The concept of MAT was introduced under income tax act to tax companies having profit as per books and declaring dividends but have no significant taxable income because of exemptions, deductions, incentives and tax holidays available to them. The intention of MAT was to ensure that no company with substantial income can avoid tax liability by using deductions and incentives.
In this article, we will see only the additions to book profit and understand the same in very simple manner. If you wish then second part will be uploaded latter. Please let me know in comment section.
ADDITIONS TO BOOK PROFIT:
Addition only if debited to p&L account except point number 9.
Income tax paid/payable or provision thereof
As per normal provision to income tax is not allowable. Likewise, the same is to be added back while calculating book profit. Now the question arises what about Surchage, edu cess and interest will it be added back –Yes these are to be added back and treated at par with income tax. But what about DDT-It shall be added back since it is considered as additional income tax. Further deferred tax is also to be added back.
- Income Tax-Add
- Edu cess-Add
- Deferred Tax-Add
Dividend paid /proposed or provision thereof
Since the same is not an expenditure, it is to be added back.
Any amount transferred to any reserve account
It is just like transferring an amount from one pocket to another i.e., from p&l to GR thus the same have no effect on reducing the real profit thus added back.
Losses or provision for losses of subsidiary company
Let us understand it in following manner----If holding company is father and subsidiary company are sons. If father income is 100lacs and sons is (50 lacs), father does not end up paying tax on 50lacs. In same manner Looses / Provision of subsidiary company if debited to pl is to be added back.
Provision for any unascertained or contingent liability
Income tax don’t recognize losses not yet materialized yet. Though it may be prudent practice as per accounts. Thus, any provision etc debited to p&l accounts without it been actually materialized shall be added back.
Expenditure incurred for earning income exempt u/s 10,11,12 except 10(38)
Expenditure for earning exempt income is to be added back if debited to p&l except any exp wrt earning income exempt u/s 10(38).
Depreciation debited to p&l Account.
Provision for diminution in value of any asset.
Though AS-28 advocate providing for losses arising due to fall in value of assets to keep shareholders well informed, Income tax doesn’t recognize such losses until it is sold and loss occurs actually. Therefore any such amount debited to p&l account shall be added back.
Amount standing in Revaluation Reserve on retirement of such assets(if not credited to p&l)
This is an interesting point. Say a company gets a valuation report of its asset the wdv of which was 100 lacs. As per valuation report value comes to 200lacs.However, company decided to take its value at 150 lacs to be on conservative side. Thus, company pass the following entry:
Asset A/c ……..Dr 50 lacs[Bal sheet]
To Revaluation reserve 50 Lacs.[Bal sheet]
Now say company sold such asset for 180 lacs. Now what will be the profit
100-150 = 30lacs Or
180-100 = 80Lacs
The answer is 80lacs since 50lacs representing revaluation was not taken into p&L earlier.
Thus, if company credits only 30 lacs to P&L, Revaluation reserve representing 50 lacs shall also be credited to p&L to bring the total profit 80lacs.In such case govt. reverse the planning of revaluing assets before sale and showing lesser profit.
Expenditure relating to share of assessee company in the income of AOP/BOI on which no income tax is payable as per SEC 86
This is introduced with AY 2016-17 .
A company can be member of AOP/BOI.
AOP/BOI can be taxed in following 3 manners.
- No Tax
- Slab rate
- MMR: Maximum rate of Tax
If AOP/BOI is taxed at MMR then share from it is not taxed in the hands of members.
Thus when income is not taxed in hands of member, expenditure relating such income shall not be allowed and thus added back.
Expenditure relating to capital gains arising on transfer of securities arising or accruing to FII’s (other than STCG on which STT is not chargeable)
FII’s were given a lollipop to invest in India and that was taxing them at a special rate of tax. However when they were ending up with paying tax under MAT which is higher than the special rate of taxes, they agitated and threaten to withdraw their investment from India. Due to this stock markets were badly affected. Thus, govt came up with a solution-The act was amended and BJP govt decided that those income of FII’S which are taxed as per special rates of tax and its % is below the rate of MAT shall not consider while computing book profit and related expenditure shall be added back to arrive at book profit.
Tags :Income Tax