The Income Tax Department has decided to reopen assessments for three years, up to 2006-07, for companies paying the minimum alternate tax (MAT)., for companies paying the minimum alternate tax (MAT). MAT, inserted in the Income Tax Act in 1996-97, is meant to make those companies pay tax which earn profit and pay dividend to shareholders but do not pay tax to the government. Under Section 115 JB of the Income Tax Act, such companies pay 18 per cent of their book profit as tax.

Officials said the assessment of such companies would be reopened to scrunitise the demand for tax within the scope of the new amendment made in Union Budget 2009. The Budget had added provisions made by MAT paying companies for diminishing the value of any asset as an additional item to be considered for calculation of book profit for the purpose of taxation. This amendment was made with retrospective effect from 2006-07.

Diminution of value, or diminished value, is the loss of financial worth of something because of damage. It could be vehicles, property, or other financial investments. The amount by which the value was diminished also depends on the extent of damage and this amount is often is contested by different parties, said the source.

Sources added that annually more than half of all tax paying companies in a certain zone pay tax under MAT. For the western zone, comprising Mumbai, Nagpur and Gujarat, which contributes more than half of the total corporate tax, the number of MAT paying companies in a single year far exceeds the number of companies paying normal tax.

Officials added that normally companies claim provisions made for diminution in value of assets as ‘unascertained liability’, which means the amount of diminution in the value of asset varies, depending on the type of company and assets. It could range from 30 to 70 per cent of the value of asset. This, in turn, is used to depress the book profit which is the basis for paying MAT.

“By reopening such cases, the amount availed as expenditure will be scrutinised and if the department feels the expenses availed under provision for diminution of asset is more than what it should have, then excess expenses will be added back to the calculation of book profit. Thus, demand will go up, since MAT will be paid under an extended base of book profit,” explained the official.

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June 2021