Special provisions relating to 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 intoExplanation (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.


EXPLAINED IN : CIT  v. GTN Textiles Ltd. [2001] 115 Taxman 55 (Ker.) in following words :

“These Circulars are not against the section and they can be looked into. According to us, the Circulars are also in tune with the interpretation given by us to section 115J.” (p. 62)

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September 2020