Minimum Alternate Tax (MAT)
Minimum Alternate Tax (MAT) is payable by companies. The MAT rate for A.Y. 11-12 is 18%. Though there has been a consistent demand from companies from various sectors for its removal, the Government continues with this tax.
The article covers MAT in full detail. It also discusses about accounting aspects of MAT. MAT under Direct Tax Code has also been discussed in the article.
Why was MAT introduced?
The concept of Minimum Alternate Tax (MAT) was introduced in the direct tax system to make sure that companies having large profits and declaring substantial dividends to shareholders but not paying tax to the Govt by taking advantage of the various incentives and exemptions provided in the Income-tax Act, pay a fixed percentage of book profit as minimum alternate tax. Though there has been a consistent demand from companies from various sectors for its removal, the Government continues with this tax. Looking at the proposed provisions of DTC, it appears that the Government is very clear that it wants to continue with MAT.
Non Applicability
The provisions of MAT contained in section 115JB would not apply to the following incomes accruing or arising on or after 1st April 2005 –
1. Income from any business carried on by an entrepreneur in a SEZ (10AA);
2. Income from the services rendered by an entrepreneur from a unit in a SEZ (10AA);
3. Income of a Developer from the development of a SEZ. (80IAB)
Rate of MAT
It is provided that in case of company (domestic or foreign) , if the income-tax payable on the total income computed under the Income-tax Act, is less than 18% of its book profit, such book profit shall be deemed to be the total income of the assessee and the tax payable by the assessee on such total income shall be the amount of income-tax at the rate of 18% (add surcharge, if applicable, i.e. 7.5% for domestic companies and 2.5% for foreign companies, where the total income exceeds Rs.1 crore) and Education cess @2% and secondary and higher education cess@1% shall be added on the aggregate of income-tax and surcharge.
The rate at which MAT is charged has been increasing since its inception. Following table shows the rates of MAT since it was introduced for the first time:-
Assessment Year | Rate of MAT (% of Book Profit) | Surcharge (if book profit exceeds Rs 1 crore) |
2011-12 | 18 | 7.5 |
2010-11 | 15 | 10 |
2007-10 | 10 | 10 |
2001-07 | 7.5 | 10 |
Computation of Book Profit as per 115JB
The book profit shall mean the net profit as shown in the profit and loss account prepared in accordance with the provisions of Part II and III of Schedule VI to the Companies Act, 1956 as adjusted by certain additions/deductions as specified.
Net profit as per profit& loss account |
| xxx |
ADD: |
|
|
Income tax paid or payable** | xx |
|
The amount of deferred tax and provision there of | xx |
|
Depreciation charged to P/L account | xx |
|
Proposed dividend or dividend paid. | xx |
|
Amount carried to any reserve
(Other than33AC). | xx |
|
Provision made for diminution in value of assets. | xx |
|
The amount of any expenditure relatable to any income u/s 10(except 10(38)) or 11or 12. | xx |
|
Provision made for liabilities (Other than ascertained). | xx |
|
Provision made for losses of Subsidiary company | xx | xxx |
LESS: |
|
|
Amount withdrawn from any Reserve or provision. | xx |
|
The amount of any income relatable to any income u/s 10(except 10(38)) or 11or 12. | xx |
|
Depreciation as per P&L a/c Excluding depreciation relatable to revaluation of assets. | xx |
|
Amounts withdrawn from revaluation reserves and credited to p&l account, but it does not exceed the amount of depreciation. | xx |
|
The amount of loss B/F or unabsorbed depreciation
Whichever less, as per book of accounts. | xx |
|
The amount of deferred tax, if any such amount is credited to the profit and loss account. | xx | (xxx) |
BOOK PROFIT |
| xxx |
**
[It may be noted that income-tax includes -
· Dividend distribution tax / tax on distributed income;
· Interest;
· Surcharge;
· Education cess; and
· Secondary and higher education cess]
MAT Credit entitlement (Section 115 JAA)
This section provides that where tax is paid in any assessment year in relation to the deemed income under section 115JB(1), the excess of tax so paid over and above the tax payable under the other provisions of the Income-tax Act, will be allowed as tax credit in the subsequent years.
The tax credit is, therefore, the difference between the tax paid under section 115JB (1) and the tax payable on the total income computed in accordance with the other provisions of the Act.
The tax credit shall be allowed to be set off in a year in which tax becomes payable on the total income computed in accordance with provisions of the Act other than section 115JB.
This tax credit is allowed to be carried forward for ten assessment years succeeding the assessment year in which the credit became allowable.
Such credit is allowed to be set off against the tax payable on the total income in an assessment year in which the tax is computed in accordance with the provisions of the Act, other than 115JB, to the extent of excess of such tax payable over the tax payable on book profits in that year.
A Numerical Illustration
Assessment Year | Normal Tax Liability | Tax Liability u/s 115JB | Tax Payable (Higher of 2 & 3) | MAT Credit Entitlement | Credit u/s 115JAA utilized | Credit availability for carry forward |
(1) | (2) | (3) | (4) | (5) | (6) | (7) |
2009-10 | 100 | 190 | 190 | 90 | 0 | 90 |
2010-11 | 170 | 200 | 200 | 30 | 0 | 120 |
2011-12 | 200 | 150 | 200 | 0 | 50 | 70 |
2012-13 | 260 | 170 | 260 | 0 | 70 | 0 |
Accounting for MAT
MAT credit entitlement will be treated as an asset and the accounting will be done by crediting the Profit & loss A/c, if there is a virtual certainty that the company will be able to recover the MAT credit Entitlement in future limited period. It will be disclosed under Loans and Advances. In the year of adjustment full provision shall be made for Tax Liability, and in the Balance Sheet the Provision for Tax shall be shown net off MAT credit Entitlement.
Journal entries (AY-2009-10)
1) Profit and loss A/c………. Dr 190
To Provision for Tax 190
2) MAT Credit Entitlement A/c……… Dr 90
To Profit and loss A/c 90
Journal entries (AY-2011-12)
1) Profit and loss A/c………. Dr 200
To Provision for Tax 200
The MAT credit entitlement will be shown as deduction from Provision for Tax in the Balance Sheet
Provision for Tax 200
Less: – MAT credit entitlement (50)
Net 150
Does Advance tax apply to MAT?
Yes it is compulsory to pay advance tax in the case of MAT as mentioned in CBDT Circular No.13/2001 dated 09/11/2001. Also Karnataka High Court in the case of Jindal Thermal Power has held that advance tax is payable under MAT. The companies liable to pay MAT are liable for the payment of advance tax and failing to do so will attract interest u/s 234B and 234C of the Act.
Other Points -
CONTROVERSIAL ISSUES IN THE COMPUTATION OF THE BOOK PROFIT AND ADJUSTMENTS TO BE MADE UNDER EXPLANATION TO SECTION 115JB
Additions:
1. The amount of income-tax paid or payable, and the provision therefor
Under this item, only income-tax paid or payable and the amount of provision made towards income-tax liability shall be added. Item such as wealth tax shall not be added as they are not to be treated as part of income-tax. Controversy may arise about the treatment of interest, penalty, dividend tax payable under Income-tax Act as regards adding them to book profit on the ground that they do not form part of income-tax as per the Act.
2. The amount carried to any reserves, by whatever name called
Attention is invited to Circular No.550 dated 1st January, 1990 vide Appendix V
3. An amount or amounts set aside to provisions meant for meeting liabilities, other than ascertained liabilities
The explanation to section 115JB requires adding back of the provision made in the books for meeting unascertained liabilities.
The word "ascertain" as per the Webster's II New Riverside University Dictionary means, "to make certain". Thus ascertained liability means a liability which is certain or known.
As per AS 4, Contingencies and events occurring after the balance sheet date, the term "contingency" is defined as,
"A condition or situation, the ultimate outcome of which, gain or loss will be known or determined only on the occurrence, or non occurrence of one or more uncertain future events."
It can therefore be said that ascertained liability is one, which is not a contingent liability. The chartered accountant may decide the items that fall under this clause on the above said lines. For better understanding, the treatment of certain specific items are explained as under:
Provision for bad and doubtful debts, Provision for Diminution in the value of investments, provision against non-performing assets:
Clause(c) to the explanation deals only with the amounts, which are set aside as provision(s) for meeting liabilities. Whereas, the above mentioned provisions are made in the books in compliance with the accounting principles and as mandated by other Statutes towards anticipated losses. As such, these items may not fall under this clause. This view is supported by the decision of the Calcutta Tribunal in the case ofSutlej Cotton Mills Limited v. ACIT (45 ITD 22). However, Madras High Court has given a contrary view inBeardsell Limited v. DCIT (244 ITR 256), in the context of erstwhile section 115J.
Therefore, the chartered accountant may exercise his professional judgement on the treatment of the above, while computing the book profits for the purpose of this section.
Provision for leave encashment / gratuity:
AS 15 requires an appropriate charge to be made in the profit and loss account for retirement benefits due to the employee on actuarial basis. The Supreme Court in Bharat Earth Movers Limited (BEML) v. CIT (112 Taxman 61) held that
"if the liability has definitely arisen in the accounting year the deduction should be allowed even though the liability may have to be quantified and discharged in a future date. What should be certain is the incurring of the liability and it should also be capable of being estimated with reasonable certainty though the actual quantification may not be possible. If these requirements are satisfied the liability is not a contingent one."
In view of the decision of the Apex Court, it may be said that the provision for meeting the above said liabilities are ascertained liabilities and do not fall under this clause.
4. The amount or amounts of expenditure relatable to any income to which section 10 or section 10A or section 10B or section 11 or section 12 apply.
It is given in the Explanation that expenditure relating to any income to which section 10 or 10A or 10B or 11 or 12 of the Act applies, shall be added back to the net profit for the purpose of computation of book profit. The accountant shall ascertain the quantum of such expenditure debited to the profit and loss account by examining the manner in which the company earns such exempt income. It is significant to note that section 10C has not been included in both additions and deductions.
Reductions:
1. The amount withdrawn from any reserves or provisions if any such amount is credited to be profit and loss account.
Where assets are revalued in the books and depreciation is claimed on the enhanced value of the asset with a corresponding withdrawal from the revaluation reserve account, the chartered accountant may keep in mind the following decisions of the Tribunal rendered in the context of erstwhile section 115J.
SRF Limited v. ACIT- 47 ITD 504 (Del) - Amount drawn from revaluation reserve has to be excluded from net profit for the computation of book profit under section 115J.
Punjab Fibres Limited v. DCIT- 72 ITD 68 (Del) - Depreciation provided on the revalued figures cannot be adjusted in determining the book profit.
Vijay Spinning Mills Ltd v. DCIT - 73 ITD 344 (Hyd) - Depreciation shall be considered only on the historical cost and not on the revalued cost for the purpose of determining the book profit.
2. The amount of loss brought forward or unabsorbed depreciation, whichever is less as per books of account.
The amount of brought forward loss or unabsorbed depreciation whichever is less as per the books of account shall be reduced from the net profit. It is also clarified by way of explanation to the said clause that the loss shall not include depreciation. It means that the depreciation and loss before depreciation are to be compared to determine the quantum of deduction under this clause.
For instance, in the case of a company, if the brought forward loss is Rs.50 lakhs which includes unabsorbed depreciation of Rs.45 lakhs, the amount that shall go to reduce the net profit is the brought forward loss of Rs.5 lakhs as it is less than the unabsorbed depreciation. Therefore, book profit shall be computed only by reducing Rs.5 lakhs.
A question may arise as to whether the loss or depreciation to be taken is cumulative over the years or on a year to year basis. As explained in the Circular No 495 dated 22/09/1987 issued by the Central Board of Direct Taxes (CBDT) in the context of erstwhile section 115J of the Act it may be said that the figure has to be taken as cumulative over the years. The same exercise has to be done each year. This view was also upheld by the Madhya Pradesh High Court in CIT v. Shree Synthetics Limited (233 ITR 333).
There may be situation where a company has only one item i.e. either brought forward loss or unabsorbed depreciation. In such a case, a doubt may arise as to the quantum of deduction under this clause. To explain this, in the example given above, if the entire brought forward loss of Rs.50 lakhs represents unabsorbed depreciation only, the assessee is compelled to compare nil brought forward loss with unabsorbed depreciation of Rs.50 lakhs and no reduction shall be allowed in determination of book profit.
3. The amount of profits eligible for deduction under section 80HHC, computed under clause (a) or clause (b) or clause (c) of sub-section (3) or sub-section (3A), as the case may be, of that section, and subject to the conditions specified in that section.
4. The amount of profits eligible for deduction under section 80HHE computed under sub-section (3) or sub-section (3A), as the case may be, of that section, and subject to the conditions specified in that section.
5. The amount of profits eligible for deduction under section 80HHF computed under sub-section (3) of that section and subject to the conditions specified in that section.
While determining the book profit under section 115JB, the amount of profits eligible for deduction under section 80HHC or 80HHE or 80HHF computed under the relevant provisions of the said sections shall be considered. In arriving at the profit eligible under the above sections reference may be made to the Guidance Note on Audit under section 80HHB and 80HHC.
IMPORTANT DECISIONS RELEVANT FOR THE PURPOSE OF COMPUTATION OF BOOK PROFIT UNDER SECTION 115JB
CASE LAWS |
DECISION |
SECTION 115J
Sutlej Cotton Mills Ltd v. ACIT 45 ITD 22 (Cal.) | Where there is no allegation of fraud or misrepresentation but only a difference of opinion has to be questioned whether a particular amount should be properly shown in the profit and loss or in the balance sheet, the provisions of sec.115J do not empower the AO to disturb the profits as shown by the assessee.
Capital gain: Capital gain cannot form part of book profit for the reason that it affects the capital structure of the company and does not affect the working results. |
Travancore Chemicals Manufacturing Co Ltd v. DCIT
46 ITD 203 Cochin | As prior period adjustment was necessary in terms of para 2(b) of Part II of the schedule VI and the Standard issued by the ICAI also defines prior period items as Material Charges or Credits which arise in the current year as a result of error, the prior period items have to be considered in arriving at the book profit.
Refund of tax not credited to profit and loss account cannot be added to book profit. |
Bombay Tyres International Ltd v. DCIT
51 ITD 339 (Bom.) | So long as the change was bona fide as per the legal and accounting requirement, the arrears pertain to a provision of an ascertained and known liability and therefore did not constitute reserve. |
National Rayon Corporation Ltd v. DCIT
51 ITD 61 (Bom.) | Provisions made for liability relating to earlier years which had accrued in the earlier year but not provided could be deducted in computing the profits for the purpose of section 115J. |
SRF Limited v. ACIT
47 ITD 504 (Del.) | Amount drawn from revaluation reserve has to be excluded from the net profit for computation of book profit under section 115J. |
PSI Data System Ltd v. DCIT
69 ITD 7 (Cochin) | Amount written off or retained by way of depreciation is included in the definition of provision and accordingly the excess amount provided in the earlier years would qualify for reduction under explanation I to section 115J(1A). |
Shree Sajjan Mills Ltd v. CIT
156 ITR 585 SC | Provision made on actuarial valuation is an ascertained liability. |
CIT v. Apollo Tyres Ltd And CIT v. Krishna Oil Extraction Ltd (MP)
237 ITR 706 (Ker.) | Arrears of depreciation not provided in the books in earlier years cannot be provided in the current year. |
Modern Woollen Ltd v. DCIT
47 ITD 154 (Bom.) | Depreciation can be provided in books of account at rates higher than those specified in Schedule XIV to the Companies Act |
Role of Chartered Accountant
Section 115JB, inserted by the Finance Act, 2000 has cast a responsibility on the chartered accountant to certify that the book profit has been computed in accordance with the provisions of the Income-tax Act. He has also to certify the income-tax payable by the company.
MAT under Direct Tax Code
The model adopted for MAT under existing law is based on book-profit. However, there is a marked shift in this respect as it is proposed to levy tax on the value of gross assets. While this will certainly achieve the objective of charging tax from the companies not paying the tax at all but it will also penalize the companies which are sloth. Certainly, clause 2(3) of DTC is hitting two birds with a single stone.
The DTC narrates the methodology to be followed for arriving at the value of GA as under:-
“Value of gross assets” will be the aggregate of the value of gross block of fixed assets of the company, the value of capital works in progress of the company, the book value of all other assets of the company, as on the last day of the relevant financial year, as reduced by the accumulated depreciation on the value of the gross block of the fixed assets and the debit balance of the profit and loss account if included in the book value of other assets.
The rate of MAT will be 0.25 per cent of the value of gross assets in the case of banking companies and 2 per cent of the value of gross assets in the case of all other companies.
Under the Code, MAT will be a final tax. Hence, it will not be allowed to be carried forward for claiming tax credit in subsequent years.
Effect of the new provision
The provisions of taxing Companies by MAT under Direct Tax Code shall have the following effect:
Positive:-
1. Efficiency with which fund is utilized will improve.
2. The tax collection will go up.
Adverse:-
1. This will create industrial disparity as capital intensive industries viz Iron & Steel, Cement etc have to pay more than the labour intensive viz software industry. Thus it will reduce investments in Infrastructure and will dissuade investments.
2. By not allowing credit of tax paid by way of minimum alternate tax, this tax is in the nature of wealth tax and not on income at all;
3. This type of tax will clearly be an additional burden to loss making companies and will make their survival more difficult;
4. In case of long gestation projects, this tax type of tax will further increase the cost of projects and might even make the projects unviable.
5. It will result in double taxation as group financing is common, viz holding company having stake in there subsidiaries and granting them loan as well, and so both holding & subsidiaries have to pay tax on their gross assets. This will affect the financing of less reputed companies as they are not able to procure finance directly.
Conclusion
Actress Kareena Kapoor made herself famous and glamorous by becoming slim and achieving the zero figure fat in “Tashan”. MAT proposes the corporate sector to be slim and beautiful. It has been successful so far to burn the fat and make the sloth run; the new scheme will also do the same but in a different manner.
Thanks ......
CA Alpesh Tated
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