Article 1
I. Introduction :
1.
The calculation of deduction u/s.80HHC of the Income-tax Act itself is a complex
issue. The complexity is further increased when one attempts to calculate the
deduction u/s.80HHC of the Act for the purpose of making adjustments u/s.115JA/JB
of the Act in order to arrive at the ‘book profit’. The Special Bench in the
case of Syncome Formulations (I) Ltd. [292 ITR (AT) 144 (Mum.)] held that for
the purpose of S. 115JB, the deduction u/s.80HHC of the Act has to be calculated
with reference to the adjusted book profits and not the normal gross total
income.
2.
Recently, the Bombay High Court has rendered a decision in the case of CIT v.
Ajanta Pharma Ltd. reported at (318 ITR 252). In the said decision, the
Bombay High Court has observed at para 36, page 269 as under :
“We
have had the benefit of going through the reasoning and the orders in
Deputy CIT v. Syncome Formulations (I) Ltd.,
(2007) 292 ITR (AT) 144; (2007) 106 ITD 193 (Mum.)(SB) as also in the case of
Deputy CIT v. Govind Rubber P. Ltd., (2004) 89 ITD 457; (2004) 82 TJT 615.
It is not possible to agree with the view taken by the Benches. Those decisions
in view of these judgments stand overruled.”
3.
An attempt has been made in this article to find out as to whether; subsequent
to the decision of Bombay High Court, the ratio laid down by the Special Bench
in the case of Syncome Formulations (I) Ltd. is still valid or not, and if yes,
to what extent.
4.
Before we really go into the judgment of the Bombay High Court in the case of
Ajanta Pharma Ltd., it is imperative to closely look into the decision of the
Special Bench in the case of Syncome Formulations (I) Ltd. and also the decision
of the Division Bench of the Mumbai Tribunal in the case of Ajanta Pharma Ltd.
(21 SOT 101) which has been ultimately reversed by the Bombay High Court in the
above-referred decision. This is for the reason that according to the humble
opinion of the author, the issue involved in Syncome Formulations (I) Ltd. is
totally different than the issue involved in the case of Ajanta Pharma Ltd.
II. Issue involved in the decision
of Special Bench — Syncome Formulations (I) Ltd. :
5.
According to the provisions of S. 80HHC of the Act, the deduction provided under
that Section is to be calculated as per the formula prescribed in Ss.(3).
According to the said formula, one has to start with the ‘profit of the
business’ and make some multiplication, division, etc. in case of manufacturing
exporter to arrive at eligible amount of deduction. The Section also provides
for the formula in case of trader exporter wherein also one has to calculate the
profit of the business. The question which arose before the Special Bench is as
to what is to be taken as the ‘profit of the business’ which would further
undergo the mathematical exercise. According to the assessee, while calculating
the deduction u/s. 80HHC for the purpose of 115JA/JB, the profit of the business
should be the profit as shown in Profit and Loss Account; whereas as per the
revenue, the profit would mean profit assessable under the head ‘business
income’. Thus, the whole controversy is — What is the starting point for
calculating deduction u/s.80HHC for the purpose of S. 115JA/JB of the Act. This
issue has been resolved by the Special Bench in favour of the assessee for the
detailed reasons given in the said decision.
III. Issue involved in the decision
of Ajanta Pharma Ltd. (80 HHC) :
6.
The Bombay High Court in the case of Ajanta Pharma Ltd. was required to address
an issue as to whether the export profits to be excluded from the ‘book profits’
u/s.115JB of the Act is to be calculated after applying the restriction of S.
80HHC(1B) of the Act. In other words, whether the amount to be reduced from the
book profits should be the entire eligible amount of deduction or only the
percentage of the eligible deduction actually allowable under the Act as per S.
80HHC(1B) of the Act ? The questions of law raised before the High Court are as
under :
“1. Whether on the facts and in the circumstances of the case and in law the
ITAT was justified in approving the Order of the CIT(A) in allowing respondent
to exclude export profits for the purpose of S. 115JB at the figure other than
that allowed u/s.80HHC(1B) ?
2. Whether in law for the purpose of calculating book profit u/s.115JB of the Income-tax Act, 1961 under Explanation 1 sub-clause (iv) the export profits to be excluded from the book profits would be the export profits allowed as a deduction u/s.80HHC after restricting the deduction as per the provisions of Ss.(1B) of S. 80HHC of the Act or the export profits calculated as per Ss.(3) and Ss.(3A) of S. 80HHC before applying the restriction contained in Ss.(1B) of S. 80HHC??”
Answering the said question, the High Court held that while computing the ‘book profits’, the quantum of deduction allowable under clause (iv) to Explanation 1 u/s.115JB of the Act will have to be restricted to actual permissible deduction as calcu-lated u/s.80HHC(1B) of the Act.
IV. To what extent is Syncome Formulations Ltd. still a good law??
7. As seen above, the question referred to the High Court was restricted to S. 80HHC(1B). The issue dealt with by the Tribunal in the case of Ajanta Pharma Ltd. was only in respect of S. 80HHC(1B) and, therefore, the High Court could not have dealt with the controversy which was there in Syncome Formulations (I) Ltd. This is further fortified by the question of law referred to before the High Court.
8. Further, no arguments were also raised by the either parties before the Bombay High Court in respect of the controversy involved in Syncome Formulations (I) Ltd. In my opinion, something which has not been considered could never have been disapproved.
9. The reason as to why the Bombay High Court observed that Syncome Formulations (I) Ltd. is overruled is because the Tribunal decision in the case of Ajanta Pharma Ltd. (21 SOT 101) at para 10, page 109 heavily relied upon para 59 of the decision of Syncome Formulations (I) Ltd. The reliance was limited to the controversy which was involved in Ajanta Pharma Ltd. and not the one which was involved in Syncome Formulations (I) Ltd. It is only because the Tribunal in the case of Ajanta Pharma Ltd. in one of the paragraphs, has heavily relied upon the decision of Syncome Formulations (I) Ltd., the High Court has observed that Syncome Formulations (I) Ltd. is overruled.
10. Further, controversy involved in Syncome Formulations (I) Ltd. is resolved in favour of the assessee after strongly relying upon the Circular of CBDT [Circular No. 680, dated 21-2-1994 (206 ITR 297)]. The said Circular has neither been cited nor discussed by the Bombay High Court.
This also establishes that the controversy was totally different before the Bombay High Court. This view is made abundantly clear by the immediately following paragraphs (para 37 on page 269, 270), wherein the Bombay High Court has observed in respect of the decision of the Kerala High Court in the case of CIT v. GTN Textiles Ltd., (248 ITR 372) as under?:
“The issue before the Kerala High Court was, what is the profit that should be taken into consideration considering the accounting system that has to be followed while working out the book profits. Therefore, the judgment would be no assistance in considering the question framed for consideration. (Emphasis supplied).
11. From this, it is clear that the decision of the Kerala High Court which is directly on the issue dealt with Syncome Formulations (I) Ltd. has been held to be not applicable. Moreover, the Bombay High Court has not dissented from the view of the Kerala High Court.
12. The view taken by the Special Bench is correct also in view of the fact that there are direct decisions of the High Court in the following cases supporting the stand taken by the Special Bench?:
- CIT v. GTN Textiles Ltd., [248 ITR 372 (Ker.)]
- CIT v. K. G. Denim, [180 Taxman 590 (Mad.)]
- Rajnikant Schenelder & Associates (P) Ltd., [302 ITR 22 (Mad.)]
13. It is also relevant to refer the decision in the case of Sun Engineering Works Ltd. (198 ITR 297) (SC), wherein the Supreme Court has observed that a decision of the Court takes its colour from the question involved in the case in which it is rendered and while applying the decision, one must carefully try to ascertain the principles laid down by the Court and not to pick out words or a sentence from the judgments delivered from the context of the question under consideration. It was categorically held that “It is neither desirable nor permissible to pick out a word or a sentence from the judgment of this Court, divorced from the context of the question under consideration and treat it to be the complete ‘law’ declared by this Court. The judgments have to be considered in the light of the question which were before this Court.” Applying the said ratio, the observations in the case of decision of the Bombay High Court in the case of Ajanta Pharma Ltd. cannot be construed to mean that the decision of Special Bench is completely overruled.
14. (ITA No. 4155/Mum./2007) dated 9-11-2009 has accepted that the issue decided by the Bombay High Court does not entirely overrule the issue decided by the Special Bench in the case of Syncome Formulations (I) Ltd. However, the Delhi Tribunal recently in the case of ACIT v. Cosmo Ferrites Ltd., [126 TTJ 666 (Del.)] has rendered a contrary view and held that the decision in the case of Ajanta Pharma Ltd. overrules the decision of the Special Bench in Syncome Formulations (I) Ltd. However, with due respect, the author disagrees with the said views of the Delhi Tribunal for the detailed discussion made above.
15. Construed from the discussion made above, it can be assumed that the decision of Syncome Formulations (I) Ltd. cannot be said to be entirely overruled except only to the extent of quantum of deduction. In other words, the necessary conclusion of the said discussion could be that while computing the amount of deduction as per clause (iv) to Explanation I to S. 115JB(2) of the Act, the book profits should be considered as the gross total income for the purpose of determining the eligible amount of deduction u/s.80HHC of the Act as per S. 80HHC(3)/(3A) of the Act. The provision of S. 80HHC(1B) would then be applied, as held by the Bombay High Court, to determine the quantum of deduction which will be allowed to be reduced while computing the book profits for the purpose of S. 115JB of the Act.
