Case: The Commissioner of Income Tax-2 Vs. Al-Kabeer Exports Limited

of Section 80HHC are made applicable not only for the purposes of computation, but it is the amount of profits eligible for deduction under Section 80HHC and as computed under subsections (3) or (3A), as the case may be, that have to be reduced from the net profits of the assessee. A subsequent judgment of the Madras High Court in Commissioner of Income Tax v. Rajanikant Schnelder and Associates Pvt. Ltd. (2008) 302 ITR 22 (Mad) similarly construed the provisions of clause (iii) of the Explanation to Section 115J. The question before the Madras High Court was whether the Tribunal was right in holding that an assessee having no profit from export was eligible for deduction under Section 80HHC on its book profits under Section 115J. The Division Bench of the Madras High Court held that the Assessing Officer was not entitled to touch the profit and loss account prepared by the assessee and the book profits so arrived at should be the basis for taxation. Since the case before the Madras High Court related to the construction of Section 115J, it is not necessary to dwell on this aspect of the case any further. Though the Madras High Court has observed that the provisions of Section 115J and 115JA are similar, that is in the context of the applicability of the principles laid down in Apollo Tyres (supra) as regards the account prepared by the assessee under Parts II and III of Schedule VI to the Companies Act 1956. From the judgment of the Madras High Court it appears that though the question that was framed referred to Section 115J, there is some discussion in the judgment of the provision of Section 115JA. 28. In Karnataka Small Scale Industries Development Corporation Ltd. v. Commissioner of Income Tax (2002) 258 ITR 770 the Supreme Court held that Section 115J does not create any right nor does it serve to allow all the deductions taken into consideration for determining whether the total income should be quantified under Section 115J (1), to be carried forward under subsection (2) of Section 115J. The provision, held the Supreme Court, allowed only the unabsorbed losses, depreciation, investment allowance etc., which otherwise could have been carried forward, to be carried forward. 29. A Division Bench of this Court in Commissioner of Income Tax v. Ajanta Pharma Ltd. (2009) 23 DTR (Bom) 1 held that a company governed by the MAT regime is entitled to the same deduction of export profits under Section 80HHC as any other company involved in export and that consequently an assessee governed by the MAT regime would be subject to the restriction contained in subsection (1B) of Section 80HHC. The Division Bench held as follows :Sec. 115JB also uses the expression profits eligible for deduction. There really can be no difficulty in understanding what this means. Only those profits which are eligible and computed in terms of subs. (3) or (3A) and quantified in terms of subs. (1B). The computation whether under subs. (3) or (3A) is for the purpose of subs. (1) or (1A). Sec.80HHC (1) permits a deduction to the extent of profits referred to in subs. (1B). The ambit of deeming fiction30. Section 115JB provides for a deeming fiction. The deeming fiction is brought into existence where in the case of a company which is an assessee the income tax payable on the total income as computed under the Act in respect of a previous year falling within the purview of the Section is less than a stipulated percentage of its book profits. The deeming fiction is that in such a case the 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 the income tax at the rate stipulated in sub section (1). A deeming fiction created by the law has to be given full effect. Equally, the deeming fiction has to be applied within the parameters envisaged by the legislative body which creates the fiction. Under Section 115JB the deeming fiction is for equating the book profits with the total income of the assessee and for determining the tax payable by the assessee on such total income at the rate as provided therein. For the purposes of computing the book profits every assessee has to maintain its profit and loss account in accordance with the provisions of Parts II and III of Schedule VI of the Companies Act 1956. The Assessing Officer has to accept the validity and correctness of an account duly certified in accordance with law and is not entitled to enquire into the correctness of the account maintained by the assessee. The Assessing Officer thereafter has the power to make increases and reductions from the net profits as maintained in the profit and loss account of the assessee in terms as provided in Explanation 1 to Section 115JB. While the Assessing Officer does not have the jurisdiction to scrutinize once again or to go behind the net profit shown in the profit and loss account, he is well within his jurisdiction in effecting the increases and reductions as warranted by Explanation 1 to Section 115JB. As a matter of fact, the Assessing Officer is duty bound to carry out the legislative intent by effecting the increases on the one hand and the reductions on the other as provided in Explanation 1. For the purposes of clause (iv) of Explanation 1, the extent of the reduction in respect of the deduction available under Section 80HHC has to be computed strictly in accordance with the provisions of Section 80HHC. We have not accepted the submission of the assessee that in applying the formula under subsection (3) of Section 80HHC, the expression profits of the business would need to be substituted by book profits. Our conclusion is that the acceptance of the submission would amount to rewriting a legislative provision which would not be permissible to the Court.

Decision (1 = appeal accepted, 0 = rejected): 1

Explanation:
1[ds]To accept the submission of the assessee, would be to rewrite the provisions of subsection (3) of Section 80HHC which is plainly impermissible for the Court to do. That it would be impermissible for the Court to carry out such an exercise is fortified by the fundamental principle that the object of Section 115JB was not to confer an additional benefit upon assessees governed by the MAT regime. What clause (iv) of the Explanation to Section 115JB provides is that the profits which would be eligible for deduction under Section 80HHC would be reduced from the net profits as part of the exercise of computing the book profits for the purposes of the section. The entirety of the profits which are eligible for deduction under Section 80HHC have to be computed and then reduced from the net profits as reflected in the books of account of thewe have noted earlier, the language of clause (iii) of the Explanation to Section 115J was different from the provision which Parliament subsequently made in clause (viii) of the Explanation to Section 115JA and now in clause (iv) of the Explanation to Section 115JB. Clause (iii) of the Explanation to Section 115J made a reference to the amounts attributable to the business, the profits from which are eligible for deduction under Section 80HHC. This was, however, made subject to the condition (the condition being evident by the use of the words so, however) that such amounts would be computed in the manner specified inter alia in subsections (3) and (3A) of Section 80HHC. It was in the context of Section 115J as it then stood, that the circular dated 4 May 1990 provided that Section 115J as originally drafted had taken away the 100 percent exemption which was to be allowed in respect of export profits and watered down the encouragement which was to be provided to such foreign exchange earning activities. The circular states that since the intention was that 100 percent of such profits should be exempt, it was decided that the profits which are exempt under Sections 80HHC and 80HHD, should be excluded from the purview of Section 115J. While construing the provisions of clause (iii) of the Explanation, the circular provided that the net profit to be excluded shall be computed in the same manner as provided for in subsections (3) and (3A) of Section 80HHC. The circular states that the profits exempt under Sections 80HHC and 80HHD have been excluded from the purview of section 115J.The subsequent circular dated 21 February 1994 notes that a doubt had been expressed as to whether the amount quantified under Section 80HHC(3) or 3(A) itself should be deducted under Explanation (iii) to Section 115J or whether only the manner of computation specified in those sections should be followed to quantify the amount of deduction. According to the circular, it is only the manner of computation specified in Section 80HHC (3) or (3A) and not the amounts themselves that should be imported into Explanation (iii) under Section 115J. The circular then provided for the method by which the deduction was to be effected.Both these circulars were in the context of Section 115J, the provisions of which were materially altered by Parliament while enacting clause (viii) of the Explanation to Section 115JA and subsequently clause (iv) of Explanation 1 to Section 115JB. In these circumstances, the provisions made in these two circulars cannot control the meaning to be ascribed to clause (iv) of the Explanation to Section 115JB.Section 115JB provides for a deeming fiction. The deeming fiction is brought into existence where in the case of a company which is an assessee the income tax payable on the total income as computed under the Act in respect of a previous year falling within the purview of the Section is less than a stipulated percentage of its book profits. The deeming fiction is that in such a case the 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 the income tax at the rate stipulated in sub section (1). A deeming fiction created by the law has to be given full effect. Equally, the deeming fiction has to be applied within the parameters envisaged by the legislative body which creates the fiction. Under Section 115JB the deeming fiction is for equating the book profits with the total income of the assessee and for determining the tax payable by the assessee on such total income at the rate as provided therein. For the purposes of computing the book profits every assessee has to maintain its profit and loss account in accordance with the provisions of Parts II and III of Schedule VI of the Companies Act 1956. The Assessing Officer has to accept the validity and correctness of an account duly certified in accordance with law and is not entitled to enquire into the correctness of the account maintained by the assessee. The Assessing Officer thereafter has the power to make increases and reductions from the net profits as maintained in the profit and loss account of the assessee in terms as provided in Explanation 1 to Section 115JB. While the Assessing Officer does not have the jurisdiction to scrutinize once again or to go behind the net profit shown in the profit and loss account, he is well within his jurisdiction in effecting the increases and reductions as warranted by Explanation 1 to Section 115JB. As a matter of fact, the Assessing Officer is duty bound to carry out the legislative intent by effecting the increases on the one hand and the reductions on the other as provided in Explanation 1. For the purposes of clause (iv) of Explanation 1, the extent of the reduction in respect of the deduction available under Section 80HHC has to be computed strictly in accordance with the provisions of Section 80HHC. We have not accepted the submission of the assessee that in applying the formula under subsection (3) of Section 80HHC, the expression profits of the business would need to be substituted by book profits. Our conclusion is that the acceptance of the submission would amount to rewriting a legislative provision which would not be permissible to the Court.