MAT u/s 115JB – no more a complete code?

Background of Minimum Alternate Tax-:

1. There were (are?) companies which used to report huge profits and distributing huge dividends and at the same time paying very small tax liability using the provisions of the Act.

2. To curb the above practices, MAT on book profit was introduced which was chargeable on reported profits with effect from 1-4-1988 with section 115J. MAT – Minimum Alternate Tax, as the words suggests, is the minimum contribution that an assessee should make by way of taxes.

3. Para 37 of memorandum to the Finance Bill 1987 reads as follows

37. under the existing provisions of income tax Act, certain deductions are allowed in the computation of profits and gains of business or profession. Various deductions are also allowed under chapter VI-A of the Income Tax Act in computing total income. As a result of these concessions, certain companies making huge profits, are managing their affairs in such a way as to avoid payment of income-tax.

with a view to making the tax system more progressive, a new chapter XII-B is proposed to be inserted in the Income Tax Act

4. Now with the recent case laws, some whisper is there that, there can be a dent to the above proposition as well whereby a ratio is emerging that

a) Income exempt under Chapter VI-A is not taxable

b) chapter XII-B is not a complete code.

5. For a learned reader, who can grasp the points just by reading it, he can go through the following two headings only.

Why This Article-:

6. whether any other adjustment i.e. other than as envisaged in section 115JB can be made while computing book profit ? If yes, which type of adjustments?

7. Is there any short fall in the judicial law as has progressed till date?

8. Whether there is any conflict in the decisions referred to above?

9. This article was first published in “Sanhita” a publication by Pune Chapter of the Institute of Company Secretaries of India. It was sent for publication with the updates upto 21 August 2015. In that article, cognizance of the cases of Forever Diamonds and Garware Polysters was not taken as they were received on 22-Aug-2015.

My Personal opinion-:

10. Adjustments other than as envisaged in section 115JB can be made. On the basis of case law decided as of date, the adjustments are in the nature of keeping out the income which the Income Tax Act does not envisage to tax.

11. As of today, there are no case laws which say that, while giving effect to the logic of this section, there can be an increase in book profit as well.

12. In my opinion, there is a conflict. Revenue may take a stand that if, in principle, there can be deviation for giving effect to the purpose of the intention behind the section, there should have been addition to book profit for adding waiver of loan to the credit of profit and loss account.

13. The procedural portion that can be adopted by revenue without disturbing order of Supreme Court is given in point 29 & 30

Progress in this area

a. Supreme Court in Apollo Tyres Ltd. v/s C.I.T., reported in 255 ITR 273

b. [2015] ITA No. : 5996/Mum/2013 (Mumbai – Trib.) Garware Polysters Ltd August 14, 2015

c. [2015] (Bombay High Court) Forever Diamonds Pvt.Ltd. August 12, 2015 (Date of pronouncement) August 22, 2015 (Date of publication) ITA/No./1609 of 2013

d. [2013] 34 taxmann.com 250 (Karnataka HC) Mindtree Ltd. JUNE  12, 2013

e. [2015] 58 taxmann.com 116 (Mumbai – Trib.) Dharmayug Investments Ltd. JUNE 10, 2015

f. [2014] 47 taxmann.com 329 (Cochin – Trib.) Nilgiri Tea Estate Ltd. JUNE  6, 2014

g. [2015] 60 taxmann.com 314 (Mumbai – Trib.) Shivalik Venture (P.) Ltd. AUGUST  19, 2015

14. It is worthwhile to mention a brief about above mentioned cases and ratio arising out of it.

[2015] 60 taxmann.com 314 (Mumbai – Trib.) Shivalik Venture (P.) Ltd. AUGUST  19, 2015

15. It was held that, something which is not within the definition of income itself as envisaged by the Income Tax Act, 1961 [the Act], can not be chargeable to tax under MAT on book profit.

16. Refer para 19 and 26 of the order

“19. In view of the ratio laid down by the Hon’ble Supreme Court in Appollo Tyres Ltd Vs. CIT (supra) and by the jurisdictional High Court in CIT Vs. M/s Akshay Textiles Trading & Agencies Pvt Ltd (supra), we hold that where the accounts of a Company are maintained as per the Provisions of Companies Act and are Certified by the Auditors to the effect that the same are maintained as per the requirements of the Companies Act and the same are approved by the shareholders of the company in its annual general meeting and filed before the Registrar of companies, the authenticity of such accounts has to be accepted by the Assessing Officer, while computing the book profits under section 115J/115JA/115JB of the I.T. Act. The assessing officer is however empowered to make such adjustments as provided for in the Explanation to the respective section.”

26. We shall now examine the scheme of the provisions of sec. 115JB of the Act. It is pertinent to note that the provisions of sec. 10 lists out various types of income, which do not form part of Total income. All those items of receipts shall otherwise fall under the definition of the term “income” as defined in sec. 2(24) of the Act, but they are not included in total income in view of the provisions of sec. 10 of the Act. Since they are considered as “incomes not included in total income” for some policy reasons, the legislature, in its wisdom, has decided not to subject them to tax u/s 115JB of the Act also, except otherwise specifically provided for. Clause (ii) of Explanation 1 to sec.115JB specifically provides that the amount of income to which any of the provisions of section 10 (other than the provisions contained in clause (38) thereof) is to be reduced from the Net profit, if they are credited to the Profit and Loss account. The logic of these provisions, in our view, is that an item of receipt which falls under the definition of “income”, are excluded for the purpose of computing “Book Profit”, since the said receipts are exempted u/s 10 of the Act while computing total income. Thus, it is seen that the legislature seeks to maintain parity between the computation of “total income” and “book profit”, in respect of exempted category of income. If the said logic is extended further, an item of receipt which does not fall under the definition of “income” at all and hence falls outside the purview of the computation provisions of Income tax Act, cannot also be included in “book profit” u/s 115JB of the Act. Hence, we find merit in the submissions made by the assessee on this legal point.

[2014] 47 taxmann.com 329 (Cochin – Trib.) Nilgiri Tea Estate Ltd. JUNE  6, 2014

17. The ITAT took a view that, agricultural income plus incomes like those on sale of personal effects which has not been envisaged by the income tax law for taxation.

[2015] 58 taxmann.com 116 (Mumbai – Trib.) Dharmayug Investments Ltd. JUNE  10, 2015

18. Per Contra, Mumbai ITAT has, on 10 June 2015, in the case of Dharmayug Investments Ltd.[3] has observed that, section 115JB is a complete code for taxation of MAT on book profit. Thus the sale of shares which is exempt u/s 10(38) has to be treated as per the section 115JB and not otherwise.

19. The courts have also held that this section is a complete code in itself and no other adjustment other than as prescribed u/s 115JB can be made to compute book profit.

[2013] 34 taxmann.com 250 (Karnataka HC) Mindtree Ltd. JUNE  12, 2013

20. It is noteworthy to refer to decision of Karnataka HC in the case of Mindtree Ltd. The assessee was in SEZ and was enjoying tax holiday under MAT, dividend distribution tax and normal income tax. By way of an amendment, the tax holiday u/s 115JB was withdrawn whereby requiring it to pay MAT where there was no actual income tax liability. The said amendment was upheld to be valid.

21. The constitutional validity of MAT on book profit u/s 115JB [ chapter XII-B, sections 115J to 115JB] has been upheld on the basis that it does not infringe the scope as envisaged in section 4 of the Act i.e. total income.

[2015] (Bombay High Court) Forever Diamonds Pvt.Ltd. August 12, 2015 (Date of pronouncement) August 22, 2015 (Date of publication) ITA/No./1609 of 2013

22. During the year, the company sold its rights in immovable properties and credited the profit thereof to reserves without routing it through Profit and Loss Account. The AO referred to the sub clause (xi) of clause-3 of Part-II of Schedule-VI as per which the assessee is required to show the amount of income earned from investment in the P/L Account, distinguishing between trade investments and other investments. It was thus mandatory for the company to show profit/loss on sale of assets in the P&L Account which had not been done. The AO thus concluded that the P/L account had not been prepared in accordance with Part-II and Part-III of Schedule-VI of the Companies Act.

23. The same position was reiterated by the Hon’ble High Court in case of CIT vs. Adbhut Trading Co. P. Ltd. (supra) in which it was held that once accounts including the P&L Account had been prepared and certified by authorities under the Companies Act, it was not open for the AO to state that P&L Account has not been prepared in accordance with the provisions of the Companies Act. The ld. DR pointed out that the Tribunal in case of Sumer Builders (P) Ltd. (supra) even after considering the judgment of the Hon’ble High Court of Bombay in case of CIT vs. Akshay Textiles Trading And Agencies P. Ltd. (supra), have held that the AO has power to re-cast the accounts prepared under the Companies Act, in case, these were not correctly prepared. Arguments advanced by the revenue have no merit in view of the issue having been already settled by the judgment.

24. Honourable High Court has also passed some strictures. Refer Para 5

It is also pertinent to note that while correcting this order dictated in Court, we found that in the grounds of appeal taken before us, the revenue concedes that the reliance in the impugned order on the decision of this Court in C.I.T. v/s Adbhut Trading Co. (P) Ltd., reported in 338 ITR 94, would conclude the issue. However, the grounds mention that the same need not be followed as it is not accepted by the revenue, although no appeal was filed to the Apex Court in view of low tax effect. In spite of the very issue being concluded by an order of this Court in respect of Section 115JB of the Act, the same was not pointed out at the hearing. Instead the counsel for the revenue insisted on seeking to make distinction between Sections 115JB and 115J of the Act without pointing out the decision of this Court in Adbhut Trading (supra) and taking up the Court’s time. We expect the counsel appearing before us to be candid and when matters are covered by orders of this Court or the Apex Court and to state so. This would ensure quicker disposal of matters.

[2015] ITA No. : 5996/Mum/2013 (Mumbai – Trib.) Garware Polysters ltd August 14, 2015

25. During the year, the company got cessation of liability of Rs. 3,52,78,700/- in one time settlement with banker in the form of waiver of principal amount of loan which were directly credited to ‘General Reserves’ in the balance sheet, which ought to have been routed through profit and loss account and therefore, would have form part of the book profit. The said loan was used for the purpose of capital expenditure.

26. The whole of the decision rests upon the decision of Supreme court in the case of Supreme Court in Apollo Tyres Ltd. v/s C.I.T., reported in 255 ITR 273 [2002] 122 TAXMAN 562 (SC)

27. Let’s examine the said decision. Reproducing the relevant portion of the said Judgement in a para phrased format.

4. For deciding this issue, it is necessary for us to examine the object of introducing section 115J which can be easily deduced from the Budget Speech of the then Finance Minister of India made in the Parliament while introducing the said section which is as follows :
   

“It is only fair and proper that the prosperous should pay at least some tax. The phenomenon of so-called ‘zero-tax’ highly profitable companies deserves attention. In 1983, a new section 80VVA was inserted in the Act so that all profitable companies pay some tax. This does not seem to have helped and is being withdrawn. I now propose to introduce a provision whereby every company will have to pay a ‘minimum corporate tax’ on the profits declared by it in its own accounts.

Under this new provision, a company will pay tax on at least 30 per cent of its book profit. In other words, a domestic widely held company will pay tax of at least 15 per cent of its book profit. This measure will yield a revenue gain of approximately Rs. 75 crores.”

5. The above Speech shows that the income-tax authorities were unable to bring certain companies within the net of income-tax because these companies were adjusting their accounts in such a manner as to attract no tax or very little tax.

It is with a view to bring such of these companies within the tax net that section 115J was introduced in the Income-tax Act with a deeming provision which makes the company liable to pay tax on at least 30 per cent of its book profits as shown in its own accounts. For the said purpose, section 115J makes the income reflected in the companies’ books of account as the deemed income for the purpose of assessing the tax. If we examine the said provision in the above background, we notice that the use of the words ‘in accordance with the provisions of Parts II and III of Schedule VI to the Companies Act’ was made for the limited purpose of empowering the assessing authority to rely upon the authentic statement of accounts of the company.

While so looking into the accounts of the company, an Assessing Officer under the Income-tax Act has to accept the authenticity of the accounts with reference to the provisions of the Companies Act which obligates the company to maintain its account in a manner provided by the Companies Act and the same to be scrutinised and certified by statutory auditors and will have to be approved by the company in its General Meeting and thereafter to be filed before the Registrar of Companies who has a statutory obligation also to examine and satisfy that the accounts of the company are maintained in accordance with the requirements of the Companies Act.

In spite of all these procedures contemplated under the provisions of the Companies Act, we find it difficult to accept the argument of the revenue that it is still open to the Assessing Officer to rescrutinise the accounts and satisfy himself that these accounts have been maintained in accordance with the provisions of the Companies Act. In our opinion, reliance placed by the revenue on sub-section (1A) of section 115J in support of the above contention is misplaced. Sub-section (1A) of section 115J does not empower the Assessing Officer to embark upon a fresh inquiry in regard to the entries made in the books of account of the company. The said sub-section, as a matter of fact, mandates the company to maintain its account in accordance with the requirements of the Companies Act which mandate, according to us, is bodily lifted from the Companies Act into the Income-tax Act for the limited purpose of making the said account so maintained as a basis for computing the company’s income for levy of income- tax.

Beyond that, we do not think that the said sub-section empowers the authority under the Income-tax Act to probe into the accounts accepted by the authorities under the Companies Act. If the statute mandates that income prepared in accordance with the Companies Act shall be deemed income for the purpose of section 115J, then it should be that income which is acceptable to the authorities under the Companies Act. There cannot be two incomes one for the purpose of Companies Act and another for the purpose of the Income-tax Act both maintained under the same Act.

If the Legislature intended the Assessing Officer to reassess the company’s income, then it would have stated in section 115J that ‘income of the company as accepted by the Assessing Officer’. In the absence of the same and on the language of section 115J, it will have to held that view taken by the Tribunal is correct and the High Court has erred in reversing the said view of the Tribunal.

Therefore, we are of the opinion that the Assessing Officer while computing the income under section 115J 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 Assessing Officer thereafter has the limited power of making increase and reductions as provided for in the Explanation to the said section. To put it differently, the Assessing Officer does not have the jurisdiction to go behind the net profit shown in the profit and loss account except to the extent provided in the Explanation to section 115J.

Analysis of Progress in this area-:

28. The ratio arising out of orders of tribunal is that, the incomes which are not envisaged to chargeability should be kept outside gamut of book profits as well.

29. The Supreme Court has pointed out that, there cannot be two incomes computed under the same Act.

30. In such a case, the Revenue may consider an option to apply to Registrar of Companies [ROC] to re-open the accounts so filed and get it declared that the accounts are not prepared in accordance with the Companies Act, 1956. In such a case, the ROC will pass an order for re-statement of financial statements. In such a case, AO will definitely have power to re-open / disturb the computation of book profit.

31. Generally that income which is exempt i.e. which is not treated as income as per the Act is given in Chapter III i.e. sections 10 to 13B. But there are many pockets in the Act where the receipt / income is not chargeable to tax. Following are the illustrations which has impact of reducing the book profits

• Receipt exempt u/s 47
• sale of personal effects of an individual like furniture etc.
• Gift from a relative as defined in sec 56.
• Amount inherited / received through will / in contemplation of death.

32. Per Contra, there are few incomes which do not enter computation of book profit but if considered will have impact of increasing the book profit like

• value of second house – deemed let out.
• receipt of a subsidy as mentioned in section 43. [though vide Finance Act, 2015 there is a change.]
• treatment of investments as stock in trade in case of banking and financial institutions.
• transfer pricing adjustment u/s 92C being at Arm’s length price
• adjustment for consideration in case of capital gain u/s 50C.

33. The reason for drawing attention to above points is that, the pendulum of ratio arising out in points no 28 should swings on both the sides as referred in points 31 and 32 above.

34. If one reads the section 115JB, it starts with non obstante clause. The operative portion is reproduced below.

35. Notwithstanding anything contained in any other provision of this Act, where in the case of an assessee, being a company, the income-tax, payable on the total income as computed under this Act in respect of any previous year, is less than [18.5%] of its book profit, such book profit shall be deemed to be the total income of the assessee and the tax payable by the assessee on such total income shall be the amount of income-tax at the rate of 18.5%.

36. Thus Courts have interpreted that, section 115JB is a complete code by itself and any adjustment other than mentioned in section 115JB can not be made while computing the book profit.

37. On reading the Nilgiri and Shvalik cases, it appears that, the section has to be read as

Notwithstanding anything contained in any other provision of this Act, but subject to provisions of section 10, section 47, section 56 and section 2(24) of this Act, where in the case of an assessee, being a company, the income-tax, payable on the total income as computed under this Act in respect of any previous year, is less than [18.5%] of its book profit, such book profit shall be deemed to be the total income of the assessee and the tax payable by the assessee on such total income shall be the amount of income-tax at the rate of 18.5%.

38. The ITAT has gone into the logic i.e. purposive test of interpretation to find out the true intention of the section. A question arises as to whether a court especially below the rank of High Court can go into this issue when the language of section is clear and unambiguous?

39. If one decides to proceed with this view, the decisions of Shivalik and Nilgiri will be wrong.

40. Alternatively, if one goes by decision of Apollo of Supreme Court and has been followed by Bombay High Court.

Whether MAT is in nature of Advance tax?

41. As the ITAT has gone into the logic of section 115JB, let’s take it a bit further and analyse section 115JAA having title as “Tax credit in respect of tax paid on deemed income relating to certain companies”. The sum and substance of the section is as follows

a. Any amount paid u/s 115JA / 115JB then credit in respect of tax so paid shall be allowed in accordance with the provisions of this section.

b. The tax liability should be on normal total income. In any case, the actual cash flow of tax liability will not be less than of an amount equal to MAT liability.

c. No Interest on this tax credit will be available.

42. Thus in a sense, MAT credit can be compared with advance tax / tax deducted / collected at source [TAS].

43. In view of above, as clarified by Supreme Court in Transmission Corporation of India, TAS can be there on sums which include element of income and which need not necessarily be purely income except for section 195.