Mumbai Income Tax Appellate Tribunal (ITAT) ruled out in the case of Bombay Diamond Co. Ltd. (Taxpayer) [2009-TIOL-760- 1TAT-MUM] on the issue of whether the Tax Authority has power to adjust the book profit base for the computation of Minimum Alternate Tax (MAT), if it is apparently found that audited accounts are not prepared in accordance with Schedule VI (prescribed format) of The Companies Act, 1956 (Co Act).
The ITAT held that for the computation of MAT, profits disclosed as per the audited accounts should be adopted, provided the accounts are prepared in the prescribed format. If the accounts are not so prepared, the Tax Authority may substitute the amount declared as per the Profit and Loss Account (P&L) with the appropriate amount, regardless of the fact that the accounts are certified as complying with the prescribed format by auditors.
Background and facts of the case
- As per Section 115JB (Section) of the Indian Tax Law (ITL), a Taxpayer, which is a company, is required to prepare the P&L for the tax year in the prescribed format and to pay MAT at the rate of 15% of the book profit. This requirement to pay MAT is applicable in those cases where tax payable, as per regular provisions of the ITL, is lower than the MAT, computed in accordance with the provisions of the Section.
- The Taxpayer earned profit on transfer of rights in an agreement through which it had agreed to purchase a building (profit). The Taxpayer took the view that as the rights in the agreement were related to the purchase of a capital asset, the profit was capital in nature.
- The Taxpayer, in its accounts, directly carried the profit to the Balance Sheet under the head Reserves and Surplus, without routing it through the P&L. The accounts were certified as complying with the prescribed format by the auditors, were approved by the shareholders in the Annual General Meeting (AGM) and were filed with the Registrar of Companies HAROC).
- In view of the above, the Taxpayer did not consider the profit as part of the book profit for the computation of MAT.
- The Tax Authority held that, as per the prescribed format, the profit ought to have been credited to the P&L and that it forms part of the book profit for the computation of MAT.
- On an appeal, the first appellate authority held that the Tax Authority has no power to adjust the book profit as per the audited accounts which are approved by the shareholders and filed with the ROC. Accordingly, it ruled in favor of the Taxpayer.
- The Tax Authority preferred an appeal before the ITAT.
Contentions of the Taxpayer
