesaid terms. The appeal is disposed of. There shall be no ..... X X X X Extracts X X X X X X X X Extracts X X X X
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