In continuation of my precious Article. I am writing once again for discussing some advance aspects in MAT. In my previous Article I have discussed the following aspects viz Purpose of introducing MAT, MAT and Total Income & Taxation and Accounting Treatment under MAT scenario. So, let’s discuss the remaining aspects.
Short communication with the readers-
After scrolling from top to bottom you may find this Article to b every lengthy, you may think to leave it without reading, its general tendency not only yours but mine too. But I request you to give full reading to the same because the Article has got lengthier in order to be comprehensive. After reading the Article you may try to solve the practical problem given below, the solution of the same will be mailed to you if you want.
Accountant Report on computation of book profits ([Section 115JB(4)]-
The report on computation of book profits is to be given by an Accountant (a practicing CA within the meaning of CA Act, 1949) in Form No.29B which requires certification by the accountant that the book profit and tax payable thereon have been computed in accordance with provisions of section 115JB. The assessee company is required to attach this report to its Return of Income.
Practically up to AY 2012-13 a company has to obtain the report of CA in Form 29B but need not to be file electronically with the Return of Income, the company was therefore required to keep it with and produce the same before Assessing Officer when the same is asked to be produced during the assessment proceedings.
[In fact up to AY 2012-13 the Tax Audit Report i.e Form 3CA, 3CB and 3CD was also not required to be filed electronically with the e-return, the company was therefore required to keep with it and produce the same before Assessing Officer when the same is asked to be produced during the assessment proceedings.]
But with the time and technological up gradation Form 29B and the tax audit report i.e Form 3CA, 3CB and 3CD is required to be filed electronically w.e.f AY 2013-14 with the e-return of income.
The facility of electronic filling of Form 29B and Tax Audit Report was too incorporated in Revamping Programme (conducted by Directorate of Income Tax) of IncomeTax E-Filling Portal incometaxindiaefilling.gov.in was revamped between Nov 4 to Nov 9, 2012.
MAT not applicable to certain companies-
For the purpose of a MAT, computation of book profits is must. But a question arises that how to work out book profits of companies which are not required to prepare their Financial Statements as per Schedule VI of Companies Act, 1956 like Insurance Companies, Electricity and Banking Companies. Therefore, MAT is not applicable to such companies.
But Govt in Budget 2012 specifically provided for applicability of MAT to such companies except companies carrying on Life Insurance business. For Instance - As such the book profit of ICICI Bank Ltd. for MAT purpose is profit of such Banking Company arrived from F/S prepared as per Banking Regulation Act, 1949.
Landmark case relating to computation of Book Profits-
No fresh inquiry by the Assessing Officer:
[ In case of Apollo Tyres Ltd. (SC) vs CIT]
The Assessing Officer, while computing the book profit of a company under section 115J of the income-tax Act, 1961, has only the power of examining whether the books of account are certified by the authorities under the Companies Act as having been properly maintained in accordance with the Companies Act. The Assessing Officer, thereafter, has the limited power of making increases and reductions as provided for in the Explanation to section 115JB. The Assessing Officer does not have the jurisdiction to go behind the net profits shown in the profit and loss account except to the extent provided in the Explanation. While so looking into the accounts of the company, the Assessing Officer has to accept the authenticity of the accounts with reference to the provisions of the Companies Act, which obligate the company to maintain its accounts in a manner provided by that Act and the same to be scrutinized and certified by statutory auditors and approved by the company in annual general meeting and once the authenticity of Accounts are certified by the Statutory Auditors and the same audited accounts are accepted by the members in Annual General Meeting Assessing Officer has no jurisdiction to beyond to the Net Profit of the company as certified by the Auditors.
Crux of the Supreme Court decision in case of Apollo Tyres vs CIT,:
Therefore, the Assessing Officer is not empowered to embark upon a fresh enquiry in regard to the entries made in the books of account of the company.
He has to simply accept the profit declared in P&L Statement audited by the Statutory Auditors and adopted by the members of the company. He can make adjustment to such declared profit only to the extent as provided by explanations to Sec 115JB.
In short the AO has to satisfy himself that the books of accounts have certified to be true and fair, and if it is so certified, then the game is over and AO has no power to examine the audit and audited accounts.
Practical Example-[KINETIC MOTOR CO. LTD. VS. DEPUTY CIT (Bombay HC)
The assessee debited Rs. 632, 65,430/- as depreciation in P&L A/c calculated as per WDV method for the current FY. But in earlier the years assessee used to charge the depreciation as per SLM.
Both WDV and SLM methods are permitted by the Companies Act, 1956. The assessee as per AS-6 revised the figures of depreciation on WDV basis from’ retrospective effect’ Further under notes to Accounts assessee has disclosed that the depreciation method has been changed retrospectively and this change has reduced profits by Rs. 91, 23,951. As such the auditors certified the accounts of the assessee to be true and fair and subsequently the accounts were duly adopted by the members in the Annual General Meeting.
The return of the company was picked up for scrutiny under Computer Assisted Scrutiny Selection System(CASS). Now, during the course of assessment proceedings Assessing Officer(AO) did not dispute that the Profits and Loss A/c was prepared in accordance with the Schedule VI of the Companies Act,1956. However, the AO took the view that there was no justification for change in the method of depreciation from SLM to WDV. According to AO the change in the method of depreciation was done only to avoid taxes on book profits (MAT).
Accordingly the AO reworked the book profits by adding back depreciation as per WDV and allowing the same as per SLM. The CIT(appeals) confirmed the recomputation of AO.
The ITAT, Mumbai reversed the order of CIT (Appeals) in view of decision of SC in case of Apollo Tyres. But here another twist was that Bombay High Court reversed the order of ITAT and made judgment in the favour of I.T Deptt(Revenue).Because Bombay High Court was of the opinion that the change in method was a colorable device to avoid taxes, therefore such changes need to smashed/quashed.
But here comes another twist when Supreme Court again reversed the order of Bombay HC stating that The Assessing Officer, while computing the book profit of a company under section 115J of the income-tax Act, 1961, has only the power of examining whether the books of account are certified by the authorities under the Companies Act as having been properly maintained in accordance with the Companies Act. In short the AO has to satisfy himself that the books and accounts have certified to be true and fair, and if it is so certified, then the game is over and AO has no power to examine the audit and audited accounts carried under Companies Act,1956. He has no power to adjust such declared profit except to the extent as provided by explanations to Sec 115J.Therfore, the re-computation made by the assessee is contrary to law and requires to be reversed.
Is Advance tax payable in MAT scenario?
If yes, then pay Interest u/s 234B & 234C for irregular payment of Advance Tax.
The Gauhati High Court, the Bombay High Court, the Madras High Court and the Punjab and Haryana High Court in their respective cases decided in favour of the Revenue, while the Madhya Pradesh High Court and the Karnataka High Court in their respective cases decided in favour of the taxpayer. The contention of High Courts favoring the assessee was that the Minimum Alternate Tax (MAT) gets determined only after the end of the relevant year when the book profits are determined from the Audited Accounts. But the companies have to pay advance tax in 4 installments starting from June 15th of the FY (as due date for first installment). “So the biggest thing that whether for AY MAT will be attracted or not is a big question to be answered and very difficult to be estimated”.
Interestingly, neither Revenue nor Assessee challenged the decisions of High Courts in all of the above cases.
But in 2009 Supreme court in the case of Rolta India Ltd. solved this controversy and held that Section 209 requiring computation of advance tax refers to tax on total income. As per Section 2(45) Total Income means Income calculated in the manner laid down under the Act. Therefore, Total Income computed u/s 2(45) also include deemed total income (i.e Book profits when deemed to be total income), therefore Advance tax liability is there on MAT and consequently Interest u/s 234B(on short payment of Advance Tax) & 234C(Deferment of Advance Tax) is chargeable .
Implied Provision of Advance Tax in MAT scenario:
During the disputes relating to advance tax whether payable in case of MAT, Government has amended section 115JB (4) of the Act by Finance Act, 2007. However the provision has no effect on the cases which were pending before ITATs and courts because the same amendment had been made prospectively and not retrospectively. So the cases pending were subject to old provisions and the old provisions were so silent that High courts and Tribunals were confused and ended up in giving contra judgments.
The Amended provision 115JB(5) stand like this:
All other provisions of this Act shall apply to every assessee, being a company, mentioned in this section. Therefore, the use of words “All” has incorporated all the provisions as would have been applicable in the absence of MAT would apply to MAT and it will also include liability to pay Advance Tax and interest on same u/s 234B&234C ,if any, chargeable.
So by this provision it is crystal clear that MAT paying companies are liable to all the consequences of Advance tax.
(Note – In view of Amendment made in sec 115JB(5), the case laws relating to Advance Tax on MAT discussed above have no relevance ***from examination point of view , but the same was discussed only as a matter of knowledge sharing)
[***From practical point of view the case laws above has some relevance if some old case has been re-opened by the Assessing Officer u/s 148. ]
Carry forward and Set off of losses under MAT-(Sec 115 JB(5)
Nothing shall affect the determination of the amounts in relation to the relevant previous year to be carried forward to the subsequent year or years under the provisions of section 32(2) or 32A(3) or 72(1) or 73 or 74 or 74A (3). In short, all the losses like Business Loss,CG Loss, HP Loss etc. can be c/f and set off assuming that there is nothing like the scheme of MAT i.e. as usual c/f and set off.
Let us discuss some easy but interesting topics
Some other case laws relating to MAT:
Title of case
Book profits not as per heads of income
(Nafab India P. Ltd. Vs .CIT, Delhi HC)
Under MAT scheme head wise income computation from various sources(like IFOS,PGBP,CG etc.) is not applicable.
Though capital gains are taxable at a lower rate compared to the general rate, no such concession is provided when such capital gains form part of the book profits.(Because Book profits under MAT = Total Income and not income from any particular head).Capital Gains like any other income will be booked under P&L by the company thus forms the part of book profits and no separate rate of tax(10 % or 15%), because entire book profits are subject to 18.5% rate )
Prior Period Items (Expenditure/Income) cannot be added back or deducted to Profit
[CIT vs Khaitan Chemicals & Ferts. Ltd.]
Such expenses or Income relate to previous FY but arises in current FY due to rectification of mistakes made in earlier FY.
If such prior period items have been debited or credited to P&L in tune with the requirements AS-5 issued by the ICAI neither the AO nor the assessee can adjust them from P&L as per their respective benefits.
Further Explanation to Sec 115JB does not expressly provide for the same to be added back or deducted as such.(Refer such explanation in previous Article)
Warranty Provision not to be added back
[Hero Briggs & Stratton Auto Ltd. v. CIT]-ITAT, Delhi
Once the assessee is maintaining his account on the mercantile system and a liability accrued, though to be discharged at a future date, it would be proper to allow deduction of the same while working out the profit and loss of his business regard being to the accepted principles of commercial practices and accountancy. The liability has been accrued as soon as when the goods have sold. As per AS- 9 Revenue Recognition issued by the ICAI, the same can be recognised/charged in the books taking past experience as the base. Therefore, the same cannot be add back because the same could be reasonably ascertained as per AS-9.
No penalty u/s 271(1)(c) if tax payable under MAT [CIT vs. Nalwa Sons
Investment Ltd – Supreme Court)
Before the High Court, the assessee argued that even if there was a concealment u/s 271(1)(c) with respect to the normal assessment, the same was not relevant because the assessee’s income was assessed u/s 115JB. HC accepted the plea and held that as the s. 115JB “book profits” were by a legal fiction (as expressed provision)deemed to be the “total income”, the furnishing of wrong particulars had no effect on “the amount of tax sought to be evaded” defined in Explanation 4 to s. 271(1)(c). Because pre-condition for charging penalty under this section is that that there must be (i)a tax evasion (ii) and such evasion should be due to furnishing wrong or inaccurate particulars of income.
Since in the above case the assessee was a loss making unit as per IT Act and was subject to MAT on book profits.
[Penalty u/s 271(1)[c] is charged @ minimum 100 and maximum 300% of tax evaded by way of concealing of income or furnishing inaccurate particulars of income]
MAT credit to be treated as Advance Tax
[CIT vs Tulsyan NEC Ltd.]
Like TDS/TCS MAT credit is also deductible before computation of Advance Tax payable, thus reducing the Adv tax liability. To the extent of MAT credit if any available for the AY.
CIT v National Hydroelectric Power Corporation Ltd. (Punjab . & Har. HC)
Provision for gratuity being ascertainable liability on actuarial( actuary is a person appointed for valuation of gratuity) valuation is deductible while computing book profits and the provision for doubtful debts result in the diminution of value of debtors and the same was liable to be added back
Alternate Minimum Tax-( Section 115JC)
In order to spread tax net, Govt has also brought Limited Liability Partnership (LLP) under MAT scheme by introducing a new scheme known as Alternate Minimum Tax(AMT).
LLPs shall be liable to pay an alternate minimum tax similar to the existing scheme of minimum alternate tax payable by a company. Where the regular income-tax payable by a LLP is less than the alternate minimum tax payable(18.5% of Adj Total Income), the adjusted total income shall be deemed to be the total income of the LLP, on which it would have to pay tax of 18.5 per cent.
Following additions are to be made to total income, in order to arrive at adjusted total income:
(i) Deductions claimed under Chapter VI-A, under the heading ‘Deductions in respect of certain incomes’.(Section 80 IAB, 80IB, 80IC, 80ID,80IE etc.)
(ii) Deduction claimed under section 10AA(to SEZ units).
Alternate Minimum Tax spread to all non-corporate assessees-(Sec 115JD)(w.e.f. AY 2013-14)-
(i) The provisions of Section 115JC will now apply to LLP and all other non-corporate assessees i.e., individual, HUF, AOP, BOI, Firm, etc. As provided in Section 115JC the assessee will have to obtain audit report in the prescribed form before the due date.
(ii) In the case of an individual, HUF, AOP, BOI or Artificial Juridical person, AMT will not be payable if the adjusted total income does not exceed `Rs.20,00,000. (Section 115JEE)
(iii) AMT is payable at 18.5% plus applicable surcharge and education cess of the adjusted total income if the amount of such tax is more than the tax payable on the total income computed under other provisions of the Income-tax Act.
(iv) Adjusted total income is defined to mean the total income computed under the Income-tax Act increased by (a) deductions claimed under Chapter VIA (section C) i.e., 80HH to 80 RRB i.e. deductions in respect of certain profits (other than section 80P) and (b) deduction claimed under Sec. 10AA (SEZ income). It is to be here noted that, Adjusted total Income of LLP and remaining non-corporate assessee is to be worked out differently. Book profits in case of company is far different from these two Adjusted Total Incomes.
(v) All other provisions like AMT credit set off and c/f of losses etc. will be same as applicable to Companies and LLPs.
Practical Question for Self Assessment:(solution may be asked by sending PM or via e-mail)
|Following information is obtained from the Accounts and Tax records of Supertech Ltd. For the FY 2012-13(AY 2013-14)|
|1||Total Income for AY 2012-13||50|
|2||MAT credit b/f|
|Asst Year 2009-10||2|
|Asst Year 2012-13||1|
|3||Profit as per audited P&L A/c||200|
|This profit has been arrived at after considering the following:|
|(i)||Income Tax provision made (30.9% of Total Inc)||15.45|
|(ii)||Depreciation for FY 2012-13 dr. to P&L (including dep Rs. 5 lacs on revalued assets)||25|
|(iii)||Provision for Warranty(worked as per AS-9)||3.5|
|(iv)||Provision for Gratuity (worked as per AS-15) by the actuary||7.5|
|(v)||Provision for Bad & Doubtful Debts||9|
|(vi)||Aggregate Payments(Exps.) made in excess of Rs. 20000 by cash||5|
|in violation of provision 40A(3) of the Act|
|(vii)||Profits made by SEZ units on export turnover exempted u/s 10AA||60|
|(viii)||Proposed dividend for FY 2012-13 (carried to Proposed div A/c)||25|
|Either Information(as Per books of accounts)|
|(i)||B/f Losses from FY 2011-12 = Rs. 5 lacs as Business Loss(excl dep) and Rs.|
|3Lcas as Unabsorbed Dep|
|(ii)||B/f Losses from FY 2010-11 = Rs. 2 lacs as Business Loss(excl dep) and Rs.|
|2 Lcas as Unabsorbed Dep|
|B/f losses as per Income tax records|
|(i)||Business Loss and Unabsorbed Depre. For AY 2011-12 = Rs. 15 lacs|
|and 30 lacs respectively for AY 2011-12|
|(ii)||Long Term CG Loss(AY 2008-09) = Rs. 15Lacs|
|Information relating to pre-paid taxes|
|Advance Tax for FY 2013-14||10|
|You are required to calculate book profits u/s 115JB and also calculate tax liabilty of the company under MAT scheme|
|Also work out losses to be carried forward under the Act, if any.|
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