IN THE SUPREME COURT OF INDIA CIVIL APPELLATE JURISDICTION CIVIL APPEAL  NO.7518 OF 2010

(Arising out of SLP(C) No. 22397 of 2009)

Ajanta Pharma Ltd.           …. Appellant(s)

              Versus

Commissioner of Income Tax-9, Mumbai       ….Respondent(s)

J U D G M E N T

S.H. KAPADIA, CJI

Leave granted.

2. Assessee  was  a  MAT  company  at  the  relevant  time.   On  

30.10.2001, it filed its return of income for assessment year 2001-02.  

The said return was accompanied by statutory audit report claiming  

deduction under Section 80HHC of the Income-tax Act, 1961 (for short,  

“the 1961 Act”).  While computing the “book profits” under Section 115-

JB of the 1961 Act, the assessee claimed reduction, under clause (iv) of  

Explanation  to  Section  115JB,  of  100% export  profits.   Vide  

assessment  order  dated  27.2.2004  the  AO allowed  only  80% of  the  

export  profits  in  terms  of  Section  80HHC(1B),  as  being  allowed  for  

reduction of “book profits” under clause (iv) of Explanation to Section  

115JB of  the  1961  Act.   Being  aggrieved  by  the  assessment  order,  

assessee  moved  before  the  CIT(A).   Vide  order  dated 30.7.2004,  the  

CIT(A)  held  that  100%  export  profits  earned  by  the  assessee  as

computed  under  Section  80HHC(3)  was  eligible for  reduction  under  

clause (iv) of Explanation to Section 115JB.  This order of CIT(A) was  

upheld by the Tribunal which took the view that the amount of profit  

eligible  for  deduction  would  not  be  governed  by  Section  80HHC(1B)  

since there is no reference to the said sub-section in clause (iv) of the  

Explanation  to  Section  115JB.   Against  the  concurrent  finding  the  

Department carried the matter in appeal to the Bombay High Court.  By  

the impugned decision dated 7.5.2009 the Department’s appeal under  

Section 260A of the 1961 Act stood allowed.  Hence this civil appeal.

3. The question of law raised in this civil appeal is : whether for  

determining the “book profits” in terms of Section 115JB, the net profits  

as shown in the P&L Account have to be reduced by the amount of  

profits eligible for deduction under Section 80HHC or by the amount of  

deduction under Section 80HHC?

4. To answer  the above question we need to quote hereinbelow  

Section 115-JB as inserted by Finance Act, 2000, w.e.f. 1.4.2001 which  

reads as follows:

“115-JB.  (1)  Notwithstanding  anything  contained  in  any  other provision of this Act, where in the case of an assessee,  

being  a  company,  the  income-tax,  payable  on  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, 2001, is less than seven and  

one-half per cent of its book profit, such book profit shall be  

deemed to be the total income of the assessee and the tax

payable by the assessee on such total income shall be the  

amount of income-tax at the rate of seven and one-half per  

cent.

(2) Every assessee being a company, shall, for the purposes  

of  this  section,  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, 1956 (1  

of 1956).

Provided …

Provided further …

Explanation : 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 sub-section (2),  

as increased by –

(a) to (f) …

If any amount referred to in clauses (a) to (f) is debited to the  

profit and loss account, and as reduced by –

(i) to (iii) …

(iv) the amount of profits eligible for deduction under Section  80HHC, computed under clause (a) or clause (b) or clause (c)  

of sub-section (3) or sub-section (3A), as the case may be, of  

that section,  and subject to the conditions specified in that  

section.”   

(emphasis supplied)

5. We also quote hereinbelow Section 80HHC as inserted by the  

Finance Act, 1983 w.e.f. 1.4.83.  Sub-section (1B) thereof was inserted  

by Finance Act, 2000, w.e.f. 1.4.2001, the relevant portion of the said  

provisions reads as follows:

“80HHC.  (1) Where an assessee, being an Indian company  or  a  person  (other  than  a  company)  resident  in  India,  is  

engaged in the business of export out of India of any goods or  

merchandise  to  which  this  section  applies,  there  shall,  in  

accordance with and subject to the provisions of this section,  

be allowed, in computing the total income of the assessee, a  

deduction to the extent of profits, referred to in sub-section  

(1B) derived by the assessee from the export of such goods or  

merchandise:

Provided …

(1A) …

(1B)   For  the  purposes  of  sub-sections  (1)  and  (1A),  the  extent of deduction of the profits shall be an amount  

equal to –  

(i) eighty  per  cent  thereof  for  an  assessment  year  

beginning on the 1st Day of April, 2001;

(ii) seventy  per  cent  thereof  for  an  assessment  year  

beginning on the 1st day of April, 2002;

(iii)fifty per cent thereof for an assessment year beginning  

on the 1st day of April, 2003;

(iv) thirty per cent thereof for an assessment year beginning  

on the 1st day of April, 2004,  

and  no  deduction  shall  be  allowed  in  respect  of  the  

assessment year beginning on the 1st day of April, 2005 and  

any subsequent assessment year.”

(emphasis supplied)

6. Sub-section (1B) was inserted by Finance Act, 2000 w.e.f.  

1.4.2001 i.e., the same Act which inserted Section 115JA.

7. In  recent  times,  the  number  of  zero-tax  companies  and  

companies  paying  marginal  tax  has  grown,  hence,  vide  the  Finance  

(No.2)  Act,  1996,  levy  of  minimum tax  on  companies  having  “book  

profits” stood introduced.  The scheme envisaged payment of minimum  

tax by deeming 30% of the book profits computed under the Companies  

Act, as taxable income, in a case where the total income as computed  

under the provisions of the 1961 Act,  is  less than 30% of the book  

profit.   The word “book profit”  has been defined in Section 115JA(2)  

read with the Explanation thereto to mean the net profit as shown in  

the Profit and Loss Account, as increased by the amount(s) mentioned  

in clauses (a) to (f), and as reduced by amount(s) covered by clauses (i)  

to (ix) of the Explanation.  These may be called for the sake of brevity as  

“Upward and Downward Adjustments”.  From the above it is clear that  

Section 115JA is a self-contained Code and will apply notwithstanding  

any provisions in the 1961 Act.  In this case, we are concerned with  

Downward  Adjustment,  particularly  clause  (viii)  which  refers  to  the  

amount(s)  of  profits  eligible for  deduction  under  Section  80HHC,  

computed under Section 80HHC(3) but  subject to conditions specified  

in Sections 80HHC(4) and 80HHC(4A).   

8. By the Finance Act, 2000, Section 115JB was inserted w.e.f.  

1.4.2001  providing  for  levy  of  MAT  on  certain  companies.   Section  

115JB,  though  structured  differently,  stood  inserted  to  provide  for  

payment  of  advance  tax  by  MAT companies.   Section  115JB is  the

successor section to Section 115JA.  In essence, it is the same except  

that Section 115JA provided for MAT on companies, so far as it does  

not  deem  the  book  profit  as  total  income.   Under  Section  115JB,  

however, clause (viii)  of Section 115JA is re-numbered as clause (iv).  

Section 115JB continues to remain a self-contained Code.

9. On  the  other  hand,  Section  80HHC(1)  inter  alia  states  that  

where  an  assessee,  who  is  the  Indian  resident,  is  engaged  in  the  

business of exports out of India of any goods earns convertible foreign  

exchange then in computing the total income, a deduction of the profits  

derived from such exports would be admissible.  Thus, Section 80HHC  

provides for tax incentives.  Section 80HHC(1) at one point of time laid  

down that an amount equal to the amount of deduction claimed should  

be debited to the P&L Account of the previous year in respect of which  

deduction is to be allowed and credited to the reserve account  to be  

utilized for the business purpose.  Section 80HHC(1) concerns eligibility  

whereas Section 80HHC(3)  concerns computation of  the quantum of  

deduction/tax relief.   At  one point  of  time prior  to the Finance Act,  

2000,  exporters  were  allowed  100%  deduction  in  respect  of  profits  

derived from export of goods.  However, that has now been reduced in a  

phase-wise manner under Section 80HHC(1B).  It may be noted that all  

assessable entities are not eligible for deduction under Section 80HHC.  

Similarly,  only  eligible  goods  are  entitled  to  such  special  deduction  

under Section 80HHC(1).  A bare reading of Section 80AB shows that

computation  of  deduction  is  geared  to  the  amount  of  income,  but  

Section 80HHC(3), which refers to quantification of deduction is geared  

to the exports turnover and not to the income.  On the other hand,  

Section 115JB refers to levy of MAT on the deemed income.  The above  

discussion is only to show that Sections 80HHC and 115JB operate in  

different spheres.  Thus, two essential conditions for invoking Section  

80HHC(1)  are  that  assessee  must  be  in  the  business  of  export  and  

secondly  that  sale  proceeds of  such exports  should be receivable  in  

India in convertible foreign exchange.  Hence, Section 80HHC(1) refers  

to “eligibility” whereas Section 80HHC(3) refers to computation of tax  

incentive.  Coming to Section 80HHC(1B) it is clear that after Finance  

Act,  2000  w.e.f.  assessment  year  2001-02  exporters  would  not  get  

100% deduction in respect of profits derived from exports but that they  

would get deduction of 80% in the assessment year 2001-02, 70% in  

the assessment year 2002-03 and so on.  Thus, Section 80HHC(1B)  

deals not with “eligibility” but with the “extent of deduction”.  As earlier  

stated,  Section  115JB  is  a  self-contained  Code.   It  taxes  deemed  

income.  It begins with a non-obstante clause.  Section 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,  under  Section  80HHC(1B)  it  is  the  extent  of  

deduction  which  matters.   The  word  “thereof”  in  each  of  the  items

under  Section  80HHC(1B)  is  important.   Thus,  if  an assessee earns  

Rs.100  crores  then  for  the  assessment  year  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 a 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 VIA.  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  Section  

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 under Section 115JB which imposes MAT  

on deemed income.  The above reasoning also gets support from the  

Memorandum of Explanation to the Finance Bill, 2000.

10. One of the contentions raised on behalf of the Department was  

that if clause (iv) of Explanation to Section 115JB is read in entirety  

including the last line thereof (which reads as “subject to the conditions  

specified in that section”), it becomes clear that the amount of profits  

eligible for deduction under Section 80HHC, computed under clause (a)  

or clause (b) or clause (c) of sub-section (3) or sub-section (3A), as the  

case  may  be,  is  subject  to  the  conditions  specified  in  that  Section.

According to the Department, the assessee herein is trying to read the  

various provisions of Section 80HHC in isolation whereas as per clause  

(iv) of Explanation to Section 115JB, it is clear that book profit shall be  

reduced by the amount of profits eligible for deduction under Section  

80HHC as computed under clause(a) or clause(b) or clause(c) of sub-

section (3) or sub-section (3A), as the case may be, of that Section and  

subject  to  the  conditions  specified  in  that  Section,  thereby  meaning  

that the deduction allowable would be only to the extent of deduction  

computed in accordance with the provisions of Section 80HHC.  Thus,  

according to the Department, both “eligibility” as well as “deductibility”  

of  the  profit  have got  to be considered together  for  working out  the  

deduction as mentioned in clause (iv) of Explanation to Section 115JB.  

We  find  no  merit  in  this  argument.   If  the  dichotomy  between  

“eligibility” of profit and “deductibility” of profit is not kept in mind then  

Section 115JB will cease to be a self-contained code.  In Section 115JB,  

as in Section 115JA, it has been clearly stated that the relief will be  

computed  under  Section  80HHC(3)/(3A),  subject  to  the  conditions  

under sub-clauses (4) and (4A) of that Section.  The conditions are only  

that the relief should be certified by the Chartered Accountant.  Such  

condition is not a qualifying condition but it is a compliance condition.  

Therefore,  one  cannot  rely  upon  the  last  sentence  in  clause  (iv)  of  

Explanation to Section 115JB (subject  to the  conditions specified in  

sub-clauses  (4)  and (4A)  of  that  Section)  to  obliterate  the  difference

between “eligibility” and “deductibility” of profits as contended on behalf  

of the Department.

11. For the above reasons, we set aside the impugned judgment of  

the High Court and restore the judgment of the Tribunal.  Accordingly,  

the civil appeal of the assessee is allowed with no order as to costs.

…………………….CJI  (S. H. Kapadia)

………………………..J.                (K.S. Radhakrishnan)

New Delhi;  September 9, 2010