MAT
CA Kishor Phadke
1
MAT issues
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Background / concept / issues
Challenge
Losses set-off
Tax Holidays
Audited accounts, Capital Gains, Capital Receipts
Other Accounts based issues (14A + Lease + DRR, etc.)
Foreign Tax Credit
Carry forward of MAT credit
Concealment Penalty and MAT
IND AS
2
Background
• At present, MAT payment @ 20% is felt as a pinch by
many corporates
• Further, MAT credit generated, hardly gets utilized
considering the low rate of normal tax
• MAT credit, only conceptually remains an asset on
books, with no practical realization
• Many perceive MAT as an extra and uncomfortable
charge
• Innovative minds work in many directions ..
3
Background
• It is worthwhile to refer to comments from Mr.
Palkhiwala’s book (10th edition - latest commentary)
– The section (115J then) is economically unsound and morally
repugnant
– It penalizes the so-called “zro-tax” companies unfairly, since,
these companies are most dynamic enterprises in corporate
sector
– The force of arbitrariness can go no better
– The section and the principles underlying it need to be seriously
examined ….
4
Background
• Over last about 28 years, we have seen three
versions of MAT section
• The fourth version, and most controversial one, is
legislated from current year, for dealing with IND-AS
• Many amendments have taken place in these
sections from time to time
• Mischiefs are plugged at one hand and scope is
enhanced to an extreme level at the other hand
• Here is a quick comparison at MACRO level
5
Background –Sections compared
Particulars
115J
115JA
115JB
Period
01/04/88 to 31/03/91
01/04/97 to 31/03/01
01/04/91
onwards
Purpose
To levy minimum tax
on companies having
huge book profits and
paying dividend
(To bring equity)
To levy minimum tax on
companies having huge
book profits and paying
dividend
Modification
of the existing
scheme
Income
Income
Tax
30% of book profit is
deemed as “Total
Income”
30% of book profit is
deemed as “Total
Income”
Book profit is
deemed as
“Total
Income”
Not available
As per 115JAA
As per 115JAA
(From
01/04/05)
Comparison between
What is deemed
MAT credit
6
Background
Circular No. 495 - Finance Act 1987
• It is an accepted canon of taxation to levy tax on the basis of ability to pay.
However, as a result of various tax concessions and incentives certain
companies making huge profits and also declaring substantial dividends,
have been managing their affairs in such a way as to avoid payment of
income-tax.
• Accordingly, as a measure of equity, s. 115J has been introduced by the
Finance Act. By virtue of the new provisions, in the case of a company
whose total income as computed under the provisions of the IT Act is less
than 30 per cent of the book profit computed under the section, the total
income chargeable to tax will be 30 per cent of the book profit as
computed.
7
Background
Circular No. 572–Finance Act 1990
• Under the existing provisions of s. 115J of the IT Act, in the case of a
company whose total income as computed under the IT Act, is less than
30 per cent of the book profit, as computed under that section, the total
income chargeable to tax will be 30 per cent of the book profit. The
provision was enacted to restrict the erosion of the base of taxable income
on account of a large number of tax concessions.
• In view of the package of measures for rationalising the tax structure
including discontinuance of certain investment incentives, having the
effect of increasing the taxable income base, there is no necessity of
retaining the provisions of s. 115J on the statute book. Accordingly, s. 115J
has been amended so as to provide that its provisions shall not apply to
asst. yr. 1991-92 and subsequent years.
8
Background
Circular No. 762–Finance Act 1996
•
In recent times, the number of zero-tax companies and companies paying marginal
tax has grown. Studies have shown that in spite of the fact companies have earned
substantial book profits and have paid handsome dividends, no tax has been paid
by them to the exchequer.
•
The Finance Act has inserted a new section 115JA in the Income-tax Act, so as to
levy a minimum tax on companies who are having book profits and paying
dividends but are not paying any taxes. The scheme envisages the payment of a
minimum tax by deeming 30% of the book profits computed under the Companies
Act, as taxable income, in a case where the total income as computed under the
provisions of the Income-tax Act, is less than 30% of the book profit.
9
Background
Circular No. 794-Finance Act 2000
•
•
•
•
In recent years, as the number of zero tax companies and companies paying marginal tax had
grown, Minimum Alternate Tax was levied under section 115JA of the Income-tax Act from
assessment year 1997-98. The efficacy of the existing provision, however, declined in view of
the exclusions of various sectors from the operation of MAT and the credit system. The Act
has, therefore, modified the scheme of MAT. The existing section 115JA has been made
inoperative w.e.f. 1st April, 2001. In its place, the Act inserts a new provision, 115JB of the
Income-tax Act.
The new provisions provide that all companies having book profits under the Companies Act,
prepared in accordance with Part-II and Part-III of Schedule-VI to the Companies Act, shall be
liable to pay a minimum alternate tax at a lower rate of 7.5%, as against the existing effective
rate of 10.5%, of the book profits. These provisions will be applicable to all corporate entities
without any exception.
The new provisions further provide that for purposes of MAT, the company shall follow same
accounting policies and standards as are followed for preparing its statutory account.
The amended provision discontinues the system of allowing credit for MAT in future.
However, the taxes paid under the existing provisions of section 115JA shall get the credit.
10
Background
Circular No. 3/2006-Finance Act 2005
•
Under the existing provisions of section 115JB, where the income-tax payable by a
company in the previous year is less than seven and one-half per cent. of its book
profit such book profit is deemed to be the total income of the company and it is
liable to pay income-tax at the rate of seven and one-half per cent. of such book
profit. No credit of such tax paid by the company under this section is allowed
against the tax liability which arises in subsequent years under the other provisions
of the Act.
•
With a view to provide credit for such payment, section 115JAA has been
amended to provide that where any amount of tax is paid under sub-section (1) of
section 115JB by a company for any assessment year beginning on or after the 1st
day of April,2006, credit in respect of the taxes so paid for such assessment year
shall be allowed on the difference of the tax paid under section 115JB and the
amount of tax payable by the company on its total income computed in
accordance with the other provisions of the Act.
11
Background
……constitutionality ..
• Ester India Ltd V. Union of India – 260 CTR 225 (Del.)
•
Tax computed u/s 115JA does not fall outside scope of tax as defined under
Section 2(45) or “total income” u/s 2(24)—Section 115J provides an alternate
method of computing income and such income as calculated is deemed to be
“total income” chargeable to tax
•
The non obstante clause indicates that the provisions of 115JA of the Act would
override the other provisions of the Act for computation of taxable income in
certain cases falling within the sweep of section 115JA. Section 115JA of the Act is
a special provision to calculate taxable income in certain cases. The levy of income
tax is under Section 4 of the Act, which is the charging section. Section 115J of the
Act only creates a legal fiction to supplant the measure of total income which is
chargeable to tax. Thus, indisputably, tax as computed on the basis of Section
115J of the Act is a tax on income.
12
Background
….constitutionality…
• Suryalatha Spinning Mills Ltd. V. UOI – 223 ITR 713 (AP)
•
The next contention is that sub-s. (1) of s. 115J results in double taxation. We are
unable to appreciate this contention. Firstly, because what is being taxed is income
determined on the basis prescribed under the said impugned provision and there
is no provision to re-tax the same income as such, as of fact there is no double
taxation
• Karimtharuvi Tea Estate Ltd. V. DCIT – 247 ITR 22 (Ker.)
•
What is taxed is not fictional or hypothetical income—By this section certain tax
concessions are restricted or curtailed to certain extent so that the company pays
some tax—This is not unreasonable so as to make it violative of Art. 14 or 19 of the
Constitution—Sec. 115J is not therefore illegal or unconstitutional
13
Background
Direct Tax Code 2009
1) Subject to the provisions of this Code, every person shall be liable to pay Income-tax in
respect of his total income for the financial year.
2) The liability to pay income-tax, referred to in sub-section (1), shall be the amount of
income tax calculated at the rate specified in the First Schedule and in the manner
provided therein.
3) However, if a person is a company, the liability to pay income-tax referred to in subsection (1) shall be the higher of the following amounts:– (a) the amount of the liability calculated under sub-section (2); and
– (b) the amount calculated at the rate specified in Paragraph A of the Second Schedule and in the
manner provided therein.
– The amount referred to in clause (b) of sub-section (3) of section 3 shall be calculated at the rate
specified, and in the manner provided, here under.
– Rate of tax (a) On the value of the gross assets, as on the close of the financial year, of a
banking company. 0.25 per cent. (b) On the value of the gross assets, as on the close of the
financial year, of any other company 2 per cent.
14
Background
..emerging principles ..
• MAT is supplement to basic charge u/s 4 (unlike a separate charge in
DTC-2009)
• MAT is not outside scope of total income u/s 2(45)
• MAT is not fictional / hypothetical / does not lead to double taxation
• MAT only restricts / curtails tax concessions
• MAT is only a special provision to calculate taxable income in certain
cases
15
Background
…..Conflict …..
• Separate charge for taxation existed in DTC 2009, when the base was
different (i.e. assets)
• No separate charge for MAT u/s 115J / JA / JB (since base is same, i.e. total
income)
• Courts have clarified that, MAT is only a supplement to the basic charge
u/s 4 and it is within meaning of total income u/s 2(45)
• As such, all those items which are outside ambit of “total income” are not
to be eligible for MAT
• As a corollary, MAT base should subsume / merge / collide / collapse in
“Total Income” under normal provisions
• This is not happening in many cases, hence the conflict / debate /
hardship ………….
16
Challenge
…deeming fictions …
• Income-tax Act is full of deeming fictions
• Class-A – such deeming which is natural, e.g. section 68 / 69, etc.
• Class-B – such deeming which are logical (considering the cause
involved), e.g. section 50-C, 56(2)(vii), 2(22)(e), etc.
• Class-C – such deeming which are schemes of tax policy, without
any cause attributable to involved assesse, e.g. MAT sections
(Many more classifications are possible. These are left at that, considering non-relevance ..)
17
Challenge
….Past controversies….
• Over last 28 years, massive litigation has been involved in MAT
execution
• Many amendments to cure mischiefs have been made
• Issues which are settled, are left at that, such as
–
–
–
–
Export benefits & MAT
Reserve for doubtful debts
Deferred Tax
Revaluation Reserve
Settled issues either through amendment, or due to irrelevance,
are left at that
18
Challenges
…ongoing threat…
• Getting an amendment against some innovative
proposition (e.g. withdrawal from reserves)
• Getting retrospective amendment (e.g. provision for
diminution in value of asset)
• Increasing rate of MAT levy from time to time
• Many more …
• But most crucial – Double Edged Sword effect
19
Losses set-off
• Rashtriya Ispat Nigam Ltd. – 285 ITR 1 (AAR)
•
Adjustment for brought forward loss and unabsorbed depreciation—Explanation to sub-cl.
(iii) in the definition of "book profit" in s. 115JB clearly states that the expression 'loss
brought forward’ does not include depreciation and that the net profit of the current year is
to be reduced by the lesser of the two—Sec. 115JB computation must follow the logic of
internal consistency and regularity year after year unaffected by the parallel computations
under the Companies Act and the normal provisions of the IT Act—Reduction made to book
loss or depreciation in any particular year must form the basis for computation of MAT
liability for the subsequent year—Above interpretation is well supported by Circular No. 495,
dt. 22nd Sept., 1987—Contention that presentation of accounts in one assessment year
under s. 115JB has no relevance to the presentation of accounts in the succeeding year for
the same purpose cannot be upheld—For the purpose of quantification of carry forward of
unabsorbed loss and depreciation to the next assessment year, company has no option to
reduce from the current year’s profit, either the loss or depreciation in a manner different
from the manner adopted for determination of book profit—It is not open to the company to
reduce the current year’s profit by the loss brought forward or unabsorbed depreciation in a
manner which is more beneficial to it and such adjustment cannot be changed from year to
year
20
Losses set-off
• Amline Textiles (P) Ltd V. ITO – 27 SOT 152
(Mum)
•
As per cl. (iii) of Expln. 1 to s. 115JB, aggregate amount of loss brought forward or
unabsorbed depreciation, whichever is less as per books of account is allowable
deduction in computing book profits under s. 115JB, therefore, reference to the
provisions of ss. 71 to 73 for arriving at the conclusion that s. 115JB refers to yearwise consideration of the loss brought forward or unabsorbed depreciation, was
erroneous.
21
Losses set-off
• Madras Aluminium Co. Ltd V. ADIT – 26 CCH
217 (Chennai)
•
Book Profits—Computation of—Unabsorbed depreciation—Deductibility—Assessee company
filed its return declaring nil income under regular computation—Under Mat book profits were
determined after claiming unabsorbed depreciation—AO added back unabsorbed
depreciation as it was already claimed in earlier year—Held, AO had stated in his assessment
order that assessee had already claimed unabsorbed depreciation in earlier A.Y. and same
was allowed—Assessee had not been able to controvert categorical finding of AO—If
unabsorbed depreciation had already been allowed in earlier A.Ys., unabsorbed depreciation
in subsequent A.Ys. would be NIL—Therefore, amount which could have been deducted in
accordance with provisions of Clause (iii) of Explanation 1 to Section 115JB is un-bsorbed
depreciation or unabsorbed business loss whichever is less, amount of depreciation being less
i.e., NIL is deductible for arriving at book profits for A.Y.
22
Losses set-off
• CIT V. Gokuldas Apparels Ltd – 78 CCH 240 (Ker.)
• Company—Book profit under s. 115JA—Set off of unabsorbed loss and
depreciation—Brought forward unabsorbed depreciation has to be set off
while computing the book profit under s. 115JA—Profit of earlier years
cannot be set off against the loss occurring in the current assessment year
23
Losses set-off
….Emerging issues …
• No clear mandate about what to be adjusted first, whether
business loss or whether unabsorbed depreciation?
• Today’s MAT is much higher quantum due to denial of provisions
for diminution in value of assets, etc.
• Such higher quantum can’t be adjusted from past losses
• Moreover, there is no such mechanism
• Hence, what is set-off against past years’ book profits, difficult
to construe …. How to resolve this????
• If an assesse follows policy of proportionate adjustment of
current year’s profits against past losses and unabsorbed
depreciation, will it be incorrect?
24
Losses set-off
…Emerging issues….
……(further issues …)
• How to put forth company stand about adjustment of book profits
against past losses / UAD
• Whether some BOD resolution could serve the cause?
• Whether a company can carry forward - past reserves separately –
then next years losses separately – and then, adjust future profits
against losses?
• What happens if losses and depreciation, both are an equal
amount?
25
Tax Holiday
• Though not u/s 115J, section 115JA did grant good benefits from MAT levy
e.g. 80HHC / 80HHD / 10A / 10B, etc.
• Many issues arose
• MAT income was to be starting point for grant of deductions under above
sections – CIT V. Bhari Information Technology Systems P Ltd – 340 ITR 593
(SC)
• Due to typical phraseology, deductions for MAT based income was not
getting pegged down to phased reductions, etc. - Ajanta Pharma Ltd. V. CIT
– 78 CCH 734 (SC)
• All traditional holidays phased out
• New holidays only for International Financial Service Centre (under SEZ
Act)
26
Tax Holiday
Impact of SEZ Act
• Section 115JB(6) was appended into the ITA, 1961 vide SEZ Act, 2005
• It provided that, 115JB will not apply to a SEZ undertaking
• Vide Finance Act, 2011, the provision of sub-section (6) above was
curtailed from 1/4/2012
• But, SEZ Act, 2005 has an overriding effect considering the peculiar
phraseology therein, i.e.
The provisions of the Income-tax Act, 1961, as in force for the time being, shall apply to, or
in relation to, the Developer or entrepreneur for carrying on the authorised operations in a
Special Economic Zone or Unit subject to the modifications specified in the Second
Schedule.
• As such, can one still argue, that, MAT not applicable on SEZ
undertakings
• Appears possible, though, not tested yet …
27
Audited Accounts
• Apollo Tyres Ltd. V. CIT - 255 ITR 273 (SC)
– Arrears of depreciation were provided which, according to the
Revenue, were not in accordance with Sch. VI
– Object of MAT was to make companies liable to tax on profits shown
in their own accounts
– AO has to accept the authenticity of the audited accounts, which are
adopted in AGM. ROC has statutory obligation to examine the
requirements of Companies Act.
– AO does not have the jurisdiction to go behind the net profit shown in
the P & L a/c except to the extent provided in the Explanation to
section 115J.
– (Hence, Audited Accounts can’t be disturbed u/s 115JB)
Followed in multiple cases including CIT v. Adbhut Trading Co. (P.)
Ltd.- 338 ITR 94 (Bom)
28
Audited Accounts
• Rain Commodities Ltd. v. DCIT – 40 SOT 265 (Hyd)(SB)
Merely because long term capital gain is exempt under section 47(iv)
under normal provisions of Act, it cannot be concluded that it is also
to be reduced from net profit for purpose of computing book profits
under section 115JB when Explanation to section 115JB does not
provide for any deduction in terms of section 47(iv)
(Audited Accounts can’t be disturbed)
• CIT v. Thiruvambadi Rubber Investment Co. (P.) Ltd.- 79 CCH 475
(Ker)
Income from capital gains should be included for purposes of
computing book profits under section 115J
(Audited Accounts can’t be disturbed)
29
Audited Accounts
B & B Infratech Ltd. v. ITO - 76 taxmann.com 188 (Kar)
–
–
–
–
–
In P & L, surplus on waiver of loan settlement was credited
Same was removed for MAT purpose
Disagreed by AO and included the same for MAT purpose
CIT(A) and ITAT confirmed such inclusion
HC observed, 115JB have overriding effect upon other provisions of
Act
– Any deduction which is otherwise not provided by Explanation would
be outside scope of operation of section 115JB
– (Followed Apollo Tyres ….)
30
Audited Accounts
• CIT V. Adbhut Trading Co. P Ltd – 338 ITR 94
(Bom)
• Revenue challenged accounts saying, the same are
intentionally prepared in a wrong manner
• HC says, once accounts are certified by authorities under
Companies Act, AO can’t contend that the same is not rightly
prepared
• Following Apollo Tyres, revenue’s appeal was dismissed
(Audited accounts can’t be disturbed)
31
Audited Accounts
• Emerging situation
– It was transpiring that, audited accounts is the absolute and no
more tinkering is possible, either by assesse or by AO
– Audited accounts finality was a shelter for some and an obstacle
for others
– Whether after Apollo decision, nothing further is permissible in
real sense?
– Many items not taxable per se, were becoming eligible for MAT
– Hence, Apollo decision was also posing challenges
32
Audited Accounts
 Goldgerg Finance (P.) Ltd.–ITA no. 7496/ Mum/ 2013
Where assessee-company, a member of an AOP, received share of
profit from AOP and credited same in profit and loss account, the
same was held as not liable for MAT
Related amendment i.e. insertion of clause (iic) in Explanation 1 to
section 115JB by Finance Act, 2005, w.e.f. 1-4-2016, read as remedial
and retrospective in nature
Held, share income was not chargeable to tax in assessee's hands
under section 115JB
(Apollo decision was not referred..)
33
Audited Accounts
Syndicate Bank. v. ACIT - 7SOT 51(Bang)
– Issue was. crediting the profit and loss account interest on zero
coupon bonds
– CBDT had clarified that interest on zero coupon bonds is not an
interest in strict sense as it encompasses over certain period of time.
– As such, interest on ZCB was excluded while computing MAT
– AO disagreed and included the same applying Apollo Tyres
– ITAT held, ZCB interest is wrongly considered as profit considering
CBDT clarification
– Crediting of such interest to P & L does not make the P & L one, strictly
in accordance with Sch-VI of Companies Act
– Hence, notional interest on ZCB was liable to be excluded from MAT
(Apollo Tyres referred to ..)
34
Audited Accounts
Shree Cement Ltd. v. ACIT – 152 ITD 561 (Jaipur)
CIT v. My Home Power Ltd. – 365 ITR 82(AP )
ACIT v. L H Sugar Factory Ltd. – 46 CCH 354(Lukhnow)
Sicpa India (P.) Ltd. v. DCIT- ITA No. 885 of 2012 (Kol)
– Sales tax subsidy, held as capital receipt
– Carbon credit receipt held as capital receipt
– Observed, capital receipts have no element of profits embedded in
them
– If such non-profit receipts get credited to P & L, working results are
not rightly reflected as per Sch-VI of Companies Act
– Hence, such receipts ought not to be credited to P & L
(Apollo Tyres referred)
35
Audited Accounts can be disturbed?
Shivalik Venture (P.) Ltd. v. DCIT- 70 SOT 92 (Mum ITAT)
– Issue was, whether, profit on transfer of asset to a WOS is liable for
MAT, though, it is exempt u/s 47(iv)
– Assessee wanted to exclude such profit for MAT purpose
– Disagreed by the AO
– ITAT observed that, audited accounts ought to be read along with the
notes given therein
– A receipt which is not 'Income', cannot be part of 'Profit' as per Profit
& Loss account prepared in terms of Part II of Schedule VI to
Companies Act
– ITAT observed, logic of exemption of incomes u/s 10 ought to be
extended even to other situations
– (Apollo Tyres and Rain Commodities, both, distinguished ..)
36
Audited Accounts
JSW Steel Limited v. ACIT- ITA No. 923/ Bang/ 2009 (Mum ITAT)
– Assessee settled some term loans with a waiver and the waiver
amount credited to P & L
– For MAT purpose, these amounts were removed from BOOK PROFIT
working, analogy was that waiver of a trading liability is in revenue
field and waiver of a term loan is in capital field
– Capital Receipts cannot be regarded as being amount available for
distribution through the P & L
– Capital field receipts are outside purview of INCOME
– ITAT approved assesse’s contentions and observed, Audited Accounts
can be tinkered with, if the accounts are not prepared as per Part II &
III of Schedule VI of the Companies Act
– (Apollo and all related decisions observed, discussed, etc…)
37
Audited Accounts
Sumer Builders (P.) Ltd. v. DCIT – 32 CCH 269 (Mum Trib)
– Profit on sale of shares was directly credited to capital reserve
– Non crediting profit on sale of shares to profit & loss account was
contrary to significant accounting policy of assessee, AS-13,
requirements of Parts II and III of Schedule VI of Companies Act, 1956,
hence, AO can go behind the accounts and recast the same
– Therefore, AO had rightly brought profit on sale of shares to taxation
under MAT provisions of section 115JB
– (Rain Commodities followd …)
38
Audited Accounts
Sri Hariram Hotels (P.) Ltd. v. CIT – 94 CCH 254 (Kar)
– Capital gain on sale of land was directly credited to capital reserve
– AO held that capital gains ought to have been included to profit and
loss account, according to accounting standard
– It was held that AO had no power to embark upon fresh enquiry in
regard to entries made in books of accounts of company and no
adjustment cannot be made beyond those specified u/s115JB
– (Apollo Tyres applied…)
39
Audited Accounts
• CIT v. Karnataka Soaps & Detergents Ltd.– 64 taxmann.com 378 (SC)
•
•
•
Deferred Revenue expenses appearing in Balancesheet, claimed as deduction for
MAT purpose
Approved finally by HC
SLP dismissed against High Court's ruling that no disallowance of actual
expenditure for computing MAT just because it was shown as deferred revenue
expenditure for shareholders
– (Apollo Tyres referred + SLP dismissed by SC)
40
Lease Equalisation
• Deduction available - YES
Pr. CIT v. Sun Pharmaceutical Industries Ltd.– 293 CTR 489 (Guj)
TVS Finance and Services Ltd. v. JCIT- 318 ITR 435 (Mad)
Lease equalization charge is neither a reserve nor a deduction; said
amount would not be part of net profit in computing book profit under
section 115JA
• Deduction available - NO
CIT v. Weizmann Homes Ltd.– 357 ITR 74 (Kar)
Provision for contingency and lease equalization reserve represented
provision made in respect of unascertained liability and, thus, same were
required to be added back while computing book profit under section
115JA
41
14A
• Not to be applied for MAT
– Varroc Engineering Ltd. (India) Ltd. v. CIT – 168 TTJ 514 (Pune)
14A being a different regime altogether, no addition can be made to
book profit
• To be applied for MAT
– DCIT v. Viraj Profiles Ltd.– 156 ITD 72 (Mum)
Assessing Officer has rightly disallowed the expenditure by invoking
the provisions of section 14A of the Act, read with rule 8D of
Income-tax Rules, 1962 for computing book profit under section
115JB(2) of the Act, read with clause (f) to Explanation 1 to clause
115JB(2)
42
Prior Period Expenses
• Whether a deductible expenditure - YES
– CIT v. Khaitan Chemicals & Fertilizers Ltd.– 307 ITR 150 (Delhi)
– Tamil Nadu Cements Corporation Ltd. v. JCIT – 349 ITR 58 (Tamil Nadu)
An assessee is eligible to adjust prior period expenses while
computing book profit under section 115JA irrespective of as to
whether such prior period expenses are shown separately or not
• Whether a deductible expenditure – NO
– Sree Bhagawathy Textiles Ltd. v. ACIT– 342 ITR 244 (Kerala)
Assessing Officer has rightly disallowed the expenditure by invoking
the provisions of section 14A of the Act, read with rule 8D of
Income-tax Rules, 1962 for computing book profit under section
115JB(2) of the Act, read with clause (f) to Explanation 1 to clause
115JB(2)
43
Income already taxed in some past year
• Whether an income already taxed in some earlier year now
taxable again since credited to P&L - NO
CIT v. Nagarjuna Fertilizers & Chemicals Ltd.– 373 ITR 252 (AP)
- Where once profit of assessee company had suffered tax, its
inclusion in book profit was no basis to bring it under purview of tax
once again. Mere inclusion of those amounts in book profit referable
to under section 115J did not make much of difference from point of
view of income tax and bringing those amounts to tax once again
44
Treatment of DRR
• Whether allowable expenditure - YES
CIT Vs. Raymond Ltd. – 81 CCH 299 (Bom.)
– Debenture Redemption Reserve is nothing but amount set apart to
meet the known liability – National Rayon Corporation Ltd. (SC).
– Debentures are nothing but secured loan – Vazir Sultan Tobacco Co.
Ltd (SC)
– When debenture are issued, the liability to repay arises on that
moment.
– Mere fact that DRR is labeled as Reserve is not a reserve in true sense.
– Therefore DRR is not a reserve within the meaning of Explanation (b)
to sec. 115JA. Hence not to be added.
Different view taken in D. R. Ranka Charitable Trust – (Banglore ITAT) by
treating it as Capital in nature.
45
Treatment of Provision for NPA
• Whether allowable expenditure - NO
CIT Vs. Yashaswi Leasing and Finance Ltd. – 80 CCH 88 (Kar.)
– “A” created provision for NPA as per RBI Guidelines for which quantum
if pre-decided.
– Lower Authorities held that the said provision not to be added back as
the same is as per RBI Guidelines.
– HC held that the provision created in not ascertainable as per
retrospective amendment
– Hence to be added back in the computation
46
Audited Accounts and other
accounts based issues
• It is felt, field is wide for further deliberation
• All those situations of obvious capital receipts, outside ken
of taxation, ought not to be liable for MAT
• All capital gains / other receipts, which exempted
specifically, also ought to be outside MAT levy
• MAT should only be on, timing differences …
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Treatment of Foreign Tax Credit in 115JAA/115JD
BARE TEXT OF AMENDMENT
•
“It is also proposed to amend section 115JAA and 115JD so as to provide that the
amount of tax credit in respect of MAT/ AMT shall not be allowed to be carried
forward to subsequent year to the extent such credit relates to the difference
between the amount of foreign tax credit (FTC) allowed against MAT/ AMT and FTC
allowable against the tax computed under regular provisions of Act other than the
provisions relating to MAT/AMT.
•
These amendments will take effect from 1st April, 2018 and will, accordingly, apply
in relation to the assessment year 2018-19 and subsequent years.”
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Treatment of Foreign Tax Credit in 115JAA/115JD
ANALYSIS OF AMENDMENT
The amount of Tax Credit in respect of MAT shall not be allowed to be carried
forward to subsequent year to the extent such credit relates to the difference
between the amount of Foreign Tax Credit (FTC) allowed against MAT/AMT and
FTC allowable against the tax computed under regular provisions of Act other than
provisions relating to MAT/AMT.
In other words:-
MAT Credit to be ignored
= (FTC allowed against MAT) – (FTC allowed against Normal Tax)
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Treatment of Foreign Tax Credit in 115JAA/115JD
Mode of computation of FTC
•
FTC shall be computed separately for each source of Income for each country. It
shall be the lower of: o Tax payable under the Act on such income; or
o Foreign tax paid on such income
•
Where the foreign tax paid exceeds the amount of tax payable under the
provisions of tax treaty, such excess amount shall not be considered.
•
In case of MAT/AMT liability, FTC would be allowed in the same manner as is
allowable against tax payable under the normal provisions.
•
Any excess of FTC available against tax payable under the MAT/ AMT provisions as
compared to the tax payable under the normal provisions shall be ignored while
computing the MAT/ AMT credit.
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Treatment of Foreign Tax Credit - Illustration
•
Illustration I – A Ltd has earned income from Singapore, on which tax has been
withheld in Singapore to the extent of INR 75,000. Assuming this income is exempt
under Section 10AA of Income Tax Act, 1961. However, tax as per MAT comes to
INR 1,00,000.
Particulars
Existing
Provisions
Tax under Normal Provisions (A)
Proposed
Amendment
Nil
Nil
Tax under MAT (B)
1,00,000
1,00,000
Tax liability for the year (A or B whichever is higher)
1,00,000
1,00,000
Tax withheld in foreign country
75,000
75,000
FTC utilised against MAT liability (C)
75,000
75,000
Nil
Nil
1,00,000
(B-A)
25,000
(B-A)-(C-D)
•
.
FTC against tax payable under Normal Provisions (D)
MAT credit allowed as per 115JAA
Hence loss of MAT Credit allowed to be carried forward due to amendment
75,000
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Treatment of Foreign Tax Credit - Illustration
•
Illustration II – Considering that everything else remains same, let's assume that
the above income is dividend income and tax as per Income Tax Act, 1961 comes
to INR 50,000
Particulars
Tax under Normal Provisions (A)
Existing
Provisions
Proposed
Amendment
50,000
50,000
Tax under MAT (B)
1,00,000
1,00,000
Tax liability for the year (A or B whichever is higher)
1,00,000
1,00,000
Tax withheld in foreign country
75,000
75,000
FTC utilised against MAT liability (C)
75,000
75,000
FTC against tax payable under Normal Provisions (D)
50,000
50,000
MAT credit allowed as per 115JAA
50,000
(B-A)
25,000
(B-A)-(C-D)
Hence loss of MAT Credit allowed to be carried forward due to amendment
25,000
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Treatment of Foreign Tax Credit
CONCLUSION
•
The Budget amendment is thus attempting to plug a double benefit, which an
Indian Tax Payer liable under MAT/AMT could potentially avail if he is offsetting
certain foreign tax credits against such MAT/AMT.
•
Possibly, now the assessees may not declare dividends to the Indian Company
from their overseas subsidiaries, if MAT is being paid by the Indian Company. The
effective tax rate increases from 17.34% (15%+12%+3%) to 21.34%
(18.5%+12%+3%) under MAT. Hence more companies would prefer to park their
money abroad till they come out of MAT.
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MAT carry forward
• In Finance Act, 2017, period of carry over is increased to 15
years from 10 years
• NPV of credit of (say) Rs. 100, which one gets after 12 years,
could be as low as (say) Rs. 10
• In many cases, it is likely to be lost
• In real terms, MAT credit is leaning to the concept of MIRAGE
• Whether any lost MAT credit could be claimed as deduction?
• Else, whether issues of validity of MAT levy itself be raised,
(in some veiled manner?)
54
Concealment penalty & MAT
• Reference to “income” in section 271(1)(c)
• Explanation-3 (no return case), Explanation-5 (search finding of
undisclosed income case), Explanation-7 (T-P additions case); all refer to
normal income
• Section 271(1)(c) existed in it’s same form (s.t. conceptual changes) from a
point of time much earlier to MAT regime
• No amendment specifically to include MAT additions in ambit of
concealment till Year 2015
• Decision in Nalwa’s case + CBDT circular are on a different point
• Issue – whether concealment penalty can be levied for period prior to
year 2015 ???
55
IND AS
• Other Comprehensive Income (OCI) – A new
mandatory disclosure
• Components of OCI
– Items that will be reclassified to P&L
– Items that will not be reclassified to P&L
56
IND AS
Other Comprehensive Income
Items that will be reclassified through P&L
- Generally these items include such effects which, at some
point of time in future will have an impact in the P&L account.
- These items have been kept out of the ambit of MAT since the
same have not been specifically mentioned under sub-section
2A of section 115JB of the ITA, 1961.
57
IND AS
Other Comprehensive Income
Items that will be reclassified through P&L
Examples:-
Impact on account of fair valuation of Debt Instruments
Exchange difference in translating the financial statements of a Foreign
Operations
Gain/Loss on hedging instruments in a cash flow hedge
Share of OCI in subsidiary / associate / JV to the extent classified to P&L
Share of Foreign Currency Translation Difference of Associates
Reclassification of financial assets out of the fair value through OCI
measurement category into fair value through profit or loss measurement
category
58
IND AS
Other Comprehensive Income
Items that will NOT be reclassified through P&L
- Generally these items include such effects which,
at no point of time in future will have an impact
in the P&L account.
- These items have been specifically mentioned
under sub-section 2A of section 115JB of the ITA,
1961 and thereby making the same liable to MAT
subject to some exceptions.
59
IND AS
Other Comprehensive Income
Items that will NOT be reclassified through P&L
Examples:-
Re-measurement effect of Defined benefit plan
Gain / Loss on Equity Instruments designated as through OCI
Gain / Loss on hedging instruments which hedge investments in equity
instruments measured at fair value through OCI
Fair value changes relating to own credit risk of financial liabilities
designated at fair value through P&L
Changes in Time Value of options contract while designating it as a
hedging instrument
Changes in the value of the forward elements of forward contracts
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IND AS
Other Comprehensive Income
Items that will NOT be reclassified through P&L
Exceptions out of the above for purpose of MAT:-
Revaluation surplus for assets in accordance with the IND AS 16 (Property,
Plant & Equipment) and IND AS 38 (Intangible Assets).
Gains or losses from investments in equity instruments designated at fair
value through OCI in accordance with the IND AS 109 (Financial
Instruments).
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IND AS
•
Concerns are raised that through IND AS, fair value based expressions are likely
to come under scope of MAT and non-income items (but only valuation
differences) will get taxed
•
Assuming so, one will have to go to basic concept and rationale for levy of MAT,
i.e. tax Zero Tax Companies to pay some tax on profits available for distribution
of dividend
•
Same test appears to have been applied by the M P Lohia committee while
suggesting MAT levy on IND AS accounts
•
Contentions can be taken accordingly….. Like, FV expression is not same as real
profit and so on ….
•
Field is wide open for professional opportunity ….
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Thank u..!!
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