Ajanta Pharma Limited
Vs. Commr. of I.T-9,Mumbai  INSC 719 (9 September 2010)
JURISDICTION CIVIL APPEAL NO.7518 OF 2010 (Arising out of SLP(C) No. 22397 of
2009) Ajanta Pharma Ltd. .... Appellant(s) Versus Commissioner of Income Tax-9,
S.H. KAPADIA, CJI
was a MAT company at the relevant time. On 30.10.2001, it filed its return of
income for assessment year 2001-02.
The said return was
accompanied by statutory audit report claiming deduction under Section 80HHC of
the Income-tax Act, 1961 (for short, "the 1961 Act"). While computing
the "book profits" under Section 115- JB of the 1961 Act, the
assessee claimed reduction, under clause (iv) of Explanation to Section 115JB,
of 100% export profits. Vide assessment order dated 27.2.2004 the AO allowed only
80% of the export profits in terms of Section 80HHC(1B), as being allowed for
reduction of "book profits" under clause (iv) of Explanation to
Section 115JB of the 1961 Act. Being aggrieved by the assessment order,
assessee moved before the CIT(A). Vide order dated 30.7.2004, the CIT(A) held
that 100% export profits earned by the assessee as computed under Section
80HHC(3) was eligible for reduction under clause (iv) of Explanation to Section
115JB. This order of CIT(A) was upheld by the Tribunal which took the view that
the amount of profit eligible for deduction would not be governed by Section
80HHC(1B) since there is no reference to the said sub-section in clause (iv) of
the Explanation to Section 115JB. Against the concurrent finding the Department
carried the matter in appeal to the Bombay High Court. By the impugned decision
dated 7.5.2009 the Department's appeal under Section 260A of the 1961 Act stood
allowed. Hence this civil appeal.
question of law raised in this civil appeal is : whether for determining the
"book profits" in terms of Section 115JB, the net profits as shown in
the P&L Account have to be reduced by the amount of profits eligible for
deduction under Section 80HHC or by the amount of deduction under Section
answer the above question we need to quote herein below Section 115-JB as
inserted by Finance Act, 2000, w.e.f. 1.4.2001 which reads as follows:
Notwithstanding anything contained in any other provision of this Act, where in
the case of an assessee, being a company, the income-tax, payable on the total
income as computed under this Act in respect of any previous year relevant to
the assessment year commencing on or after the 1st day of April, 2001, is less
than seven and one-half per cent of its book profit, such book profit 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
seven and one-half per cent.
(2) Every assessee
being a company, shall, for the purposes of this section, prepare 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 (1 of
Provided further ...
Explanation : For the
purposes of this section, "book profit"
means the net profit
as shown in the profit and loss account for the relevant previous year prepared
under sub-section (2), as increased by - (a) to (f) ...
If any amount
referred to in clauses (a) to (f) is debited to the profit and loss account,
and as reduced by - (i) to (iii) ...
(iv) the amount of
profits eligible for deduction under Section 80HHC, computed under clause (a)
or clause (b) or clause (c) of sub-section (3) or sub-section (3A), as the case
may be, of that section, and subject to the conditions specified in that
also quote herein below Section 80HHC as inserted by the Finance Act, 1983
w.e.f. 1.4.83. Sub-section (1B) thereof was inserted by Finance Act, 2000,
w.e.f. 1.4.2001, the relevant portion of the said provisions reads as follows:
Where an assessee, being an Indian company or a person (other than a company)
resident in India, is engaged in the business of export out of India of any
goods or merchandise to which this section applies, there shall, in accordance
with and subject to the provisions of this section, be allowed, in computing
the total income of the assessee, a deduction to the extent of profits,
referred to in sub-section (1B) derived by the assessee from the export of such
goods or merchandise:
(1B) For the purposes
of sub-sections (1) and (1A), the extent of deduction of the profits shall be
an amount equal to - (i) eighty per cent thereof for an assessment year
beginning on the 1st Day of April, 2001;
(ii) seventy per cent
thereof for an assessment year beginning on the 1st day of April, 2002;
(iii)fifty per cent
thereof for an assessment year beginning on the 1st day of April, 2003;
(iv) thirty per cent
thereof for an assessment year beginning on the 1st day of April, 2004, and no
deduction shall be allowed in respect of the assessment year beginning on the
1st day of April, 2005 and any subsequent assessment year."
(1B) was inserted by Finance Act, 2000 w.e.f. 1.4.2001 i.e., the same Act which
inserted Section 115JA.
recent times, the number of zero-tax companies and companies paying marginal
tax has grown, hence, vide the Finance (No.2) Act, 1996, levy of minimum tax on
companies having "book profits" stood introduced. The scheme
envisaged payment of minimum tax by deeming 30% of the book profits computed
under the Companies Act, as taxable income, in a case where the total income as
computed under the provisions of the 1961 Act, is less than 30% of the book
profit. The word "book profit" has been defined in Section 115JA(2)
read with the Explanation thereto to mean the net profit as shown in the Profit
and Loss Account, as increased by the amount(s) mentioned in clauses (a) to
(f), and as reduced by amount(s) covered by clauses (i) to (ix) of the
Explanation. These may be called for the sake of brevity as "Upward and
Downward Adjustments". From the above it is clear that Section 115JA is a
self-contained Code and will apply notwithstanding any provisions in the 1961
Act. In this case, we are concerned with Downward Adjustment, particularly
clause (viii) which refers to the amount(s) of profits eligible for deduction
under Section 80HHC, computed under Section 80HHC(3) but subject to conditions
specified in Sections 80HHC(4) and 80HHC(4A).
the Finance Act, 2000, Section 115JB was inserted w.e.f. 1.4.2001 providing for
levy of MAT on certain companies. Section 115JB, though structured differently,
stood inserted to provide for payment of advance tax by MAT companies. Section
115JB is the successor section to Section 115JA. In essence, it is the same
except that Section 115JA provided for MAT on companies, so far as it does not
deem the book profit as total income. Under Section 115JB, however, clause
(viii) of Section 115JA is re-numbered as clause (iv).
continues to remain a self-contained Code.
the other hand, Section 80HHC(1) inter alia states that where an assessee, who
is the Indian resident, is engaged in the business of exports out of India of
any goods earns convertible foreign exchange then in computing the total
income, a deduction of the profits derived from such exports would be admissible.
Thus, Section 80HHC provides for tax incentives. Section 80HHC(1) at one point
of time laid down that an amount equal to the amount of deduction claimed
should be debited to the P&L Account of the previous year in respect of
which deduction is to be allowed and credited to the reserve account to be
utilized for the business purpose. Section 80HHC(1) concerns eligibility
whereas Section 80HHC(3) concerns computation of the quantum of deduction/tax
relief. At one point of time prior to the Finance Act, 2000, exporters were
allowed 100% deduction in respect of profits derived from export of goods.
However, that has now been reduced in a phase-wise manner under Section
80HHC(1B). It may be noted that all assessable entities are not eligible for
deduction under Section 80HHC.
eligible goods are entitled to such special deduction under Section 80HHC(1). A
bare reading of Section 80AB shows that computation of deduction is geared to
the amount of income, but Section 80HHC(3), which refers to quantification of
deduction is geared to the exports turnover and not to the income. On the other
hand, Section 115JB refers to levy of MAT on the deemed income. The above
discussion is only to show that Sections 80HHC and 115JB operate in different
spheres. Thus, two essential conditions for invoking Section 80HHC(1) are that
assessee must be in the business of export and secondly that sale proceeds of
such exports should be receivable in India in convertible foreign exchange.
Hence, Section 80HHC(1) refers to "eligibility" whereas Section
80HHC(3) refers to computation of tax incentive. Coming to Section 80HHC(1B) it
is clear that after Finance Act, 2000 w.e.f. assessment year 2001-02 exporters
would not get 100% deduction in respect of profits derived from exports but
that they would get deduction of 80% in the assessment year 2001-02, 70% in the
assessment year 2002-03 and so on. Thus, Section 80HHC(1B) deals not with
"eligibility" but with the "extent of deduction". 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.
of the contentions raised on behalf of the Department was that if clause (iv)
of Explanation to Section 115JB is read in entirety including the last line
thereof (which reads as "subject to the conditions specified in that
section"), it becomes clear that the amount of profits eligible for
deduction under Section 80HHC, computed under clause (a) or clause (b) or
clause (c) of sub-section (3) or sub-section (3A), as the case may be, is
subject to the conditions specified in that Section.
According to the
Department, the assessee herein is trying to read the various provisions of
Section 80HHC in isolation whereas as per clause (iv) of Explanation to Section
115JB, it is clear that book profit shall be reduced by the amount of profits
eligible for deduction under Section 80HHC as computed under clause(a) or
clause(b) or clause(c) of sub- section (3) or sub-section (3A), as the case may
be, of that Section and subject to the conditions specified in that Section,
thereby meaning that the deduction allowable would be only to the extent of
deduction computed in accordance with the provisions of Section 80HHC. Thus,
according to the Department, both "eligibility" as well as
of the profit have
got to be considered together for working out the deduction as mentioned in
clause (iv) of Explanation to Section 115JB.
We find no merit in
this argument. 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
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.
the above reasons, we set aside the impugned judgment of the High Court and
restore the judgment of the Tribunal. Accordingly, the civil appeal of the
assessee is allowed with no order as to costs.
(S. H. Kapadia)