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The manner of computation of deduction u/s 80HHC for export profits earned is often a core of contention between an assessee and the assessing officer.

Due to business deductions such as depreciation, 100% deduction of scientific research expenditure, bad debts, full write off of deferred revenue expenditure, unabsorbed claims for losses and depreciation of earlier years etc. the income computed under the head business is found to be insufficient to absorb eligible deduction u/s 80HHC.

For instance assuming the net profit before such statutory deductions is 1000 and the aggregate amount of statutory deductions is 800,in which case the business income would be 200 only. Assuming the ratio of export turnover to total turnover is 50% the normal tax liability at 35% tax rate would be 35%(200-50%*200)= 35. Since the MAT liability would be higher at 67.5 assuming we adopt the deduction u/s 80HHC at 100 only based computed with reference to profits computed under the head business after taking into account such statutory deductions and disallowances.

Now the question arises if it is permissible to compute deduction for export profits u/s 80HHC with reference to the amount of net profit or book profit rather than the sum arrived as per infra in the context of present section 115JB of the Income tax Act, 1961.

The answer to this question would in affirmative when one would go deep to understand the intent behind such insertion in the section.

The latest in the row of cases on this subject is the decision of the Kerala High Court in the case of CIT v. G T N Textiles Ltd. (248ITR372). Though this decision pertains to section 115J yet would be supporting the assesses case in the newly drafter section 115JB.

In referring to both sections 115J & 80HHC the Court explained that under clause (iii) of the Explanation, it is not the profit as computed under the head “ Profits and gains of business or profession” that is to be applied. Instead of the words “ profits and gains of business or profession” occurring in sub section (3) and (3A) of section 80HHC or sub section (3) of section 80HHD, the word “profit” that is mentioned in section 115J has to be applied. 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 is made applicable to the extent only for calculating the deduction. The Court further held that the Circulars issued by the Board which are not against the section could be looked into while interpreting the provision.

Further in the Circular No. 559 dated 4.5.90 the Board has clarified that the intention for inserting such incentive provision in section 115J is to exclude profits that are otherwise 100% exempt under the Act. The object remaining the same there is no reason to hold a contention different from the one which hold good in the context of section 115J. Thus even for the purposes of section 115JB workings the deduction is to be computed with reference to book profits or net profit as shown in the profit and loss account. Further in Circular NO. 680 dated 21.2.94 such an intention is exemplified. The circular clarifies as under: –

“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).”

In the author’s opinion it is therefore possible to claim deduction for export profits with reference to book profits for the following two reasons: –

1) Section 115J begins with a non obstante clause due to which “book profit” will have superior value than the profit computed under head “business or profession”
2) By adopting the figure as computed under the head business for computing such relief would be against the legislative intent.

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