AJANTA PHARMA LTD.versusCOMMISSIONER OF INCOME TAX-9, MUMBAI

                     [2010] 11 S . C.R. 404


A                  AJANTA PHARMA LTD.
                              v.
          COMMISSIONER OF INCOME TAX-9, MUMBAI
               (Civil Appeal No. 7518 of 2010)
                       SEPTEMBER 9, 2010
B
            (S.H. KAPADIA, CJI AND K.S. PANICKER
                     RADHAKRISHNAN, J.)

         Income Tax Act, 1961 - ss. 115JB and BOHHC -
c   Assessment of Minimum Alternate Tax (MAT) Company u/s.
    115-JB for assessment year 2001-2002 - Deduction in respect
    of profits retained for export business - Computation of 'book
    profits' uls. 115-JB - Held: Reduction of 100% export profits,
    as computed u/s. 80HHC(3), is eligible for reduction under
D   clause (iv) of Explanation to s. 115JB.
         The appellant, a Minimum Alternate Tax (MAT)
    Company, filed its return of income for the assessment year
    2001-02. It claimed deduction under Section 80HHC of the
    lncome'-Tax Act, 1961". While computing the 'book profits'
E   under Section 115-JB of the Act, the assessee claimed
    reduction of 100% export profits under clause (iv) of
    Explanation to Section 11 SJB. The Assessing Authority
    allowed reduction of only 80% of the export profits in
    terms of Section 80HHC(1 B). The Appellate Authority as
F   well as the tribunal allowed the claim of the assesee
    holding 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
    11 SJB. Aggrieved, respondent-Department filed an appeal
G   and the High Court allowed the same. Therefore, the
    appellant-assessee filed the instant appeal.
        Allowing the appeal, the Court
        HELD: 1.1 Section 115JB of the Income Tax Act, 1961
H                            404
   AJANTA PHARMA LTD. v. COMMISSIONER OF               405
            INCOME TAX-9, MUMBAI
refers to levy of MAT on the deemed income. Sections A
80HHC and 11 SJB operate in different spheres. The 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, B
Section 80HHC(1) refers to 'eligibility' whereas Section
80HHC(3) refers to computation of ta>< incentive. Coming
to Section 80HHC(1 B), it is clear that after Finance Act,
2000 w.e.f. assessment year 2001~02 exporters would not
get 100% deduction in respect of pn:>fits derived from c
exports but 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(1 B) deals not
with 'eligibility' but with the 'extent of deduction'. [Para 9]
[411-F-H; 412-A-B]
                                                             D
     1.2 Section 11 SJB is a self-contained Code. It taxes
deemed income. It begins with a non-obstante clause.
Section 11 SJB refers to computation of 'book profits'
which have to be computed by making Upward and
Downward Adjustments. In the Downward Adjustment, E
vide clause (iv) it seeks to exclude 'eligible' profits derived
from exports. On the other hand, under Section 80HHC(1 B)
it is the extent of deduction which matters. The word
'thereof' in each of the items under Section 80HHC(1 B) is
important. Thus, if an assessee· earns Rs. 100 crores then F
for the assessment year 2001-2002, 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 is different from G
normal computation under the 1961 Act/computation
under Chapter VIA, the Upward and Downward
Adjustments are to be kept in mind 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 H
    406      SUPREME COURT REPORTS            [2010) 11 S.C.R.


A   reduced to 80% by relying on Section 80HHC(18). Thus,
    for computing 'book profits' the Downward Adjustment
    would be Rs. 100 crores and not Rs. 90 crores. The idea
    being to exclude 'export profits' from computation of book
    profits under Section 11 SJB which imposes MAT on
B   deemed income. The Memorandum of Explanation to the
    Finance Bill, 2000 supports the said reasoning. [Para 9)
    [412-B-G]
       1.3 It cannot be said that the 'eligibility' as well as
   'deductibility' of the profit have got to be considered
C together for working out the deduction as mentioned in
  clause (iv) of Explanation to Section 11 SJB. If the
  dichotomy between 'eligibility' of profit and 'deductibility'
  of profit is not kept in mind then Section 11 SJB will cease
  to be a self-contained code. In Section 11 SJB, as in
D Section 11 SJA, it is clearly stated that the relief would 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
E qualifying condition but it is a compliance condition.
  Therefore, reliance cannot be placed on the last sentence
  in clause (iv) of Explanation to Section 11 SJB (subject to
  the conditions specified in sub-clauses (4) and (4A) of that
  Section) to obliterate the difference between 'eligibility'
F and 'deductibility' of profits. Therefore, the impugned
  judgment of the High Court is set aside and the judgment
  of the tribunal is restored. [Para 10) [413-B-F]
         CIVIL APPELLATE JURIDICTION : Civil Appeal No. 7518
    of 2010.
G
         From the Judgment & Order dated 07.05.2009 of the High
    Court of Judicature at Bombay in Income Tax Appeal No. 1005
    of 2008.
          Bishwajit Bhattacharya, ASG, Mukul Gupta, Jehangir D.
H
   AJANTA PHARMA LTD. v. COMMISSIONER OF                       407
            INCOME TAX-9, MUMBAI
Mistri, Rustom B. Hathikhanawala, Vikas Malhotra, Ajay Singh,          A
Judy James, B.V. Balaram Das for the apearing parties.

     The Judgment of the Court was delivered by

     S.H. KAPADIA, CJI. 1. Leave granted.
                                                                       B
      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         c
"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(1 B), as being allowed for reduction         D
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
                                                                       E
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(1 B) 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        F
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.
                                                                       G
     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?                     H
    408        SUPREME COURT REPORTS                  [2010] 11 S.C.R.


A        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,
B
          being a company, the income-tax, payable on the total
          income as computed under this Act in respect of ~ny
          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
c         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.

D         (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 Ill of Schedule VI to the Companies Act, 1956
          (1 of 1956).
E
          Provided

          Provided further

          Explanation : For the purposes of this section, "book profit"
F         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)

G         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
H         Section 80HHC, computed under clause (a) or clause (b)
   AJANTA PHARMA LTD. v. COMMISSIONER OF                       409
   INCOME TAX-9, MUMBAI [S.H. KAPADIA, CJI.]
    or clause (c) of sub-section (3) or sub-section (3A), as the       A
    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            B
by the Finance Act, 1983w.e.f. 1.4.83. Sub-section (1 B) 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             C
    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,         D
    a deduction to the extent of profits, referred to in sub-section
    (1 B) derived by the assessee from the export of such goods
    or merchandise:

    Provided
                                                                       E
    (1A)

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

            (iii)   fifty per cent thereof for an assessment year
                    beginning on the 1st day of April, 2003;

            (iv)    thirty per centthereof for an assessment year
                    beginning on the 1st day of April, 2004,           H
    410      SUPREME COURT REPORTS                  [2010] 11 S.C.R.


A                      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)
B
          6. Sub-section (1 B) was inserted by Finance Act, 2000
    w.e.f. 1.4.2001 i.e., the same Act which inserted Section
    115JA.

c        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
D 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
E 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
F 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 BOHHC(4) and BOHHC(4A).
G
          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
H 115JB is the successor section to Section 115JA. In essence,
   AJANTA PHARMA LTD. v. COMMISSIONER OF                      411
   INCOME TAX-9, MUMBAI [S.H. KAPADIA, CJI.]
it is the same except that Section 115JA provided for MAT on          A
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   8
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.          C
Section 80HHC(1) atone 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)             D
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             E
manner under Section 80HHC(1 B). 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             F
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                 G
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            H
    412      SUPREME COURT REPORTS                   [2010] 11 S.C.R.


A   Section 80HHC(1 B) 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
B   80HHC(1 B) 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
c   Adjustments. In the Downward Adjustment, vide clause (iv) it
    seeks to exclude "eligible" profits derived from exports. On the
    other hand, under Section 80HHC(1 B) it is the extent of
    deduction which matters. The word "thereof' in each of the items
    under Section 80HHC(1 B) is important. Thus, if an assessee
D   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
E   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(1 B). Thus, for computing "book profits" the
F   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
G   Finance Bill, 2000.
        1O. 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
H
     AJANTA PHARMA LTD. v. COMMISSIONER OF                         413
     INCOME TAX-9, MUMBAI [S.H. KAPADIA, CJI.]
  becomes clear that the amount of profits eligible for deduction          A
  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                B
  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         c
  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         D
  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 115J B 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        E
  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          F
  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.
                                                                           G
      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.
 N.J.                                                Appeal allowed.       H