While computing book profits under Section 115JA, should profits eligible for deduction be computed under the normal provisions of the I-T Act or with reference to the book profits, is a question that came up before the Special Bench of the Bombay Tribunal recently.
Tax incentives for exporters have almost been phased-out only a few, such as those provided to units located in Special Economic Zones, remain. One of the tax incentives that was provided earlier to exporters was deduction of export profits under Section 80HHC of the Income-Tax Act.
This was one of the most controversial sections in the I-T Act leading to litigations, with regard to interpretational and computation issues, before various appellate authorities/courts. Though the deduction under Section 80HHC has not been available to exporters from assessment year 2005-06, even today there is a lot of litigation pertaining to the years when the statute was in force.
The litigation gets compounded when it has to be read along with provisions relating to Minimum Alternative Tax (MAT) a section relating to computation of book profits under Sections 115J, 115JA or 115JB prevailing at various points in time.
The issue becomes even more interesting when these Sections use different language.
The taxable income is required to be computed as per the various provisions in the I-T Act. In case the taxable income is negative, deduction under Section 80HHC is not available. However, in such a case, the company may be required to pay tax on the book profits. While computing the book profits, the issue that arises is whether deduction under Section 80HHC is to be computed with reference to the profits computed under the normal provisions of the I-T Act, in which case the deduction would be nil in the absence of positive income, or whether it is to be computed with reference to the book profits.
Recently, a similar issue came up before the Special Bench of the Mumbai Tribunal in the DCIT vs Syncome Formulations (I) Ltd case, wherein the Special Bench was called upon to decide whether while computing the book profits under Section 115JA, the profits eligible for deduction have to be computed with reference to the profits computed under the normal provisions of the I-T Act or with reference to the book profits.
The Special Bench analysed all the three provisions Sections 115J, 115JA and 115JB as the language used for granting deduction for export profits under Section 80HHC is different in all the three sections prevailing at different points in time.
The Special Bench went into the respective speeches made by the Finance Minister to gather the legislative intention behind these sections. The Bench referred to the CBDT Circular No. 680 of December 1994 issued in the context of Section 115J wherein it was clarified that the quantum of computation under Section 80HHC is to be worked out on the basis of the adjusted book profits.
The Special Bench observed that the reasoning given in the Circular continues to hold good even in the case of Section 115JA or 115JB and further observed that the reference made to profit and gains in Sections 115J, 115JA and 115JB with reference to the various items are always to book profit and, therefore, reference cannot be switched over to profit, computed under the normal provisions of the I-T Act only in respect of deduction available under Section 80HHC.
The Special Bench finally held that deduction under Section 80HHC while computing the book profits is to be worked out on the basis of the adjusted book profit and not on the basis of the profit computed under the normal provisions of the I-T Act.
This decision throws open a debate on another equally interesting issue: That is, though sub-section (1B) of Section 80HHC provides for a deduction in a phased-out manner that is, 100 per cent in the first year, going down to 80 per cent in the assessment year 2001-02, 70 per cent in the assessment year 2002-03, 50 per cent in the assessment year 2003-04, 30 per cent in the assessment year 2004-05 and eventually nil deduction in the assessment year 2005-06 whether, while computing the book profits, deduction under Section 80HHC can be claimed on entire profits without considering such phase-out or not.
The Special Bench in the above-discussed case has at one place observed that Section 115JB in relation to deduction under Section 80HHC confines its reference to clauses (a), (b) or (c) of sub-section (3) or sub-section (3A). The Bench has also observed that in the case of Section 115JB, the Finance Act has made it very clear that the deduction under Section 80HHC would be available in its entirety to an assessee even if the relief under the section is being eliminated in a phased manner.
Drawing an analogy from the said observation, it is possible to take a position that since there is no reference to sub-section (1B) of Section 80HHC in Section 115JB which provides for a phased-out deduction, deduction under Section 80HHC can be claimed on entire profits without considering such phase-out while computing the book profits.
With tax incentives for exporters falling year after year, the above decision of the Special Bench is a nothing short of a silver lining.
Kamlesh Chainani (The author is Senior Manager, Deloitte Haskins & Sells, Mumbai.)