Minimum Alternate Tax (MAT) | Section 115JB | Income Tax Act 1961

CA Rockey

Introduction:-

Law makers observed that there is many companies which are disclosing massive profit in the accounts as laid in the Annual General Meeting (AGM) before the shareholder but at the same time these companies also showing profit nil or bit above nil for the income tax purpose. Variance between profits as per the Companies Act and as per Income Tax Act was due to many dissimilar allowance of disallowance in the both Acts e.g. difference in method and rate of depreciation provided in both Acts.

To put an end on this trend and bring these kind of companies under the tax net, law maker framed concept of MAT, according to this concept corporate entity has to pay minimum tax. The concept of MAT is govern by the provisions contains in section 115JB of Income Tax Act, 1961.

Applicability of MAT:-

MAT is applicable to all companies including the foreign companies.

Analysis of provision of section 115JB:-

Where in case of a company, the income tax payable on the total income as computed under the income tax act in respect of any previous year is less than 15% of its BOOK PROFIT, then such book profit shall be deemed to be the total income of the assessee and the tax payable on such total income shall be the amount of income tax at the rate of 15%. This income tax is, further has to be enhance by surcharge (as applicable) and education cess (@4%).

In the simple words every company has to compute its income tax liability as per two sets of provisions. The set of provisions which results in higher income tax liability become the income tax payable. Followings are the two set of provisions:

1). Income tax computed as per normal provisions of income tax act.

2). Income tax computed as per provision of section 115JB of income tax act.

Meaning of Book Profit:-

Book Profit is defined in the explanation 1 to section 115JB as book profit means the net profit as shown in the profit & loss account for the relevant previous year and as increased and decreased by some prescribed items.

In simple words to compute book profit, we have to take profit & loss account and make some prescribed additions and deletions to it.

Before going to analysis prescribed additions and deletions, we must understand the meaning of “Profit & Loss Account”.

Meaning of profit & loss account for the purpose of book profit:-

As per sub-section (2) of section 115JB:-

1). Assessee being a company on which the proviso to sub-section (1) of section 129 of the companies act, 2013 is applicable, shall for the purpose of section 115JB, prepare profit & loss account for the relevant previous year in accordance with the provisions of Act governing such company. (However, proviso to sub-section (1) of section 129 of the companies act, 2013 is applicable on Electricity, Insurance & Banking companies, these company is required to follows the provisions of governing laws for the purpose of making profit & loss account.)

2). Assessee being a company other than a company refer above in (1), shall, for the purpose of section 115JB, prepare the profit & loss account in accordance with provision of schedule-III to the Companies Act, 2013.

While preparing the profit & loss account for the purpose of book profit and for the purpose of laying accounts before the company at its AGM, following shall be same:-

1). The accounting polices

2). The accounting standards

3). The method & rates of depreciation.

Analysis of prescribed additions and deletion to the net profit as shown in the profit & loss account:-

Explanation 1 to sub-section (2) of section 115JB prescribed some items which has to be added or deleted from the net profit as shown in the profit and loss account.

Additions to net profit: Where followings amount debited to profit & loss account:-

1. Amount carried to any reserves by whatever name called (other than reserves relating to shipping business created under Section 33AC)

2. Amount of expenditure in relation to incomes covered by section 10 [except section 10(38)];

3. Amounts of dividends paid or proposed to be paid;

4. Amount of depreciation as per tax provisions.

5. Balance in revaluation reserve relating to revalued asset on the retirement or disposal of such asset.

6. Amount of deferred tax or provisions thereof;

7. Amount of Income tax paid, payable or provision thereof; However, Income tax penalty or its interest, Tax including Wealth tax penalty or its interest, Penalties under other laws need not be added back

8. Provisions for loss of subsidiaries

9. The amount or amounts of expenditure relatable to, income, being share of the taxpayer in the income of an association of persons or body of individuals, on which no income-tax is payable in accordance with the provisions of section 86.

10. The amount or amounts of expenditure relatable to income accruing or arising to a taxpayer being a foreign company, from :

(a) the capital gains arising on transactions in securities; or

(b) the interest, royalty or fees for technical services chargeable to tax at

the rate or rates specified in Chapter XII if the income-tax payable on above income is less than the rate of MAT

11. The amount representing notional loss on transfer of a capital asset, being share or a special purpose vehicle to a business trust in exchange of units allotted by that trust referred to in clause (xvii) of section 47 or the amount representing notional loss resulting from any change in carrying amount of said units or the amount of loss on transfer of units referred to in clause (xvii) of section 47

12. Expenditure relatable to income by way of royalty in respect of patent chargeable to tax under section 115BBF

13. Amounts set aside as provision for diminution in the value of assets; Example: Provision for bad debts to be added

14. Amounts set aside to provisions made for meeting unascertained liabilities, However, provisions made on scientific basis are not to added back for Example: Provision for encashment of leave (SC Judgment: BHARAT EARTH MOVERS)

15. The amount standing in revaluation reserve relating to revalued asset on the retirement or disposal of such an asset if not credited to statement of profit and loss

16. The amount of gain on transfer of units referred to in clause (xvii) of section 47 computed by taking into account the cost of the shares exchanged with units referred to in the said clause or the carrying amount of the shares at the time of exchange where such shares are carried at a value other than the cost through statement of profit and loss as the case may be;

Deletion to net profit:

1. Amount withdrawn from any reserve or provision

2. Amount of income covered by section 10 [except section 10(38)], section 11 or section 12

3. The amount of loss brought forward or unabsorbed depreciation whichever is less as per books of account. Note: Loss and unabsorbed depreciation to be considered in the books as at the commencement of the year

4. Depreciation excluding depreciation on account of revaluation of assets.

5. Any amount withdrawn from the revaluation reserve and credited to P&L A/c, to the extent it does not exceed the amount of depreciation on account of revaluation of assets

6. Amount of deferred tax, if any

7. Profits of a sick industrial company subject to certain conditions

8. The amount of income, being the share of the taxpayer in the income of an association of persons or body of individuals, on which no income-tax is payable in accordance with the provisions of section 86, if any such amount is credited to the statement of profit and loss

9. The amount of income accruing or arising to a taxpayer being a foreign company, from :

(a) the capital gains arising on transactions in securities; or

(b) the interest, royalty or fees for technical services chargeable to tax at the rate or rates specified in Chapter XII

if such income is credited to the statement of profit and loss and the income-tax payable on above income is less than the rate of MAT.

10. The amount (if any, credited to the statement of profit and loss) representing

(a) notional gain on transfer of a capital asset, being share of a special purpose vehicle to a business trust in exchange of units allotted by that trust referred to in clause (xvii) of section 47; or

(b) notional gain resulting from any change in carrying amount of said units; or

(c) gain on transfer of units referred to in clause (xvii) of section 47,

11. The amount representing notional gain on transfer of units referred to in clause (xvii) of section 47 computed by taking into account the cost of the shares exchanged with units referred to in the said clause or the carrying amount of the shares at the time of exchange where such shares are carried at a value other than the cost through statement of profit and loss, as the case may be;

11. Income by way of royalty in respect of patent chargeable to tax under section 115BBF Aggregate amount of unabsorbed depreciation and loss brought forward in case of:

a) A company and its subsidiary and the subsidiary of such subsidiary, where, the Tribunal, on an application moved by the Central Government under Section 241 of the Companies Act, 2013 has suspended the Board of Directors of such company and has appointed new directors who are nominated by the Central Government under Section 242 of the said Act;

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

MAT Credit: –

When any amount of tax is paid as MAT by an assessee being a company, then, credit in respect of tax so paid shall be allowed to him in accordance with the provision of section 115JAA.

1). Allowable Tax Credit = Difference of MAT paid and income tax payable under normal provision of Income tax Act, 1961.

(However, no interest shall be paid on this Tax credit by the revenue.)

2). Such tax credit shall be carry forward for 15 assessment year immediately succeeding the assessment year in which such credit is become allowable.

3). Tax credit shall be allowed set off in a year when tax becomes payable on the total income in accordance with the normal provisions of the Act.

4). Set off shall be allowed to the extent of difference between tax on the total income (under normal provision) and tax which would have been payable u/s 115JB for that assessment year.

Applicability of other provisions of Income tax Act:-

Section 115JB(5) states that save as otherwise provided in this section, all other provisions of this act shall apply to every company, mentioned in this section.

Therefore the company to which MAT applies shall be liable to pay Advance Tax, interest u/s 234A, 234B & 234C. The company shall also be liable to pay penalty for concealment of income.

Furnishing of the Report:-

Every company to which this section applies shall furnish a report from a Chartered Accountant in the Form-29B certifying that the book profit has been computed in accordance with the provisions of the section 115JB and such report shall be furnished along with the return of income.

(Author can be contacted at M- 08287392720 or on Email: [email protected])

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(Republished with Amendments by Team Taxguru)