H.Padamchand Khincha, B.com, FCA, LLB Chartered Accountant Bangalore

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1 H.Padamchand Khincha, B.com, FCA, LLB Chartered Accountant Bangalore 1

2 To counter increase in number of Zero tax paying companies. To counter company earning substantial income: Paying dividends. Not paying tax on account of various incentives. All profitable companies should pay minimum tax. 2

3 Section 115JB was inserted by the Finance Act, 2000 w.e.f Minimum Alternate Tax ( MAT ) computed under section 115JB is an alternative regime of taxation. The section provides for an alternate, nay an additional mechanism, of computing the tax liability of an assessee apart from the normal computation. A comparison is made between tax payable under normal provisions of the Act and the tax payable on book profits. The higher of the tax payable from out of the two computations would have to be discharged by the assessee company. 3

4 The first step towards levy of tax on book profits or on income higher than the income computed under normal provisions of the Act was through the introduction of section 80VVA. As per this section, the various incentives or deductions allowed to the corporate sector under sections 32A, 32AB, 33, 33A, 33AB, 35, 35C, 35CC, 35CCA, 80G, 80GGA, 80HH and 80HHA, 80HHB, 80HHC, 80I, 80M, 80O, 80QQ etc was restricted to 70% of income computed before allowing deduction under these sections. Section 80VVA was in operation from AY to

5 Section 115J was introduced into the statute w.e.f. AY and was in force upto AY Section 115J levied tax on 30% of book profits. Thereafter, section 115JA was introduced w.e.f AY and was in force upto AY This section also levied tax with reference to 30% of book profits. With effect from AY , section 115JB was introduced by the Finance Act,

6 As per section 115JB, if the income tax payable on total income computed under normal provisions of the Act is less than 18.5% of book profits, then, book profits shall be deemed to be the total income and the income tax payable by the assessee on such total income shall be at the rate of 18.5% of such book profit. Explanation to section 115JB defines the term book profits. The net profit as shown in the P & L account of the Company is increased and/or reduced by certain items to constitute the book profits. For the purposes of section 115JB, a company is required to prepare its profit and loss account for the relevant previous year in accordance with the provisions of Parts II of Schedule VI to the Companies Act, [Now Schedule III of the Companies Act, 2013]. This is the mandate of subsection 2 of section 115JB. While preparing Profit and loss account, the accounting policies and accounting standards shall be the same as have been adopted for the purpose of preparing such accounts including profit and loss account and laid before the company at its annual general meeting in accordance with the provisions of section 210 of the Companies Act, (Now Section 129 of the Companies Act, 2013). 6

7 Amendments made by Finance Act 2012 A company to which the proviso to sub-section (2) of section 211 of the Companies Act, 1956 is applicable (Now section 129 of the Companies Act, 2013), shall, for the purposes of this section, prepare its profit and loss account for the relevant previous year in accordance with the provisions of the Act governing such company: In other words, w.e.f insurance company, banking company or any company engaged in the generation or supply of electricity to which section 211(2) of the Companies Act, 1956 is not applicable, profit and loss account for the previous year is to be prepared in accordance with the provisions of the Act governing such companies. Explanation 3 was introduced under section 115JB(2) w.e.f clarifying that for the purposes of this section, the assessee, being a company to which the proviso to sub-section (2) of section 211 of the Companies Act, 1956 is applicable, has, [for an assessment year commencing on or before the 1st day of April, 2012] an option to prepare its profit and loss account for the relevant previous year either in accordance with the provisions of Part II and Part III of Schedule VI to the Companies Act, 1956 or in accordance with the provisions of the Act governing such company. 7

8 Step Procedure 1 Compute Total Income under Income Tax Act, Compute Book Profit u/s 115JB. 3 Compute tax on Total Income at rates applicable for Companies under Income Tax Act. 4 Compute Tax at 18.5% on Book Profit. 5 Tax payable = Higher of Step 3 or Step 4 8

9 Additions Income Tax paid / payable debited to P & L account Amount transferred to reserves other than a reserve specified under section 33AC for Shipping business Provision for unascertained liabilities Note: Provision for gratuity is an ascertained liability DCIT v Inox Leisure Ltd 351 ITR 314 Provision for leave encashment is an ascertained liability - Bharat Earth Movers v CIT 245 ITR 428 (SC) Provision for losses of subsidiary companies Dividends paid or proposed Expenditure relatable to income falling under sections 10 [(except 10(38)], 11& 12 Depreciation debited to P & L account Amount of deferred tax Provision for diminution in the value of any asset Revaluation reserve to the extent relating to revalued asset on retirement or disposal of such asset. 9

10 Deductions Amount withdrawn from reserves (credited to P&L account in earlier year) Income falling under sections 10 [except section 10(38)], 11 and 12 Depreciation other than depreciation on revaluation of assets Revaluation reserve credited to P & L account to the extent of depreciation on account of revaluation of assests Loss brought forward or unabsorbed depreciation which ever is less [Note: This deduction is not applicable if either loss brought forward or unabsorbed depreciation is NIL] Profit of Sick companies Amount of deferred tax if credited to profit & loss account. 10

11 Every company shall furnish a report in Form No. 29B from an accountant as defined in the Explanation below subsection (2) of section 288, certifying that the book profit has been computed in accordance with the provisions of this section. The certificate shall be filed along with the return of income. The provisions of this section shall not apply to any income accruing or arising to a company from life insurance business. The provisions of this section shall apply to the income accruing or arising from any business carried on or services rendered from an SEZ unit w.e.f

12 Computation of MAT Credit Available when Assessee pays tax on Book Profit Step 1 Step 2 Tax on Book Profit Tax on Total Income Step 3 MAT Credit = Step 1 Step 2 MAT Credit can be availed in 10 Subsequent Assessment Years. 12

13 Availing MAT Credit - Mechanism Applicable when Assessee is liable to pay tax on Total Income as per regular computation Step 1 Tax on Total Income Step 2 Tax on Book Profit Step 3 Difference of Tax = Step 1 Step 2 Step 4 Availed MAT Credit = Aggregate available MAT Credit or Step 3,whichever is less. Step 5 Net Tax Payable = Tax on Total Income [Step 1 Step 4] 13

14 Whether Electricity company is liable for MAT u/s 115JB? [Kerala State Electricity Board v DCIT 329 ITR 91 (Ker) & Amendment to section 115JB(2)] Whether introduction of Explanation 3 under section 115JB(2) w.e.f would bring the banking, insurance and electricity companies within the ambit of section 115JB retrospectively? Whether Foreign company is liable for MAT u/s 115JB? [Praxair Pacific Ltd, In re 326 ITR 276 (AAR)] Whether AO can make certain adjustments outside the P & L Account in computation of book profits? [Apollo Tyres Limited vs CIT (255 ITR 273) (SC)] 1) Situation 1: Books of accounts prepared and accepted as presenting a true and fair view by Statutory Auditors 2) Situation 2: Books not prepared as per Companies Act 3) Situation 3: Qualifications in the report of the Statutory Auditor 14

15 Whether prior period items debited to profit and loss account are to be adjusted in computation of book profits? [CIT vs Krishna Oil Ext Ltd (232 ITR 928)] Whether MAT credit can be carried forward by the successor in the case of amalgamation/merger? SKOL Breweries Ltd. v. ACIT, 28 ITAT India 998 (Mum.) ITA No. 313/Mum./07 A.Y Whether the MAT credit is to be allowed / set off against the tax payable before calculating interest u/s 234A, 234B and 234C or after calculating the same? [CIT v Tulsyan Nec Ltd 330 ITR 226 (SC)] 15

16 Whether income directly credited to reserves and not routed through P&L Account can be added to Book profits for the purpose of computing MAT? [CIT vs Veekaylal Investment Co P Ltd (249 ITR 597)(Bom)] Whether MAT could lead to double taxation on the same income: - Once when tax is paid in a joint development on the date of agreement with granting of possession and again u/s 115JB when income is recognised in books of accounts. - When tax is paid on regular computation because of disallowance u/s 40(a) and is paid on book profits when TDS is paid in the subsequent years. 16

17 The assets pertaining to the manufacturing division of XYZ Ltd were revalued by crediting revaluation reserve on These assets would be sold in FY The surplus of sale consideration over the revalued book figure is proposed to be credited to the profit and loss account. The amount standing in revaluation reserve would be transferred to general reserve. In other words, the gains on sale to the extent of revaluation reserve are not credited to Profit and loss account. Whether P & L account is reflective of operating profits. Whether treatment of the entire gains as a Balance Sheet item (reserves) would be inconsistent with Part II of Schedule VI to the Companies Act [Now Schedule III of Companies Act 2013] 17

18 The financial results of a company (say ABC Ltd) for the period to are as under: Financial Year Profit / (Loss) Rs (30) [Depreciation loss of which is Rs 10] (20) [Depreciation loss of which is Rs 8] What is the quantum of loss to be set off while computing the book profit for the year ? 18

19 Whether year to year comparison of cash loss and depreciation loss is to be made or comparison is to be made on aggregate basis? Year Loss (Rs) Depreciation (Rs) Total (Rs) Year 1 (10) (8) (18) (8) Year 2 Nil (4) (4) Nil Total (10) (12) (22) Adjustment being lower of Loss OR Depreciation In the year 3 - On a year wise comparison, only Rs 8/- would remain available for setoff. On an aggregate, Rs 10 would be available for reduction being lower of the two figures Rs 10 and Rs 12 19

20 ABC limited acquired 1,00,000 equity of X Ltd for a consideration of Rs 60 crores. In the year (i.e, AY ), ABC Ltd created a Provision for investment loss amounting to Rs. 16 crores [by debiting the P & L account]. Cost of investment in the balance sheet was reduced to the extent of the provision (i.e. Rs. 16 crores). The net loss as per the profit and loss account was Rs 17 crores. While computing the book profit under section 115JB the Provision for investment loss (i.e. Rs 16 crores) was added back to net loss as per the profit and loss account. The book loss (under section 115JB) for the year was accordingly computed at Rs 1 crore. The loss computed under the regular provisions of the Act was Rs. 50 lakhs. The loss computed under regular provisions being lower than the book loss, the return of income for financial year was filed with loss of Rs. 50 lakh. Continued 20

21 In the year (AY ), ABC Ltd sold the investment for Rs 68 crores. The sale resulted in a gain of Rs. 8 crores. ABC Ltd recognised this gain as Profit on sale of investment in the Profit and loss account along with reversal of Provision for investment loss (pertaining to investment sold during the year) amounting to Rs. 16 crores. Cumulatively, profit on sale of investment recognised in financial statements added up to Rs. 24 crores [i.e. 8 cr + 16 cr]. The company paid tax under the provisions of Minimum Alternate Tax (section 115JB) amounting to Rs. 2 crore [after reducing Rs. 16 crores from the net profit]. Whether the reversal of provision for diminution in the value of investment made in the FY is liable for MAT as per the provision of section 115JB? 21

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