2010 (7) TMI 1211 - HC - Income Tax

Summary

Issues Involved:
1. Whether the deduction admissible under Explanation (iv) to Section 115JB(2) towards profit exempt under Section 80HHC should be quantified with reference to the profits as per accounts duly adjusted under various clauses to the Explanation of Section 115JB or with reference to the normal computation under the chapter 'Profits and Gains of Business or Profession'.

Detailed Analysis:

The Question of Law:
The primary issue is whether the Income Tax Appellate Tribunal was justified in holding that the deduction admissible under Explanation (iv) to Section 115JB(2) towards profit exempt under Section 80HHC should be quantified with reference to the profits as per accounts duly adjusted under various clauses to the Explanation of Section 115JB and not with reference to the normal computation under the chapter 'Profits and Gains of Business or Profession'.

The Facts:
The assessee, engaged in the manufacture and processing of meat and meat products, filed its return of income for Assessment Year 2003-04 declaring a nil income after setting off unabsorbed depreciation of earlier years. The assessee computed its book profits for the purposes of Section 115JB at Rs. 55.41 lacs and deducted from the book profits the profits eligible for deduction under Section 80HHC of Rs. 2.14 Crores. The Assessing Officer, however, computed the eligible deduction under Section 80HHC at Rs. 90,46,441/- by adopting a figure of Rs. 4,00,75,199/- as the adjusted profit of business. The Commissioner (Appeals) and the Tribunal upheld the assessee's method of computation.

The Statutory Context:
Section 115JB provides that if the income tax payable on the total income as computed under the Act is less than a specified percentage of its book profits, such book profits shall be deemed to be the total income of the assessee. Explanation 1 to Section 115JB defines "book profit" and includes a reduction for the amount of profits eligible for deduction under Section 80HHC.

Submissions:
- Revenue's Argument: The deduction under Section 80HHC should be computed under sub-section (3) of Section 80HHC, and the computation must be made in accordance with the provisions of Section 80HHC.
- Assessee's Argument: The deduction should be based on the net profits as reflected in the Profit and Loss Account and not on the basis of the provisions of Section 80HHC.

Legislative History:
- Section 115J: Introduced to deal with zero tax but highly profitable companies, requiring every company to pay a minimum corporate tax on the profits declared in its accounts.
- Section 115JA: Introduced with effect from 1 April 1997, initially without a provision for reducing the profits eligible for deduction under Section 80HHC from the net profits.
- Section 115JB: Enacted with effect from 1 April 2001, providing a similar provision in clause (iv) of Explanation 1 for reducing the amount of profits eligible for deduction under Section 80HHC.

Interpretation of Section 115JB:
The legislative intent behind Section 115JB and its predecessors was to ensure that highly profitable companies pay a minimum tax. The reduction for profits eligible for deduction under Section 80HHC must be computed in accordance with sub-sections (3) or (3A) of Section 80HHC.

CBDT Circulars:
The circulars dated 4 May 1990 and 21 February 1994 were issued in the context of Section 115J and cannot control the meaning of clause (iv) of Explanation 1 to Section 115JB.

Judgments of Kerala and Madras High Courts:
- Kerala High Court: Held that the computation of net profits for the purpose of estimating export profits under Section 80HHC for allowing a deduction under Section 115J should not be made in the ordinary manner of computing income from business or profession.
- 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 should be the basis for taxation.

The Ambit of Deeming Fiction:
Section 115JB creates a deeming fiction where the book profits shall be deemed to be the total income of the assessee if the income tax payable on the total income is less than a stipulated percentage of its book profits. The Assessing Officer is required to effect increases and reductions from the net profits as maintained in the profit and loss account in accordance with Explanation 1 to Section 115JB.

Conclusion:
The Tribunal was not justified in holding that the amount to be reduced under clause (iv) of Explanation 1 to Section 115JB in respect of the profits eligible for deduction under Section 80HHC should be computed with reference to the net profits in the profit and loss account and not according to the profits of the business computed under the head of profits and gains of business or profession. The question of law is answered in favor of the Revenue and against the assessee. The appeal is disposed of with no order as to costs.