Currently companies are required to pay MAT tax if the tax payable under normal provisions of the Act is lower than 10% (15% w.e.f. A.Y. 2010-11) of the book profit as defined u/s.115JB of the Act. An issue which arises is whether an assessee liable to MAT should pay interest u/s.234B and u/s.234C for shortfall in payment of advance tax.
Bombay High Court in Snowcem India Ltd. :
Recently the Bombay High Court in the case of Snowcem India Ltd. (313 ITR 170) had an opportunity to consider this issue in the context of S. 115JA of the Act. The Court held that S. 115JA is same or similar to S. 115J of the Act. It further held that since the Karnataka High Court’s decision in Kwality Biscuits Ltd. was affirmed by the Supreme Court by dismissing the appeals, it was binding on them. Accordingly, the Bombay High Court allowed the appeal in favour of the assessee.
It may be noted that the Bombay High Court in Snowcem has held that the terminology in S. 115JA is the same or similar as that contained in S. 115J. Attention is invited to the fact that the wordings in S. 115JA(4) and S. 115JB(5) which provide that ‘save as otherwise provided in this Section all other provisions of this Act would be applicable’ were not present in the earlier S. 115J of the Act. Also the Finance Act in the years when S. 115J was applicable did not provide for payment of advance tax on income chargeable u/s.115J of the Act as is currently provided. This distinction is explained as follows:
|Assessment year onwards||1988-89 to 1990-91||1997-98 to 2001-02||2000-01|
|All other provisions applicable||—||115JA(4)||115JB(5)|
|Advance tax payable as per Finance Act||—||—||S. 2(8)|
It appears that the provisions of S. 115JA(4) were not considered by the High Court leading to the conclusion that the terminology is the same.
Karnataka High Court in Kwality Biscuits Ltd. :
This issue was earlier addressed by the Karnataka High Court in the case of Kwality Biscuits Ltd., 243 ITR 519 in the context of S. 115J of the Act. The Karnataka High Court considering the contention of the assessee held that for the purpose of assessing tax u/s.115J, firstly, the profit as computed under the Income-tax Act has to be prepared, thereafter the book profit as contemplated by the provisions of S. 115J are to be determined and then the tax is to be levied. The liability of the assessee for payment of tax u/s.115J arises if the total income as computed under the provisions of the Act is less than 30% of its book profits. The Court then observed that since the entire exercise of computing the income or that of book profit could be only at the end of the financial year, the provisions of S. 207, S. 208, S. 209 or S. 210 cannot be made applicable, until and unless the accounts are audited and the balance sheet is prepared as even the assessee may not know whether the provision of S. 115J would be applicable or not. Accordingly, the Court held that interest could not be charged u/s.234B and u/s.234C of the Income-tax Act. The judgment of the Karnataka High Court was contested by way of SLP to Supreme Court which passed an order dismissing the appeals (284 ITR 434).
Bombay High Court in Kotak Mahindra Finance Ltd. :
It may be mentioned here that the Bombay High Court in Kotak Mahindra Finance Ltd. (265 ITR 119) had taken the view that even in a case covered by S. 115J the provisions of S. 234B and S. 234C were attracted. While deciding the issue the learned Bench of the Court negated the contention as raised on behalf of the assessee that provisions of S. 234B and S. 234C are not attracted in cases falling u/s.115J as book profits were determinable after the end of the financial year. The Court held that the difficulty faced by the assessee in the matter of computation cannot defeat the liability for payment of advance tax and that u/s.207 of the Income-tax Act, advance tax is payable during any financial year in respect of the ‘current income’. The Court held that the words ‘current income’ refer to computation of total income under the provisions of the Income-tax Act including S. 115J. The Court further observed that u/s.207 of the Income-tax Act the words ‘total income’ have been equated to the expression ‘current income’. The Court held that the interest leviable u/s.234B and u/s.234C is compensatory in nature and it has no element of penalty. Therefore, if there is non-payment or short payment of tax on the current income, then the assessee has to pay interest as the income has accrued to the assessee for the previous year. The distinction sought to be made in respect of companies falling u/s.115J was not accepted. While holding so, the learned Bench observed that the view being taken is supported by the judgment of the Gauhati High Court in the case of Assam Bengal Carriers Ltd. v. CIT, (1999) (239 ITR 862) as also the judgment of the Madhya Pradesh High Court in the case of Itarsi Oils and Flours (P) Ltd. v. CIT, (2001) (250 ITR 686). The Court further held that they disagreed with the judgment of the Karnataka High Court in the case of Kwality Biscuits Ltd. v. CIT, (2000) (243 ITR 519).
Legislative history of MAT :
Let us look at the legislative history of the Sections and how it has been amended from time to time.
Initially S. 115J was inserted by the Finance Act, 1987 as per which tax at the regular rates on 30% of the book profit was levied if the same was found to be more than the total income computed under the Act. S. 115J(1) provided that where the total income computed under the Act is found to be less than 30 per cent of the book profit the total income of the assessee, shall be deemed to be an amount equivalent to 30% of such book profit. Thus, the concept of ‘deemed total income’ emerged. The liability to pay MAT would arise only on the determination of book profits which by necessary implication could be determined only after the accounts are audited as held in Kwality Biscuits case. S. 115J ceased to be effective from the A.Y. 1991-92.
The scheme of MAT, however, was revived effective from A.Y. 1997-98 by insertion of a new charging S. 115JA and under the said provision where the total income computed under the provisions of the Act was found to be less than 30% of the book profit, the total income chargeable to tax would be deemed to be an amount equivalent to 30% of the book profit. S. 115JA operated up to and including A.Y. 2000-01 when it gave way for another charging S. 115JB effective from A.Y. 2001-02. It was different from its predecessor in one respect in not seeking to deem any total income but providing for tax payable to be deemed at 7.5% of such book profit. S. 115JB was amended by the Finance Act, 2002 with retrospective effect from 1-4-2001 substituting for the words ‘the tax payable for the relevant previous year shall be deemed to be seven and one-half percent of such book profit’ the words ‘such book profit shall be deemed to be the total income of the assessee and the tax payable by the assessee on such total income shall be the amount of income-tax at the rate of 7.5%’. The main difference between the provision as introduced initially and later amended is that the former provided for an obligation to pay tax at 7.5% of the book profit without deeming the book profit to be total income.
S. 115JB as it stands now is as follows :
(1) Notwithstanding anything contained in any other provision of this Act, where in the case of an assessee, being a company, the income-tax, payable on the total income as computed under this Act in respect of any previous year relevant to the assessment year commencing on or after 1-4-2007 is less than 10% of its book profit, such book profit shall be deemed to be the total income of the assessee and the tax payable by the assessee on such total income shall be the amount of income-tax at the rate of 10%.”
(2) Every assessee, being a company, shall, for the purposes of this section, prepare its profit and loss account for the relevant previous year in accordance with the provisions of Parts II and III of Schedule VI to the Companies Act, 1956 (1 of 1956).
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(5) Save as otherwise provided in this section, all other provisions of this Act shall apply to every assessee, being a company, mentioned in this section.”
CBDT Circular No. 13/2001 was issued on 9-11-2001 clarifying that all companies are liable for payment of advance tax under the new MAT provisions of S. 115JB of the Act. It is abundantly made clear in the said Circular that the new provisions of S. 115JB as introduced by the Finance Act, 2000 are a self-contained Code. Ss.(1) lays down the manner in which income-tax payable is to be computed. Ss.(2) provides for computation of ‘book profit’. Ss.(5) specifies that save as otherwise provided in this section, all other provisions of this Act shall apply to every assessee, being a company mentioned in that section. The Circular clarifies that except for substitution of tax payable and the manner of computation of book profits, all the provisions relating to charge, definitions, recoveries, payment, assessment, etc., would apply in respect of the provisions of this Section.
The Circular further goes on to explain the scheme of the Income-tax Act. S. 4 of the Act charges to tax the income at any rate or rates which may be prescribed by the Finance Act every year. S. 207 deals with liability for payment of advance tax and S. 209 deals with its computation based on the rates in force for the financial year, as are contained in the Finance Act. The first proviso to S. 2(8) of the Finance Act, 2001 provides that tax would be payable by way of advance tax in respect of income chargeable u/s.115JB as introduced by Finance Act, 2000. The Circular clarifies that consequently the provisions of S. 234B and S. 234C for interest on default in payment of advance tax and deferment of advance tax would also be applicable.
This was the view taken by the Karnataka High Court in the case of Jindal Thermal Power Co. Ltd. 286 ITR 182 in the context of S. 115JB. This view has also been taken by the Mumbai Tribunal in Madaus Pharmaceuticals P. Ltd. 24 SOT 180 following Karnataka High Court in Jindal Thermal Power Co. Ltd.
It may be appropriate to mention that the Mumbai Tribunal in Deepak Fertilizer and Petrochemicals Corporation [304 ITR (AT) 167], the Cochin Tribunal in Escapade Resorts P. Ltd. (13 SOT 300) and the Bangalore Tribunal in IBM India Ltd. [290 ITR (AT) 183] have in the context of S. 115JA taken a view in favour of the assessee following the principle laid down by the Supreme Court in Kwality Biscuits Ltd.
Ahmedabad Special Bench in Ashima Syntex Ltd. :
However, attention is invited to the Ahmedabad Special Bench decision in the case of Ashima Syntex Ltd. 310 ITR (AT) 1. The Special Bench has held that the aforesaid decision in the case of Kwality Biscuits Ltd. was not rendered in the context of the provisions of S. 115JA of the Act. The Special Bench has analysed various decisions in detail. It has stated that for the purpose of payment of advance tax, all the assesses including companies, are required to make an estimate of their current income. Even before the introduction of the provisions of S. 115J of the Act, companies had been estimating their total income after providing deductions admissible under the Act. In fact, all the assesses who maintain books of account have to undertake this exercise for the purpose of payment of advance tax. If a profit and loss account can be drawn up on estimate basis for the purpose of the Income-tax Act, it is not understood as to why a similar profit and loss account on estimate basis under the Companies Act cannot be drawn up. If the explanation of the companies that the profits u/s.115JA of the Act can only be determined after the close of the year were to be accepted, then no assessee who maintains regular books of account would be liable to pay advance tax as in those cases also, income can only be determined after the close of the books of account at the end of the year. The provisions of S. 207 to S. 209 of the Act do not exclude the income determined u/s.115JA of the Act from the purview of current income on which advance tax is payable. Similarly, there is no scope for considering the hardship of the assessee as the levy is automatic and does not require any opportunity to be given to the assessee. S. 4 of the Act envisages charge to tax the income at any rate or rates which may be prescribed by the Finance Act every year and S. 207 deals with liability for payment of advance tax and S. 209 deals with its computation based on the rates in force for the financial year, as are contained in the relevant Finance Act.
Accordingly the Special Bench has held that all other provisions of the Act including provisions relating to payment of advance tax are applicable even when income is computed u/s.115JA of the Act.
It may be concluded that subsequent to incorporation in the Finance Act of the requirement for payment of advance tax by companies falling u/s.115JB, there can be no doubt in the matter. Considering the difference in the language of S. 115J and S. 115JA/ S. 115JB, provisions of the Finance Act and the view taken by Ahmedabad Special Bench and the Karnataka High Court, MAT companies would be liable to pay advance tax u/s.115JB. If they don’t do so they may land up paying heavy interest u/s.234B and u/s.234C which is not tax deductible.
V. A. Mittal