Issues – Minimum Alternate Tax (MAT) – Section 115JB

Section 115JB was inserted by the Finance Act, 2000, w.e.f. 01/04/2001. It had replaced Section 115JA, which was inserted by the Finance Act, 1996 w.e.f. 01/04/1997. Section 115JA was replacement of earlier Section 115J, which was inserted by the Finance Act, 1987 w.e.f. 01/04/1988. The objective and philosophy of the provisions of Section 115J, Section 115JA and Section 115JB are same; however, the method of computation has been slightly changed in these sections.

It was seen by the policy framers that certain companies were making huge profits and were also declaring substantial dividends; however, they were not paying any tax as a result of various tax concessions and incentives and because of managing their affairs in such a way as to avoid payment of income-tax. Therefore, Section 115J was introduced in the Income-tax Act, 1961 and subsequently it was replaced by Section 115JA and Section 115JB.

As per sub Section (1) of Section 115JB of the Act, if total income of a company in any year commencing from A.Y. 2012-13 is less than eighteen and one half per cent on its book profit, then such book profit shall be deemed to be the total income of the assessee company and the tax payable by such company will be eighteen and one half per cent of such book profit.

Sub Section (2) of Section 115JB mandates that every company shall prepare its statement of profit and loss in accordance with the provisions of  Schedule III  to the Companies Act, 2013.

For arriving book profit of the company, the profit as shown in the statement of profit and loss as per the provisions of the Companies Act is to be increased by the items mentioned in clause (a) to (k) to Explanation-1 of Section 115JB {if items (a) to (i) are debited to the statement of profit and loss or if any amount referred to in clause (j) is not credited to the statement of profit and loss and is to be reduced by the items mentioned in clause (i) to (viii) to Explanation-1 of Section 1 15JB of the Act.

It is to be noted that rate of eighteen and one half per cent is applicable for A.Y. 2012-13 onwards. These rates were eighteen per cent for A.Y. 2011-12 and fifteen per cent for A.Y. 2010-11.

There are many issues related to Section 115JB, which have been the matter of contention between the assessees and the Department. Some of these issues have been settled by way of amendment in the Act or by way of judgements of the Hon’ble Supreme Court; however, some of these issues are still controversial. Both type of issues are discussed here under:

1. The amount of deferred tax and the provision therefore:Earlier deferred tax was not added back by the assessees while computing book profit on the plea that this is not an income-tax as mentioned in clause (a) in Explanation-1. Clause (h) was inserted in the Explanation to remove this difficulty. Now, if deferred tax or any provision on this account is debited in tatement of profit and loss, then it has to be added back as per clause (h) of Explanation-1. This amendment was made by the Finance Act, 2008 and it has been made effective from A.Y. 2001-02 onwards.

2. The provision for doubtful debts:Majority of the A.Os. were adding this item while computing book profit under clause(c) of Explanation-1. Clause (c) refers to the amount set-aside for liabilities, other than ascertained liabilities. The Hon’ble Supreme Court in the case of CIT v/s HCL Comnet Systems & Services Ltd., 174 Taxman 118 has held that provision for doubtful debts is not a liability. The provision for doubtful debt is a provision made for likelihood of ir-recoverability of any money advanced by the assessee. Hence, by no stretch of imagination it can be termed as liability.

The Act has now been amended and clause (i) has been inserted in Explanation-1 by Finance Act, 2009 w.r.e.f. 01/04/2001. As per clause (i), the amount or amounts set-aside as provision for diminution in the value of any asset has to be added back in net profits, if this amount was debited to P&L account.

Thus, now provision for doubtful debts should be added under clause (i) of Explanation-1.

3. Scope of the term ‘Income-tax’:

As per clause (a) the amount of Income-tax paid or payable and the provision therefor is to be added back while computing book profit, if the same is debited in the tatement of profit and loss. Whether tax on distributed profits or surcharge on Income-tax is covered in clause (a) was a matter of dispute between the assessees and the Department. This dispute has been settled by way of insertion of Explanation-2 in Section 115JB of the Act. Explanation-2 has been inserted by the Finance Act, 2008 w.r.e.f. 01/04/2001. As per this explanation, dividend distribution tax, surcharge, education cess and secondary and higher education cess is included in the definition of Income-tax for the purposes of clause (a).

A peculiar situation arises sometimes when it is observed that the companies make provision for taxation to be paid by their foreign branches under tax laws of those countries. The question arises that such tax payable in foreign countries is to be added back or not while computing book profits. The AAR in the case of Bank of India, In re AAR No.732 of 2006 has held that such provision is required to be added back to book profits, because ‘income-tax’ in clause (a) does not mean only income-tax payable in India..

4. Applicability of the provisions of Advance tax:It has been clarified by Circular No.13/2001 dated 09/11/2001 that provisions of advance tax are also applicable on the companies paying MAT and interest under Section 234B & 234C is leviable in case of default by these companies. This view has been affirmed by the Honb’le Supreme Court in the case of JCIT vs. Rolta India Ltd. reported in 196 Taxman 594.

5. Tax credit under Section 115JAA and calculation of interest under Section 234B:The controversy in this regard has been settled in favour of the assessee by way of substitution of explanation to sub-section(1) of Section 234B of the Act. The tax credit under Section 115JA has to be given before calculating the shortage in respect of payment for advance tax. This explanation was substituted by the Finance Act, 2006 and is applicable from A.Y. 2007-08 onwards.

6. Depreciation on account of revaluation of assets:Earlier there was a dispute whether higher amount of depreciation on re-valued assets can be allowed while computing book profit. The dispute has been settled now by way of amendment in the Act. The depreciation on account of revaluation of assets cannot be reduced while calculating book profit and this can be understood from combined reading of clause (g) and clause (iia) of Explanation-1. The amount of depreciation is to be added back to the net profits, if debited to P&L account as per provisions of clause (g) of Explanation-1. As per the provisions of clause (iia), the amount of depreciation debited to the P&L account (excluding the depreciation on account of revaluation of assets) is to be reduced from the net profits. The net effect is that depreciation on account of revaluation of assets is not to be reduced for the purpose of computation of book profit. Clause (g) and clause (iia) were inserted in the Act by the Finance Act, 2006 and are applicable for A.Y. 2007-08 onwards.

However, it has to be noted that if any amount is withdrawn from revaluation reserve and credited to P&L account, the amount to the extent of depreciation on account of revaluation of assets would be reduced while computing the book profit as per the provisions of clause (iib) of explanation-1.

7. Amount withdrawn from any reserve:

As per clause (i) of Explanation-1 to Section 115JB of the Act, the amount withdrawn from any reserve or provision and credited to the statement of profit and loss is to be reduced while computing book profits only if the book profit was increased by amount of reserve in the year in which the reserve was created.

Therefore, the A.O. should examine the P&L account of the year in which the reserved was created. The P&L account of the assessee company should be effectively credited by the amount of reserve in the year of creation and it should not be merely an adjustment contra entry. The Hon’ble Supreme Court in a very well reasoned and speaking judgement in the case of Indo Rama Synthetics (I) Ltd. vs. CIT, 196 Taxman 535 has discussed this provision at length. This judgement should be read by every A.O. in order to clarify concepts regarding reserves and credits in P&L account.

It is to be further noted that amount transferred to every kind of reserve is to be added to net profit to determine book profit. Therefore, if any amount is transferred to reserve account under Section 36(1)(viii), 80IA(6), 10A(1A) or 10AA of the Act; though it is allowed as a deduction while computing the total income under normal provision, it should be added back to compute book profits, if debited to P&L account.

8. Carry forward of unabsorbed depreciation and business losses:

Taxation on the basis of book profits does not affect the carry forward and set off of business losses and unabsorbed depreciation under the normal provisions of the Act. This has been amply clarified in sub-section (3) of Section 115JB of the Act. Carry forward of losses for the purposes of book profits and carry forward of the losses for the purposes of normal provisions of the Act are two parallel streams and each stream is unaffected and untouched by the other stream. It is to be further observed that carry forward of losses and unabsorbed depreciation under the normal provisions of the Act will be computed as per the provisions of Income-tax Act. On the other hand the carry forward of business losses and unabsorbed depreciation for the purposes of book profits will be as per the books of account of the assessee company.

The hon’ble Supreme Court in the case of Karnataka Small Scale Industries Development Corporation vs. CIT, 258 ITR 770 has held that the brought forward business losses, unabsorbed depreciation or investment allowance etc determined as per the normal provisions of the Act should be set-off against the total income as per the normal provisions and only balance amount should be carried forward, even if when the tax has been determined and paid on the basis of book profits and not on the basis of total income as per the normal provisions.

The AAR in the case of Rashtrya Ispat Nigam Ltd., In re reported in 155 Taxman 60 has ruled that the applicant does not have the option to reduce the current year’s profits by the loss brought forward or unabsorbed depreciation for the purpose of carry forward under Section 115JB in its accounts in a manner different from the manner adopted for determination of book profits under Section 1 15JB of the Act.

In the above case, the applicant had correctly applied the provisions of Section 115 JB in the current year by reducing brought forward business losses , but while carrying forward it had adjusted the book profit from unabsorbed depreciation. This was done in order to ensure that figure of carried forward business losses does not become nil in near future. The applicant pleaded that it has right to set-off income as per its option in its books of account and it is not bound by the manner of computation specified in Section 1 15JB for carry forward of business losses and unabsorbed depreciation.

The AAR did not accept the contentions of the assessee. Although the ruling of AAR is only applicable for a specific case under consideration, but it has a persuasive value. Further, the reasoning given in the ruling is very sound. Therefore, the A.O. should carefully scrutinise the manner of computation of carry forward of losses and unabsorbed depreciation in earlier years, while computing book profit. The correct manner has also been explained in Circular No.495, dated 22/09/1987.

9. The amount of loss brought forward or unabsorbed depreciation, whichever is less as per books of account:

As per clause (iii) of Explanation-1 of Section 11 5JB of the Act, the amount of loss brought forward or unabsorbed depreciation, whichever is less as per books of account has to be reduced for the purpose of computation of book profit other than the company referred to in clause (iih) of Explanation-1 . The controversy regarding whether loss shall include depreciation or whether provisions of clause (iii) will apply in case if any of these amounts is nil has been put to rest by insertion of explanation in clause (iii) itself. It has been clarified that the business loss shall not include depreciation loss and should be calculated after reducing deprecation amount. It has been further clarified that the provisions of this clause shall not apply if the amount of loss brought forward or unabsorbed depreciation is nil.

However, one more debatable issue whether accumulated figures of unabsorbed depreciation/brought forward loss is to be taken into account and lesser of these two is to be reduced or whether unabsorbed deprecation/brought forward loss is to be reckoned on year to year basis has not been resolved. The view of the Department is that the quantification should be done on year to year basis. The view of the assessee is that the quantification should be done on the accumulated amount. This can be understood from the following table –

In the above case, the assessee had reduced Rs. 1,51,15,393 while computing book profit as per clause (iii). However, the A.O. allowed reduction of only Rs.1,06,61,828. The A.O. took the correct plea that since there was no loss in AY 2001-02, therefore, no amount was available for set-off as per clause (iii) in this year.

Although the ITAT in the case of Amline Textiles (P) Ltd v/s ITO, 27 SOT, 152 did not accept the plea of the Department and allowed the appeal of the assessee; however with due respect to ITAT, the view taken by it in the above case is not the correct proposition of law and reasoning given in the Order is flawed. Therefore, The A.O. should allow the reduction on year to year basis in the correct spirit of law and not on the consolidated amount.

Clause (iih) of Explanation-1, says the aggregate amount of unabsorbed depreciation and loss brought forward in case of a company against whom an application for corporate insolvency resolution process has been admitted by the Adjudicating Authority under section 7 or section 9 or section 10 of the Insolvency and Bankruptcy Code, 2016 (31 of 2016) shall be reduced from the profit shown in statement of profit and loss to arrive at book profit.

10. Treatment of capital gains:

There may be instances where the surplus arising out of transfer of capital assets is taken directly by the assessee company to the reserves and said transaction is not routed through the P&L account. The assessee may take plea that since this transaction is not routed through the P&L account, therefore, the A.O. cannot make any adjustment in view of the judgement of the Hon’ble Supreme Court in the case of Apollo Tyres Ltd. vs. CIT.

The Hon’ble Bombay High Court in the case of CIT vs. Veekaylal Investment Co. (P) Ltd., 116 Taxman 104 has held that capital gains would be part of computation of book profits. It has been held by the Hon’ble high Court that under clause (2) of part-II of Schedule VI to the Companies Act where a company receives the amount on account of surrender of leasehold rights, the company is bound to disclose in the P&L account the said amount as non recurring transaction or a transaction of an exceptional nature irrespective of its being capital or revenue in nature. It would be inappropriate to directly transfer such amount to capital reserve. Such receipts are also covered by clause 2 (b) of Part-II of Schedule VI of the Companies Act which, inter-alia, states that P&L account shall disclose every material feature including credits or receipts and debits or expenses in respect of non recurring transactions or transactions of exceptional nature. The Hon’ble High Court further held that capital gains would certainly be one of the various items whose information is required to be given to the share holders under clause 3 (xii) (b). The Hon’ble High Court overruled the order of the Calcutta Special Bench of ITAT in the case of Sutlej Cotton Mills Ltd. vs. Asst. CIT, 199 ITR 164 in this case.

It is to be kept in mind by the A.O.s that even if the long term capital gains is nil because of any exemption like exemption under Section 54E of the Act as per the normal provisions of the Act, then also long term capital gains is to be included while computing book profits.

11. Scope of scrutiny of P&L account by the A.O. while applying MAT provisions:

The Hon’ble Supreme Court in the landmark judgement of Apollo Tyres Ltd. vs. CIT, 122 Taxman 562 has held that the A.O. while computing the income under Section 1 15J has only the power of examining whether the books of account are certified by the authorities under the Companies Act as having been properly maintained in accordance with the Companies Act. The A.O. thereafter has limited power of making additions and reductions as provided for in the Explanation to the said section. To put it differently, the A.O. does not have the jurisdiction to go behind the net profit shown in the P&L account except to the extent provided in the Explanation to Section 115J.

In the case of Malayala Manorama Co. Ltd., the A.O. observed that the depreciation debited in the P&L account as per the IT Rules was not admissible and the company should have debited depreciation as per the provisions of the Companies Act. The case travelled upto the Supreme Court. Following the judgement in the case of Apollo Tyres, the Hon’ble Supreme Court did not accept the argument of the Revenue that the A.O. can re-scrutinize the account and satisfy himself that these accounts are prepared as per the provisions of the Companies Act.

Fortunately, Hon’ble Supreme Court in the case of Dynamic Orthopaedics (P) Ltd. vs. CIT reported in 190 Taxman 288 has differed from the above judgement delivered in the case of Malayala Manorama Co. Ltd. vs. CIT 169 Taxman 471 and referred the matter to a larger Bench of the Court.

Therefore, issue of scrutiny of P&L account prepared by the Company is still wide open and it is expected that the issue will be decided by a larger Bench of the Supreme Court.

12. Applicability of MAT provisions on statutory corporations and boards etc.:

Sometimes it is observed that some corporation or boards are governed by specific Acts and they are created by such Acts. In the Income-tax proceedings, their status is Company. However, they are not required to prepare their P&L account and balance sheet as per the provisions of the Companies Act and they are required to prepare their P&L account as per their governing Acts. In the case of Kerala State Electricity Board vs. DCIT reported in 196 Taxman 1, the Hon’ble Kerala High Court observed that MAT provisions are not applicable on Kerala State Electricity Board since it is required to prepare its P&L account as per Electricity Act and not as per the Companies Act.

If any corporation/board is not required to prepare its P&L account as per the Companies Act, then it will be very difficult to put forth the Revenue’s case for applicability of MAT provisions. However, this difficulty has been removed in the case of certain companies by way of insertion of clause(b) in sub-section (2) in Section 115JB by the Finance Act, 2012. It has been been mandated in this clause that every company , to which proviso to sub-section (2) of Section 211 of the Companies Act is applicable, shall prepare its P&L account as per the Act governing such company for the purposes of Section 115 JB.

The following companies have been mentioned in second proviso to sub-section (1) of section 129 of the Companies Act, 2013

(i)  Insurance or banking company.

(ii)  Any company engaged in the generation or supply of electricity.

(iii) Any other class of company for which a form of financial statement has been specified in or under the Act governing such class of company.

13. Arrears of depreciation:

Although, the assessee has an option under the Companies Act of adopting a straight line method or WDV method for claiming depreciation; however, deduction of extra depreciation as arrears of past years while computing book profit is not allowable, as has been held by the Hon’ble M.P. High Court in the case of Gilt Pack Ltd. vs. Union of India reported in 163 Taxman 331. While arriving this conclusion, the Hon’ble High Court followed the judgement of the Hon’ble Supreme Court in the case of Karnataka Small Scale Industries Development Corporation vs. CIT.

14. Prior period expenses:

The predominant view of the Courts is that if prior period expenses are debited in P&L account in accordance with the provisions of the Companies Act, then such expenses are liable for deduction.

However, if it is found by the A.O. that prior period expenses are not debited in P&L account and these expenses are shown in P&L appropriation account, then the A.O. should not allow these expenses to be reduced while computing book profits since the judgement of the Hon’ble Supreme Court in the case of Apollo Tyres is equally applicable to the assessees also. The judgements of the Hon’ble Kerala High Court in the case of Sree Bhagwathy Textiles Ltd. vs. ACIT, 199 Taxman 14 and Hon’ble Madras High Court in the case of CIT vs. Swamiji Mills Ltd., 25 Taxmann.com 110 are the judgements in the favour of the Department on this issue.

One more example that the judgement of the Supreme Court in the case of Apollo Tyres is equally applicable to the assessee is the case of the Gujarat State Petroleum Corporation Ltd. vs. JCIT reported in 308 ITR (AT) 248 (Ahmedabad). The ITAT, Ahmedabad following the judgement in the case of Apollo Tyres has held that deduction under Section 42 for business engaged in prospecting for extraction or production of mineral oil not debited in the accounts cannot be claimed as deduction while computing book profits.

15. Applicability of MAT provisions on foreign companies:The applicability of MAT provisions on foreign companies has been a matter of dispute since long. The Authority for Advance Ruling in No.14 of 1997, In re 234 ITR 335 held that Dutch Company was liable to tax on book profits. In the case of Timken Company, In re 326 ITR 193, the AAR has held that since the non resident US Company has no PE in India, therefore, it cannot be liable for MAT.

Explanation 4.—For the removal of doubts, it is hereby clarified that the provisions of this section shall not be applicable and shall be deemed never to have been applicable to an assessee, being a foreign company, if—

(i)  the assessee is a resident of a country or a specified territory with which India has an agreement referred to in sub-section (1) of section 90 or the Central Government has adopted any agreement under sub-section (1) of section 90A and the assessee does not have a permanent establishment in India in accordance with the provisions of such agreement; or

(ii)  the assessee is a resident of a country with which India does not have an agreement of the nature referred to in clause (i) and the assessee is not required to seek registration under any law for the time being in force relating to companies.]

[Explanation 4A.—For the removal of doubts, it is hereby clarified that the provisions of this section shall not be applicable and shall be deemed never to have been applicable to an assessee, being a foreign company, where its total income comprises solely of profits and gains from business referred to in section 44B or section 44BB or section 44BBA or section 44BBB and such income has been offered to tax at the rates specified in those sections.]

16. MAT credit of amalgamated Company to the amalgamating Company:The tax credit determined under Section 11 5JAA of the Act is allowed as set off in a year in which tax is payable on the total income in accordance with the normal provisions of the Act. Set off of MAT credit brought forward in allowed to the extent of the difference between tax on total income and tax which would have been payable under Section 115JB of the Act. As per the provisions of sub-section (1A) of Section 1 15JAA of the Act, if tax is paid by any company under Section 115JB then credit in respect of the tax so paid shall be allowed to him in accordance with the provisions of this section.

It is clear from sub Section (1A) that tax credit is to be allowed to the company which has paid taxes under Section 115JB. When amalgamating company has not paid any tax and tax was paid by the amalgamated company, then credit cannot be provided to the amalgamating company. Further, wherever certain benefits are to be provided to the amalgamating company, then the same have been mentioned in the Act itself. Since there is no specific provision for credit of MAT in the case of the amalgamating company, therefore, the A.O. should not allow any credit to the amalgamating company.

Moreover wef A.Y 2018-19

 where the amount of tax credit in respect of any income-tax paid in any country or specified territory outside India, under section 90 or section 90A or section 91, allowed against the tax payable under the provisions of sub-section (1) of section 115JB exceeds the amount of such tax credit admissible against the tax payable by the assessee on its income in accordance with the other provisions of this Act, then, while computing the amount of credit under this sub-section, such excess amount shall be ignored.

17. Applicability of MAT on undertakings covered under Sections 10A & 10B:

Earlier MAT was not applicable on income of the units covered under Section 10A and 10B. Now, these undertakings have been brought under MAT provisions from A.Y. 2008-09 onwards.

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Author – Sanjay Dhariwal , JCIT, Central Range 2, Ahmedabad

(Republished With Amendments)