2010 (9) TMI 8 - SC - Income Tax

Export profits fully excluded from book profits under Section 115JB; Section 80HHC(3)/(3A) certification is compliance

Ajanta Pharma Ltd. Versus Commissioner of Income Tax-9, Mumbai

SC held that for computing book profits under Section 115JB (MAT) export profits are to be excluded in full under Explanation clause (iv) as an eligible ... Minimum Alternation Tax - Computation of Book profit for the purpose of MAT - reduction of book profit by deduction allowable u/s 80HHC (Export Benefit) - difference between eligibility and deductibility of deduction - Held that:- As earlier stated, Section 115JB is a self-contained Code. It taxes deemed income. It begins with a non-obstante clause. Section 115JB refers to computation of 'book profits' which have to be computed by making Upward and Downward Adjustments. In the Downward Adjustment, vide clause (iv) it seeks to exclude 'eligible' profits derived from exports. On the other hand, under Section 80HHC(1B) it is the extent of deduction which matters. The word 'thereof' in each of the items under Section 80HHC(1B) is important. Thus, if an assessee earns Rs.100 crores then for the assessment year 2001-02, the extent of deduction is 80% thereof and so on which means that the principle of proportionality is brought in to scale down the tax incentive in a phased manner. However, for the purposes of computation of book profits which computation is different from normal computation under the 1961 Act/computation under Chapter VIA. We need to keep in mind the Upward and Downward Adjustments and if so read it becomes clear that clause (iv) covers full export profits of 100% as 'eligible profits' and that the same cannot be reduced to 80% by relying on Section 80HHC(1B). Thus, for computing 'book profits' the Downward Adjustment, in the above example, would be Rs.100 crores and not Rs.90 crores. The idea being to exclude 'export profits' from computation of book profits under Section 115JB which imposes MAT on deemed income. The above reasoning also gets support from the Memorandum of Explanation to the Finance Bill, 2000. If the dichotomy between 'eligibility' of profit and 'deductibility' of profit is not kept in mind then Section 115JB will cease to be a self-contained code. In Section 115JB, as in Section 115JA, it has been clearly stated that the relief will be computed under Section 80HHC(3)/(3A), subject to the conditions under sub-clauses (4) and (4A) of that Section. The conditions are only that the relief should be certified by the Chartered Accountant. Such condition is not a qualifying condition but it is a compliance condition. Therefore, one cannot rely upon the last sentence in clause (iv) of Explanation to Section 115JB (subject to the conditions specified in sub-clauses (4) and (4A) of that Section) to obliterate the difference between 'eligibility' and 'deductibility' of profits as contended on behalf of the Department. - We need to keep in mind the Upward and Downward Adjustments and if so read it becomes clear that clause (iv) covers full export profits of 100% as 'eligible profits' and that the same cannot be reduced to 80% by relying on Section 80HHC(1B). Thus, for computing 'book profits' the Downward Adjustment, in the above example, would be ₹ 100 crores and not ₹ 90 crores. Issues:Interpretation of provisions under Section 115JB and Section 80HHC for determination of book profits and deduction eligibility.Analysis:The case involved an assessee, a MAT company, claiming deduction under Section 80HHC while computing 'book profits' under Section 115JB of the Income-tax Act, 1961. The dispute arose regarding the reduction of export profits for determining book profits. The CIT(A) allowed 100% export profits for reduction under Section 115JB, which was upheld by the Tribunal. The Department appealed to the Bombay High Court, which allowed the appeal. The Supreme Court addressed the question of whether net profits or deduction under Section 80HHC should be reduced for book profits under Section 115JB.The Court analyzed Section 115JB and Section 80HHC to determine the legislative intent. Section 115JB, introduced by the Finance Act, 2000, imposes MAT on certain companies. It deems book profits as total income and provides for advance tax payment. The Court highlighted that Section 115JB is a self-contained Code, focusing on deemed income calculation. On the other hand, Section 80HHC provides tax incentives for exporters, distinguishing between eligibility under Section 80HHC(1) and deduction computation under Section 80HHC(3).The judgment emphasized the importance of distinguishing between eligibility and deductibility of profits under the respective sections. The Court clarified that for computing book profits under Section 115JB, the reduction of export profits should be based on the extent of deduction provided in Section 80HHC(1B), not the total profits eligible for deduction. The Court rejected the Department's argument that eligibility and deductibility should be considered together, maintaining that such an interpretation would undermine the self-contained nature of Section 115JB.Ultimately, the Supreme Court set aside the High Court's judgment and reinstated the Tribunal's decision, allowing the assessee's civil appeal. The Court emphasized the distinction between eligibility and deductibility of profits under Section 115JB and Section 80HHC, ensuring the proper computation of book profits for MAT purposes.This detailed analysis of the judgment showcases the Court's interpretation of the provisions under Section 115JB and Section 80HHC, emphasizing the legislative intent behind each section and clarifying the distinction between eligibility and deductibility of profits for computing book profits under the Income-tax Act, 1961.