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For Minimum Alternate Tax computation, deduction in respect of profits from export of computer software should be based on book profit
In brief
In a recent decision in the case of Bhari Information Technology Systems Pvt. Ltd.1 (the “assessee” or the “company”), the Supreme Court held that a deduction under section 80HHE for the purpose of computing Minimum Alternate Tax (“MAT”) on adjusted book profit under section 115JA of the Income-tax Act, 1961 (the “Act”) is to be computed on the basis of adjusted book profit and not on the basis of profit computed under the normal provisions of law applicable to computation of business income.
1 CIT v. Bhari Information Tech. Systems Pvt. Ltd. [TS-634-SC-2011]
Facts
The salient features of the agreement are summarised below:
• In its tax return for AY 2000-01, the company claimed deduction under section 80HHE of INR 15.63 millions against its net profit of INR 30.78 millions (as per the profit and loss account) to arrive at a book profit of INR 15.15 millions.
• The Assessing Officer (“AO”) contended that while computing the total income under the normal provisions of the Act, there was no profit remaining after set- off of brought forward losses.
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• According to the AO, if book profit was computed under section 115JA of the Act, deduction under section 80HHE of the Act was not admissible.
• The order of the AO was upheld by the Commissioner of Income-tax (Appeals) (“CIT(A)”).
• The assessee challenged the CIT(A) order before the Income Tax Appellate Tribunal (“Tribunal”).
• The Tribunal, relying on the decision of the Special Bench of the Tribunal in the case of Syncome Formulations (I) Ltd.2 allowed the company’s claim.
• The High Court upheld the order of the Tribunal.
• The revenue challenged the order of the High Court in the Supreme Court.
Issue
Whether for the purpose of MAT computation, deduction under section 80HHE of Act is to be worked out on the basis of adjusted book profit under section 115JA of the Act or on the basis of the normal provisions of the Act relating to computation of business income.
Assessee’s contentions
• The reference to section 80HHE in section 115 JA of the Act does not suggest that regular income tax profit should be the basis of MAT computation rather than adjusted book profit.
• The Legislature’s intention is to give full deduction to assessees in respect of the MAT scheme, under section 80HHE of the Act.
2 DCIT v. Syncome Formulations (I) Ltd. [2007] 106 ITD 193 (Mum)(SB)
Revenue’s contentions
• For MAT purposes, deduction under section 80HHE of the Act has to be computed based on profit calculated according to the normal provisions of law.
Supreme Court ruling
• The Supreme Court referred to the decision of the Special Bench in the case of Syncome Formulations (I) Ltd. (above) where it had been held that:
- Deduction under section 80HHC (section 80HHE also falls in Chapter VI- A) has to be computed on the basis of adjusted book profit and not on the basis of regular income tax profit in a case where section 1115JA of the Act is applicable.
- Section 115JA of the Act relief has to be computed under section 80HHC(3)/(3A) of the Act.
- Once the law declares that the adjusted book profit is amenable for further deductions, computation of deduction under section 80HHC of the Act must be with reference to adjusted book profit.
• The decision of the Special Bench squarely applies to the Bhari Information Technology Systems Pvt. Ltd. case.
• Following the view taken by the Special Bench, the Tribunal in this case came to the conclusion that deduction under section 80HHE of the Act have to be computed on the basis of adjusted book profit under section 115JA of the Act and not on the basis of profit as computed under the regular provisions of law applicable to the computation of profits and gains of business.
• The decision of the Tribunal was upheld by the High Court.
• The Supreme Court saw no reason to interfere with the High Court’s decision.
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Conclusion
This decision would enable claim for deduction under section 80HHE of the Act (and Chapter VI-A) for MAT purposes, to be based on adjusted book profit and not on profit computed under the normal provisions of law.
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