Interpretation of Profit Calculation under Section 115J

The court held that for the purpose of section 115J, the profit should be considered as per the books of account and not as calculated under the Act. The Tribunal's interpretation was upheld, answering the questions in favor of the assessee and against the Revenue.

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Issues Involved:
1. Computation of deduction u/s 80HHC for the purpose of section 115J of the Income-tax Act, 1961.
2. Method of computing net profit for estimating export profit u/s 80HHC for deduction u/s 115J.

Summary:

Issue 1: Computation of Deduction u/s 80HHC for the Purpose of Section 115J

The court examined whether the method of computing the deduction u/s 80HHC for the purpose of section 115J, as considered by the assessee and upheld by the Tribunal, was correct and in accordance with law. The assessee, engaged in manufacturing and exporting goods, claimed that due to substantial depreciation and investment allowance, it had no taxable income under the regular provisions of the Act. Consequently, the assessment was made u/s 115J, which mandates that if the total income is less than 30% of the book profit, the income will be deemed to be 30% of the book profit. The assessee claimed deduction of export profit in the computation of book profit as per the Explanation to section 115J(1A)(iii), using the formula:

\[ \text{Export turnover} / \text{Total turnover} \times \text{Net profit credited in profit and loss account} \]

The assessing authority rejected this computation, determining the eligible deduction of export profit as "Nil" by applying the formula:

\[ \text{Profit computed under the provisions of the Income-tax Act} / \text{Total turnover} \times \text{Export turnover} \]

Issue 2: Method of Computing Net Profit for Estimating Export Profit u/s 80HHC for Deduction u/s 115J

The court considered whether the computation of net profit for estimating export profit u/s 80HHC for deduction u/s 115J should be made in the regular way of computing income from business or profession or in a limited way by restricting only to the additions and deductions as required by the Explanation to section 115J(1A). The court noted that section 115J involves two processes: determining the income of the company under the provisions of the Act and working out the book profit as per the Explanation to section 115J(1A). The court emphasized that section 115J begins with a non obstante clause, indicating that book profit is to be treated as net profit. The court agreed with the assessee's argument that the profit for the purpose of clause (iii) of section 115J should be the profit as per the books of account and not calculated under the Act. The court also referred to circulars issued by the Central Board of Direct Taxes, which supported this interpretation.

Conclusion:

The court concluded that the Tribunal was correct in interpreting that u/s 115J(1A)(iii), the profit should be taken into consideration as the profit as per the books of account and not as calculated under the Act. The questions referred were answered in the affirmative and against the Revenue.

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