2011 (4) TMI 1560 - AT - Income Tax

Assessee succeeds; book profit computed under s.115JB excludes export profits as computed under s.80HHC(3), restoring AO's position

N.W. Export Limited Versus The ITO Ward 2 (2) (4), Mumbai

ITAT MUMBAI allowed the assessee's appeal, restoring the AO's original computation of book profits under s.115JB after the SC reversed the HC's contrary ... - ISSUES PRESENTED AND CONSIDERED 1. Whether, for the purpose of computing 'book profits' under section 115JB (Explanation 1(iv)), the amount of export profit to be excluded is the profit 'eligible for deduction' as computed under clauses (a)/(b)/(c) of section 80HHC(3)/(3A) (i.e. full export profit), or only the portion actually allowed as a deduction under the normal provisions after application of the restriction in section 80HHC(1B). 2. Whether section 115JB is a self-contained code such that its Explanation permitting exclusion of 'amount of profit eligible for deduction u/s 80HHC' must be read independently of limitations on deductibility that operate under the normal income-tax provisions. 3. Whether an assessing officer (or the Commissioner under section 263) is justified in disallowing the exclusion under Explanation 1(iv) to section 115JB where the same deduction was not allowed while computing total income under the normal provisions. ISSUE-WISE DETAILED ANALYSIS Issue 1 - Proper meaning of 'amount of profit eligible for deduction u/s 80HHC' for computing book profits under section 115JB (Explanation 1(iv)) Legal framework: Explanation 1(iv) to section 115JB(2) permits reduction of book profit by 'amount of profit eligible for deduction u/s 80HHC, computed under clause (a)/(b)/(c) of sub-section (3) or sub-section (3A)'. Section 80HHC(3)/(3A) provide methods for computing export profits; section 80HHC(1B) contains restrictions (e.g. percentage limits, eligible entities/goods) that may reduce the deduction actually allowable under the normal provisions. Precedent treatment: The jurisdictional High Court had held that only the portion actually allowable after applying section 80HHC(1B) could be excluded from book profits; that view was subsequently reversed by the Supreme Court which held that the exclusion under section 115JB relates to export profits computed under section 80HHC(3) and is not limited by the deductibility restrictions in section 80HHC(1B). Interpretation and reasoning: The Court adopts the Supreme Court's approach that section 115JB constitutes a self-contained code. The language of Explanation 1(iv) expressly refers to 'amount of profit eligible for deduction... computed under clause ... of sub-section (3) or (3A)'. Sub-sections (3)/(3A) are procedural/methodological provisions for computing export profits. The proper construction separates (i) eligibility/method of computing export profit under sub-section (3)/(3A) from (ii) the policy/limiting provisions of sub-section (1B) that apply to deductibility under normal assessment. To preserve the self-contained nature of the MAT/book profit regime, the exclusion must be the export profit as computed under sub-section (3) (i.e. the profit eligible for exclusion under the book-profit code), and not the restricted amount that may be allowable under normal income-tax calculations. Ratio vs. Obiter: The holding that the 'amount of profit eligible for deduction' for section 115JB purposes is the export profit computed under section 80HHC(3)/(3A) is treated as ratio decidendi by the Court, being essential to the decision to restore the AO's original book profit computation. Any discussion of policy or distinctions between eligibility and deductibility is explanatory and may be regarded as ratio insofar as it is necessary to uphold the self-contained nature of section 115JB. Conclusion: The amount to be excluded from book profits under Explanation 1(iv) to section 115JB(2) is the export profit as computed under section 80HHC(3)/(3A) (i.e. the profit eligible for deduction), and is not reduced by the restrictions of section 80HHC(1B) that govern deductibility under the normal provisions. Issue 2 - Characterisation of section 115JB as a self-contained code and consequences for interplay with section 80HHC Legal framework: Section 115JB imposes tax on 'book profits' with its own definition and adjustments set out in the Explanation; earlier jurisprudence treated predecessor provisions (section 115JA) as a self-contained code, and the successor provision (section 115JB) continues in that tradition. Precedent treatment: The Supreme Court reaffirmed that section 115JA/JB is self-contained and must be applied notwithstanding other provisions; therefore, exclusions specified in the Explanation must be construed in the context of the MAT/book profit machinery rather than by reference to separate restrictions applicable in the normal income tax computation. Interpretation and reasoning: Treating section 115JB as self-contained requires that adjustments and exclusions expressly provided (such as exclusion of export profits eligible under section 80HHC computed under sub-sections (3)/(3A)) be applied as written, without importing limitations from separate provisions unless the text of section 115JB itself incorporates such limitations. Failing to keep eligibility (method of computation) distinct from deductibility (allowance under normal tax rules) undermines the statutory scheme of MAT/book profit computation. Ratio vs. Obiter: The declaration that section 115JB is self-contained is central to the decision and thus a ratio; its application to the treatment of section 80HHC exclusion is also ratio in this judgment. Conclusion: Section 115JB must be construed as a self-contained code; exclusions expressly provided by its Explanation are to be applied according to their terms and are not curtailed by unrelated limitations under the normal provisions unless section 115JB itself so provides. Issue 3 - Validity of exercise of revisionary powers under section 263 to disallow exclusion where deduction was not allowed under normal provisions Legal framework: Under section 263 the Commissioner can revise an assessment where the order is prejudicial to the interests of revenue for lack of enquiry or wrong application of law. The question is whether it was permissible to direct recomputation of book profits excluding the export profit when the assessing officer, in the original assessment, had allowed the export profit reduction in computing book profits. Precedent treatment: The Tribunal relies on the Supreme Court's rule on the correct construction of section 115JB vis-à-vis section 80HHC; where the Supreme Court declares that the eligible export profit (as computed under sub-section (3)) is to be excluded for book-profit purposes, a contrary view by the Commissioner cannot stand. Interpretation and reasoning: The Commissioner under section 263 directed recalculation on the basis that because the deduction under section 80HHC was not allowed for normal total income computation, it should not be allowed for book profits. That approach incorrectly conflates normal deductibility restrictions with the self-contained book-profit regime. Given the Supreme Court's ruling to the contrary, the exercise of revision to exclude the export profit from book profits was unsustainable. Ratio vs. Obiter: The conclusion that the section 263 direction was incorrect insofar as it required exclusion of export profit from book profits is a necessary outcome of applying the authoritative construction of section 115JB and section 80HHC and therefore part of the ratio. Conclusion: The reassessment/revision that removed the export profit exclusion from book profits was not justified once the correct legal interpretation (that the export profit as computed under section 80HHC(3) is to be excluded under Explanation 1(iv) to section 115JB) is applied; the AO's original computation restoring the export profit deduction for book-profit purposes is to be upheld. OVERALL CONCLUSION The book profits must be computed by reducing the profit as per the profit & loss account by the export profit computed under section 80HHC(3)/(3A) (i.e. the amount 'eligible for deduction' for the purposes of Explanation 1(iv) to section 115JB(2)), without regard to the limiting operation of section 80HHC(1B) that affects deductibility under the normal provisions. Consequently, the reassessment under section 263 removing that exclusion was set aside and the original book-profit computation (including the exclusion) restored.