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Commissioner Of Income-Tax v. G.T.N Textiles Ltd.
Structured Summary of the Opinion (S. Sankarasubban, J.)
Factual and Procedural Background
These are Income-Tax references made by the Commissioner of Income-Tax, Cochin, at the instance of the Revenue. The questions of law referred concerned the computation of deduction under section 80HHC for the purpose of section 115J of the Income-Tax Act, 1961. The relevant assessment years were 1989–90 and 1990–91.
The assessee was engaged in manufacture of goods, most of which were exported. Because of substantial depreciation and investment allowance, the assessee's computation under the Income-Tax Act showed no taxable income for the years in question. The assessing authority therefore assessed the assessee under section 115J (minimum tax on book profits). For the computation of the deduction attributable to export profits, the assessee claimed a deduction applying the formula found in section 80HHC(3) (i.e., export turnover × profit credited in profit and loss account / total turnover). The assessing authority rejected that computation and instead computed the eligible deduction as nil by applying a formula based on profit computed under the Income-Tax Act (i.e., after setting off depreciation and investment allowance of the current year and unabsorbed portions carried forward).
The central procedural question before the court was what profit figure should be taken into account for the purpose of determining the export profit deduction under the Explanation to section 115J(1A)(iii) read with section 80HHC.
Legal Issues Presented
- Whether, on the facts and in the circumstances of the case, the manner and method of computation of deduction under section 80HHC for the purpose of section 115J (as considered by the assessee and upheld by the Tribunal) is correct and in accordance with law?
- Whether the Tribunal was right in holding that the computation of the net profit of the assessee for the purpose of estimating its export profit under section 80HHC, for allowing deduction under section 115J, should not be made in the regular way of computation of income from business or profession by applying all the relevant provisions of the Income-Tax Act and, instead, should be made in a limited way by restricting only to the additions and deductions required by the Explanation to section 115J(1A)?
Arguments of the Parties
Revenue's Arguments
- The Revenue's counsel argued that clause (iii) of the Explanation to section 115J should be interpreted so as to "lift" sub-section (3) and (3A) of section 80HHC and sub-section (3) of section 80HHD bodily — i.e., that the profits should be calculated in the same way as profits and gains of business or profession are calculated under the Income-Tax Act.
- The Revenue contested the use of departmental circulars as authoritative guidance on interpretation.
Assessee's Arguments
- The assessee's counsel argued that clause (iii) only directs that the deduction be computed "in the manner specified" in the relevant sub-sections, and does not make those sections applicable in their entirety as if incorporated by reference. Thus the profit to be excluded should be the profit as per the books (book profit) — and, in the context of section 115J, the book profit is to be treated as net profit (30% rule applied to book profit where applicable).
- The assessee relied on the formula in section 80HHC(3) for computing the export-element of book profit (export turnover × profit credited in profit and loss account / total turnover) and on two Central Board of Direct Taxes circulars (Circular No. 559 dated May 4, 1990; Circular No. 680 dated February 21, 1994) that described the computation steps for book profits and deduction under the amended Explanation to section 115J.
Table of Precedents Cited
| Precedent | Rule or Principle Cited For | Application by the Court |
|---|---|---|
| Surana Steels Pvt. Ltd. v. Dy. CIT, [1999] 237 ITR 777 (Supreme Court) | Interpretation of clause (iv) of the Explanation to section 115J — held that section 205 of the Companies Act was "bodily lifted" and incorporated into section 115J in that clause (i.e., a direct legislative incorporation). | The court relied on this precedent to distinguish clause (iv) from clause (iii): unlike clause (iv), clause (iii) does not incorporate another statutory provision bodily; clause (iii) only prescribes the manner in which amounts are to be computed for the purpose of deduction and therefore does not make section 80HHC applicable as such. |
| Chintha Printing and Publishing Co. (P.) Ltd. v. CIT, I.T.R. No. 178 of 1997; reported [2001] 247 ITR 95 (Kerala High Court, Division Bench) | Interpretation of clause (iv) of the Explanation to section 115J (the Division Bench followed the Supreme Court decision noted above). | The court noted this decision as authority on clause (iv) but stated that its facts are not applicable to the present case (i.e., it related to clause (iv) and the incorporated provision). |
| V.V. Trans-Investments (P.) Ltd. v. CIT, [1999] 237 ITR 777 (referenced) | Referenced in connection with judicial treatment of clause (iv) (same citation used in the opinion in relation to clause (iv) matters). | The Division Bench in the Chintha Printing matter is said to have followed this authority; the present court treated these authorities as not being applicable to clause (iii) under consideration. |
Court's Reasoning and Analysis
The court proceeded through a statutory and contextual interpretation of section 115J and the Explanation to subsection (1A), focusing on clause (iii) which states that amounts attributable to businesses eligible for deduction under section 80HHC or 80HHD "shall be computed in the manner specified in sub-section (3) or sub-section (3A) of section 80HHC or sub-section (3) of section 80HHD, as the case may be."
Key steps in the court's reasoning:
- Statutory framework: Section 115J is a special provision imposing a minimum tax (deemed total income equal to 30% of book profit if computed total income is less than that). The provision begins with a non obstante clause and directs preparation of profit and loss account per Parts II and III of Schedule VI to the Companies Act.
- Amendment history and purpose: The court observed that the original section 115J did not provide for exemptions/deductions under sections 80HHC and 80HHD, and the 1989 amendment inserted clause (iii) in the Explanation to avoid hardship to exporters by allowing the book profit computation to reflect export deductions (i.e., to give effect to exemptions/deductions for export profits for the purpose of computing book profits under section 115J).
- Textual distinction between "applying" a provision and "incorporating" it: The court contrasted clause (iii) with clause (iv) of the Explanation. Clause (iv) expressly incorporates the provisions of clause (b) of the first proviso to sub-section (1) of section 205 of the Companies Act (and the Supreme Court has held that such incorporation is a bodily lifting). Clause (iii), by contrast, only provides that the amounts should be "computed in the manner specified" in the sub-sections of sections 80HHC/80HHD; it does not say that those sections are applied bodily.
- Meaning of profits in section 80HHC/80HHD: The court noted that sub-sections 3 and 3A of section 80HHC and sub-section 3 of section 80HHD refer to "the profits of the business (as computed under the head 'Profits and gains of business or profession')". The Revenue argued that this meant the profits must be computed under the Income-Tax Act rules for that head. The assessee argued otherwise.
- Interpretive conclusion: The court accepted the assessee's argument. It held that, within the Explanation to section 115J(1A)(iii), the word "profit" to be applied is the profit as per the books of account (book profit) used for section 115J purposes rather than the profit computed for tax purposes under the head "Profits and gains of business or profession". The court emphasized that treating the profit as computed under the Income-Tax Act would defeat the object of section 115J's amendment and would reintroduce the hardship the amendment sought to remedy.
- Distinguishing precedent: The court considered the Supreme Court's decision in Surana Steels (and related Division Bench authority) about clause (iv), accepted that where the statute expressly incorporates another provision bodily the incorporated provision applies as such, but found clause (iii) materially different and therefore not subject to that precedent's application.
- Administrative guidance: The court considered Central Board of Direct Taxes circulars (Circular No. 559 of 1990 and Circular No. 680 of 1994) which describe the steps for computing book profits and the deduction under the amended Explanation. The Revenue argued the circulars were not admissible; the court held the circulars were not contrary to the statute and were consistent with the court's interpretation, and therefore could be looked into.
Holding and Implications
Holding:
Answered in the affirmative and against the Revenue. The court held that under section 115J(1A)(iii) the profit to be taken into consideration for computing the deduction attributable to export business is the profit as shown in the profit and loss account (book profit), and not a profit recalculated under the Income-Tax Act's computation of "Profits and gains of business or profession." In other words, the deduction under clause (iii) must be computed in the manner specified in sections 80HHC/80HHD but applied to the book profit (profit as per books) as determined for section 115J purposes.
Direct consequences and implications:
- Direct effect on the parties: The Tribunal's approach (allowing the assessee's method of computing the export profit deduction by reference to book profit and the manner specified in section 80HHC) was upheld; the Revenue's contrary computation (which used profits computed under the Income-Tax Act after setting off depreciation and investment allowance) was rejected.
- Broader precedent: The opinion distinguishes earlier decisions that held for bodily incorporation of provisions where the statute expressly does so (e.g., clause (iv) incorporating section 205). The court did not state that it was laying down a novel legal principle beyond its statutory interpretation here; it confined its ruling to the correct interpretation of clause (iii) of the Explanation to section 115J. The opinion does not assert that it creates a new broader rule beyond the facts and statutory context decided.
Final statement in the opinion: "In the above view of the matter, the questions referred to us are answered in the affirmative and against the Revenue."
S. Sankarasubban, J.:— These Income-Tax references are references made by the Commissioner of Income-Tax, Cochin, at the instance of the Revenue. The questions of law referred for consideration are:
“(1) Whether, on the facts and in the circumstances of the case, the manner and method of computation of deduction under section 80HHC for the purpose of section 115J of the Income-Tax Act, 1961, as considered by the assessee and upheld by the Tribunal is correct and in accordance with law?
(2) Whether, on the facts and in the circumstances of the case, the Tribunal is right in holding that the computation of the net profit of the assessee for the purpose of estimating its export profit under section 80HHC, for allowing deduction under section 115J, should not be made in the regular way of computation of income from business or profession by applying all the relevant provisions of the Income-Tax Act and, on the other hand, should be made in the limited way by restricting only to the additions and deductions as are required to be made in accordance with the Explanation to section 115J(1A) of the Income-Tax Act?”
2. The relevant assessment years are 1989–90 and 1990-91. The assessee is engaged in the manufacture of goods, most of which are exported outside India. According to the assessee, because of the substantial amount of depreciation and investment allowance, the assessee did not have any taxable income for these assessment years on the computation under the provisions of the Act. Therefore, the assessing authority made the assessment under section 115J of the Income-Tax Act (hereinafter referred to as “the Act”). According to this section, when the total income is less than 30 per cent, of the book profit, the income will be considered as 30 per cent, of the book profit and the assessee will be assessed accordingly. Under section 115J of the Act, the net profit is to be added to certain amounts which are given under that section. Under section 115J(1A)(iii) of the Act, the amounts as arrived at after increasing the net profit by the amounts referred to in clauses (a) to (f) and reducing the net profit by the amounts referred to in clauses (i) and (ii) attributable to the business, the profits from which are eligible for deduction under section 80HHC or 80HHD; so, however, that such amounts are computed in the manner specified in sub-section (3) or sub-section (3A) of section 80HHC or sub-section (3) of section 80HHD, as the case may be. According to the assessee, it is exporting most of its products and, therefore, substantial profit is from export business.
3. It claimed deduction of export profit in the computation of book profit as provided under the Explanation to section 115J(1A)(iii) of the Act. According to the assessee, the deduction should be in the manner provided in section 80HHC(3) of the Act, i.e, by applying the formula:
Export turnover × profit credited in profit and loss account
Total turnover
4. The assessing authority rejected the said computation and worked out the eligible deduction of export profit under section 115J(1A)(iii) read with section 80HHC of the Act as “Nil” by applying the formula:
Profit computed under the provisions of the Income-Tax
Export turnover × Act; i.e, after setting off depreciation and investment
Total turnoverallowance of current year and the unabsorbed portion of it carried forward from earlier years
5. The question for consideration under section 80HHC in this case is what is the profit that should be taken into consideration.
6. As already stated, section 115J of the Act is the special provision relating to certain companies. It says that: “Notwithstanding anything contained in any other provision of this Act, where in the case of an assessee being a company other than a company engaged in the business of generation or distribution of electricity, the total income, as computed under this Act in respect of any previous year relevant to the assessment year commencing on or after the 1st day of April, 1988, but before the 1st day of April, 1991, hereafter in this section referred to as the relevant previous year, is less than thirty per cent, of its book profit, the total income of such assessee chargeable to tax for the relevant previous year shall be deemed to be an amount equal to thirty per cent, of such book profit”. Sub-section (1A) says that the assessee, for the purposes of this section is directed to prepare its profit and loss account for the relevant previous year in accordance with the provisions of Parts II and III of Schedule VI to the Companies Act. There is an Explanation to section 115J(1A) of the Act, which says thus: “For the purposes of this section, “book profit” means the net profit as shown in the profit and loss account for the relevant previous year prepared under subsection (1A), as increased by… or as reduced by… Section 115J of the Act, therefore, involves two processes. Firstly, the assessing authority has to determine the income of the company under the provisions of the Act and, secondly, the book profit is to be worked out in accordance with the Explanation to section 115J(1A) of the Act and it is to be seen whether the income determined under the first process is less than 30 per cent, of the book profit. Section 115J would be invoked if the income determined under the first process is less than 30 per cent, of the book profit. Originally, section 115J of the Act did not contain exemption under section 80HHC and section 80HHD of the Act. Section 80HHC of the Act provides for deduction in respect of export profits earned by the exporters or supporting manufacturers. Thus, these sections seek to encourage exports by providing tax deduction in respect of profits from such activities. But section 115J of the Act levies a minimum tax on book profits. Section 115J of the Act as it originally stood, did not include exemption allowed to exporters. It was restricted by the provisions of section 115J, under which they would have been obliged to pay tax at least on 30 per cent, of the profits, which otherwise would have been exempted under section 80HHC of the Act. It was then decided to amend section 115J of the Act by incorporating the Explanation by which clause (iii) was added. The amendment came into force with effect from 1st April, 1989. As per the amendment, for the purpose of the computation of book profits, the net profit shall be reduced by the amount attributable to the business, the profits of which are liable for deduction under section 80HHC or section 80HHD, the amounts are to be computed in the manner specified in the section. Section 80HHD of the Act deals with deduction in respect of earnings in convertible foreign exchange.
7. The question to be considered is with regard to the interpretation of the words occurring in the Explanation, clause (iii) of section 115J of the Act, “so however, that such amounts are computed in the manner specified in sub-section (3) or sub-section (3A) of section 80HHC or sub-section (3) of section 80HHD, as the case may be”. Now, we shall turn to section 80HHC(3) and (3A) and section 80HHD(3) as it stood at the relevant time. Under section 80HHC(3), the profits derived from the export of goods or merchandise out of India shall be, (a) in a case where the business carried on by the assessee consists exclusively of the export out of India of the goods or merchandise to which this section applies, the profits of the business as computed under the head “Profits and gains of business or profession”. Under clause (b) where the business carried on by the assessee does not consist exclusively of the export out of India of the goods or merchandise to which this section applies, the amount which bears to the profits of the business (as computed under the head “Profits and gains of business or profession”).
8. Under sub-section (3A) for the purposes of sub-section (1A), profits derived by a supporting manufacturer from the sale of goods or merchandise shall be described. There also what is to be taken into consideration is the profits of the business as computed under the head “Profits and gains of business or profession”. Under section 80HHD(3) for the purposes of sub-section (1), profits derived from services provided to foreign tourists shall be, (a) in a case where the business carried on by the assessee consists exclusively of services provided to foreign tourists resulting in receipts in convertible foreign exchange, the profits of the business as computed under the head “Profits and gains of business or profession”. Under clause (b), where the business carried on by the assessee does not consist exclusively of services provided to foreign tourists resulting in receipts in convertible foreign exchange, the amount which bears to the profits of the business (as computed under the head “Profits and gains of business or profession”), the same proportion as the receipts in convertible foreign exchange bear to the total receipts of the business carried on by the assessee. Thus, a perusal of section 80HHC(3) and (3A) and section 80HHD(3) of the Act will show that what is mentioned in these sections is profits and gains of business or profession.
9. The question to be considered is whether for the purpose of Explanation to section 115J(iii) of the Act, profits and gains of business or profession had to be taken into account. While learned counsel for the Revenue will argue that in interpreting clause (iii) of the Explanation to section 115J, we have to bodily lift section 80HHC(3) and (3A) and section 80HHD(3) and the profits should be calculated in the same way as it is done under that section. But learned counsel for the assessee will argue that what section provides is only that the deduction should be calculated in the manner laid down under sections 80HHC and 80HHD. Learned counsel submits that the profits of the firm are to be deemed 30 per cent, of the book profit. Hence, for the purpose of clause (iii) of section 115J, the amount of profit from business should not be incorporated. We agree with the argument of learned counsel for the respondent-assessee. Section 115J begins with a non obstante clause. According to this clause, book profit is to be treated as net profit. Section 80HHC(3) and (3A) gives concession to the exporters and section 80HHD gives certain concessions to those people, who earned, in convertible foreign exchange. Originally, section 115J of the Act did not take into account the deductions under section 80HHC and section 80HHD. It was only included subsequently, as it was found that non-inclusion of the provision under section 80HHC and section 80HHD will cause great hardship to the assessee. If the profit is to be computed on the basis of the profits and gains of business or profession, that will go against the very object of section 115J of the Act. Section 115J(1A)(iv) says that the amount of the loss or the amount of depreciation which would be required to be set off against the profit of the relevant previous year as if the provisions of clause (b) of the first proviso to sub-section (1) of section 205 of the Companies Act are applicable. Thus, in clause (iv) we can see that the provisions of clause (b) of the first proviso to sub-section (1) of section 205 of the Companies Act are entirely made applicable. Such an intention is not there in clause (iii). Hence, we are of the view that under clause (iii), Explanation, it is not the profit as computed under the head “Profits and gains of business or profession” that is to be applied. According to us, instead of the words “profits and gains of business or profession” occurring in sub-sections (3) and (3A) of section 80HHC or sub-section (3) of section 80HHD, the word profit that, is mentioned in section 115} has to be applied.
10. Learned counsel for the Revenue brought to our notice a decision of the Supreme Court in Surana Steels Pvt. Ltd. v. Dy. CIT, [1999] 237 ITR 777. That was a case dealing with the interpretation of clause (iv) of Explanation to section 115J of the Act. Clause (iv) states thus (page 782):
“… the amount of the loss or the amount of depreciation which would be required to be set off against the profit of the relevant previous year as if the provisions of clause (b) of the first proviso to sub-section (1) of section 205 of the Companies Act, 1956 (1 of 1956), are applicable.”
11. The question arose whether the loss can take into account depreciation. The Supreme Court held that under clause (iv), section 205 of the Companies Act has been incorporated in section 115J of the Act. It is a piece of legislation by incorporation. It was held that section 205 of the Companies Act stands bodily lifted and incorporated into the body of section 115J of the Income-Tax Act. Under section 205(1) of the Companies Act brings out the unabsorbed portion of the amount of depreciation already provided for computing the loss for the year. It was in that context that the Supreme Court interpreted clause (iv) of section 115J.
12. But so far as the present case is concerned clause (iii) does not say that section 80HHC of the Act is applicable as such. It only says that the profit shall be determined in the manner provided in that section. Section 80HHC of the Act is made applicable to the extent only for calculating the deduction.
13. Hence, we are of the view that the Tribunal was correct in interpreting that under section 115J(1A)(iii) of the Act, profit will be taken into consideration as profit as per the books of account and not calculated under the Act. Learned counsel for the Revenue also brought to our notice a judgment of this court in I.T.R No. 178 of 1997 (Chintha Printing and Publishing Co. (P.) Ltd. v. CIT, [2001] 247 ITR 95). That was a case interpreting clause (iv) of Explanation to section 115J of the Act. In the above judgment, the Division Bench followed the decision of the Supreme Court in V.V Trans-Investments (P.) Ltd. v. CIT, [1999] 237 ITR 777. The facts of that decision are not applicable to the facts of the case in hand. Learned counsel for the assessee also brought to our notice two circulars in this context. One is Circular No. 559 (see [1990] 184 ITR (St.) 91), dated May 4, 1990, issued by the Central Board of Direct Taxes and the other is Circular No. 680 (see [1994] 206 ITR (St.) 297), dated February 21, 1994. A portion of the circular dated May 4, 1990, reads as follows (page 106):
“An Explanation in the section provides for the manner of computation of ‘book profits’ for the purposes of the section. The Amending Act, 1989, has carried out the following amendments in the said Explanation:
(a) A new clause (iii) has been inserted in the Explanation to provide that for the purposes of computation of ‘book profits’, the net profit shall be reduced by the amount of net profits derived from the business of exports or from services provided to foreign tourists by approved hotels and tour operators or by travel agents, which are eligible for deduction under sections 80HHC and 80HHD. For this purpose, the net profit to be excluded shall be computed in the same manner as provided for in subsections (3) and (3A) of section 80HHC or sub-section (3) of section 80HHD, as the case may be.”
14. Similarly, in the circular dated February 21, 1994, it is stated as follows (see [1994] 206 ITR (St.) 297, 298):
“(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 the export house or trading house to the total turnover of the business carried on by the assessee as required under section 30HHC(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.”
15. Learned counsel for the Revenue submitted that the circulars cannot be looked into. We cannot completely accept this contention. According to us, these circulars are not against the section and they can be looked into. According to us, the circulars are also in tune with the interpretation given by us to section 115J of the Act.
16. In the above view of the matter, the questions referred to us are answered in the affirmative and against the Revenue.
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