Of Book Profit Is One And The Same Both Under Section 115Ja And 115Jb Of The Act v. The Respondents

IN THE HIGH COURT OF KERALA AT ERNAKULAM PRESENT : THE HONOURABLE MR. JUSTICE C.N.RAMACHANDRAN NAIR & THE HONOURABLE MR. JUSTICE B.P.RAY & THE HONOURABLE MR. JUSTICE P.N.RAVINDRAN TUESDAY, THE 30TH NOVEMBER 2010 / 9TH AGRAHAYANA 1932 ITA.No. 930 of 2009() ------------------------------- ITA.1283 (COCH)/2004 of INCOME TAX APPELLATE TRIBUNAL,COCHIN BENCH .................... APPELLANT/RESPONDENT: ----------------------------------------- THE COMMISSIONER OF INCOME TAX, COCHIN. BY ADV. SRI.JOSE JOSEPH, SC FOR INCOME TAX RESPONDENT/APPELLANT: ----------------------------------------- PACKWORTH UDYOG LTD, ERUMATHALA P.O, ALUVA-683 015. BY ADV. SRI.P.BALAKRISHNAN. THIS INCOME TAX APPEAL HAVING BEEN FINALLY HEARD ON 30/11/2010, ALONG WITH ITA NO. 1525 OF 2009 AND CONNECTED CASES, THE COURT ON THE SAME DAY DELIVERED THE FOLLOWING: C .N. RAMACHANDRAN NAIR,BHABANI PRASAD RAY, &P.N. RAVINDRAN, JJ. -------------------------------------------- I.T.A. Nos. 930, 1525, 1638, 1668 & 1681 of 2009 -------------------------------------------- Dated this the 30th day of November, 2010 JUDGMENT Ramachandran Nair, J. In these appeals filed by the revenue, the only question raised iswhether the assessees are entitled to deduction under Section 80HHCin the computation of book profit under Section 115JB of the IncomeTax Act. Even though in respect of one assessee, the provisioninvolved is Section 115JA, there is no need to consider the issueseparately because applicability of Section 80HHC in the computation of book profit is one and the same both under Section 115JA and115JB of the Act. 2. When huge amount of carried forward business loss andunabsorbed depreciation were set off by the assessees, the gross profitbecame a negative figure. Therefore the assessees were not entitled todeduction under Section 80HHC of the Act by virtue of operation of Section 80AB and Section 80B(5) of the Act. However, the assessingofficer proceeded to make assessment on book profit under Section115JB of the Act. In the computation of book profit, the assessingofficer declined deduction under Section 80HHC, though the assesseeclaimed it under Section 115JB (2)(iv) of the Act. When the matterwas heard before the Division Bench, the assessees relied on thedecision of the Division Bench of this Court in CIT V. G.T.N.TEXTILES LTD., 248 I.T.R. 372, which was in their favour.However, standing counsel appearing for the revenue contended thatthe Division Bench judgment of this Court requires reconsideration inview of subsequent decisions of the Supreme Court in IPCALABORATORY LTD. V. DEPUTY COMMISSIONER OF INCOMETAX, (2004) 266 I.T.R. 521, A.M. MOOSA V. COMMISSIONER OFINCOME TAX, (2007) 294 I.T.R. 1 (SC) and C.I.T. v. SHIRKECONSTRUCTION EQUIPMENTS LTD., (2007) 291 I.T.R. 380. Inview of the contentions raised by the revenue, the matter was referredto Full Bench and hence these appeals are before us. We have heardsenior standing counsel appearing for the revenue and senior counselSri. Joseph Markose, and Advocate, Sri. P. Balakrishnan, appearing for the respondents. the respondents. 3. Counsel appearing for both sides brought to our notice thelatest decision of the Supreme Court on Section 115JB in AJANTAPHARMA LTD. V. CIT, (2010) 327 I.T.R. 305 (SC) wherein the issuedecided is assessee's eligibility for deduction under Section 80HHC ofthe Act in the computation of book profit under Section 115JB. Whilethe case of the assessees is that issue is squarely covered by thisjudgment of the Supreme Court in their favour, standing counsel for therevenue contended all what the Supreme Court has said is that ceilingof deduction provided under Section 80HHC (1B) at 80% should notbe applied in the computation of book profit and assessees are entitledto deduction of the entire eligible export profit computed underSection 80HHC of the Act. In other words, standing counselcontended that in the computation of book profit, deduction underSection 80HHC should be considered by applying the provisions ofSection 80AB and Section 80B(5), etc., of the Act. Thereforeaccording to him, if the total income computed before considering theclaim of deduction under Chapter VIA-C is a negative figure then theassessees shall not be entitled to deduction under Section 80HHC at all. His contention is that in the case of all the assessees herein carriedforward business loss and depreciation from previous years are suchthat gross profit, after setting off the same from the gross total income,is a negative figure which disentitles the assessees for deduction underany of the provisions of Chapter VIA-C of the Act. Therefore thecontention of the revenue is that assessees are not entitled to deductionunder Section 80HHC of the Act, even in the computation of bookprofit for assessment. 4. The short question arising for consideration therefore iswhether the assessees whose gross total income after setting offbusiness loss and depreciation carried forward from previous years isNIL are entitled to deduction under Section 80HHC in the computationof book profit under Section 115JB (2)(iv) of the Act. For easyreference we extract hereunder the relevant portions of Section 115JBof the Act: 115JB. Special provision for payment of tax by certaincompanies: (1) Notwithstanding anything contained in any otherprovision of this Act, where in the case of an assessee,being a company, the income-tax payable on the totalincome as computed under this Act in respect of anyprevious year relevant to the assessment year commencingon or after the 1st day of April, 2001, is less than seven and one-half per cent of its book profit, such book profit shallbe deemed to be the total income of the assessee and the taxpayable by the assessee on such total income shall be theamount of income tax at the rate of seven and one-half percent. (2) Every assessee, being a company, shall for the purposesof this section, prepare its profit and loss account for therelevant previous year in accordance with the provisions ofparts II and III of Schedule VI to the Companies Act, 1956(1 of 1956): Provided that while preparing the annual accounts including profit and loss account,-- (i) the accounting policies; (ii) the accounting standards followed for preparingsuch accounts including profit and loss account; (iii) the method and rates adopted for calculating thedepreciation,depreciation, ....................... Explanation.-- For the purposes of this section, “bookprofit” means the net profit as shown in the profit and lossaccount for the relevant previous year prepared under sub-section (2), as increased by-- ................... (e) the amount or amounts of dividends paid orproposed; or (f) the amount or amounts of expenditure relatable toany income to which section 10 or section 10A or section10B or section 11 or section 12 apply, if any amount referred to in clauses (a) to (f) is debited tothe profit and loss account, and as reduced by-- (i) the accounting policies; (ii) the accounting standards followed for preparingsuch accounts including profit and loss account; (iii) the method and rates adopted for calculating thedepreciation,depreciation, ....................... Explanation.-- For the purposes of this section, “bookprofit” means the net profit as shown in the profit and lossaccount for the relevant previous year prepared under sub-section (2), as increased by-- ................... (e) the amount or amounts of dividends paid orproposed; or (f) the amount or amounts of expenditure relatable toany income to which section 10 or section 10A or section10B or section 11 or section 12 apply, if any amount referred to in clauses (a) to (f) is debited tothe profit and loss account, and as reduced by-- (i) the amount withdrawn from any reserve orprovision (excluding a reserve created before the 1stday of April, 1997 otherwise than by way of a debitto the profit and loss account), if any such amount is credited to the profit and loss account: Provided that where this section is applicable toan assessee in any previous year, the amountwithdrawn from reserves created or provisions madein a previous year relevant to the assessment yearcommencing on or after the 1st day of April, 1997shall not be reduced from the book profit unless thebook profit of such year has been increased by thosereserves or provisions (out of which the said amountwas withdrawn) under this Explanation orExplanation below second proviso to section 115JA,as the case may be; or (ii) the amount of income to which any of theprovisions of section 10 or section 10A or section10B or Section 11 or section 12 apply, if any suchamount is credited to the profit and loss account; or (iii) the amount of loss brought forward orunabsorbed depreciation, whichever is less as perbooks of account, Explanation.-- For the purposes of this clause,-- (a) the loss shall not include depreciation; (b) the provisions of this clause shall not applyif the amount of loss brought forward orunabsorbed depreciation, is nil, or (iv) the amount of profits eligible for deduction undersection 80HHC, computed under clause (a) or clause(b) or clause © of sub-section (3) or sub-section (3A)as the case may be, of that section, and subject to theconditions specified in that section; or, (v) the amount of profits eligible for deduction under section 80HHE computed under sub-section (3) orsub-section (3A), as the case may be, of that section,and subject to the conditions specified in that section;or (vi) the amount of profits eligible for deduction undersection 80HHF computed under sub-section (3) ofthat section and subject to the conditions specified inthat section; or (vii) the amount of profits of sick industrial companyfor the assessment year commencing on and from theassessment year relevant to the previous year inwhich the said company has become a sick industrialcompany under sub-section (1) of section 17 of theSick Industrial Companies (Special provisions) Act,1985 (1 of 1986) and ending with the assessment yearduring which the entire net worth of such companybecomes equal to or exceeds the accumulated losses. Explanation.-- For the purposes of this clause“net worth” shall have the meaning assigned toit in clause (ga) of sub-section (1) of section 3of the Sick Industrial Companies (SpecialProvisions) Act, 1985 (1 of 1986). ....... The contention raised by the revenue is that admissible deduction ofexport profit under clause (iv) in the computation of book profit is thesame amount of deduction allowable to the assessee under Section80HHC in the computation of total income, had the assessment beenmade in the normal course. Therefore according to him, if the assessee Explanation.-- For the purposes of this clause“net worth” shall have the meaning assigned toit in clause (ga) of sub-section (1) of section 3of the Sick Industrial Companies (SpecialProvisions) Act, 1985 (1 of 1986). ....... The contention raised by the revenue is that admissible deduction ofexport profit under clause (iv) in the computation of book profit is thesame amount of deduction allowable to the assessee under Section80HHC in the computation of total income, had the assessment beenmade in the normal course. Therefore according to him, if the assessee is not entitled to any deduction under Section 80HHC in thecomputation of total income under the other provisions of the Act, thenno deduction is admissible under export profit under clause (iv) abovein the computation of book profit as well. Counsel appearing for theassessees on the other hand relied on the decision of the Supreme Courtin AJANTA PHARMA LTD.'s case wherein the Supreme Court hasheld that Section 115JB is a self-contained code in the computation ofbook profit. Assessees' counsel has also relied on the decision of theMadras High Court in CIT V. MAGNA ELECTRO CASTINGS LTD.,(2009) 184 Taxman 79 (Mad.) and the earlier decision of this Court inGTN TEXTILES's case referred above and submitted that restrictionsin the computation of deduction under Chapter VIA-C which includesdeduction of export profit under Section 80HHC cannot be subject tothe provisions of Section 80AB or Section 80B(5) of the Act. Thefurther contention canvassed by assessees' counsel is that export profithas to be determined with reference to the profit available in the Profitand Loss Account prepared under the Companies Act, with reference towhich book profit is determined under Section 115JB of the Act. 5. After hearing both sides and after going through the decisions above referred, particularly that of the Supreme Court, we feel thatassessees are entitled to deduction under Section 80HHC computed inaccordance with sub-section (3) and (3A) of Section 80HHC of the Actbecause it is expressly so provided under clause (iv) of Section 115JB(2) of the Act. All what the Supreme Court has held is that the ceilingcontained in Section 80HHC (1B) is not applicable for the purpose ofgranting deduction under clause (iv) above in the computation of bookprofit. However, there is nothing to indicate in the Supreme Courtdecision that eligible deduction of export profit under clause (iv) abovein the computation of book profit can be computed in any other mannerother than what is provided in sub-section (3) and (3A) of Section80HHC of the Act. What is clearly stated in clause (iv) is thatdeduction of export profit in the computation of book profit is the same“amount of profit eligible for deduction under Section 80HHC”computed under clause (a) or clause (b) or clause © of sub-section (3)or sub-section (3A) of the said section. So much so, computation ofexport profit has to be done only in accordance with the methodprovided under Section 80HHC which is in fact done in thecomputation of business profit if the assessment was on the total income computed under the other provisions of the Act. MATassessment is only an alternative scheme of assessment and what isclear from clause (iv) above is that even in the alternative scheme ofassessment under Section 115JB assessee is entitled to deduction ofexport profit under Section 80HHC. In other words, export profiteligible for deduction under Section 80HHC is allowable under boththe scheme of assessment. So much so, assessees are certainly entitledto deduction under Section 80HHC but it is only by following themethod provided under sub-section (3) and (3A) of Section 80HHC.However, by virtue of the decision of the Supreme Court abovereferred, we feel the restriction contained in Section 80AB or Section80B(5) could not be applied inasmuch as carry forward of business lossor depreciation should not be first set-off leaving gross total incomenil, which disentitles the assessee for deduction under other provisionsof Chapter VIA-C which includes Section 80HHC also. But assessees'contention that export profit has to be computed with reference to theProfit and Loss Account prepared under the Companies Act is equallyunacceptable because there is no such provision in Section 80HHC todetermine export profit with reference to Profit and Loss Account maintained under the Companies Act. Consistent with the decision ofthe Supreme Court, we hold that assessees are entitled to deduction ofexport profit under Section 80HHC and the relief is to be granted interms of sub-section (3) and (3A) of the said section. We therefore dispose of the appeals by vacating the orders of thelower authorities with direction to the assessing officer to recomputethe book profit by granting deduction under Section 80HHC in terms ofabove findings and the decision of the Supreme Court in AJANTAPHARMA LTD's case referred above. Sd/- (C.N.RAMACHANDRAN NAIR) Judge. Sd/- (BHABANI PRASAD RAY) Judge. Sd/- (P.N. RAVINDRAN) Judge. True copy kk PS to Judge