Minimum Alternate Tax (MAT), DDT, Corporate taxes


Amount
Computation of Minimum Alternate Tax (MAT) for AY 2016 and after
Net profit as per Profit and Loss account (A)
Add: Positive adjustments
1) Income-tax and provision thereof
2) Reserve created during the year
3) Provisions for unascertained liabilities
4) Provision for losses of subsidiary companies
5) Dividend paid or proposed
6) Expenditure to earn income exempt under Sec. 10, 11 and 12
7) Depreciation (including the depreciation on revalued amount)
8) Deferred tax liability created during the year
9) Provision for diminution in the value of any asset
10) Revaluation reserve relating to revalued asset on retirement or disposal of such asset

Total positive adjustments (B)
Less: Negative adjustments
1) Amount withdrawn from any reserve or provision
2) Income exempt under Sec. 10, 11 and 12
3) Depreciation (excluding depreciation on revalued amount)
4) Lower of brought forward book losses or book depreciation
5) Profits of sick industrial company (if losses doesn't exceed net worth)
6) Deferred tax assets created during the year
7) Amount withdrawn from revaluation reserve and credited to the P&L account, to the extent it does not exceed amount of depreciation on account of revaluation of assets as referred above.
Total negative adjustments (C)
Book profits for purpose of MAT (A + B - C)
Minimum Alternative Tax
Add: Surcharge
Add: Education Cess
Add: Secondary and Higher Education Cess
Total tax payable as per MAT
Tax payable as per normal provisions (including surcharge and cess)
Less: MAT Credit
Final tax payable during the year



Salient Features



·         This provision is applicable only to a company.

·         This section overrides other provisions of Income Tax Act.

·         Section 115JB (5): Starts with wording “Save as otherwise provided in this section”, hence all other provisions of this Act shall apply to book profit. i.e. Advance tax, TDS, Interest, surcharge etc.

·         Section 115JB is not applicable to a foreign company which is not having Permanent Establishment in India.

·         When applicable: Tax payable under the normal tax provision (as per books of accounts) is less than 18.50%+SC+EC+SHEC of book profit.

·         Book profit refers to Net profit as per Schedule VI of the companies Act, which is carried to balance sheet and shown in shareholders fund. Here the term net profit read as profit and loss appropriation a/c balance appear below the line.

·         Heads of income classification is only for tax payable under the normal tax provision. From Schedule VI perspective, such classification does not exist. The principle of accrual concept is applied. Income of the year matched with expenses of the year and all the revenue of the entity should be booked in profit and loss account.

·         Section 115JAA: The excess of tax paid, over and above normal tax, will be allowed as tax credit and permitted to be carried forward for ten assessment years succeeding the AY in which the credit become  allowable. The excess of tax paid referred above shall be known as MAT credit.

·         MAT credit adjustment can take place when normal tax is more than MAT, provided adequate MAT credit is available.

·         Conversion of net profit into book profit is made by adjustments as permitted under law.

·         MAT is applicable only in the year, in which book profits exist. So, MAT is not applicable when a company reports loss.

·         Section 211(2) of the Companies Act, 1956: Certain companies like Insurance companies, Banking companies, Electricity companies etc., are allowed to prepare their profit and loss account in accordance with the form specified in or under the Act governing such class of companies. Hence an option is available to prepare its profit and loss accounts either in accordance with the provisions of Schedule VI of the Companies Act, 1956 (or) in accordance with the provisions of the Act governing such company.

·         Any income accruing or arising to a company from life insurance business would not be subject to MAT provision. {(Retrospective w.e.f. 2000-01)(Fin. Act, 2012)}





Various Issues in MAT


There are many issues related to Section 1 15JB, which have been the matter of contention between the assessees and the Department. Some of these issues have been settled by way of amendment in the Act or by way of judgements of the Hon’ble Supreme Court; however, some of these issues are still controversial.

Both type of issues are discussed here under

1.  The amount of deferred tax and the provision therefor:Earlier deferred tax was not added back by the assessees while computing book profit on the plea that this is not an income-tax as mentioned in clause (a) in Explanation-1. Clause (h) was inserted in the Explanation to remove this difficulty. Now, if deferred tax or any provision on this account is debited in P&L account, then it has to be added back as per clause (h) of Explanation-1. This amendment was made by the FINANCE  Act, 2008 and it has been made effective from A.Y. 200 1-02 onwards.

2.  The provision for doubtful debts:Majority of the A.Os. were adding this item while computing book profit under clause(c) of Explanation-1. Clause (c) refers to the amount set-aside for liabilities, other than ascertained liabilities. The Hon’ble Supreme Court in the case of CIT v/s HCL Comnet Systems & Services Ltd., 174 Taxman 118 has held that provision for doubtful debts is not a liability. The provision for doubtful debt is a provision made for likelihood of ir-recoverability of any money advanced by the assessee. Hence, by no stretch of imagination it can be termed as liability.
The Act has now been amended and clause (i) has been inserted in Explanation-1 by FINANCE  Act, 2009 w.r.e.f. 01/04/2001. As per clause (i), the amount or amounts set-aside as provision for diminution in the value of any asset has to be added back in net profits, if this amount was debited to P&L account.
Thus, now provision for doubtful debts should be added under clause (i) of Explanation-1.

3. Scope of the term ‘Income-tax’:
As per clause (a) the amount of Income-tax paid or payable and the provision therefor is to be added back while computing book profit, if the same is debited in the P&L account. Whether tax on distributed profits or surcharge on Income-tax is covered in clause (a) was a matter of dispute between the assessees and the Department. This dispute has been settled by way of insertion of Explanation-2 in Section 1 15JB of the Act. Explanation-2 has been inserted by the FINANCE  Act, 2008 w.r.e.f. 01/04/2001. As per this explanation, dividend distribution tax, surcharge, education cess and secondary and higher education cess is included in the definition of Income-tax for the purposes of clause (a).
A peculiar situation arises sometimes when it is observed that the companies make provision for taxation to be paid by their foreign branches under tax laws of those countries. The question arises that such tax payable in foreign countries is to be added back or not while computing book profits. The AAR in the case of Bank of India, In re AAR No.732 of 2006 has held that such provision is required to be added back to book profits, because ‘income-tax’ in clause (a) does not mean only income-tax payable in India..

4.          Applicability of the provisions of Advance tax:It has been clarified by Circular No.13/2001 dated 09/11/2001 that provisions of advance tax are also applicable on the companies paying MAT and interest under Section 234B & 234C is leviable in case of default by these companies. This view has been affirmed by the Honb’le Supreme Court in the case of JCIT vs. Rolta India Ltd. reported in 196 Taxman 594.

5.          Tax credit under Section 115JAA and calculation of interest under Section 234B:The controversy in this regard has been settled in favour of the assessee by way of substitution of explanation to sub-section(1) of Section 234B of the Act. The tax credit under Section 1 15JA has to be given before calculating the shortage in respect of payment for advance tax. This explanation was substituted by the FINANCE  Act, 2006 and is applicable from A.Y. 2007-08 onwards.

6. Depreciation on account of revaluation of assets:Earlier there was a dispute whether higher amount of depreciation on re-valued assets can be allowed while computing book profit. The dispute has been settled now by way of amendment in the Act. The depreciation on account of revaluation of assets cannot be reduced while calculating book profit and this can be understood from combined reading of clause (g) and clause (iia) of Explanation-1. The amount of depreciation is to be added back to the net profits, if debited to P&L account as per provisions of clause (g) of Explanation-1. As per the provisions of clause (iia), the amount of depreciation debited to the P&L account (excluding the depreciation on account of revaluation of assets) is to be reduced from the net profits. The net effect is that depreciation on account of revaluation of assets is not to be reduced for the purpose of computation of book profit. Clause (g) and clause (iia) were inserted in the Act by the FINANCE  Act, 2006 and are applicable for A.Y. 2007-08 onwards.
However, it has to be noted that if any amount is withdrawn from revaluation reserve and credited to P&L account, the amount to the extent of depreciation on account of revaluation of assets would be reduced while computing the book profit as per the provisions of clause (iib) of explanation-1.

7. Amount withdrawn from any reserve:
As per clause (i) of Explanation-1 to Section 11 5JB of the Act, the amount withdrawn from any reserve or provision and credited to the P&L account is to be reduced while computing book profits only if the book profit was increased by amount of reserve in the year in which the reserve was created.
Therefore, the A.O. should examine the P&L account of the year in which the reserved was created. The P&L account of the assessee company should be effectively credited by the amount of reserve in the year of creation and it should not be merely an adjustment contra entry. The Hon’ble Supreme Court in a very well reasoned and speaking judgement in the case of Indo Rama Synthetics (I) Ltd. vs. CIT, 196 Taxman 535 has discussed this provision at length. This judgement should be read by every A.O. in order to clarify concepts regarding reserves and credits in P&L account.
It is to be further noted that amount transferred to every kind of reserve is to be added to net profit to determine book profit. Therefore, if any amount is transferred to reserve account under Section 36(1)(viii), 80IA(6), 10A(1A) or 10AA of the Act; though it is allowed as a deduction while computing the total income under normal provision, it should be added back to compute book profits, if debited to P&L account.

8. Carry forward of unabsorbed depreciation and business losses:
Taxation on the basis of book profits does not affect the carry forward and set off of business losses and unabsorbed depreciation under the normal provisions of the Act. This has been amply clarified in sub-section (3) of Section 115JB of the Act. Carry forward of losses for the purposes of book profits and carry forward of the losses for the purposes of normal provisions of the Act are two parallel streams and each stream is unaffected and untouched by the other stream. It is to be further observed that carry forward of losses and unabsorbed depreciation under the normal provisions of the Act will be computed as per the provisions of Income-tax Act. On the other hand the carry forward of business losses and unabsorbed depreciation for the purposes of book profits will be as per the books of account of the assessee company.
The hon’ble Supreme Court in the case of Karnataka Small Scale Industries Development Corporation vs. CIT, 258 ITR 770 has held that the brought forward business losses, unabsorbed depreciation or investment allowance etc determined as per the normal provisions of the Act should be set-off against the total income as per the normal provisions and only balance amount should be carried forward, even if when the tax has been determined and paid on the basis of book profits and not on the basis of total income as per the normal provisions.
The AAR in the case of Rashtrya Ispat Nigam Ltd., In re reported in 155 Taxman 60 has ruled that the applicant does not have the option to reduce the current year’s profits by the loss brought forward or unabsorbed depreciation for the purpose of carry forward under Section 115JB in its accounts in a manner different from the manner adopted for determination of book profits under Section 1 15JB of the Act.
In the above case, the applicant had correctly applied the provisions of Section 115 JB in the current year by reducing brought forward business losses , but while carrying forward it had adjusted the book profit from unabsorbed depreciation. This was done in order to ensure that figure of carried forward business losses does not become nil in near future. The applicant pleaded that it has right to set-off income as per its option in its books of account and it is not bound by the manner of computation specified in Section 1 15JB for carry forward of business losses and unabsorbed depreciation.
The AAR did not accept the contentions of the assessee. Although the ruling of AAR is only applicable for a specific case under consideration, but it has a persuasive value. Further, the reasoning given in the ruling is very sound. Therefore, the A.O. should carefully scrutinise the manner of computation of carry forward of losses and unabsorbed depreciation in earlier years, while computing book profit. The correct manner has also been explained in Circular No.495, dated 22/09/1987.

9. The amount of loss brought forward or unabsorbed depreciation, whichever is less as per books of account:
As per clause (iii) of Explanation-1 of Section 11 5JB of the Act, the amount of loss brought forward or unabsorbed depreciation, whichever is less as per books of account has to be reduced for the purpose of computation of book profit. The controversy regarding whether loss shall include depreciation or whether provisions of clause (iii) will apply in case if any of these amounts is nil has been put to rest by insertion of explanation in clause (iii) itself. It has been clarified that the business loss shall not include depreciation loss and should be calculated after reducing deprecation amount. It has been further clarified that the provisions of this clause shall not apply if the amount of loss brought forward or unabsorbed depreciation is nil.
However, one more debatable issue whether accumulated figures of unabsorbed depreciation/brought forward loss is to be taken into account and lesser of these two is to be reduced or whether unabsorbed deprecation/brought forward loss is to be reckoned on year to year basis has not been resolved. The view of the Department is that the quantification should be done on year to year basis.

The view of the assessee is that the quantification should be done on the accumulated amount. This can be understood from the following table –
Depreciation as per books Loss as per
books excluding
depreciation Total (Rs.)
A.Y. 1999-2000 42,25,696/- 94,88,756/- 1,37,14,352/-
A.Y. 2000-2001 44,42,777/- 1,30,33,168/- 1,74,76,945/-
A.Y. 2001-2002 44,53,565/- (7,30,402) 37,23,163/-
A.Y. 2002-2003 19,93,456/- 22,84,195/- 42,77,650/-
1,51,15,393/- 2,40,75,717/- 3,91,91,110/-
In the above case, the assessee had reduced Rs. 1,51,15,393 while computing book profit as per clause (iii). However, the A.O. allowed reduction of only Rs.1,06,61,828. The A.O. took the correct plea that since there was no loss in AY 2001-02, therefore, no amount was available for set-off as per clause (iii) in this year.
Although the ITAT in the case of Amline Textiles (P) Ltd v/s ITO, 27 SOT, 152 did not accept the plea of the Department and allowed the appeal of the assessee; however with due respect to ITAT, the view taken by it in the above case is not the correct proposition of law and reasoning given in the Order is flawed. Therefore, The A.O. should allow the reduction on year to year basis in the correct spirit of law and not on the consolidated amount.

10. Treatment of capital gains:
There may be instances where the surplus arising out of transfer of capital assets is taken directly by the assessee company to the reserves and said transaction is not routed through the P&L account. The assessee may take plea that since this transaction is not routed through the P&L account, therefore, the A.O. cannot make any adjustment in view of the judgement of the Hon’ble Supreme Court in the case of Apollo Tyres Ltd. vs. CIT.
The Hon’ble Bombay High Court in the case of CIT vs. Veekaylal Investment Co. (P) Ltd., 116 Taxman 104 has held that capital gains would be part of computation of book profits. It has been held by the Hon’ble high Court that under clause (2) of part-II of Schedule VI to the Companies Act where a company receives the amount on account of surrender of leasehold rights, the company is bound to disclose in the P&L account the said amount as non recurring transaction or a transaction of an exceptional nature irrespective of its being capital or revenue in nature. It would be inappropriate to directly transfer such amount to capital reserve. Such receipts are also covered by clause 2 (b) of Part-II of Schedule VI of the Companies Act which, inter-alia, states that P&L account shall disclose every material feature including credits or receipts and debits or expenses in respect of non recurring transactions or transactions of exceptional nature. The Hon’ble High Court further held that capital gains would certainly be one of the various items whose information is required to be given to the share holders under clause 3 (xii) (b). The Hon’ble High Court overruled the order of the Calcutta Special Bench of ITAT in the case of Sutlej Cotton Mills Ltd. vs. Asst. CIT, 199 ITR 164 in this case.
It is to be kept in mind by the A.O.s that even if the long term capital gains is nil because of any exemption like exemption under Section 54E of the Act as per the normal provisions of the Act, then also long term capital gains is to be included while computing book profits.

11. Scope of scrutiny of P&L account by the A.O. while applying MAT provisions:
The Hon’ble Supreme Court in the landmark judgement of Apollo Tyres Ltd. vs. CIT, 122 Taxman 562 has held that the A.O. while computing the income under Section 1 15J 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 A.O. thereafter has limited power of making additions and reductions as provided for in the Explanation to the said section. To put it differently, the A.O. does not have the jurisdiction to go behind the net profit shown in the P&L account except to the extent provided in the Explanation to Section 115J.
In the case of Malayala Manorama Co. Ltd., the A.O. observed that the depreciation debited in the P&L account as per the IT Rules was not admissible and the company should have debited depreciation as per the provisions of the Companies Act. The case travelled upto the Supreme Court. Following the judgement in the case of Apollo Tyres, the Hon’ble Supreme Court did not accept the argument of the Revenue that the A.O. can re-scrutinize the account and satisfy himself that these accounts are prepared as per the provisions of the Companies Act.
Fortunately, Hon’ble Supreme Court in the case of Dynamic Orthopaedics (P) Ltd. vs. CIT reported in 190 Taxman 288 has differed from the above judgement delivered in the case of Malayala Manorama Co. Ltd. vs. CIT 169 Taxman 471 and referred the matter to a larger Bench of the Court.
Therefore, issue of scrutiny of P&L account prepared by the Company is still wide open and it is expected that the issue will be decided by a larger Bench of the Supreme Court.

12. Applicability of MAT provisions on statutory corporations and boards etc.:
Sometimes it is observed that some corporation or boards are governed by specific Acts and they are created by such Acts. In the Income-tax proceedings, their status is Company. However, they are not required to prepare their P&L account and balance sheet as per the provisions of the Companies Act and they are required to prepare their P&L account as per their governing Acts. In the case of Kerala State Electricity Board vs. DCIT reported in 196 Taxman 1, the Hon’ble Kerala High Court observed that MAT provisions are not applicable on Kerala State Electricity Board since it is required to prepare its P&L account as per Electricity Act and not as per the Companies Act.
If any corporation/board is not required to prepare its P&L account as per the Companies Act, then it will be very difficult to put forth the Revenue’s case for applicability of MAT provisions. However, this difficulty has been removed in the case of certain companies by way of insertion of clause(b) in sub-section (2) in Section 115JB by the Finance Act, 2012. It has been been mandated in this clause that every company , to which proviso to sub-section (2) of Section 211 of the Companies Act is applicable, shall prepare its P&L account as per the Act governing such company for the purposes of Section 115 JB.
The following companies have been mentioned in proviso to sub-section (2) of Section 211 of the Companies Act
(i)                Insurance or banking company.
(ii)             Any company engaged in the generation or supply of electricity.
(iii) Any other class of company for which a form of P&L account has been specified in or under the Act governing such class of company.


13. Arrears of depreciation:
Although, the assessee has an option under the Companies Act of adopting a straight line method or WDV method for claiming depreciation; however, deduction of extra depreciation as arrears of past years while computing book profit is not allowable, as has been held by the Hon’ble M.P. High Court in the case of Gilt Pack Ltd. vs. Union of India reported in 163 Taxman 331. While arriving this conclusion, the Hon’ble High Court followed the judgement of the Hon’ble Supreme Court in the case of Karnataka Small Scale Industries Development Corporation vs. CIT.


14. Prior period expenses:
The predominant view of the Courts is that if prior period expenses are debited in P&L account in accordance with the provisions of the Companies Act, then such expenses are liable for deduction.
However, if it is found by the A.O. that prior period expenses are not debited in P&L account and these expenses are shown in P&L appropriation account, then the A.O. should not allow these expenses to be reduced while computing book profits since the judgement of the Hon’ble Supreme Court in the case of Apollo Tyres is equally applicable to the assessees also. The judgements of the Hon’ble Kerala High Court in the case of Sree Bhagwathy Textiles Ltd. vs. ACIT, 199 Taxman 14 and Hon’ble Madras High Court in the case of CIT vs. Swamiji Mills Ltd., 25 Taxmann.com 110 are the judgements in the favour of the Department on this issue.
One more example that the judgement of the Supreme Court in the case of Apollo Tyres is equally applicable to the assessee is the case of the Gujarat State Petroleum Corporation Ltd. vs. JCIT reported in 308 ITR (AT) 248 (Ahmedabad). The ITAT, Ahmedabad following the judgement in the case of Apollo Tyres has held that deduction under Section 42 for business engaged in prospecting for extraction or production of mineral oil not debited in the accounts cannot be claimed as deduction while computing book profits.

15.     Applicability of MAT provisions on foreign companies:The applicability of MAT provisions on foreign companies has been a matter of dispute since long. The Authority for Advance Ruling in P.No.14 of 1997, In re 234 ITR 335 held that Dutch Company was liable to tax on book profits. In the case of Timken Company, In re 326 ITR 193, the AAR has held that since the non resident US Company has no PE in India, therefore, it cannot be liable for MAT.

16.   MAT credit of amalgamated Company to the amalgamating Company:The tax credit determined under Section 11 5JAA of the Act is allowed as set off in a year in which tax is payable on the total income in accordance with the normal provisions of the Act. Set off of MAT credit brought forward in allowed to the extent of the difference between tax on total income and tax which would have been payable under Section 115JB of the Act. As per the provisions of sub-section (1A) of Section 1 15JAA of the Act, if tax is paid by any company under Section 1 15JB then credit in respect of the tax so paid shall be allowed to him in accordance with the provisions of this section.
It is clear from sub Section (1A) that tax credit is to be allowed to the company which has paid taxes under Section 1 15JB. When amalgamating company has not paid any tax and tax was paid by the amalgamated company, then credit cannot be provided to the amalgamating company. Further, wherever certain benefits are to be provided to the amalgamating company, then the same have been mentioned in the Act itself. Since there is no specific provision for credit of MAT in the case of the amalgamating company, therefore, the A.O. should not allow any credit to the amalgamating company.

17. Applicability of MAT on undertakings covered under Sections 10A & 10B:
Earlier MAT was not applicable on income of the units covered under Section 10A and 10B. Now, these undertakings have been brought under MAT provisions from A.Y. 2008-09 onwards.


Dividend Distribution Tax Computation - Grossing up from Oct 2014



*DDT impact on foreign investors* The committee led by CBDT member Arbind Modi is expected to submit its report to the finance ministry in the coming days. It is unclear whether it will be made available for public comments. 

Currently, an Indian company declaring dividends has to pay DDT at the rate of 20.55% (including surcharge and cess). Dividend income is tax-free in the hands of foreign shareholders. Certain tax residents of India, such as individuals, Hindu Undivided Families (HUFs) and firms, having dividend income aggregating to Rs 10 lakh or more, have to pay tax at 10% plus applicable surcharge and cess.

The task force examined the mechanism for taxing dividends across countries. While India’s mechanism of DDT was drawn from the South African regime, the latter abolished this system several years ago. With countries also lowering their corporate tax rate — for instance, US lowered it from 35% to 21% — it was felt that the maximum marginal rate for India Inc of 35% (for companies with a turnover of more than Rs 250 crore) and the DDT of 20.55% is onerous.

Foreign tax credit (FTC), which is a credit in the home country (that is, in the country of the investor) for taxes paid overseas, is challenging to avail in respect of DDT. Major investor countries in India — such as Singapore, Japan and the UK — adopt a territorial tax regime and foreign dividend is not taxed. After recent tax reforms, dividends from a foreign subsidiary are exempt in the hands of a US company, subject to meeting a 10% ownership requirement. 

As foreign dividend is tax-free, FTC is not available in these countries. In such cases, DDT is a heavy sunk cost for the parent or affiliate investor company. Participation exemption clauses in several EU countries entail that a significant portion of foreign dividend is exempt in the hands of shareholders of such countries. FTC is available, but only to the extent it relates to taxable foreign income. Other countries, such as Mauritius or Australia, tax foreign dividend but grant an FTC for the taxes paid in the source country (eg, India).

As DDT is levied on the Indian company and not on the shareholders who receive the dividend, claiming FTC generally poses difficulties or requires meeting of certain conditions. Underlying tax credit (for DTT) can be claimed in Mauritius by investors who meet certain threshold norms in the Indian investee company. “Even overseas individual investors, say a green card holder who has to pay tax on his worldwide income in the US, suffer. While DDT is an indirect burden borne by them, they do not get or find it difficult to get an FTC,” says Gautam Nayak, tax partner at CNK & Associates. 

“Removal of DDT and its replacement with withholding tax will benefit international investors significantly. First, the rate of withholding tax under many tax treaties is low — typically at 10%. Second, the ambiguity that exists today on whether DDT is available as a credit in the home country of the foreign investor will go away,” says Abhishek Goenka, tax expert.

“Most foreign shareholders will be able to claim an FTC for the taxes withheld in India. The lower withholding tax rates will also result in enhanced dividend payouts and boost investor sentiment,” adds Punit Shah, partner, Dhruva Advisors.

“Of course, if foreign dividends are tax-exempt in the home country, no FTC will be available for taxes withheld in India. But, owing to a lower withholding rate as compared to DDT, the sunk cost burden will be reduced,” says Nayak.