Taxation under 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. In the past, a large number of companies showed book profits on their profit and loss account and at the same time distributed huge dividends. However, these companies didn’t pay any tax to the government as they reported either nil or negative income under provisions of the Income-Tax Act. These companies were showing book profits and declaring dividends to their shareholders but were not paying any tax. These companies are popularly known as ‘zero tax’ companies.

The Indian Income-Tax Act allows a large number of exemptions from total income. Besides exemptions, there are several deductions permitted from the gross total income. Further, depreciation allowable under the Income-Tax Act, is not the same as required under the Companies Act. The latter provides a lower rate viz-a-viz the I-T Act which computes a higher rate of depreciation.   The result of such exemptions, deductions, and other incentives under the Income-Tax Act in the form of liberal rates of depreciation is the emergence of zero tax companies, which in spite of having high book profit are able to reduce their taxable income to nil.

In order to bring such companies under the I-T net, Section 115JA was introduced from assessment year 1997-98. Now, all companies having book profits under the Companies Act shall have to pay a minimum alternate tax at 18.5%. MAT is a way of making companies pay minimum amount of tax. It is applicable to all companies except those engaged in infrastructure and power sectors. Income arising from free trade zones, charitable activities, investments by venture capital companies are also excluded from the purview of MAT. However, foreign companies with income sources in India are liable under MAT. For example, book profit before depreciation of a company is Rs. 7 lakh. After claiming depreciation and other exemptions, gross taxable income comes to Rs. 4 lakh. The income tax applicable Rs. 1.2 lakh at a rate of 30%. However, MAT would be Rs. 1.29 lakh (Rs. 7 lakh at 18.5%). The MAT paid can be carried forward and set-off (adjustment) against regular tax payable during the subsequent five-year period subject to certain conditions.

Wherein Book Profit is arrived at after making following adjustments in the Profits after Tax of the company: 

MAT and S. 10A :

Explanation to S. 115JB(2) provides the items to be added to or deducted from the net profits to arrive at the book profits to be used for comparison u/s. 115JB(1). As a result of amendment to S. 115JB by the Finance Act, 2007, income (and expenditure incurred in relation to such income) qualifying for deduction u/s.10A income are not to be excluded in the computation of book profits.

One of the items required to be added back to net profit is expenditure relatable to S. 10A income. This is provided by clause (f) of the explanation as under :

"(f) the amount or amounts of expenditure relatable to any income to which S. 10 (other than the provisions contained in clause (38) thereof) or S. 10A or S. 10B or S. 11 or S. 12 apply;"

Similarly, one of the items to be excluded from the net profits is the amount of income to which provisions of S. 10A are applicable and credited to profit and loss account. This is provided by clause (ii) as under :

"(ii) the amount of income to which any of the provisions of S. 10 [other than the provisions contained in clause (38) thereof] or S. 10A or S. 10B or S. 11 or S. 12 apply, if any such amount is credited to the profit and loss account;"

Deduction u/s.10A is available to an undertaking which exports articles or things or computer software. An undertaking of an assessee rendering software development services will be entitled to a deduction u/s.10A of the Income-tax Act, 1961 not only for software exported by it from India, but also for software developed by it outside India. This is by virtue of Explanation 3 to S. 10A. As a result of the above amendment, S. 10A incomes form part of MAT computation, but continue to be exempt under normal computation. However, incomes exempt u/s.10AA (SEZ units) continue to be exempt both under normal computation and MAT computation.

Double Taxation Relief and S. 10A :

An assessee can render software development services either from a location within or outside India. Income arising outside India would be taxable both in India and outside India. Under such circumstances, the assessee will be entitled to double taxation relief.

S. 90 and S. 91 of the Act deal with relief from double taxation. S. 90 applies to cases with a double taxation avoidance agreement between India and any other country. S. 91 applies to cases where no such agreement exists. In either case, there should be an income which has suffered double taxation, before S. 90 or S. 91 can be applied. If any income on which tax is paid in any foreign country does not form part of total income (due to exemption/deduction), relief u/s.90 and u/s.91 will not be available to the assessee. As such, in respect of income eligible for deduction u/s.10A, double taxation relief is not available under normal computation. Since S. 10A incomes form part of MAT computation, double taxation relief will be available.

A company rendering software development services would be impacted by provisions contained in S. 10A, S. 90, S. 91, S. 115JAA and S. 115JB. Several issues arise out of the interplay of these provisions, especially S. 90 and S. 91 on the one hand and S. 115JB and S. 15JAA on the other. This article addresses some of the issues.

(a) Stage of comparison u/s.115JB(1) :

The first issue for consideration is whether comparison of tax on total income as per normal provisions with 18.5% of book profits is to be post-DTAA credit or pre-DTAA credit. The issue under consideration can be understood with the help of the following illustration :

‘A2’ will normally be greater than A1 due to inclusion of S. 10A exempt income. ‘C2’ could however be lower than ‘C1’. This is due to DTAA credit ‘B2’ which will be available in respect of MAT computation. If comparison for S. 115JB(1) purposes is done at level ‘A’, then the amount arrived at under MAT computation, being the higher figure, should be adopted as the starting point in arriving at the ultimate tax liability. On the other hand, if comparison is done at level ‘C’, MAT will not be attracted if the figure thereunder is lower than the figure under regular provisions (this is likely to happen as a result of DTAA relief). The question that arises is, whether comparison is to be made at ‘A’ level or at ‘C’ level ? This issue is addressed hereunder.

(1) Double taxation relief is available to an assessee either u/s.90 or u/s.91. To reiterate, the applicability of these two Sections depends upon the presence or absence of a double taxation avoidance agreement between the Government of India and the country in which tax has been paid. S. 91 provides that relief thereunder is allowed as a ‘deduction from the Indian income-tax payable’. Even S. 90 relief is allowed as a deduction from the Indian income-tax payable.

Double taxation relief is a mechanism of abatement of tax payable. Such relief is from the tax payable under the Act. The words ‘income-tax payable’ relevant for the present discussion would therefore be the figure before the computation of relief. In other words, the term ‘income-tax payable’ for the present discussion involves a comparison between income-tax payable computed under normal provisions before DTAA credit and 18.5% of book profits. The credit u/s.90 and u/s.91 will be available only after such a comparison and not before the comparison.

(2) Tax u/s.115JB is payable when the tax under normal computation is lower than 18.5% of book profits. It is only then that book profit is deemed as total income and is subjected to tax at the rate of 18.5%. If the tax under normal computation is greater than 18.5% of book profit, the deeming fiction does not apply. 18.5% of book profit is only a benchmark figure at the time of comparison and not a deemed tax on total income. It is only after the comparison wherein 18.5% of book profit is greater than the normal tax payable, that 18.5% of book profit is deemed as the tax payable. Double taxation relief is a deduction from income-tax payable and not from a benchmark figure. Therefore double taxation relief can be provided only after S. 115JB is attracted. Such relief cannot be considered in the process of determining the applicability of S. 115JB.

(3) No adjustments can be made to the net profit while arriving at the book profit, other than those specifically provided under explanation to Ss.(2) of S. 115JB. The Supreme Court in Apollo Tyres Ltd. v. CIT, (2002) 255 ITR 273 (SC) has reiterated this view in relation to S. 115J. The Court observed :

"The Assessing Officer while computing the income u/s.115J 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 the said section. To put it differently, the Assessing Officer does not have the jurisdiction to go behind the net profit shown in the profit and loss account except to the extent provided in the Explanation to S. 115J."

In other words, S. 115JB has to be construed strictly so as to give no scope for any unspecified adjustments to the ‘book profit’. Similarly, there should be no scope for any unspecified adjustments to the words ‘ten percent of book profit’.

(4) The term ‘income-tax payable on total income’ employed in S. 115JB is to be understood as not the ultimate amount payable as tax to the government, but as an amount prior to the computation of rebates and relief. Reference to S. 87 of the Income-tax Act is useful in the context. S. 87 provides as under :

"87. (1) In computing the amount of income-tax on the total income of an assessee with which he is chargeable for any assessment year, there shall be allowed from the amount of income-tax (as computed before allowing the deductions under this Chapter), in accordance with and subject to the provisions of S. 88, S. 88A, S. 88B, S. 88C, S. 88D and S. 88E, the deductions specified in those Sections.

(2) The aggregate amount of the deductions u/s.88 or u/s.88A or u/s.88B or u/s.88C or u/s.88D or u/s.88E shall not, in any case, exceed the amount of income-tax (as computed before allowing the deductions under this Chapter) on the total income of the assessee with which he is chargeable for any assessment year."

This points out that the term ‘income-tax payable on total income’ is a pre-rebate and relief figure.

(5) S. 2 of the Finance Act, 2007 specifies the manner in which income-tax in respect of total income is to be arrived at. No mention is made of relief u/s.90 and u/s.91 in the process specified for computing tax on total income. The procedure remains the same, whether or not S. 115JB applies. S. 2(3), S. 2(1) and S. 2(11) of the Finance Act, 2007, if read together, indicate : (a) computation of tax u/s.115JB precedes claiming of rebate under chapter VIII-A; (b) claiming of rebate under chapter VIII-A precedes levy of surcharge; and (c) levy of surcharge precedes levy of cess. The provisions of the Finance Act therefore substantiate that the term ‘income tax payable on total income’ is a pre-rebate and relief figure.

(6) When two or more amounts are compared for any purpose, they should be computed on the same basis to ensure a meaningful comparison. As mentioned above, the term ‘income-tax, payable on total income’ being pre-rebate and relief figure, 18.5% of book profits should also before allowing rebates and reliefs. This means double taxation relief should not be deducted from the book profits before making the comparison u/s.115JB.

(7) The contents of Form ITR-6 (prescribed for Companies) in ‘Part B-TTI’ — ‘Computation of tax liability on total income’ clearly indicate that double taxation relief is to be provided after application of S. 115JB(1) and not in the process of computing the Minimum alternate tax. The extract of Part B-TTI — ‘Computation of tax liability on total income’ is given in Table on next page :

The Supreme Court of India in CIT v. Smt. P. K. KochammuAmmaPeroke, (1980) 125 ITR 624 (SC), has laid down the principle that forms prescribed by the Department cannot be ignored, and the interpretation of law contained therein reflects the executive opinion on the matter. Part B – TTI of Form ITR 6 indicates that the executive is also of the opinion that double taxation relief should not be considered at the time of determining applicability of S. 115JB.

In light of the above, one can conclude that the tax payable on total income is to be compared with 18.5% of book profits before deducting the double taxation relief and not after deducting the same.

(b) Extent of double taxation credit under MAT :

The next issue for consideration is regarding the extent and effect of double taxation credit available in relation to tax computed u/s.115JB and under the normal provisions. A specific formula is available for computation of the relief in cases covered by S. 91. The double taxation relief u/s.91 is computed on the amount referred to as ‘doubly taxed income’ at the rate, which is lower of ‘Indian rate of tax’ and ‘the rate of tax of the said country’. S. 91 reads :

"91. (1) If any person who is resident in India in any previous year proves that, in respect of his income which accrued or arose during that previous year outside India (and which is not deemed to accrue or arise in India), he has paid in any country with which there is no agreement u/s.90 for the relief or avoidance of double taxation, income-tax, by deduction or otherwise, under the law in force in that country, he shall be entitled to the deduction from the Indian income-tax payable by him of a sum calculated on such doubly taxed income at the Indian rate of tax or the rate of tax of the said country, whichever is the lower, or at the Indian rate of tax if both the rates are equal."

Doubly Taxed Income :

One of the important conditions for availing relief u/s.91 is that there should be a ‘doubly taxed income’. It is on this income that relief u/s.91 is computed. S. 91 does not define the term ‘doubly taxed income’. One can rely upon the following judicial observations to understand the meaning of this phrase.

In CIT v. Best and Crompton Engineering Limited, (2006) 284 ITR 225 (Mad.) the Madras High Court observed that "the unilateral relief is granted only in respect of the ‘doubly taxed income’, which means that, that part of the income is actually included in the assessee’s total income".

The Bombay High Court in CIT v. Bombay Burmah Trading Corporation Limited, (2003) 259 ITR 423 (Bom.) held that basically "u/s.91(1), the expression ‘such doubly taxed income’ indicates that the phrase has reference to the tax which foreign income bears when it is again subjected to tax by its inclusion in the computation of income under the Indian Income-tax Act, 1961."

Doubly taxed income, therefore, means such income which is taxed outside India under any foreign law and which forms part of the total income of the assessee in India. As such, double tax relief arises only when any income taxed outside India is included in the total income of the assessee in India. In case income subjected to tax outside India is exempt in India or deductible from gross total income of the assessee in India, then such income cannot be treated as doubly taxed income, and accordingly S. 91 will not be attracted.

In case of software companies entitled to deduction u/s.10A and u/s.10AA, the total income may also comprise of income from domestic transactions and income from other sources. Incomes from domestic and other transactions in India will not suffer any foreign taxes and therefore will not constitute ‘doubly taxed income’. S. 90 and S. 91 will not be applicable to such incomes.

However, if S. 115JB is attracted, the book profit is deemed as the total income of the assessee. By virtue of inclusion of income eligible for S. 10A deduction in the book profit, such income becomes part of the deemed total income of the assessee and therefore also a ‘doubly taxed income’. In such cases, double taxation relief is available.

Extent of relief :

The extent of relief u/s.91 is computed as a percentage of such ‘doubly taxed income’. The percentage to be applied is the lower of the ‘Indian rate of tax’ and the ‘rate of tax of the said country’. The terms ‘Indian rate of tax’ and the ‘rate of tax of the said country’ are defined in clauses (ii) and (iii) of the explanation to S. 91. Clause (ii) of the explanation defines ‘Indian rate of tax’ as under :

"(ii) the expression ‘Indian rate of tax’ means the rate determined by dividing the amount of Indian income-tax after deduction of any relief due under the provisions of this Act but before deduction of any relief due under this Chapter, by the total income;"

Clause (iii) of the explanation defines the phrase ‘rate of tax of the said country’ in the following words :

"(iii) the expression ‘rate of tax of the said country’ means income-tax and super-tax actually paid in the said country in accordance with the corresponding laws in force in the said country after deduction of all relief due, but before deduction of any relief due in the said country in respect of double taxation, divided by the whole amount of the income as assessed in the said country;"

The rate determined above is to be applied to the ‘doubly taxed income’ arrived under the normal provisions or u/s.115JB, as the case may be. The manner of computation of the rate of relief remains the same for both streams of computation.

Relief u/s.90 :

In cases covered by S. 90, the extent and manner of computation of the relief is determined by the provisions of the respective double taxation avoidance agreements read with provisions of the Act. The double taxation agreement may provide for different rules for computing the extent of double taxation relief.

For example, one may refer to the Indo–US DTAA. Article 25(2) of this agreement deals with extent of double taxation credit to be provided while computing tax in India. The provision applicable to general cases is contained in clause (a) of Article 25(2). It provides :

"2. (a) Where a resident of India derives income which, in accordance with the provisions of this Convention, may be taxed in the United States, India shall allow as a deduction from the tax on the income of that resident an amount equal to the income-tax paid in the United States, whether directly or by deduction. Such deduction shall not, however, exceed that part of the income-tax (as computed before the deduction is given) which is attributable to the income which may be taxed in the United States."

In most cases, the rate of tax paid under the foreign laws is higher than 18.5%. Tax payable under MAT being 18.5% of book profits, will be lower than foreign taxes. Therefore, entire tax payable in India, in respect of incomes covered by the relief provision is deductible. As a result, effectively no tax is payable even u/s.115JB, by the companies on its foreign incomes entitled for double taxation relief.

Effect of double taxation relief :

For the reasons already detailed, double taxation relief under normal computation will be lower than relief available if total income is computed u/s. 115JB. This is so under both S. 90 and S. 91.

The total income computed under normal provisions will include domestic income of S. 10A and S. 10AA units and income from other sources. This total income may be subject to normal rate of tax and will not be entitled for double taxation relief.

On the other hand and under similar circumstances, deemed total income u/s.115JB will consist of income eligible for S. 10A deduction, domestic business income and income from other sources. All these incomes will suffer tax at the rate of 18.5% and will also be entitled for double taxation relief.

This can be explained with the help of the following illustration.

‘A1’ will be lower than ‘A2’ as income eligible for S. 10A deduction is part of book profits, but not part of total income under normal computation. ‘B1’ will be lower than ‘B2’. This is because S. 10A incomes being not taxable in India, no DTAA credit will be available under regular provisions. Since under MAT, S. 10A incomes are includible in arriving at book profits, relief would be available on such income. As a result ‘C2’ will be lower than ‘C1’. This will be because : (a) MAT payable on the S. 10A incomes would be nullified by the DTAA credit and (b) the residual income constituting book profits would be taxable at only 18.5% (and not 30% had they continued to remain a part of total income under normal computation).

The effect of the amendment to S. 115JB requiring incomes eligible for S. 10A to be included in the book profit is more beneficial to software companies enjoying the benefits u/s.10A, for the reason that all their income will be subject to tax at the rate of 18.5% as against the normal rates.

(c) MAT credit and DTAA credit :

The next issue is whether the S. 115JAA credit is to be computed by considering tax paid u/s.115JB before or after allowing double taxation relief. In other words, the issue is whether the terms ‘tax paid’ and ‘amount of tax payable’ employed in S. 115JAA(2A) are after considering S. 90 and 91 relief or without considering such relief. This issue is addressed as under :

(a) S. 115JAA provides for credit in respect of taxes paid u/s.115JA and u/s.115JB. While sub-section (1) provides for credit in respect of tax paid u/s.115JA, Ss.(1A) provides for credit in respect of tax paid u/s.115JB. For the present discussion, it is S. 115JAA(1A) that is relevant. Ss.(1A) reads :

"115JAA. (1A) Where any amount of tax is paid under sub-section (1) of S. 115JB by an assessee, being a company for the assessment year commencing on the 1st day of April, 2006 and any subsequent assessment year, then, credit in respect of tax so paid shall be allowed to him in accordance with the provisions of this Section."

(b) The credit u/s.115JAA(1A) arises if any amount of tax is actually paid by a company, deeming the book profits as the total income and 18.5% as tax thereon. The tax credit can be carried forward for a maximum of 7 years. The extent of credit is controlled by S. 115JAA(2A). It provides that where any tax is paid u/s.115JB(1), the tax so paid in excess of the normal income-tax payable, (i.e., tax on total income computed under the normal provisions) shall be the amount of tax credit. S. 115JAA(2A) states :

"(2A) The tax credit to be allowed under sub-section (1A) shall be the difference of the tax paid for any assessment year under sub-section (1) of S. 115JB and the amount of tax payable by the assessee on his total income computed in accordance with the other provisions of this Act :

Provided that no interest shall be payable on the tax credit allowed U/ss.(1A)."

(c) The following illustration can be considered at this juncture :

In case ‘A1’ is lower than ‘A2’, then the provision of MAT will be attracted and ‘A2’ becomes the deemed tax on total income. In such cases MAT credit will be ‘A2’ – ‘A1’. For the reasons discussed above, ‘B2’ (the DTAA credit for MAT purposes) will be higher than ‘B1’ (DTAA credit for normal computation). If DTAA credit is considered for the purposes of computation of credit u/s.115JAA(2A), then ‘C2’ will be tax paid u/s.115JB(1) and ‘C1’ will be amount of tax payable by the assessee on his total income computed in accordance with the other provisions of this Act. If ‘C2’ is greater than ‘C1’, S. 115JAA(2A) is satisfied and MAT credit is available. The extent of MAT credit will be the difference between ‘C2’ and ‘C1’. If ‘C2’ is lesser than ‘C1’, then no MAT credit will be available. The question for consideration is whether the MAT credit is the difference between ‘C2’ and ‘C1’ or the difference between ‘A2’ and ‘A1’.

(d) The following arguments support the proposition that MAT credit is to be computed after considering double taxation credit, i.e., at level ‘C’.

(i) S. 115JAA(2A) employs the words ‘tax paid for any assessment year U/ss.(1) of S. 115JB’. The word ‘paid’ is also found in Ss.(1A) indicating that the actual amounts paid are to be considered and not just a juristically computed amount. The word ‘paid’ refers to a factual event and a fiscal fact that has already occurred. Therefore the words ‘tax paid’ in S. 115JAA(2A) mean tax amount actually discharged by an assessee after taking into account all rebates, reliefs and credits including DTAA credit.

(ii) The cardinal rule of interpretation is that the language of the law has to be interpreted literally, so that no word used therein is rendered otiose. The crucial word used is the term ‘paid’. The term ‘paid’ is the past tense of the term ‘pay’. The Shorter Oxford English Dictionary, fifth edition, 2002, volume 2, page 2126 defines the term ‘pay’ to mean ‘give (a thing owed, due, or deserved); discharge (an obligation, promise, etc.)’. The term ‘pay’ has many meanings attributable to it depending upon the context in which it is used. In the present context, it means to give money for fulfilling the tax obligations imposed under the Act. The tax obligation for the purpose is the ultimate amount that remains after considering rebate under chapter VIII-A, surcharge and cess, relief u/s.90 and u/s.91 and interest u/s.234A, u/s.234B and u/s.234C.

(iii) The extent of MAT credit should be the difference between the actual tax liability of the assessee company of the previous assessment year or years for which S. 115JB is applicable less the final tax liability, but for the deeming fiction u/s.115JB for such years. In other words, credit should be the amount of additional tax liability arising due to the deeming fiction u/s.115JB. The credit computed in any other manner will not reflect the actual difference and thus would defeat the purpose of S. 115JAA. Such interpretation is to be avoided.

(iv) The word ‘paid’ if interpreted literally, would be a post-DTAA credit figure. This view is supported by Part B – TTI — ‘Computation of tax liability on total income’ of form ITR 6. This part clarifies that ‘tax paid’ at point 15e is after considering ‘double taxation relief’ at point 11. One may refer to the extract of ITR – 6, Part B – TTI — ‘Computation of tax liability on total income’ above.

(f) Alternatively, it can be argued that MAT credit has to be computed without considering DTAA credit. The following arguments support this view that MAT Credit is to be computed at level ‘A’ as illustrated above.

(i) The terms ‘paid’ and ‘payable’ are not different from each other, except one is executed and the other is executory in nature. The former indicates that an obligation has been met while the latter indicates that an obligation is yet to be met. However, there is no difference between the two terms qua the extent of obligation and the manner in which the obligation is arrived at.

(ii) The Act itself recognises that the term ‘paid’ includes ‘payable’. S. 43(2) for the purposes of chapter IV-D states that the term ‘paid’ means actually paid or incurred according to the method of accounting upon the basis of which the profits or gains are computed under the head ‘Profits and gains of business or profession.’ Therefore, if the context requires, the word ‘paid’ can be read down as ‘payable’.

(iv) CBDT Circular No. 763, dated 18-2-1998 while explaining the rationale for insertion of S. 115JAA uses the words ‘tax payable on MAT’ indicating that the word ‘paid’ has to be read down as ‘payable’. It states :

"45.4 The Act also inserts a new S. 115JAA to provide for a tax credit scheme by which the MAT paid can be carried forward for set-off against regular tax payable during the subsequent five-year period subject to certain conditions, as under :

(1) When a company pays tax under MAT, the tax credit earned by it shall be an amount which is the difference between the amount payable under MAT and the regular tax. Regular tax in this case means the tax payable on the basis of normal computation of total income of the company."

(v) The word ‘payable’, as discussed above in respect of ‘income-tax payable on the total income’, does not mean the ultimate or net amount which is payable under the Act. In the context it means tax computed either under the normal provisions or u/s.115JB without adjustments towards rebates, reliefs and credits. Once such adjustments are made, the amount payable as tax would no longer be characterised as ‘tax payable under normal provision’ or as ‘tax payable under MAT provisions’. Instead it would be characterised as ‘tax payable under the Act’.

(vi) S. 115JB(1) itself does not use the words ‘tax paid’. It uses the words ‘tax payable’. ‘Tax payable’ u/s.115JB(1) is the gross tax liability and not the net or ultimate tax liability. U/s.115JB(1), 18.5% of book profits is treated as ‘tax payable by the assessee’. The word ‘tax paid’ in S. 115JAA(2A) cannot but be ‘tax payable by the assessee’ u/s.115JB(1). Since u/s.115JB(1), 18.5% of book profits does not consider DTAA credit, ‘tax paid’ u/s.115JAA(2A) is also before considering DTAA credit.

(vii) S. 115JB is a provision for determining the gross tax payable under certain circumstances. It is not a provision under which any tax is actually paid. Separate provisions exist for actual payment of tax in the form of advance tax, tax deducted or collected at source and self-assessment tax. There is no possibility of any tax being paid u/s.115JB(1). Therefore, the reference u/s.115JAA is only to ‘tax payable by the assessee’ u/s.115JB(1).

(viii) Double taxation credit stands on the same footing as rebate under chapter VIII-A, surcharge, cess and interest u/s.234A, u/s.234B and u/s.234C. All these items are adjusted against gross tax liability to arrive at the net tax liability. If double taxation credit is to be considered for computing MAT credit, even the other items have to be considered for computing MAT credit. There is nothing in the Act to indicate that MAT credit has to be computed after such adjustment to gross tax payable under the two streams of computation.

(ix) The phrase/wording used in the later part of S. 115JAA(2A) is ‘amount of tax payable by the assessee on its total income computed in accordance with the other provisions of this Act’. There cannot be a comparison of one item which is ‘payable’ and another item which is ‘paid’. Therefore the words ‘tax paid’ in the first part of S. 115JAA(2A) have to read as ‘tax payable’.

(x) As discussed above, for determining applicability of S. 115JB(1) comparison between 18.5% of book profits and tax on total income under normal provision is made prior to DTAA credit. Same logic has to be extended while computing the difference between 18.5% of book profits and tax on total income under normal provisions u/s.115JAA.

(xi) Schedule MATC of Form ITR-6, ‘Computation of tax credit u/s.115JAA’ indicates that the extent of MAT credit has to be computed without considering any rebates or reliefs including credit u/s.90 and u/s.91. Schedule MATC of Form ITR-6 is extracted on the next page.

If construed so, the tax would be payable before considering all the benefits that the assessee is entitled to under law, including double taxation relief.

(xii) The extent of MAT credit will be higher if comparison is made at Level ‘A’ in the illustration above than at Level ‘C’. This is for the reason that DTAA credit ‘B2’ will be greater than ‘B1’ for the reasons discussed above. S. 115JAA being a beneficial provision, has to be interpreted liberally and in favour of the assessee. Any other interpretation is to be avoided.

(xiii) One may note that S. 115JA did not use the words ‘tax paid’ or ‘tax payable’. It did not contain any deeming fiction regarding extent of tax. It only contained a deeming fiction as to what constituted total income. Tax if any had to be computed by applying the normal rates to such deemed income. However, S. 115JAA(2) employs the words ‘tax paid for any assessment year U/ss.(1) of S. 115JA’ for computing MAT credit u/s.115JA regime. These words would therefore mean, gross tax payable on the deemed income and not ‘tax paid’. Similar words found in S. 115JAA(2A) with reference to S. 115JB would also mean gross tax payable being 18.5% of book profits, i.e., tax computed before adjusting double taxation credit.

We are of the view the second argument is to be accepted, as it is backed by executive interpretation in the CBDT Circular and Form ITR-6, apart from being the interpretation beneficial to the assessee. As a result, the tax credit is to be computed u/s. 115JAA(2A) before considering double taxation relief in the two variables, viz., (1) tax payable u/s.115JB(1) and (2) tax payable normal provisions of the Act.

Conclusion :

The issues that arise out the interplay between MAT provisions and provisions dealing with double taxation relief are yet to receive judicial scrutiny. These issues are relevant not only in case of S. 10A companies, but also generally for all companies having incomes outside India. Further, amendment of S. 115JB by Finance Act, 2007 to include S. 10A incomes within the ambit of book profits, was aimed at increasing the tax liabilities. However, it has become an advantageous proposition to certain companies developing software, which are eligible for deduction u/s.10A. Entire income of such companies will suffer tax at a concessional rate of 18.5% by virtue of this interplay.

In case you have any query, feel free to contact me at taxbymanish@yahoo.com