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The treatment of deferred tax charge in determining the tax liability under the special provisions of Section 115JB of the Income-Tax Act is one such case. Section 115JB levies minimum alternate tax (MAT) at 10% of book profits (plus surcharge and cess thereon) if such tax is higher than the tax payable under the normal provisions of the Act. Book profits, for this purpose, needs to be calculated by making certain specified adjustments to the net profit as shown in the profit & loss account prepared in accordance with the Companies Act and after taking into account accounting policies and accounting standards adopted for preparing such accounts. Accounting Standard 22 issued by the Institute of Chartered Accounts of India (ICAI) provides for creation of a deferred tax liability or a deferred tax asset on account of timing differences between an allowance for tax purposes and its debit in company’s P&L account. To illustrate, if tax depreciation is higher than the book depreciation, then the tax impact of the difference between the two needs to be reflected in those years by debiting the P&L account and crediting the ‘deferred tax liability’ account. The same gets reversed in the subsequent years when the tax depreciation is lower than the book depreciation by accounting for such difference as a deferred tax asset.
For computing book profits, Section 115JB, inter alia, requires that the net profit should be increased by – (a) the income tax paid or provision thereof; (b) an amount carried to any reserve; (c) provisions for meeting unascertained liabilities. A question that arises is whether the sum debited to the P&L account on account of deferred tax liability is covered by any of the points mentioned above and accordingly, needs to be added back while computing the book profits for MAT purposes. The Kolkata Tribunal in Balrampur Chini’s case has held that the deferred tax liability should not be added back whereas in a recent decision by the Chennai Tribunal in Prime Textiles Ltd’s case has held otherwise.
The Chennai Tribunal observed that AS-22 is mandatory as per Section 211(3) of the Companies Act, however, the same is not notified by the Central Government under Section 145(2) of the IT Act. Moreover, the deferred tax liability cannot be considered as ascertained liability and therefore, assessing officer has every power to make adjustment on this account as it cannot be termed as tinkering of audited accounts prepared in accordance with the provisions of the Companies Act. The decision of the Chennai tribunal deals with the limited aspect i.e. whether the charge for deferred tax liability can be considered as the provision for unascertained liability or not. However, the decision of the Kolkata Tribunal, which was rendered prior to Chennai Tribunal decision, is a detailed one and deals with all the three aspects mentioned above. The Kolkata tribunal based its decision relying mainly on the objective of issuing AS-22 for determining the true nature of such charge. The tribunal observed that the deferred tax charge is not a provision for tax but is a provision for tax effect for difference between taxable income and accounting income and further that deferred tax charge cannot be termed as income-tax paid or payable, which has to be paid out of the profit earned. The tribunal also observed that the reserves mentioned in Section 115JB is different in many respects in the sense that it can be unilaterally transferred back to P&L account or can be utilised for issuing bonus shares or declaring dividend. However, amounts created towards deferred tax charge cannot be so transferred or utilised. The tribunal also relied on the ICAI guidelines which advice to treat deferred tax charge separately than reserve as stipulated for the MAT purposes.
Further, in tribunal’s view, the amount of deferred tax charge is not in the nature of unascertained liability as it is measured scientifically as per the strict guidelines of ICAI. However, Chennai Tribunal is of different view on this aspect. The Kolkata tribunal also observed that in case a deferred tax asset is created by crediting the P&L account, it would be considered as part of book profits and it would result in absurdity if the provision for deferred tax liability is also added back to arrive at the book profit.
The reasoning given by the Kolkata tribunal in arriving at the decision seems to be a correct/rational interpretation of law. However, with the conflicting judgments existing on the subject, controversy will remain till a clarification is issued by the government or when the matter is decided by the high court.