Provisions of Minimum Alternate Tax (MAT) do not apply to Banking Companies

Brief : Recently in the case of Krung Thai Bank PCL Vs. Jt Director of Income-tax – International Taxation (ITA No. 3390/Mum/2009) (Mum), the Mumbai bench of the Income-tax Appellate Tribunal (the Tribunal) held that the provisions of Section 11 5JB of the Income-tax Act, 1961 (the Act) pertaining to Minimum Alternate Tax (MAT) would come into play only when the tax payer is required to prepare its profit and loss account in accordance with the provisions of Part II and III of Schedule VI of the Companies Act.

Further, since banking companies are not required to prepare their financial statements as per Schedule VI to the Companies Act in view of the exemption set out under proviso to Section 211 (2) of the Companies Act, the tribunal held that the provisions of Section 11 5JB of the Act cannot be applied to a banking company.

Citation : Krung Thai Bank PCL v. Jt Director of Income-tax – International Taxation (ITA No. 3390/Mum/2009) (Mum)

Court : Mumbai bench of the Income-tax Appellate Tribunal

Facts of the case

• · The taxpayer is a foreign bank operating in India through branch office. As per the profit and loss account, the tax payer had shown a profit of INR 7.83 million. In its return of income, the tax payer had declared a NIL income after making adjustment under the normal provisions of the Act and after setting off prior years losses. The taxpayer did not compute tax liability under the MAT provisions in its return of income.
• · The Assessing Officer (AO) completed the assessment under Section 143(3) of the Act without making any adjustment to the returned income. However, the AO subsequently re-opened the assessment under Section 147 of the Act for the reason inter-alia that the tax payer had not computed its tax liability under the MAT provisions. The Commissioner of Income-tax (Appeals) upheld the order of the AO.

Taxpayer’s contention

• · As per the provisions of Section 11 5JB of the Act, every tax payer is required to prepare its profit and loss account in terms of Part II and III of Schedule VI to the Companies Act. Accordingly, the MAT provisions would come into play only when the tax payer is required to prepare the profit and loss account in accordance with Schedule VI to the Companies Act.
• · The tax payer is a banking company and is exempt from the requirements of preparing accounts as per Schedule VI under proviso to Section 211(2) of the Companies Act. Further, the tax payer is required to prepare its books of accounts in terms of the provision of the Banking Regulation Act.
• · Since the provisions of Section 11 5JB do not apply to the tax payer, the reasons recorded for re-opening the assessment under Section 147 are wrong and insufficient.

Tax department’s contention- The provisions of MAT under Section 11 5JB apply to all companies and there is no specific exclusion clause in the MAT provisions for banking companies.

Issues before the Tribunal

• · Whether the provisions of MAT under Section 11 5JB of the Act would apply to the tax payer being a banking company which is not required to prepare its accounts as per Schedule VI to the Companies Act?
• · Whether the re-opening of assessment under Section 147 of the Act was valid given the facts of the case?

Tribunal’s ruling

• · The provisions of Section 11 5JB of the Act can only come into play when the tax payer is required to prepare its profit and loss account in accordance with the provisions of Part II and III of Schedule VI to the Companies Act. The starting point of computation of MAT under Section 115 JB of the Act is the result shown by such a profit and loss account.
• · In the case of banking companies, the provisions of Schedule VI are not applicable in view of exemption set out under proviso to Section 211 (2) of the Companies Act. The final accounts of banking companies are required to be prepared in accordance with the provisions of the Banking Regulation Act and the provisions of Section 11 5JB of the Act cannot be applied to a banking company.
• · The tribunal also relied on the ruling of the Bombay High Court in the case of Maharashtra State Electricity Board (MSEB)², wherein it was held that the provisions of MAT cannot be applied to electricity companies for mutually similar reasons.
• · The AO was in error to conclude that the income had escaped assessment in the hands of the tax payer and the very initiation of the re-assessment proceedings was bad in law as the provisions of Section 11 5JB of the Act did not apply to the tax payer.

Our Comments

The ruling reiterates the principle laid down by the Bombay High Court in the case of MSEB that the provisions of MAT under Section 11 5JB of the Act cannot be made applicable to companies which are not required to maintain its financial statements as per the provisions of Schedule VI of the Companies Act.

Though the ruling is in the context of a banking company, it should equally apply to electricity companies, insurance companies and any other class of companies which are not required to prepare their financial statements as per Schedule VI to the Companies Act.