Rationalisation of provisions of section 115JB in line with Indian Accounting Standard (Ind-AS)
Central Government notified the Indian Accounting Standards (Ind AS) which are converged with International Financial Reporting Standards(IFRS) and prescribed the Companies( Indian Accounting Standards) Rules, 2015 which laid down a roadmap for implementation of these Ind AS.
Globally, different approaches have been adopted to deal with the tax issues arising from adoption of IFRS. For ensuring horizontal equity across the companies irrespective of the fact that whether they follow Ind AS or the existing Indian GAAP, the Central Government has issued Income Computation and Disclosure Standards (ICDS) for computation of taxable income for specified heads of income.
As the book profit based on Ind AS compliant financial statement is likely to be different from the book profit based on existing Indian GAAP, the Central Board of Direct Taxes (CBDT) constituted a committee in June, 2015 for suggesting the framework for computation of minimum alternate tax (MAT) liability under section 11 5JB for Ind AS compliant companies in the year of adoption and thereafter.
The Committee submitted first interim report on 18th March, 2016 which was placed in public domain by the CBDT for wider public consultations. The Committee submitted the second interim report on 5th August, 2016 which was also placed in public domain. The comments/ suggestions received in respect of the first and second interim report were examined by the Committee. After taking into account all the suggestions/ comments received, the Committee submitted its final report on 22nd December, 2016.
In view of the above, it is proposed to amend section 115JB so as to provide the framework for computation of book profit for Ind AS compliant companies in the year of adoption and thereafter. The main features of this proposed framework are as under:
A. MAT on Ind AS compliant financial statement
(i) No further adjustments to the net profits before other comprehensive income of Ind AS compliant companies, other than those already specified under section 11 5JB of the Act shall be made.
(ii) The other comprehensive income includes certain items that will permanently be recorded in reserves and hence never be reclassified to the statement of profit and loss included in the computation of book profits. These items shall be included in book profits for MAT purposes at the point of time as specified below—
| Sl.No | Items | Point of time |
| 1 | Changes in revaluation surplus of Property, Plant or Equipment (PPE) and Intangible assets (Ind AS 16 and Ind AS 38) | To be included in book profits at the time of realisation/ disposal/ retirement or otherwise transferred |
| 2 | Gains and losses from investments in equity instruments designated at fair value through other comprehensive income (Ind AS 109) | To be included in book profits at the time of realisation/ disposal/ retirement or otherwise transferred |
| 3 | Remeasurements of defined benefit plans (Ind AS 19) | To be included in book profits every year as the remeasurements gains and losses arise |
| 4 | Any other item | To be included in book profits every year as the gains and losses arise |
(iii) Appendix A of Ind AS 10 provides that any distributions of non-cash assets to shareholders (for example, in a demerger) shall be accounted for at fair value. The difference between the carrying value of the assets and the fair value is recorded in the profit and loss account. Correspondingly, the reserves are debited at fair value to record the distribution as a ‘deemed dividend‘ to the shareholders. As there is a corresponding adjustment in retained earnings, this difference arising on demerger shall be excluded from the book profits. However, in the case of a resulting company, where the property and the liabilities of the undertaking or undertakings being received by it are recorded at values different from values appearing in the books of account of the demerged company immediately before the demerger, any change in such value shall be ignored for the purpose of computing of book profit of the resulting company.
B. MAT on first time adoption
(i) The adjustments arising on account of transition to Ind AS from existing Indian GAAP is required to be recorded directly in Other Equity at the date of transition to Ind AS. Several of these items would subsequently never be reclassified to the statement of profit and loss / included in the computation of book profits. Accordingly, the following treatment is proposed:
(I) Those adjustments recorded in other comprehensive income and which would subsequently be reclassified to the profit and loss, shall be included in book profits in the year in which these are reclassified to the profit and loss;
(II) Those adjustments recorded in other comprehensive income and which would never be subsequently reclassified to the profit and loss shall be included in book profits as specified hereunder-
| Sl.No. | Items | Point of time |
| 1 | Changes in revaluation surplus of PPE and Intangible assets (Ind AS 16 and Ind AS 38) | To be included in book profits at the time of realisation/ disposal/ retirement or otherwise transferred |
| 2 | Gains and losses from investments in equity instruments designated at fair value through other comprehensive income (Ind AS 109) | To be included in book profits at the time of realisation/ disposal/ retirement or otherwise transferred |
| 3 | Remeasurements of defined benefit plans (Ind AS 19) | To be included in book profits equally over a period of five years starting from the year of first time adoption of Ind AS |
| 4 | Any other item | To be included in book profits equally over a period of five years starting from the year of first time adoption of Ind AS |
(III) All other adjustments recorded in Reserves and Surplus (excluding Capital Reserve and Securities Premium Reserve) as referred to in Division II of Schedule III of Companies Act, 2013 and which would otherwise never subsequently be reclassified to the profit and loss account, shall be included in the book profits, equally over a period of five years starting from the year of first time adoption of Ind AS subject to the following—
a) PPE and intangible assets at fair value as deemed cost
An entity may use fair value in its opening Ind AS Balance Sheet as deemed cost for an item of PPE or an intangible asset as mentioned in paragraphs D5 and D7 of Ind AS 101. In such cases the treatment shall be as under—
- The existing provisions for computation of book profits under section 11 5JB of the Act provide that in case of revaluation of assets, any impact on account of such revaluation shall be ignored for the purposes of computation of book profits. Further, the adjustments in retained earnings on first time adoption with respect to items of PPE and Intangible assets shall be ignored for the purposes of computation of book profits.
- Depreciation shall be computed ignoring the amount of aforesaid retained earnings adjustment.
- Similarly, gain/loss on realisation/ disposal/ retirement of such assets shall be computed ignoring the aforesaid retained earnings adjustment.
b] Investments in subsidiaries, joint ventures and associates at fair value as deemed cost
An entity may use fair value in its opening Ind AS Balance Sheet as deemed cost for investment in a subsidiary, joint venture or associate in its separate financial statements as mentioned in paragraph D15 of Ind AS 101. In such cases retained earnings adjustment shall be included in the book profit at the time of realisation of such investment.
c] Cumulative translation differences
- An entity may elect a choice whereby the cumulative translation differences for all foreign operations are deemed to be zero at the date of transition to Ind AS. Further, the gain or loss on a subsequent disposal of any foreign operation shall exclude translation differences that arose before the date of transition to Ind AS and shall include only the translation differences after the date of transition.
- In such cases, to ensure that such Cumulative translation differences on the date of transition which have been transferred to retained earnings, are taken into account, these shall be included in the book profits at the time of disposal of foreign operations as mentioned in paragraph 48 of Ind AS 21.
(ii) All other adjustments to retained earnings at the time of transition (including for example, Decommissioning Liability, Asset retirement obligations, Foreign exchange capitalisation/ decapitalization, Borrowing costs adjustments etc.) shall be included in book profits, equally over a period of five years starting from the year of first time adoption of Ind AS.
(iii)Section 11 5JB of the Act already provides for adjustments on account of deferred tax and its provision. Any deferred tax adjustments recorded in Reserves and Surplus on account of transition to Ind AS shall also be ignored.
C. Reference year for first time adoption adjustments
In the first year of adoption of Ind AS, the companies would prepare Ind AS financial statement for reporting year with a comparative financial statement for immediately preceding year. As per Ind AS 101, a company would make all Ind AS adjustments on the opening date of the comparative financial year. The entity is also required to present an equity reconciliation between previous Indian GAAP and Ind AS amounts, both on the opening date of preceding year as well as on the closing date of the preceding year. It is proposed that for the purposes of computation of book profits of the year of adoption and the proposed adjustments, the amounts adjusted as of the opening date of the first year of adoption shall be considered. For example, companies which adopt Ind AS with effect from 1 April 2016 are required prepare their financial statements for the year 20 16-17 as per requirements of Ind AS. Such companies are also required to prepare an opening balance sheet as of 1 April 2015 and restate the financial statements for the comparative period 2015-16. In such a case, the first time adoption adjustments as of 31 March 2016 shall be considered for computation of MAT liability for previous year 2016-17 (Assessment year 2017- 18) and thereafter. Further, in this case, the period of five years proposed above shall be previous years 2016-17, 2017-1 8, 2018-19, 2019-20 and 2020-21.
As the Ind-AS is required to be adopted by certain companies for financial year 2016-17 mandatorily, these amendments will take effect from 1st April, 2017 and will, accordingly, apply in relation to the assessment year 20 17-18 and subsequent assessment years.
[Clause 47]
Extract of relevant clause from Finance Bill, 2017
Amendment of section 115JB.
47. In section 115JB of the Income-tax Act,—
(i) in sub-section (2),—
(a) for the words “profit and loss account” wherever they occur, the words “statement of profit and loss” shall be substituted;
(b) for the words and figures “the Companies Act, 1956” wherever they occur, the words and figures “the Companies Act, 2013” shall be substituted;
(c) in clause (a), for the words and figures “Part II of Schedule VI”, the word and figures “Schedule III” shall be substituted;
(d) in clause (b), for the words, brackets and figures “proviso to sub-section (2) of section 211”, the words, brackets and figures “second proviso to sub-section (1) of section 129” shall be substituted;
(e) in the first proviso, for the word and figures “section 210”, the word and figures section 129” shall be substituted;
(ii) after sub-section (2), the following sub-sections shall be inserted, namely:—
‘(2A) For a company whose financial statements are drawn up in compliance to the Indian Accounting Standards specified in Annexure to the Companies (Indian Accounting Standards) Rules, 2015, the book profit as computed in accordance with Explanation 1 to sub-section (2) shall be further––
(a) increased by all amounts credited to other comprehensive income in the statement of profit and loss under the head “Items that will not be re-classified to profit or loss”;
(b) decreased by all amounts debited to other comprehensive income in the statement of profit and loss under the head “Items that will not be re-classified to profit or loss”;
(c) increased by amounts or aggregate of the amounts debited to the statement of profit and loss on distribution of non-cash assets to shareholders in a demerger in accordance with Appendix A of the Indian Accounting Standards 10;
(d) decreased by all amounts or aggregate of the amounts credited to the statement of profit and loss on distribution of non-cash assets to shareholders in a demerger in accordance with Appendix A of the Indian Accounting Standards 10:
Provided that nothing contained in clause (a) or clause (b) shall apply to the amount credited or debited to other comprehensive income under the head “Items that will not be re-classified to profit or loss” in respect of—
(i) revaluation surplus for assets in accordance with the Indian Accounting Standards 16 and Indian Accounting Standards 38; or
(ii) gains or losses from investments in equity instruments designated at fair value through other comprehensive income in accordance with the Indian Accounting Standards 109:
Provided further that the book profit of the previous year in which the asset or investment referred to in the first proviso is retired, disposed, realised or otherwise transferred shall be increased or decreased, as the case may be, by the amount or the aggregate of the amounts referred to in the first proviso for the previous year or any of the preceding previous years and relatable to such asset or investment.
(2B) In the case of a resulting company, where the property and the liabilities of the undertaking or undertakings being received by it are recorded at values different from values appearing in the books of account of the demerged company immediately before the demerger, any change in such value shall be ignored for the purpose of computation of book profit of the resulting company under this section.
(2C) For a company referred to in sub-section (2A), the book profit of the year of convergence and each of the following four previous years, shall be further increased or decreased, as the case may be, by one-fifth of the transition amount:
Provided that the book profit of the previous year in which the asset or investment referred to in sub-clauses (B) to (E) of clause (iii) of the Explanation is retired, disposed, realised or otherwise transferred, shall be increased or decreased, as the case may be, by the amount or the aggregate of the amounts referred to in the said sub-clause relatable to such asset or investment:
Provided further that the book profit of the previous year in which the foreign operation referred to in sub-clause (F) of clause (iii) of the Explanation is disposed or otherwise transferred, shall be increased or decreased, as the case may be, by the amount or the aggregate of the amounts referred to in the said sub-clause relatable to such foreign operations.
Explanation.––For the purposes of this sub-section, the expression––
(i) “year of convergence” means the previous year within which the convergence date falls;
(ii) “convergence date” means the first day of the first Indian Accounting Standards reporting period as defined in the Indian Accounting Standards 101;
(iii) “transition amount” means the amount or the aggregate of the amounts adjusted in the other equity (excluding equity component of compound financial instruments, capital reserve, and securities premium reserve) on the convergence date but not including the following,––
(A) amount or aggregate of the amounts adjusted in the other comprehensive income on the convergence date which shall be subsequently re-classified to the profit or loss;
(B) revaluation surplus for assets in accordance with the Indian Accounting Standards 16 and Indian Accounting Standards 38 adjusted on the convergence date;
(C) gains or losses from investments in equity instruments designated at fair value through other comprehensive income in accordance with the Indian Accounting Standards 109 adjusted on the convergence date;
(D) adjustments relating to items of property, plant and equipment and intangible assets recorded at fair value as deemed cost in accordance with paragraphs D5 and D7 of the Indian Accounting Standards 101 on the convergence date;
(E) adjustments relating to investments in subsidiaries, joint ventures and associates recorded at fair value as deemed cost in accordance with paragraph D15 of the Indian Accounting Standards 101 on the convergence date; and
(F) adjustments relating to cumulative translation differences of a foreign operation in accordance with paragraph D13 of the Indian Accounting Standards 101 on the convergence date.’;
(iii) in Explanation 1,—
(a) for the words “net profit”, the word “profit” shall be substituted;
(b) for the words “profit and loss account” wherever they occur, the words “statement of profit and loss” shall be substituted;
(c) in clause (k) for the words “profit or loss account”, the words “statement of profit and loss” shall be substituted;
(iv) in Explanation 3,—
(a) for the words, brackets and figures “proviso to sub-section (2) of section 211 of the Companies Act, 1956”, the words, brackets and figures “second proviso to sub-section (1) of section 129 of the Companies Act, 2013” shall be substituted;
(b) for the words “profit and loss account”, the words “statement of profit and loss” shall be substituted;
(c) for the words and figures “Part II and Part III of Schedule VI to the Companies Act, 1956”, the words and figures “Schedule III to the Companies Act, 2013” shall be substituted.
