MAT need not be based on audited accounts not complying with the prescribed format: ITAT Mumbai

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

• The profit was earned on transfer of an asset which was not a business trading asset, but a capital asset. Hence, the profit, being capital in nature, was not required to be credited to the P&L.

• The accounts were certified as complying with the prescribed format by the auditors, were approved by the shareholders in the AGM and were filed with the ROC.

• The Supreme Court (SC) in the case of Apollo Tyres Ltd. (255 ITR 273) held that in the case of a taxpayer who satisfies the above conditions, the Tax Authority cannot make any adjustment to the profit, as disclosed in the accounts, for computing MAT.

Contentions of the Tax Authority

• The accounting treatment of directly crediting profit on sale of an asset without being routed through the P&L, is not in accordance with the prescribed format.
• The Tax Authority is not precluded from making any adjustment to the profit as per the P&L merely because the auditors have certified the accounts as complying with the prescribed format, when apparently it is not so.
• The SC ruling (supra), relied upon by the Taxpayer, dealt with an issue of whether the Tax Authority has the power to make adjustments to the book profit when the accounts are prepared in accordance with and are certified as complying with the prescribed format by the auditors. The said ruling cannot be relied upon in a case where accounts are not complying with the prescribed format.

Ruling of the ITAT

• The prescribed format, inter alia, mandates that the P&L shall be so prepared so that it discloses the following:

(1) Every material feature, including credits or receipts and debits or expenses, in respect of transactions that are non­recurring or exceptional.

(2) Profit or loss (of material amount) in respect of transactions which are ordinarily not undertaken or are of non-recurring nature.

• In the present case, the profit is of a material amount and should have been routed through the P&L for the accounts to be compliant with the prescribed format. Apparently, therefore, the accounts prepared by the Taxpayer, certified by the auditors and approved by the shareholders are not in compliance with the prescribed format.

• In the SC ruling (supra), it was held that the accounts prepared by a taxpayer, certified as complying with the prescribed format by the auditors and adopted by the shareholders, cannot be modified by the Tax Authority for the MAT computation . However, the ruling does not convey that in the cases when the accounts are not prepared as per the prescribed format, the Tax Authority cannot make any adjustment to the book profit only because the auditors have certified the accounts as complying with the prescribed format and the shareholders have approved the same.
• In the present case, as the accounts are apparently not in compliance with the prescribed format, the Tax Authority is justified in making the appropriate adjustment to the profit as shown in the P&L, for MAT computation.

Comments

This ruling reiterates the principles laid down by the SC in Apollo Tyres Ltd. (supra) that the Tax Authority, for MAT computation, cannot make any adjustment to the accounts prepared by a taxpayer in the prescribed format, certified as complying with the said format by the auditors and approved by the shareholders.

However, when the accounts are apparently not complying with the prescribed format, regardless of the fact that the auditors have certified them as complying, the Tax Authority, for MAT computation, may make appropriate adjustments to the profit as shown in the P&L,

The ruling also suggests that the profit on sale of assets needs to be included in the P&L and that it forms a part of the book profit for MAT computation.

NF