2013 (3) TMI 896 - AT - Income Tax

Clause (baa) to Explanation of s.80HHC applies in computing s.115JA book profits; duty drawback excluded from turnover

M/s. Wheels India Limited Versus The Dy. Commissioner of Income Tax, Large Tax Payer Unit Chennai

M/s. Wheels India Limited Versus The Dy. Commissioner of Income Tax, Large Tax Payer Unit Chennai - TMI ISSUES PRESENTED AND CONSIDERED 1. Whether clause (baa) of the Explanation to section 80HHC is applicable when computing the deduction under section 80HHC for purposes of arriving at book profits under section 115JA, thereby permitting exclusion of 90% of specified incomes (dividend income, interest, profit on sale of fixed assets, duty drawback, miscellaneous receipts) from profits of business. 2. Whether duty drawback and labour charges form part of 'total turnover' for the purpose of computing deduction under section 80HHC (i.e., whether duty drawback is excluded from total turnover by the proviso to clause (ba) of the Explanation and whether labour charges must be included). ISSUE-WISE DETAILED ANALYSIS Issue 1 - Applicability of clause (baa) of the Explanation to section 80HHC in computing deduction under section 80HHC for purpose of book profits under section 115JA Legal framework: Section 115JA requires deduction under section 80HHC to be reduced from net profit shown in profit & loss account as per clause (viii) of the Explanation to section 115JA, which refers to 'the amount of profits eligible for deduction under section 80HHC computed under clause (a), (b) or (c) of sub-section (3) or sub-section (3A), and subject to the conditions specified in sub-sections (4) & (4A) of that Section.' Section 80HHC contains an Explanation (following sub-sections (4)/(4A)) defining terms including clause (baa) which permits exclusion of 90% of certain incomes from 'profits of business' for the purpose of section 80HHC. Precedent treatment: A Mumbai Special Bench decision held that, in the MAT/book-profit scheme, the deduction under section 80HHC must be computed with reference to adjusted book profits (i.e., deduction is to be worked out on adjusted book profit), implying that computation of section 80HHC should follow the manner specified in the section for computation with reference to book profits. That Special Bench decision was later considered in higher authority decisions (noted as confirmed in a Supreme Court decision in related jurisprudence). The Special Bench did not hold that clause (baa) is inapplicable when computing deduction with reference to book profits. Interpretation and reasoning: The Court reasoned that the clause (viii) reference in the Explanation to section 115JA imports the computation mechanics of section 80HHC - i.e., profits eligible for deduction must be computed under clauses (a),(b) or (c) of section 80HHC and subject to subsections (4)/(4A). The Explanation to section 80HHC, introduced after sub-sections (4)/(4A), is expressly stated to apply 'for the purpose of this section' (i.e., section 80HHC) and therefore its definitions (including clause (baa)) apply to the whole section and not only to sub-sections (4)/(4A) or any sub-parts. The Special Bench's analysis that, under the MAT/book-profit regime, the adjusted book profit is treated as the gross total income and section 80HHC deduction must be computed on that basis, supports computing section 80HHC with the adjustments specified in the Explanation. Consequently, clause (baa) must be considered when computing deduction under section 80HHC for book profits under section 115JA; exclusion of 90% of the specified incomes is permissible. Ratio vs. Obiter: Ratio - The Explanation to section 80HHC (including clause (baa)) is applicable to the whole of section 80HHC and therefore must be applied when computing the amount of profits eligible for deduction under section 80HHC for the purpose of reducing book profits under section 115JA. The deduction under section 80HHC for MAT/book-profit purposes is to be computed with reference to adjusted book profits and includes adjustments specified in the Explanation. Remarks distinguishing prior decisions that addressed a different question (i.e., whether deduction must be computed with reference to regular income vs book profits) are explanatory but supportive of the principal holding. Conclusion: Clause (baa) of the Explanation to section 80HHC applies when computing deduction under section 80HHC for the purpose of arriving at book profits under section 115JA. The Assessing Officer was correct to exclude 90% of the specified incomes while computing the deduction under section 80HHC and determining book profits under section 115JA. Issue 2 - Inclusion/exclusion of duty drawback and labour charges in 'total turnover' for computing deduction under section 80HHC Legal framework: Clause (ba) of the Explanation to section 80HHC defines 'total turnover' and contains a proviso that, for assessment years commencing on or after 1-4-1991, the expression 'total turnover' shall have effect as if it also excluded any sum referred to in clauses (iiia)-(iiie) of section 28. Clause (iiic) of section 28 refers to income received by way of duty drawback. Precedent treatment: The Supreme Court decision in the case law relied upon by the authorities (referred to in the judgment) treated labour charges as part of total turnover in the context of section 80HHC computations. The Special Bench did not alter the application of clause (ba) proviso concerning duty drawback. Interpretation and reasoning: The Court observed that the proviso to clause (ba) expressly imports exclusions by reference to section 28(iiia)-(iiie); since clause (iiic) of section 28 specifically excludes duty drawback, duty drawback must be excluded from 'total turnover' for the purposes of section 80HHC. Consequently, duty drawback cannot be included in total turnover when computing deduction under section 80HHC. In contrast, labour charges do not fall within the proviso exclusions and, on authoritative precedent (the Supreme Court decision cited concerning labour charges), must be included in total turnover for the purpose of computing relief under section 80HHC. Ratio vs. Obiter: Ratio - Duty drawback is excluded from 'total turnover' for purposes of section 80HHC by virtue of the proviso to clause (ba) read with section 28(iiic); labour charges are to be included in 'total turnover' for purposes of section 80HHC in accordance with established precedent. Observations about the scope of clause (ba) and the interplay between the Explanation and section 115JA are integral to the binding holding. Conclusion: Duty drawback is not to be included in total turnover for computing deduction under section 80HHC; labour charges are to be included in total turnover for that purpose. The inclusion of labour charges and exclusion of duty drawback, as done by the revenue authorities, are confirmed.