“Happy is he for whom the Creator does not attribute iniquity and whose spirit does not contain deceit” (The Zohar, Nasso, Item 1).
That is, why should the Creator not attribute iniquity to him although he has iniquities? It is because there is no deceit in his spirit.
“Exalted” means greatness. He is not great because he has iniquities, for sometimes a person is proud; he has grievances against the Creator but thinks that he himself is fine.
This is considered that there is deceit in his spirit, that he deceives himself thinking that he is fine because he is deceiving himself. For this reason, with pride he pretends to be observing Torah and Mitzvot [commandments], and by keeping the covenant, he then feels as though he did not circumcise himself at all.