Assurance and Advisory Business Services December 2, 2018 All India Chartered Accountants’ Society Minimum Alternate Tax (‘MAT’) 5th Annual Workshop on Direct Tax Session XXII June 20, 2008 Promod Batra Preliminary and tentative

Assurance and Advisory Business Services December 2, 2018 Contents Background and Objective Computation of Book profits Key issues on MAT Preliminary and tentative

Assurance and Advisory Business Services December 2, 2018 Background & Objective Preliminary and tentative

Background & Objective Assurance and Advisory Business Services December 2, 2018 Background & Objective Objective of MAT is to levy tax on “Zero tax companies” Section 80VVA provided for restricting the quantum of deduction/incentive under various sections to 70% of Pre-incentive income – Section was operative from AY 1984-85 to AY 1987-88 Section 115J was introduced by Finance Act 1987 – Rationale explained vide CBDT Circular No 495 dated 22-9-1987 - Section was operative from AY 1988-89 to AY 1990-91 Section 115JA was introduced by Finance Act (No 2) of 1996 – Rational explained vide CBDT Circular No 762 dated 18-2-1998 – Section was operative from AY 1997-98 to AY 2000-01 Preliminary and tentative

Background & Objective Assurance and Advisory Business Services December 2, 2018 Background & Objective Section 115JB was introduced by Finance Act 2000 – Applicable from AY 2001-02 onwards Constitutional Validity of the levy of MAT was challenged as being violative of Article 14 and 19 of the Constitution – Validity upheld by Delhi High Court in the case of National Thermal Power Corporation Ltd vs Union of India (192 ITR 187) and by AP High Court in the case of Suryalata Spinning Mills Limited (223 ITR 713) Provisions of Computing MAT are self contained code – Upheld in the case of Pennar Steels Limited (60 ITD 1) and AAR in the case of Niko Resources Limited (234 ITR 828) Preliminary and tentative

Assurance and Advisory Business Services December 2, 2018 MAT – Section 115JB If the income tax liability computed under the normal provisions is less than 10% of the adjusted book profits, then such books profits shall be deemed to be the total income of the company and tax shall be payable at the rate of 10% (plus applicable surcharge and education cess) on such total income Requirement of preparing a separate P&L A/c in accordance with the provisions of Schedule VI of the Companies Act P&L A/c has to be aligned with the P&L A/c laid down before the shareholders in its AGM in respect of the rates and methods of depreciation; and accounting standards/policies. This requirement applies even if the company adopts a financial year which is different from the previous year under the Act Nothing contained in 115JB shall affect the amount to be c/f to subsequent years u/s 32 or u/s 32A or u/s 72 or u/s 73 or u/s 74 or u/s 74A Preliminary and tentative

Assurance and Advisory Business Services December 2, 2018 MAT – Section 115JB Every company to which this section applies shall furnish a report from a Chartered Accountants along with the ROI certifying that the book profits are computed in accordance with provisions of 115JB Save as otherwise provided in this section, all other provisions of this Act shall apply to every company mentioned in this section The provisions of this section shall not apply to the income accrued or arising on or after the 1st day of April, 2005 from any business carried on, or services rendered by an entrepreneur or a Developer, in a Unit or Special Economic Zone, as the case may be MAT Credit available only to the extent of excess MAT paid over tax payable under normal provisions of the Act over a period of 7 years Preliminary and tentative

Assurance and Advisory Business Services December 2, 2018 Computation of Book Profit Preliminary and tentative

Computation of book profit – Explanation 1 to Sec 115JB Assurance and Advisory Business Services December 2, 2018 Computation of book profit – Explanation 1 to Sec 115JB Book Profit means net profit as shown in the Profit and Loss A/c as INCREASED by: The amount of income tax* paid or payable, and the provision thereof (if debited to P&L account); or Amount carried to any reserves by whatever name called (other than reserves for shipping business as specified under Section 33AC); or Amounts set aside to provisions made for meeting unascertained liabilities ; or Amount of provision for losses of subsidiary companies; or Amounts of paid or proposed dividends; or Amounts of expenditure relating to income under section 10, 11 or 12; or Amount of Depreciation; or Amount of deferred tax or provision therefor** * Finance Act 2008 has included DDT, interest, surcharge and education cess in the scope of ‘income tax’ w.r.e.f April 1, 2001 ** Inserted by Finance Act 2008 w.r.e.f April 1, 2001 Preliminary and tentative

Assurance and Advisory Business Services December 2, 2018 Computation of book profit – Explanation 1 to Sec 115JB Book Profit means net profit as shown in the Profit and Loss A/c as REDUCED by: The amount withdrawn from any reserves or provisions if any such amounts is credited to the P&L A/c; or The amounts of income u/s 10, 11 or 12, if any such amount is credited to P&L A/c; or The amount of loss brought forward or unabsorbed depreciation whichever is less as per books of account Depreciation debited to P&L A/c (excluding depreciation on account of revaluation of assets) 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 Amount of profits of sick industrial company for the AY commencing from the AY relevant to the previous year in which the company has become a sick industrial company and ending with AY during which entire net worth of such company becomes equal to or exceeds the accumulated losses The amount of profits eligible for deduction u/s 80HHC; 80 HHE; 80HHF Amount of deferred tax, if any, credited to P & L account Preliminary and tentative

Assurance and Advisory Business Services December 2, 2018 Few Issues on MAT Preliminary and tentative

Assurance and Advisory Business Services December 2, 2018 Few Issues on MAT Issue 1 Power of Assessing Officer to recompute Book profits- Qualification in Auditors Report Issue 2 Scope of the term “income-tax” paid or payable Issue 3 Treatment of profits of exempted undertakings Issue 4 Whether a Company paying MAT is liable to pay interest under section 234A/B/C of the Act Issue 5 Tax Planning options Preliminary and tentative

Power of Assessing Officer to recompute Book profits Assurance and Advisory Business Services December 2, 2018 Power of Assessing Officer to recompute Book profits Section 115JB (2) of the Income Tax Act Every company to prepare its profit and loss account for the relevant previous year in accordance with the provisions of Parts II and III of Schedule VI to the Companies Act, 1956 . Further, while preparing the annual accounts including Profit/Loss account Accounting policies Accounting Standards; and Method adopted for calculating depreciation shall be the same as for preparing final accounts for the AGM. Section 211 of the Companies Act, 1956 (2) Every profit and loss account of a company shall give a true and fair view of the profit or loss of the company for the financial year and shall comply with the requirements of Part II of Schedule VI. (3A) Every profit and loss account and balance sheet of the company shall comply with the accounting standards Thus compliance with Schedule VI and the prescribed accounting standards is necessary to present a true and fair view of the books of account Preliminary and tentative

Power of Assessing Officer to recompute Book profits Assurance and Advisory Business Services December 2, 2018 Power of Assessing Officer to recompute Book profits JUDICIAL PRECEDENT Supreme Court in the case of Apollo Tyres Limited vs CIT (255 ITR 273) (2002) (SC) held that: The use of words in accordance with the provisions of Part II and Part III of Schedule VI was made for the limited purpose of empowering the assessing authority to rely upon the accounts. “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 being properly maintained in accordance with Companies Act” i.e. The AO thereafter has limited power of making increases and reductions as provided in the explanation. To conclude Modified Report Where there is a non compliance with Schedule VI/ Accounting standards, the AO is well within his rights to make an adjustment in respect of the relevant item to determine the correct book profit/ loss. Unqualified Report Where a clean report is given by the auditors, no further adjustment to the book profits can be made by the AO Preliminary and tentative

Assurance and Advisory Business Services December 2, 2018 Modified reports A modified report can be of the following types: a) Matters that do not affect the auditor’s opinion Emphasis of the Matter b) Matters that do affect the auditors opinion Qualified opinion Disclaimer of opinion Adverse opinion The necessity for an adjustment may arise only in the second case i.e. matters which affect auditors opinion Preliminary and tentative

Common Issues in computation of book profit Assurance and Advisory Business Services December 2, 2018 Common Issues in computation of book profit PRIOR PERIOD ITEMS AO is bound by the books of accounts prepared in accordance with the provisions of the Companies Act as upheld by the case of Apollo Tyres Limited. Per Para 19 of AS – 5, ‘Prior period items are normally included in the determination of net profit or loss for the current period. An alternative approach is to show such items in the statement of profit and loss after determination of current net profit or loss. In either case, the objective is to indicate the effect of such items on the current profit or loss” Per Para 15 of AS – 5, ‘The nature and amount of prior period items should be separately disclosed in the statement of profit and loss in a manner that their impact on the current profit or loss can be perceived. Explanation to Section 115JB does not have a specific requirement to add or reduce prior period items as per the provisions of section 115JB No adjustment on account of prior period adjustments should be made. Favorable Rulings National Rayon Corporation (51 ITD 621) (Mum) Maharashtra State Electricity Board (82 ITD 422) (Mum) Adverse Rulings J K Cotton Spinning and Weaving Mills ( 60 ITD 99) (All) Preliminary and tentative

Common Issues in computation of book profit Assurance and Advisory Business Services December 2, 2018 Common Issues in computation of book profit PROFIT/LOSS ON SALE OF FIXED ASSET As per Apollo Tyres case, audited profit and Loss account to be accepted for computation of book profit and AO has no powers to go behind the net profit as per profit & loss account: Amount directly taken to capital reserve account and not credited to profit and loss account could not be added to compute book profits – CIT vs Indian Syntans Investments Ltd (106 TTJ 388) PROFIT ON SALE OF INVESTMENTS As per AS-13 profits and losses on disposal of investments is to be included in the profit and loss statement and also requires separate disclosure in the statement of profit / loss account Accordingly, where the accounts comply with the accounting standards, the AO has no powers adjust the book profits. Preliminary and tentative

Scope of the term ‘income tax’ paid or payable Assurance and Advisory Business Services December 2, 2018 Scope of the term ‘income tax’ paid or payable Fringe Benefit Tax View 1: Amount of FBT paid/ payable is income tax and thus needs to be added back Definition of tax under section 2(43) of the Act expanded w.e.f. AY 2006-07 to include Fringe Benefit Tax payable under section 115WA” FBT is additional income tax: The provisions of section 115WA of The Act levy the charge of FBT. “In addition to the income-tax charged under this Act, there shall be charged for every assessment year commencing on or after the 1st day of April, 2006, additional income-tax (in this Act referred to as fringe benefit tax) in respect of the fringe benefits provided or deemed to have been provided…” FBT is a tax on the benefits enjoyed by the employees and therefor it is an ‘income tax. Judicial Precedents: The Chennai ITAT in the case of SCIT vs Dhanalakshmi Paper Mills Limited (290 ITR 27) made the following observations “Merely because the tax on profit distributed to the shareholders was levied and collected form the domestic companies, it will not loose its character as tax on income.” FBT is nothing but tax on income and accordingly should be added back to book profits as ‘income tax’ Preliminary and tentative

Scope of the term ‘income tax’ paid or payable Assurance and Advisory Business Services December 2, 2018 Scope of the term ‘income tax’ paid or payable Fringe Benefit Tax View 2: Amount of FBT paid/ payable is not income-tax and thus need not be added back Section 4 provides for “Charge of income tax” while sec 115WA provides for “charge of FBT” – therefore two different section for levy Only ‘income tax’ covered under Section 4 - The essential feature of charge of income tax is that what is levied by virtue of the provisions of section 4 is income tax alone. Interest, penalty and fines which are also payable under the other provisions of the Act cannot be termed as Income Tax. They are charged in addition to the income tax for the purposes of levy of income tax - Bhor Industries Ltd vs CIT(1961)(42 ITR 57 (SC) The term Income tax is not defined, however, means tax levied on total income computed in accordance with the Act. FBT is not a tax on the income of the assessee. Finance Act 2008 has specifically included DDT, interest etc in the scope of ‘income tax’ but FBT not so included. The Q 103 of Circular 8 of 2005 ( FBT circular) provides that - “It is an expenditure laid out or expended wholly and exclusively for the purposes of the business or profession of the employer. The prohibition u/s 40(a) (ic) does not apply to the computation of ‘book profit’ for the purposes of section 115JB. Preliminary and tentative

Scope of the term ‘income tax’ paid or payable Assurance and Advisory Business Services December 2, 2018 Scope of the term ‘income tax’ paid or payable Placing reliance on the CBDT's Circular on FBT (Q 103), it should be possible to take a position that FBT should not be added to the net profit for computing book profit. Preliminary and tentative

Scope of the term ‘income tax’ paid or payable Assurance and Advisory Business Services December 2, 2018 Scope of the term ‘income tax’ paid or payable Securities Transaction Tax/ Commodities Transaction Tax Chapter VII of the Finance Act 2004 provides for levy of STT on the sale/purchase of securities listed in the stock exchange. STT is a tax on transactions and not taxes on income STT brought as a separate levy under a separate Chapter by way of Finance Act 2004 and not under Income Tax Act. Further, not treated as additional Income Tax as in case of FBT Upto AY 2008-09, sec 40(a)(ib) denied the deduction for STT. However, rebate u/s 88 E against income tax allowed Effective AY 2009-10, Sec 36(1)(xv) provides for deduction of STT and therefore for 115JB also allowable Similarly CTT introduced by FA 2008 is eligible for deduction u/s 36(1)(xvi) Both STT/ CTT should be allowable for computing book profit. Preliminary and tentative

Treatment of profits of exempted undertakings Assurance and Advisory Business Services December 2, 2018 Treatment of profits of exempted undertakings Claim in respect of undertaking eligible for deduction under section 10A/10B Up to AY 2007-08, profits of 10 A & 10 B undertaking were excluded in computing Book Profits. However, vide Finance Act 2007, section 115JB amended to tax the profits of such undertakings. Claim in respect of units in a SEZ: Section 115JB(6) provides that provisions of section 115JB shall not apply to the income accrued or arising on or after April 1, 2005 (i.e. w.e.f AY 2006-07) from any business carried on or services rendered, by an entrepreneur / developer, in a unit or Special Economic Zone. Exemption from 115JB is differently placed unlike the erstwhile adjustments to book profits for section 10A/ 10B. Issue Whether entire income of an entrepreneur or a developer would be exempt; or Only income from business activities alone would be exempt Preliminary and tentative

Levy of Interest u/s 234B and 234C of the Act Assurance and Advisory Business Services December 2, 2018 Levy of Interest u/s 234B and 234C of the Act Section 115JB (5) provides that “Save as otherwise provided in this section, all other provisions of this Act shall apply to every assessee, being a company, mentioned in this section”. Thus, as per sub-section (5) thereof all other provisions of the Act including levy of interest etc. would apply in respect of the provisions of this section. The Annual Finance Acts also provide for the payment of advance tax for tax payable under section 115JB - e.g. Refer proviso to Section 2(9) of Finance Act, 2008 which reads as under: “Provided that in cases to which the provisions of Chapter XII or ….or section 115JB or...of the Income-tax Act apply, “advance tax” shall be computed with reference to the rates imposed by this sub-section or the rates as specified in that Chapter or section, as the case may be” Karnataka High Court in the case of Jindal Thermal Power (2006) (154 Taxman 547) (Kar) held that section 115JB is a self contained code and interest would be applicable for failure to discharge advance tax Even under section 115J of the Act, I the following decisions, levy of interest upheld: Assam Bengal Carrier Limited vs CIT (1999) 239 ITR 862 (Gau) Itarsi Oils and Flours Pvt Ltd vs CIT (2001) 250 ITR 686 (MP) Kotak Mahindra Finance Limited (2004) 265 ITR 119 (Bom) Chennai High Court in the case of Geetha Ramakrishna Mills Ltd (2006) (288 ITR 489) CBDT Circular 13/2001 dated 9.11.2001 also provides for payment of advance tax in the context of computation under section 115JB Preliminary and tentative

Avenues for Tax Planning Assurance and Advisory Business Services December 2, 2018 Avenues for Tax Planning Possible areas – Deferment of claims Under section 43B Other expenses/ accrual for liabilities Plan tax holiday claims where more than one undertakings e.g. under section 80-IA etc Preliminary and tentative

Assurance and Advisory Business Services December 2, 2018 Thank You Preliminary and tentative