The provisions relating to Minimum Alternate Tax (MAT) were introduced under the Income-tax Act, 1961 (the Act) from Assessment Year 1988-89 with an intent to levy tax on zero tax companies on the basis of their book profits. The term book profit is defined to mean the net profit as shown in the Profit and loss account (P&L a/c) as prepared in accordance with Parts II and III of Schedule VI of the Companies Act, 1956 (Cos. Act) subject to prescribed adjustments, including inter alia deductions for certain tax benefits (for e.g. export profits under section 80HHC, 80HHE etc.).
There has been considerable dispute on the manner of computation of book profit. One of the areas of dispute is whether income which is otherwise exempt under the normal provisions of the Act is deductible while computing the book profit under MAT.
Some earlier rulings
In an earlier ruling in CIT vs Veekaylal Investment Company Pvt. Ltd. [2001] 249 ITR 597, the Bombay High Court held that book profit under section 115J was to be computed in accordance with the provisions of Schedule VI of the Cos. Act, which essentially required disclosure of credits or receipts and debits or expenses in respect of non-recurring transactions or transactions of an exceptional nature. Consequentially, long term capital gains were held to be included for the purposes of computing the book profit.
In a landmark decision in Apollo Tyres Ltd. vs. CIT [2002] 255 ITR 273, the Supreme Court held that the assessing officer (AO), while computing the book profit has only the power to examine whether the books of account are certified by the authorities as having been properly maintained under the provisions of the Cos. Act and that the AO does not have any jurisdiction to go behind the net profit in the P&L a/c, prepared in accordance with Parts II and III of Schedule VI except to the extent provided under the Explanation to section 115J of the Act.
Recent ruling
The Special Bench of the Income-tax Appellate Tribunal, Hyderabad (Tribunal) has recently, in the case of Rain Commodities Ltd. vs. DCIT (ITA No. 673/Hyd/2009) (the Company) considered the above issue, since there were conflicting rulings on the subject of inclusion of exempt income for MAT.
The Company, in this case, had transferred certain capital assets to its wholly owned subsidiary. The capital gains thereon had been claimed as exempt, in computing the tax liability under the normal provisions of the Act, in view of the specific exemption under section 47(iv) of the Act for such transfers. The profits arising from the transfer was disclosed as an extraordinary item in the P&L a/c and had also been excluded while computing the book profit under section 115JB. The tax authorities rejected this claim and included the gains for computing the book profit and levying MAT thereon.
The question, inter alia, before the Special Bench was whether the gains arising from the transfer of capital assets to its wholly owned subsidiary, being exempt under the normal provisions of the Act, was to be included in the computation of book profits under section 115JB?
Relying upon settled judicial precedents the Tribunal observed that, under MAT provisions, the AO has the power to alter the net profit as per its books of account only in the following cases :
· If it is discovered that the P&L a/c is not drawn in accordance with Parts II and III of Schedule VI of the Cos. Act; or
· If accounting policies and standards are not adopted for preparing accounts and the method, rate of depreciation have not been correctly adopted for preparing such accounts laid before the annual general meeting
The key issue therefore was whether exclusion of capital gains was permitted under Parts II and III of Schedule VI. It was an undisputed fact that the company had included the capital gains earned in the P&L a/c which had been prepared in accordance with Parts II and III of Schedule VI. Neither in the notes to accounts nor in the audit report had the auditors given any reservations in connection with the accounting treatment of such gains. In any case the profits or losses in respect of transactions of an exceptional or non-recurring nature were required to be disclosed in the P&L a/c. Hence it could not be disputed that the capital gains were to be included in computing the book profit.
The Tribunal further observed that section 115JB overrides the other provisions of the Act. At the same time sub-section (5) to section 115JB provides that the book profit has to be computed after taking into consideration the other provisions of the Act. On a conjoint and harmonious reading, the Tribunal held that, the computation mechanism specifically provided under section 115JB needs to be followed and the normal provisions relating to computation of income under any head of the Act shall not be applicable. Accordingly, the company was not entitled to a deduction of the exempt capital gains, in the absence of a specific exclusion provided under section 115JB, for the purposes of computing the book profit.
Conclusion
The Tribunal has therefore reaffirmed the principles laid down by the Supreme Court in Apollo Tyres Ltd. case that the net profit as per the P&L a/c prepared in accordance with Schedule VI of the Cos. Act has to be accepted. The Ruling clarifies that an item of income that is otherwise exempt under the normal provisions of the Act would be liable to MAT unless specifically excluded in computing the book profit. The Tribunal did not deal with a situation where the profits are credited directly to the Balance Sheet without routing through the P&L a/c. Nonetheless, the ruling provides guidance to companies having exempt income in computing their MAT liability and in planning for the same.
The authors are Director and Manager respectively in Deloitte Haskins and Sells (DHS). The views expressed herein are their personal views and not of DHS.
