Quantum of Exclusion of Export Profit From Book Profit— MAT

2.2 On behalf of the Revenue, it was, inter alia, contended that while computing book profit u/s. 115JB,?only reduced export profit as provided u/s. 80HHC(1B) should be excluded from the book profit and not the amount of entire export profit. As per the Memorandum explaining the Finance Bill, 2000, the reason to introduce S. 115JB was to simplify the MAT provisions. Considering the language of Clause (iv) of the said Explanation, the export profit eligible for deduction should be equal to the amount of actual deduction allowed u/s.80HHC while computing the total income of the assessee under the normal provisions of the Act. If this is not done, an absurdity will be created to the extent that while full deduction is not allowed in respect of export profit u/s.80HHC, for the purpose of S. 115JB, the full amount of export profit will be excluded. This was never the intention of the Legislature while interpreting the provisions of law. An interpretation that results in an absurd situation is to be avoided. It was alternatively contended that even if one takes a view that eligible export profit is referable to only S. 80HHC(3) without applying the restriction contained in Ss.(1B), one has to bear in mind the expression ‘subject to the conditions specified in that Section’ contained in Clause (iv) of the said Explanation (hereinafter referred to as the said conditions). Accordingly, the restriction contained in Ss.(1B), being a condition for allowing deduction u/s.80HHC, has to be considered while determining the quantum of export profit to be excluded from the book profit u/s.115JB. It was also contended that the Finance Minister’s speech and the Memorandum explaining the provisions of the Finance Bill cannot by itself be used to interpret literal meaning of Act.

2.3 On the other hand, on behalf of the assessee-company, various contentions were raised, which, inter alia, include : Considering the expression, ‘eligible for deduction u/s.80HHC’ used in the said Clause (iv), the entire export profit requires to be excluded from the book profit that being the amount eligible for deduction u/s.80HHC. The provision for exclusion of export profit contained in Clause (iv) of the said Explanation is to ensure that the export profits are not subjected to MAT. In the past also, in different provisions made in the Act for the levy of MAT, the export profits have been kept outside the purview of MAT. Therefore, the policy adopted by the Legislature of encouraging/boosting export was considered to be of such importance that the Legislature wished to forego taxes thereon, including MAT. Referring to the dictionary meaning of the expression ‘eligible’, it was contended that it would be beyond any doubt that the word ‘eligible’ has to be read to mean type or class or nature of profit (i.e., qualitative description of profits) and can never take within its ambit, a particular proportion or quantum thereof. The amount quantified for deduction u/s.80HHC(1B) is only a subclass or part of the type/class or nature of profit eligible and hence, the same cannot be considered for this purpose. In short, it was pointed out that Clause of the said Explanation refers to entire export profit and not reduced export profit. It was submitted that the quantum set out u/s.80HHC(1B), is not a condition and the same only provides the extent of deduction available u/s.80HHC(1). This is also supported by the language of S. 80HHC(1), which specifically allows ‘a deduction to the extent of profits referred to in Ss.(1B)’. It was also contended that if two views are possible of interpretation of the said Clause (iv), then the view in favour of the taxpayer ought to be adopted.

2.4 To decide the issue on hand, at the outset, the Court first noted the following settled position with regard to interpretation of a taxing statute [pages 258/259]:

“With the above background, let us now consider the provisions. What the Legislature ought to have done or what language or words or expression ought to have been used, is not for the Courts to consider.?The duty of the Court, in the event, where literal interpretation would defeat the intent of the Legislature or lead to an absurdity or the like would be to ascertain the Parliamentary intent, by applying the rules of statutory interpretation as followed in our jurisdiction. A word of caution, it is only in the event when the literal interpretation would lead to an absurdity or defeat the object or intent of the legislation and not otherwise. The principle of all fiscal legislation is that if the person sought to be taxed comes within the letter of the law he must be taxed, however, great the hardship may appear to the judicial mind to be. On the other hand, if the State, seeking to recover tax, cannot bring the subject within the letter of the law, the subject is free, however, apparently within the spirit of the law the case might?otherwise?appear?to?be.?The?taxing?statutes cannot be interpreted on any presumptions or assumptions. The Court must look squarely at the words of the statute and interpret them. It must interpret a taxing statute in the light of what is clearly expressed; it cannot imply anything which is not expressed, it cannot import provisions in the statutes so as to supply any assumed deficiency [CST v. Modi Sugar Mills Ltd., AIR 1961 SC 1047; (1961) 12 STC 182].”

2.5 The Court, then, proceeded to decide the issue and referred to the provisions of S. 80HHC, as well as S. 115JB, as applicable to the case under consideration. The Court also referred to the earlier version of MAT contained u/s.115J as well as u/s.115JA. After tracing the history of the provisions relating to MAT, the Court stated as under (page 261)?:

“Insofar as MAT companies are concerned, that reduction of export profit while computing the book profits was not available when S. 115J was introduced from April 1, 1988. The benefit was given subsequently from April 1, 1989. Similarly the reduction was not available in the case of S. 115JA which was introduced with effect from April 1, 1997. The benefit was extended only from April 1, 1998. This intent of the Legislature must be considered while interpreting the provisions. The other aspect would be that if Ss.(1B) is not read while computing the book profits and which contains the sunset clause it would mean that even after April 1, 2005, MAT companies could claim deduction of export profits, while computing book profits which would be an absurdity.”

2.6 Proceeding further, referring to the judgment of the Apex Court in the case of K. P. Varghese (131 ITR 597), the Court noted that in that judgment it was observed that it is well-recognised rule of construction that the statutory provisions must be so construed if possible that absurdity and mischief may be avoided. If the situation arises where the construction suggested by the Revenue would lead to wholly unreasonable and unjust result, which could never have been intended by the Legislature, then it must be avoided. The Court also noted that this judgment also supports the rule of interpretation that the speech made by the mover of the Bill explaining the reason for the introduction of the Bill can certainly be referred to for the purpose of ascertaining the mischief sought to be remedied by the legislation and the object and the purposes for which the legislation was enacted. Therefore, the Finance Minister’s speech can be relied upon by the Court for the purposes of ascertaining what was the reason for introducing that clause. The Court also referred to various judgments of the Apex Court dealing with principles of statutory interpretation and in particular, dealing with principles of interpretation of taxing statute.

2.7 After referring to the judicial pronouncements with regard to principles of statutory interpretation, the Court stated as under (Page 266):

“The principles elucidated earlier of statutory construction can now be considered for interpreting the provisions of S. 115JB vis-à-vis S. 80HHC. Does a literal reading of S. 80HHC read with S. 115JB(2), Explanation 1(iv), lead to an absurdity and/or does not make clear Parliamentary intent considering the law as it stood before S. 115JB was introduced. In S. 115J and S. 115JA the expression used were ‘profits eligible for deduction u/s.80HHC.’ S. 115JB also uses the expression ‘profits eligible for deduction.’ There really can be no difficulty in understanding what this means. Only those profits which are eligible and computed in terms of Ss.(3) or Ss.(3A) and quantified in terms of Ss.(1B). The computation whether under Ss.(3) or Ss.(3A) are for the purpose of Ss.(1) or Ss.(1A). S. 80HHC(1) permits a deduction to the extent of profits referred to in Ss.(1B). The only question is whether the expression in clause(a), (b) or (c) of Ss.(3) consequent on introduction of Ss.(1B) to S. 80HHC will have a meaning different from the meaning than what was originally understood, considering clause (iv) to Explanation 1 of S. 115JB.”

2.8 Referring to the argument made on behalf of the assessee that for the above purposes, provisions contained in Ss.(1B) should be ignored, the Court stated as under (Page 267):

“…….If the construction sought to be given by the counsel for the assessee is accepted it would make Ss.(1B) irrelevant for the purpose of S. 115JB. Ss.(1B) provides for deduction in terms set out therein. Ss.(3) sets out the method of computation of profits. The computation of profits is, therefore, for the purpose of working out the deduction of profits available u/s. 80HHC(1B). Earlier it was in terms of Ss.(1). Now, S. 80HHC(1) in term refers to Ss.(1B) . All the provisions are interrelated and cannot be read de hors one another. If Ss.(1B) is not read in Ss.(1), then the expression ‘no deduction shall be allowed in respect of the assessment beginning on the first day of April, 2005, and any subsequent year’, shall be rendered otiose.”

2.9 The Court also considered the argument made on behalf of the assessee that the provisions of Ss.(1B) is not a condition, but in the nature of computation and stated that even if we accept this proposition and proceed on that finding, nevertheless it is impossible of reading S. 80HHC(3) or (3A) independent of S. 80HHC(1B). The Court also noted that basically the argument of the assessee is based on the Memorandum explaining the provisions of the Finance Bill, 2000. However, at the same time, in the Notes on Clauses, it is clearly stated that the profits will be reduced by certain adjustments which are eligible for deduction u/s.80HHC. The profits eligible for deduction are Reduced export profits in terms of S. 80HHC(1B). According to the Court, there is nothing in the Finance Minister’s speech of February 29, 2000 to hold otherwise. Noting the argument made on behalf of the assessee that if two views are possible, the view favourable to the taxpayer should be adopted, the Court stated that the question is whether there are two views possible in this case. According to the Court, no two views are possible, but the only view is that the MAT companies are entitled to the same deduction of export profits u/s.80HHC, as any other company involved in export in terms of S. 80HHC(1B). Once that be the case, this argument is also devoid to merit.

2.10 The Court finally concluded as under (page 268):

“……To our mind, the language is clear. The literal meaning does not in any way defeat the object of the Section and/or lead to any absurdity. The object of S. 115JB is to allow even MAT companies to avail of the benefit of deduction. If we consider the assessee’s arguments that MAT companies are entitled to full deduction of export profits, it will lead to anomaly, whereby the companies which are paying tax on total income under the normal rules, for them the deduction of export profits will be lesser than what MAT companies are entitled to. Is this a possible view? When S. 115J was originally introduced, MAT companies were not entitled to deduction of profits u/s.80HHC while working out the book profits…….”

“……Can it now be argued that MAT compa-nies considering S. 115JB(2), Explanation 1(iv) are entitled to be placed in a better position than the other companies entitled to the export deduction under 80HHC, though earlier they constituted one class? No rule of construction nor the language of the S. 80HHC read with S. 115JB, in our opinion, will permit such construction. If such construction is not possible, then both the classes of companies will be entitled to the same deduction. This would contemplate that both would be entitled to deductions of profits in terms of S. 80HHC(1B). So read, it would be a harmonious construction…..”

Ajanta Pharma Limited v. CIT, 327 ITR 305 (SC):

3.1 The above-referred judgment of the Bombay High Court came up for consideration before the Apex Court at the instance of the assessee. To consider the issue, the Court referred to the facts of the case and noted that the following question of law is raised in the Civil Appeal:

“whether for determining the ‘book profits’ in terms of S. 115JB, the net profits as shown in the profit and loss account have to be reduced by the amount of profits eligible for deduction u/s.80HHC or by the amount of deduction u/s. 80HHC?”

3.2 To decide the question, the Court noted the provisions of S. 115JB and S. 80HHC as applicable to the case of the assessee. After referring to relevant provisions, the Court also noted and analysed in brief, the earlier provisions relating to MAT contained in S. 115JA. The Court, then, stated that from these provisions it is clear that S. 115JA is a self-contained code and will apply not-withstanding any other provisions in the Act. The Court then stated that S. 115JB, though structured differently, stood inserted to provide for payment of advance tax by MAT Companies. S. 115JB is the successor to S. 115JA. In essence, it is the same as S. 115JA with certain differences. Accordingly, S. 115JB continues to remain a self-contained code.

3.3 Referring to the object for which S. 80HHC was enacted, the Court noted that the Section provides for tax incentive to exporters. At one point of time, S. 80HHC(1) laid down that an amount equal to an amount of deduction claimed should be debited to profit & loss ac-count and credited to reserve account to be utilised for business purposes. Ss.(1) of 80HHC is concerned with eligibility, whereas Ss.(3) is concerned5 with computation of quantum of deduction. Prior to amendment made by the Finance Act, 2000, the exporters were allowed 100% deduction in respect of the export profit. Thereafter, the same has been reduced in a phasewise manner, as provided in Ss.(1B). The Court also noted that the deduction is available in respect of eligible goods and the same is not available to all assessable entities. Referring to S. 80AB, the Court noted that computation of deduction is geared to an amount of income, whereas the quantification of deduction u/s.80HHC(3) is geared to export turnover and not to the income. On the other hand, S. 115JB refers to levy of MAT on deemed income. This shows that the S. 80HHC and S. 115JB operate in different spheres.

3.4 Dealing with S. 80HHC, the Court further stated that S. 80HHC(1) refers to ‘eligibility’, whereas S. 80HHC(3) refers to computation of tax incentive. According to the Court, S. 80HHC(1B) deals with ‘extent of deduction’ and not with the eligibility.

3.5 The Court then referred to the argument raised on behalf of the Revenue, with regard to applicability of other conditions of S. 80HHC incorporated in Clause (iv) of the said Explanation and noted that based on this, the Revenue contends that the quantum of export profit for this purpose should be subject to Ss.(1B) of 80HHC. The Court then pointed out that according to the Revenue, both ‘eligibility’ as well as ‘deductibility’ of the profit have got to be considered together while applying the said Clause (iv). Rejecting this contention, the Court stated that if the dichotomy between ‘eligibility’ of profit and ‘deductibility’ of profit is not kept in mind, S. 115JB will cease to be a self-contained code. According to the Court, for the purposes of S. 80HHC(3)/(3A), the conditions are only that the relief should be certified by a chartered accountant. Such condition is not a qualifying condition, but it is a compliance condition. Therefore, one cannot rely upon the last sentence of the said Clause (iv) to obliterate the difference between ‘eligibility’ and ‘deductibility’ of profits as contended on behalf of the Revenue.

3.6 Comparing the relevant provisions of S. 115JB and S. 80HHC, the Court concluded as under (page 310):

“As earlier stated, S. 115JB is a self-contained code. It taxes deemed income. It begins with a non obstante clause. S. 115JB refers to computation of ‘book profits’ which have to be computed by making upward and downward adjustments. In the downward adjustment, vide clause (iv) it seeks to exclude ‘eligible’ profits derived from exports. On the other hand, u/s. 80HHC(1B) it is extent of deduction which matters. The word ‘thereof’ in each of the items u/s.80HHC(1B) is important. Thus, an assessee earns Rs.100 crores then for the A.Y. 2001-02, the extent of deduction is 80% thereof and so on which means that the principle of proportionality is brought in to scale down the tax incentive in phased manner. However, for the purposes of computation of book profits which computation is different from normal computation under the 1961 Act/computation under Chapter VI -A. We 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 S. 80HHC(1B). Thus, for computing ‘book profits’ the downward adjustment, in the above example, would be Rs.100 crores and not Rs. *90 crores. The idea being to exclude ‘export profits’ from computation of book profits u/s.115JB which imposes MAT on deemed income. The above reasoning also gets support from the Memorandum of the Explanation to the Finance Bill, 2000.”

* In the given example, this should be Rs.80 crores.

Conclusion:

4.1 In view of the above judgment of the Apex Court, it is settled that for the purpose of excluding the export profit from the book profit while applying the MAT provisions, the entire export profit will be excluded and not the reduced export profit. Primarily, the decision of the Court seems to have been rested on the finding that both provisions (S. 80HHC & S. 115JB) operate in different spheres, S. 115JB is a self-contained code, S. 80HHC(1) deals with the ‘eligibility’, whereas S. 80HHC(3) deals with computation of quantum of deduction, S. 80HHC(1B) deals with the extent of deduction and not with the eligibility, there is dif-ference between the ‘eligibility’ and ‘deductibility’ of profits and the view also gets support from the Memorandum explaining the Finance Bill, 2000.

4.2 Interestingly, in the above judgment, the arguments raised on behalf of the assessee, as well as the view expressed by the Bombay High Court on such argument and the reasons given by the High Court for reaching the conclusion are neither referred to nor dealt with. It appears that perhaps the same arguments must have been raised by the assessee before the Apex Court, which were raised before the High Court.

4.3 On a careful reading of both the judgments, one may notice that the Apex Court has taken a view that while determining the amount of export profit for exclusion from the book profit, provisions of S. 80HHC(1B) are not to be taken in the account, whereas the Bombay High Court had taken exactly contrary view. One of the reasons given by the High Court for taking such a view was that if, while computing the book profit, Ss.1(B) is not to be read with Ss.(1) of S. 80HHC, then there would an absurdity as in such an event, MAT companies would claim deduction of export profit even after 1-4-2005 (refer para 2.5 and para 2.8 above). This reason is also to be treated as impliedly overruled as otherwise, an interesting academic issue may arise as to whether on account of the view taken by the Apex Court, whether MAT companies can attempt to claim the benefit of Clause (iv) of the said Explanation even after A.Y. 2004-05.