Circular No. 680

Sections 115J & 115JA

What this is

Circular No. 680 was issued by the Central Board of Direct Taxes on 21 February 1994. Its subject is Sections 115J & 115JA.

This is a clarification. The Board is stating how it reads a provision. That reading binds the department; it does not bind a court, and where the section says otherwise the section wins.

What it does

Settles how the export and tourism deduction is to be worked out inside book profits. Explanation (iii) to section 115J allows a deduction from book profits attributable to a business whose profits qualify under section 80HHC or section 80HHD, computed 'in the manner specified' in section 80HHC(3) or (3A) or section 80HHD(3). Two readings were possible: that the amount actually quantified under those sub-sections goes out of book profits, or that only their method of computation is borrowed and applied to book profits. The Board takes the second: only the manner of computation is imported, not the amounts. It then sets out the steps — decide whether the assessee carries on an eligible business; adjust the profit and loss account net profit by clauses (a) to (f), (i) and (ii) of the Explanation; if the business consists exclusively of eligible business, allow the whole of that adjusted figure; otherwise apply to it the export turnover to total turnover ratio under section 80HHC(3)(b), or the ratio of turnover of sales to an export house or trading house under section 80HHC(3A)(b), or the ratio of receipts specified in section 80HHD(2) to total receipts.

Why it was issued

Doubts had been expressed on which of the two readings was right. The Board points to its own Circular No. 559 dated 4 May 1990, which had explained that the Explanation was meant to ensure that the tax on book profits did not take away the 100 per cent exemption for export profits and tourism profits.

Who it reaches

Companies liable to book profit tax under section 115J with export or tourism business
Exporters claiming section 80HHC alongside a section 115J computation
Hotels and tour operators claiming section 80HHD
Assessing Officers computing book profits from assessment year 1989-90

The provisions it speaks to

Left, the provision of the Income-tax Act, 1961 as the instrument itself names it. Right, the section of the Income-tax Act, 2025 that the department’s own concordance maps it to — which is where the same ground is now covered.

Under the 1961 Act	Now
s.80HHC	no counterpart recorded
s.80HHD	no counterpart recorded
s.115J	no counterpart recorded

The instrument, as the Board published it

The words below are the department’s own, reproduced from its published text. Where the department’s copy carried a publisher’s notes after the instrument, those are not reproduced.

SECTIONS 115J & 115JA
Special provisions relating to companies
SECTION 115J l SPECIAL PROVISIONS RELATING TO CERTAIN COMPANIES
742. Effect of Explanation (iii) to section 115J - Clarification
1. Clause (iii ) of the Explanation to 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) to 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) to section 115J, it was stated in para 9.2 of Board’s Circular No. 559, dated 4-5-1990 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). Further the Explanation (iii) under section 115J itself clearly lays down that the amount, as arrived at after adjusting the net profit as shown in the P&L Account for the relevant previous year by the adjustments referred to in clauses (a) to (f), (i ) and (ii) of the said Explanation should be allowed as deduction, computing the deduction however in the manner specified under section 80HHC(3) or (3A) or 80HHD(3). It is, therefore, clear that it is only the manner of computation specified in section 80HHC(3) or (3A) or 80HHD, and not the amounts themselves, that should be imported into Explanation (iii) under section 115J.
3. Accordingly, the deduction contemplated under Explanation (iii) to section 115J should be computed according to the following steps:
(i) it should be first decided whether the assessee carries on a business, the profits from which are eligible for deduction under section 80HHC or 80HHD;
(ii) if so, the net profit, shown in the P&L Account of the relevant previous year should be adjusted as per clauses (a) to (f ) and (i) and (ii) of the said Explanation;
(iii) if the business exclusively consists of the types of business which are eligible for deduction under section 80HHC/80HHD the whole of such amount arrived at as per (ii) above should be allowed as deduction; and
(iv) if not, the proportion of the export turnover of the total turnover of the business carried on by the assessee as required under section 80HHC(3)(b) or, the proportion of the turnover in respect of the sales made to export house or trading house to the total turnover of the business carried on by the assessee as required under section 80HHC(3A)(b) or, as the case may be, the proportion of the receipts specified in section 80HHD(2) to the total receipts of the business carried on by the assessee should be determined and the said proportion should be applied to the amount arrived at (ii) above to determine the quantum of deduction under section 115J.
Circular: No. 680, dated 21-2-1994.

What to watch

The trap is exactly the point clarified: the section 80HHC or 80HHD figure computed on business profits is not the figure to deduct from book profits — the ratio must be reapplied to the adjusted book profit.
Where the business is not exclusively eligible business, the turnover or receipts ratio must be worked out and applied; forgetting that step overstates the deduction.
This is written for section 115J and its Explanation (iii) as inserted by the Direct Tax Laws (Amendment) Act, 1989 from assessment year 1989-90; the heading also names section 115JA, but the text speaks only to section 115J.
The three limbs use different ratios — export turnover, export house sales turnover, and section 80HHD(2) receipts — and the right one depends on which sub-section the claim rests on.

Where you meet it

In an assessment or appeal on a section 115J computation where the Assessing Officer has restricted the Explanation (iii) deduction.

An example

Ours, not the Board’s: a worked case built from the rule the instrument sets, to show how it falls out.

A company's profit and loss account net profit, adjusted by clauses (a) to (f), (i) and (ii) of the Explanation, comes to Rs. 100 lakh. Its export turnover is Rs. 40 lakh out of a total turnover of Rs. 200 lakh. The deduction under Explanation (iii) is 40/200 of Rs. 100 lakh, that is Rs. 20 lakh — not the amount separately quantified as the section 80HHC deduction on business profits.

On the same provision

Other instruments in this library that name the same provision of the 1961 Act. They are not necessarily still operative, and a later one may have replaced an earlier one without saying so.

Circular No. 1 — 558. Guidelines regarding filing of auditor’s report in old format of Form No. 10CCAC, along with the return, in place o 17 January 2001
Circular No. 729 — 557. Whether profits derived from export of cut and polished dimensional blocks, granite or other rocks is eligible for 1 November 1995
Circular No. 693 — 556. Whether profits derived from export of cut and polished dimensional blocks, granite or other rocks is eligible for 17 November 1994
Circular No. 624 — 555. Clarification regarding reopening of assessments on account of retrospective amendment made in section 80HHC in res 23 January 1992
Circular No. 600 — 554. Profits retained for export business in the case of tax-payers engaged in the business of growing and manufacturing 23 May 1991
Circular No. 575 — 545. Whether ‘convertible foreign exchange’ does not include remittances from Nepal and Bhutan 31 August 1990

← Circular No. 681 · Circular No. 679 →

A circular binds the department, not you and not a court. The Board issues a circular to its own officers. An assessee may hold the department to a circular that helps him; the department cannot hold an assessee to one that hurts him, and the Tribunal and the courts decide the law for themselves.

Source: the Income Tax Department’s own published text — its page for this instrument.