The Supreme Court on S.80HHC and 115JB in Ajanta Pharma Ltd. Vs.CIT- A discussion about continuing importance of the decision.

[C.A. DEV KUMAR KOTHARI]

Importance of the decision in respect of future matter:

Although the decision is with reference to provisions of S.80HHC (Deduction for exports) vis a vis S. 115JB (MAT). The benefit of export benefits under section 80HHC have been phased out. Therefore, strictly speaking, the judgment can benefit in respect of old matters directly. However, there are certain important aspects decided by the Supreme Court, which will be helpful in context of present provisions as well. One more possible view is that although the deduction under section 80HHC was discontinued from assessment year 2005-06, yet a reduction from book profit equal to eligible amount can be claimed from book profit. Hence this article for brain storming.

Ajanta Pharma Ltd. Versus Commissioner of Income Tax-9, Mumbai [2010 -TMI - 77381 - SUPREME COURT OF INDIA]

S.80HHC and 115JB:

The controversy arose because deduction u/s 80HHC started its journey for phasing out. In the particular year that is assessment year 2001-02, with which the Supreme Court was concerned, it was allowable equal to 80% of eligible profit.

Whereas in S. 115JB reduction contemplated was of 'eligible profit from exports'. Considering that S. 115JB was a self contained code, the Supreme Court held that in computing book profit entire amount of eligible profit from exports will be reduced. 

Revenues contentions:

The revenue contended that amount deductible u/s 80HHC should only be reduced from book profit for MAT this contention was allowed by the High Court by reversing concurrent findings of CIT(A) which was approved by ITAT. Hence assessee appealed before the Supreme Court challenging judgment of the high Court.

The SC reversed the judgment of the  high Court and held that the amount eligible u/s 80 HHC is to be reduced from book profit and not the amount for which assessee is entitled to get  deduction under section 80HHC from its gross total income.

Thus, the Supreme Court decided the issue in favor of assessee and inter alia  held there is difference between 'amount eligible' u/s 80HHC- (this is entire  profit from eligible exports) and the 'amount of deduction' allowed u/s 80HHC - that is certain percentage of eligible profits - in particular year it was 80%.

An important aspect decided that is S.115JB is a self contained code:

The Supreme Court also held that S. 115JB is a self contained code and the amount eligible u/s 80HHC is to be reduced from book profit and not the amount of deduction allowable  from gross total income to compute total income.

Supreme Court also held that if the contention of revenue be accepted then the S. 115JB shall no longer remain self contained code, thus revenue's contention was not acceptable.

In simple words the author express that section 115JB is a self contained code means that it is a code in itself, it contains charging provision as well as computation provision. Therefore, it has to be applied and practiced independently or aloof of other provisions except to the extent other provisions are imported into it or are relevant to apply the charging and computation provisions. Therefore, if and only if the section can be strictly applied, it will not be applicable.

Conditions of Certificate of CA is procedural:

The Supreme Court also held that in S. 115JB the only condition is that the relief should be certified by the Chartered Accountant. Such condition is not a qualifying condition but it is a compliance condition.

In view of author the expression 'Compliance conditions', as used by the Supreme Court means a procedural condition or the procedural requirement. As per several judgments on issue of procedural requirement, the procedural requirement can be fulfilled at some later time or event if not complied with the initially intended time. For example, a certificate intended to be filed along with the return can also be filed later on or at the time of assessment proceedings etc.

An analysis of the judgment:

The issue relates to quantification of Minimum Alternation Tax payable by assessee company as its normal tax liability was lesser than the liability of MAT.

For computation of book profit for the purpose of MAT , among many other items one items is  reduction of book profit by amount eligible for deduction  u/s 80HHC (Export Benefit).

There is difference between eligibility and deductibility of deduction.

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  well as in Section 115JA relating to MAT earlier, 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.

One  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 (should be 80 crores- author).

Referring to the relevant clause of S. 115JB about reductions that is caluse (iv)

                      "(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 section."

             The court held that what is to be reduced is  "the amount of profits eligible for deduction under Section 80HHC" and not the amount allowed as deduction u/s 80HHC.

Significance of judgment:

We find that the benefit of S. 80HHC was phased out as follows:

80% for the assessment year  2001-02.

70% for the assessment year  2002-03.

50% for the assessment year  2003-04.

30% for the assessment year  2004-05.

And no deduction is allowed under this section from the assessment year  2005-06.

The case before the court was for AY 2001-02. In that year deduction allowable was 80% however, while computing book profit 100% of eligible profit will be reduced. This get greater significance with reduction of amount of deduction u/s 80HHC.

Whether benefit u/s 115JB is available from assessment year 2005-06:

A question arises as to whether benefit of reduction of eligible amount can be availed even for assessment year 2005-06 onwards. We find that the section 115JB is still in the same form as it was till assessment year 2004-05. Furthermore S. 80HHC is still on statute book, though the amount of deduction has been reduced to nil from AY 2005-06.

When a deduction of 80% or 30% was allowed u/s 80HHC but reduction from book profit could be made equal to 100% of eligible amount, it can be said that even when deduction u/s 80HHC is 0% or nil, reduction can be 100% from book profit of the eligible amount of profits from exports.

Ajanta Pharma Ltd. Versus Commissioner of Income Tax-9, Mumbai [2010 -TMI - 77381 - SUPREME COURT OF INDIA]

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