C S Arun Kumar V. K.
Central Board of Direct Taxes (CBDT) constituted MAT- Ind AS Committee to suggest framework for computation of book profit for purposes of levy of Minimum Alternate Tax (MAT) under Section 115JB of the Income-tax Act, 1961 for Indian Accounting Standards (Ind AS) compliant companies in the year of adoption and thereafter.
The following are brief extracts based on the discussions of the Committee on provisions of Section 115JB, Ind AS and relevant sections of the Companies Act, 2013 held for suggesting framework for computation of books profit of Ind AS compliant companies and report for frame work made thereafter.
Provisions under Section 115JB of Income Tax Act, 1961, and its implicit relation with provisions of Companies Act –
- Levy of MAT shall be on the basis of “book profit” disclosed in the P & L account prepared in accordance with provisions of the Companies Act, 2013.
- Section 115JB provides for certain adjustments for determining book profit, mainly for:
(i) items relating to income-tax;
(ii) appropriation of profit adjustment for brought forward loss/unabsorbed depreciation;
(iii) revaluation of assets;
(iv) distribution of dividend, etc.
- Adjustment for brought forward loss/unabsorbed depreciation is provided on the basis of provisions contained in Section 205 of Companies Act, 1956 which provides for determining amount available for distribution of dividend.
- The adjustments indicate that provisions of Section 115JB seek to compute realised profit before tax which is available for appropriation/distribution.
- Based on the above, there appears to be an implicit relation between distributable profits which is available for payment of dividend under the Companies Act and the tax base for levying MAT under Section 115JB.
Provisions under Section 129 of the Companies Act, 2013 –
- Board of Directors of a company shall lay financial statements in AGM.
- As per lnd AS financial statements includes balance sheet, P & L account and statement of change in equity. Ind AS compliant company shall be required to divide its P & L account into following 02 parts:-
(i) Net P & L for the year;
(ii) Net other comprehensive income, which includes both items to be reclassified to P & L and items not to be reclassified to P & L in subsequent periods.
Provisions under Section 123 of the Companies Act, 2013 –
- Dividend is to be declared out of profits of the company for current year or out of profits of earlier year.
- In case of inadequacy of profits, dividend may be declared out of accumulated profits of earlier year, which has been transferred to reserve (reserve shall mean free reserves only).
Provisions under Section 2(43) of Companies Act, 2013 –
- Free reserve shall not include:
(i) any amount representing unrealised gains, notional gains or revaluation of assets, or
(ii) any change in carrying amount of an asset or of a liability recognized in equity, including surplus in P & L account on measurement of the asset or the liability at fair value.
- Section 123 read with Section 2(43) prohibits distribution of dividend out of reserves containing notional/unrealized gains.
View of Committee –
Fair value accounting is predominant in Ind AS and therefore net profit and net other comprehensive income of current year may include sizeable amount of notional/unrealised gains or losses. It appears that dividend is allowed to be paid out of profits of current year without any adjustments in respect of notional/unrealised gains.
Provisions under Section 197 and Section 198 of Companies Act, 2013 –
- Total managerial remuneration payable by a public company should not exceed 11% of net profit for that year.
- Profit shall not include any changes in carrying amount of an asset or of a liability recognized in equity, including surplus in P & L account on measurement of asset or the liability at fair
MCA clarification on the above conflicting provisions in CA Act, 2013 –
- MCA intimated that all notional/unrealized gains included in net other comprehensive income are to be excluded for purposes of arriving at distributable profits for payment of dividend as well as for calculation of profit for managerial remuneration.
- MCA listed the following items -•
(i) Changes in revaluation surplus (Ind AS 16 and Ind AS 38);
(ii) Remeasurements of defined benefit plans (lnd AS 19);
(iii) Gain and losses arising from translating the financial statements of a foreign operation (lnd AS 21);
(iv) Gains and losses from investments in equity instruments designated at fair value (Ind AS 109);
(v) Gains and losses on financial assets measured at fair value (Ind AS 109);
(vi) Effective portion of gains and losses on hedging instruments in a cash flow hedge and gains and losses on hedging instruments that hedge investments in equity instruments measured at fair value through other comprehensive income (lnd AS 109);
(vii) For particular liabilities designated at fair value through profit or loss, amount of change in fair value that is attributable to changes in the liability’s credit risk (Ind AS 109);
(viii) Changes in value of time value of options when separating intrinsic value and time value of an option contract and designating as hedging instrument only changes in intrinsic value (Chapter 6 of lnd AS 109);
(ix) Changes in value of forward elements of forward contracts when separating forward element and spot element of a forward contract and designating as hedging instrument only changes in spot element, and changes in value of foreign currency basis spread of a financial instrument when excluding it from the designation of that financial instrument as hedging instrument (Chapter 6 of Ind AS 109 ).
- MCA suggested that the above principle may be extended for reckoning book profits for the purposes of MAT provisions.
Recommendations by Committee based on MCA clarification –
- No further adjustments are to be made to net profits (excluding net other comprehensive income) of Ind AS compliant companies, other than those specified under Section 115JB of Income Tax Act, 1961.
- Net profits (excluding net other comprehensive income) under Ind AS may include a sizeable amount of notional/unrealised gains or losses. But, MCA may prescribe further adjustments to current year profits (excluding net other comprehensive income) for computation of distributable profits, the requirement for such adjustments to the book profit under Section 115JB may be examined.
Recommendations by Committee on impact of first time adoption of Ind AS –
- Accounting policies that an entity uses in its opening Ind AS balance sheet at its first time of adoption may differ from those that it previously used in its Indian GAAP financial statements.
- An entity is required to record these adjustments directly in retained earnings and reserves at the date of transition to Ind AS.
- Adjustments recorded in reserves, which would subsequently be reclassified to P & L account, should be included in book profits in the year in which these are reclassified to P & L account.
- Adjustments recorded in net other comprehensive income, which would never be subsequently reclassified to P & L account, should be included in book profits.
- All other adjustments recorded in retained earnings and which would otherwise never subsequently be reclassified to the P & L account, should be included in book profits in the first year of adoption of Ind AS.
- Section 115JB already provides for certain adjustments for computation of bock The above adjustments would be subject to the existing provisions of Section 115JB.