1. MAT Provisions: (Clauses 43, 44 & 45)
1.1 Present Provision: 115JA, 115JAA and 115JB
It was zero-tax companies, which were profitable and paid dividends to shareholders but owing to various deductions/sops available under the tax laws did not have a taxable income and thus did not pay tax, that caught the attention of the legislators and led to the introduction of MAT. Under the existing provision a company is liable to pay minimum tax u/s. 115JB on its book profit @ 10% if the tax payable by such company on the total income under the other provisions of the Act is less than the tax payable under MAT. The credit of taxes such paid can be carried forward u/s. 115 JAA for 7 years to be set off against the tax liability arising under the other provisions of the Act. At the same time the section provides for the specific additions and deductions that are to be made to book profit in order to arrive at the profit as per section 115JB of the Act.
1.2 Increase in Tax Rate under MAT, restriction on deduction of certain provision & extension of timeline for availing tax credit:
In an attempt to fill the gap of revenue collection that may arise by the withdrawal of FBT, the government has proposed to use the tool of increase in rate of tax under MAT.
As per the proposed amendment the tax rate u/s. 115JB is proposed to be increased from 10% to 15% on the book profit. Also, it is also proposed to amend section 115 JAA to allow the credit of taxes paid u/s. 115JB for 10 years from the existing time limit of 7 years.
It is also proposed to insert another clause in the existing list of adjustments that were the items debited to the profit & loss account but the same has to be added to the net profit as shown in the profit & loss account for the purpose of computation of book profit under MAT. It is proposed to include any amount or amounts that has been set aside as provision for diminution in the value of any asset’. The result is that if the Profit & Loss A/c. prepared as per company law has a debit for such provision, it will be added back to the book profit.
1.3 Reasons for proposed amendment
In its give and take relief exercise the government has increased the rate under MAT, whereas abolishing the FBT would amount to loss of revenue. Both the provisions will have wide impact on companies claiming sections 10A, 10B, 80-IA, 80-IB tax holidays and other entities which have tax losses shield.
The Supreme Court in the case of CIT vs. HCL Comnet Systems & Services Limited [2008] 305 ITR 409 had held that bad & doubtful debts should be viewed as a diminution in the value of an asset, rather than as provision towards an ‘Unascertained liability’. Such a provision is not a provision for liability because even if the debt is not recovered, no liability can be fastened on the assessee.
The Supreme Court has also pointed out that where the books of account are duly certified as having been maintained in accordance with the Companies Act, the Assessing Officer has jurisdiction only to make such adjustments as provided in the Explanation to section 115JA.
This interpretation was leading to several litigations causing a leakage of the revenue under MAT. To reverse the aforesaid interpretation, the amendment has been introduced w.r.e.f. from A.Y. 2001-02 for section 115JB and from A.Y. 1998-99 for section 115JA.
1.4 Effective date of proposed amendment
The proposal of increase in the rate of taxation under MAT from 10% to 15% and extension of time period for availing the said tax credit paid under MAT from 7 years to 10 years is proposed to take effect from 1st April, 2010 and shall apply in relation to assessment year 2010-11 and subsequent years.
Whereas the inclusion of increasing the book profit to disable the provision for diminution in the value of any asset debited to profit & loss account is proposed to be inserted retrospectively from 1st April, 1998 for the erstwhile section 115JA and from 1st April, 2001 for section 115JB. Thus, this would be deemed to have been included with an earlier effect being a retrospective inclusion.
1.5 Comments
Section 115JB requires that any liability debited to Profit and Loss (P&L) account other than an ascertained liability needs to be added to the net profit for arriving at book profits chargeable to MAT. Whether a provision for doubtful debts is an ascertained liability or not has been disputed widely in the past. Notably, the Madras High Court rendered a decision in March 2000 in the case of Dy. CIT vs. Beardsell Ltd. (2000) 244 ITR 256 holding that the provision for bad debts cannot be termed as an ascertained liability, and therefore needs to be added back to the net profits for arriving at the book profit subject to MAT. However, distinguishing this decision, the Special Bench of Kolkata ITAT rendered a decision in October 2006 in the case of Jt. CIT vs. Usha Martin Industries Ltd. (2007) 104 ITD 249 It held that the provision for bad debt is not a liability, per se, as no liability would be fastened upon the tax-payer even if the underlying debt is not recovered. It, therefore, concluded that the question whether the provision is an ascertained or unascertained liability does not arise.
The controversy continued till September 2008 when the Supreme Court in the case of CIT vs. HCL Comnet Systems & Services Limited [2008] 305 ITR 409 affirmed the view purported in Usha Martin’s case allowing the deductibility of provision for doubtful debts. The Supreme Court has, in fact, held that the provision for doubtful debts is akin to the provision for diminution in value of assets.
But once after the Supreme Court had decided an issue it was always exposed to the risk whether the tax laws will be amended thus overturning this decision and whether such amendment, if any, will be with retrospective effect. This amendment has come on expected lines as one of the several efforts made by the budgets to counter the judicial interpretation of any provision.
The increase in the rate of MAT has proved that the Finance Minister heard the slogans of tax- payer wrongly from “MAT Hatao” to “MAT Bhadao”, as Bangla ascent and lingual diction often leads to such interpretation and our Finance Minister has gone no wrong in doing that.
Author: CA. Nirjay Singh
It means apart from provision for bad debts we have to add other diminution in the value of assets such as prov for diminution in the value of Investments etc.