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Computation of book profits under section 115J of the Income-tax Act, 1961--Effect of clause (iii) of the ^Explanation^ under section 115J - Income Tax - 680/1994Extract Computation of book profits under section 115J of the Income-tax Act, 1961--Effect of clause (iii) of the ^Explanation^ under section 115J Circular No. 680 Dated 21/2/1994 To All Chief Commissioners of Income-tax All Directors-General of Income-tax. Sir, Clause (iii) of the Explanation under section 115J, which was inserted by the Direct Tax Laws (Amendment) Act, 1989, with effect from assessment year 1989-90, provides for a deduction from the book-profits attributable to a business, the profits from which are eligible for deduction under section 80HHC or 80HHD. It also provides that the amount of deduction shall be computed "in the manner specified" in sub-section (3) or (3A) of section 80HHC or sub-section 3 of section 80HHD. Certain doubts have been expressed as to whether the amount quantified under section 80HHC(3) or (3A) or section 80HHD(3) itself should be deducted under Explanation (iii) under section 115J or whether only the manner of computation specified in those sections should be followed to quantify the amount of deduction. 2. It may be noted that while deductions under sections 80HHC and 80HHD are related to the profits computed under the head "Profits and gains of business or profession" section 115J is concerned only with book profits. While explaining the scope of Explanation (iii) under section 115J, it was stated in para 9.2 of the Board's Circular No. 559 dated 4-5-1990 (see [1990] 184 ITR (St.) 91), that the intention behind introduction of the said Explanation was to ensure that the provisions of section 115J, which provided for a tax on the book-profits, did not take away the 100 per cent. exemption which was to be allowed in respect of export profits and the profits from tourism-related industry. It was also stated therein that the intention was that 100 per cent. of such profits should be exempt in such cases. In para 9.3(a) of the same circular, it was elaborated that for the purposes of the subject Explanation, the "net profit" to be excluded shall be computed in the same manner as provided for in section 80HHC(3) or (3A) or section 80HHD(3). Further, the Explanation (iii) under section 115J itself clearly lays down that the amount, as arrived at after adjusting the net profit as shown in the profit and loss account for the relevant previous year by the adjustments referred to in clauses (a) to (f) and (i) and (ii) of the said Explanation, should be allowed as deduction, computing the deduction, however, in the manner specified under section 80HHC(3) or (3A) or 80HHD(3). It is, therefore, clear that it is only the manner of computation specified in section 80HHC(3) or (3A) or 80HHD, and not the amounts themselves, that should be imported into Explanation (iii) under section 115J. 3. Accordingly, the deduction contemplated under Explanation (iii) to section 115J should be computed according to the following steps :_ (i) it should be first decided whether the assessee carries on a business, the profits from which are eligible for deduction under section 80HHC or 80HHD ; (ii) if so, the net profit shown in the profit and loss account of the relevant previous year should be adjusted as per clauses (a) to (f) and (i) and (ii) of the said Explanation. (iii) if the business exclusively consists of the types of business which are eligible for deduction under section 80HHC/80HHD the whole of such amount arrived at as per (ii) above should be allowed as deduction ; and (iv) if not, the proportion of the export turnover to the total turnover of the business carried on by the assessee as required under section 80HHC(3)(b) or the proportion of the turnover in respect of the sales made to export house or trading house to the total turnover of the business carried on by the assessee as required under section 80HHC(3A)(b) or, as the case may be, the proportion of the receipts specified in section 80HHD(2) to the total receipts of the business carried on by the assessee should be determined and the said proportion should be applied to the amount arrived at (ii) above to determine the quantum of deduction under section 115J. 4. This may be brought to the notice of all the Assessing Officers working under your charge. Yours faithfully, (Sd.) Ajay Kumar. Under Secretary-ITA.II. Central Board of Direct Taxes.
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