Objective behind the introduction of MAT:
Normally, a company is liable to pay tax on the income computed in accordance with the provisions of the income tax Act , but the profit and loss account of the company is prepared as per provisions of the Companies Act. There were large number of companies who had book Profits as per their profit and loss account but were not paying any tax because income computed as per provisions of the income tax act was either nil or negative or insignificant . In such case, although the companies were showing book profits and declaring dividends to the shareholders, they were not paying any income tax. These companies are popularly known as Zero Tax companies. In order to bring such companies under the income tax act net , MAT was introduced.
Computation of book profit:
Book profit mean net profit as per profit and loss a/c as increased by certain items and decrease by certain items. Now, let analyse what are the items that required to be added or deducted.
1. Items which are to be added if debited to profit and loss a/c/ not credited.
a. Income tax paid /payable and provision for income tax.
Analysis: For purpose of clause a, income tax includes dividend distribution tax, any interest under income tax act(eg.234 A,B,C; interest on delayed payment of TDS etc), Education cess and SAH education cess. Note: Addition under clause a is nothing unusual, we normally added it while computing total income as per normal provision.
b. Amount carried to any reserve by whatever name called.
Analysis: Any reserve debited to P&L a/c shall be added even if transfer is made to reserve as per RBI guidelines.
c. Amount provided to meet unascertained liabilities.
Analysis: please note that provisions made on scientific basis is an ascertained liability and it shall not be added back. For e.g., provision for gratuity as per actuary report.
d. Provision for loss of subsidiary companies. Even actual loss debited to p&l a/c is to be added back.
e. Dividend paid or proposed
f. Expenditure debited to p&l a/c which is related to income which are exempt u/s 10,11,12 10AA. Except u/s 10(38). i.e., expenditure related to income to which section 10(38)[LTCG] applies, if debited in p&l A/c shall not be added back for calculating book profit.
h. Deferred tax and the provision there for
i. Provision for diminution in value of any asset. This clause was introduced to overrule Supreme Court decision in case of HCL COMNET SYSTEM AND SERVICES LTD where it was held that provision for bad and doubtful debt can’t be said to be amount set aside for meeting unascertained liabilities since there is no liability. Thus PBDD can’t be added back. Now, as per clause (I) ,PBDD will amount to diminution in value of assets (debtors) and to be added back.
j. Amount standing to revaluation reserve a/c related to revalued asset on sale of such assets (if not credited to P&L a/c) Analysis: This is a interesting point. What companies use to do was: say, an asset of Rs. 100 is to be sold for Rs 2000. Therefore Rs 1900 will form part of NP and company will have to pay tax on Rs 1900.
Following tax planning were adopted by companies
1. Revalue asset by Rs. 1890 and create a Revaluation account for Rs 1890.
2. Now asset value is 100+1890=1990.
3. On sale @ 2000, profit is only Rs 2000-1990=10
4. Now company transfer revaluation account amount to general reserve ie., revaluation reserve a/c dr 1890 To general reserve a/c............ 1890
One can clearly see that company has been able to save tax on Rs 1890. Finance act 2012 nullifies such planning and now 1890 is to be added to NP since same is not credited to profit and loss account. Thus now company is liable to pay MAT on 1900(1890+10).
2. Now the deduction part.
i. The amount withdrawn from any reserve or provision(only if book profit was increased under clause b in earlier year)
ii. Income exempt u/s 10,11,12 except u/s 10(38).
iia. Depreciated debited to P&L account excluding depreciation on account of revaluation of asset.
iib. Amount withdrawn from revaluation reserve and credited to p&l a/c, to the extent it does not exceed amount of depreciation on account of revaluation.
Analysis: say depreciation was Rs 25. Now after revaluation depreciation is Rs 70(done to reduce book profit). Thus depreciation due to revaluation is Rs 50. Say amount withdrawn from revaluation reserve and credited to p&l is Rs 45. For MAT we add Rs 70 to NP, deduct Rs 25(ie., depreciation excluding depreciation on account of revaluation), deduct Rs 45(since withdraw from relation reserve is not exceeding depreciation on account of revaluation.).If withdraw from revaluation reserve is zero, we would have added Rs 70 and deduct Rs 25 only.
iii. B/f loss or unabsorbed depreciation as per books of accounts.(whichever is less)
iv. Clause for sick industries ,not relevant for all(if you want to know about it, please ask specific question in comment section)
v. Deferred tax, credited to p&l account.
1. This article is for amateurish ,who are going to deal MAT first time this September
2. This is an overview, please ask any specific question in comment section. I would love to answer them and learn from you queries.
3. Learning is life, after going through this , go through a good text book. I follow vinod gupta, T N Manoharan.
4. In work life, sharing knowledge is gaining knowledge.
Share your view, comments etc. It would be appreciated.
Tags Income Tax