1 APPLICABILITY OF MAT

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1 CONTENTS Chapter-heads I-5 MAT/AMT Ready Reckoner I-21 DIVISION ONE MINIMUM ALTERNATE TAX (MAT) 1 APPLICABILITY OF MAT 1.1 History of Minimum Alternate Tax (MAT) Comparative study of sections 115J, 115JA and 115JB Rationale for MAT Who is liable to pay MAT MAT not applicable to income from life insurance business Where company has no taxable income but has a positive book profit Where company has negative net profit as per its P&L account but has a positive book profit Where company has positive net profit and taxable income but negative book profit Applicability to foreign companies Applicability to assessees covered by presumptive tax provisions Exemption from MAT to developer of SEZ or unit located in SEZ 9 I-7

2 CONTENTS I Exemption to sick industrial companies MAT not applicable where company incurring commercial losses not attributable to tax incentives Applicability of MAT to section 25 companies (now section 8 companies) and mutual concerns Applicability of MAT to shipping companies covered by Tonnage Tax Scheme Applicability of MAT to company eligible for tax holiday Applicability of MAT to company whose total income is Nil When liability to MAT arises? Rate of MAT/MAT liability Definition of book profit Computation of book profit Comparison of adjustments to net profit under sections 115J, 115JA and 115JB to compute book profit Book profit quarantined from total income Auditor s certificate Reopening of assessment where retrospective amendments made to section 115JB 26 2 NET PROFIT AS PER PROFIT AND LOSS ACCOUNT 2.1 Net profit as shown in the profit and loss account Preparation of Profit and Loss Account in accordance with section 115JB(2) Main Provisions of section 115JB(2) as amended by the Finance Act, 2012 & New Explanation The two provisos to section 115JB(2) Supreme Court s interpretation of words in accordance with the provisions of Parts II and III of Schedule VI to the Companies Act 34

3 I-9 CONTENTS 2.3 Relevance of sections 348 and 349 of the Companies Act, 1956 [now section 198 of the Companies Act, 2013] for calculating net profits for section 115JB purposes Profit and Loss account as per Revised Schedule VI [now Schedule III] Starting point for computation of book profit Prior Period Items and extraordinary items Gain due to restatement at the balance sheet date of foreign currency term loan Profit on sale of assets credited to profit & loss account being long-term capital gain eligible for section 54EC benefit A Treatment of the cessation of liability on account of settlement loan liability with bank for the purpose of Book profits Income received by assessee, which had earlier been written off as a bad debt Deduction under section 80-IB cannot be allowed while computing book profit under section 115JB Accumulated depreciation standing in provision for depreciation account as credit balance in respect of assets sold or disposed off Capital gains exempt under section 47(iv) Interest on borrowed capital not debited to P&L account Income by way of interest on Zero Coupon Bonds not accrued during previous year Loss on sale of fixed assets debited to P&L account Income covered by the principle of mutuality Waiver of loan and interest by the lender (gains) Where the Company Revises its accounts which were adopted by AGM and submits revised return Change in accounting policy-from treating preliminary expenses as deferred revenue to writing off in one go and qualified by auditor - Whether violation of Schedule VI [now Schedule III]? Revised accounts pursuant to scheme of amalgamation which has retrospective effect 52

4 CONTENTS I-10 3 INCOME-TAX PAID/PAYABLE/PROVISION FOR INCOME-TAX 3.1 Addition to net profit of income-tax amount Amount of income-tax Taxes which do not fall within the scope of the term income-tax and cannot be added back Deferred tax Provision for wealth-tax - Whether can be added to net profit? Foreign income tax Impact of Revised Schedule VI [now Schedule III to the Companies Act, 2013] on addition of income-tax amounts to net profit 56 4 AMOUNTS CARRIED TO RESERVES 4.1 Addition to net profit of amounts carried to reserves Conditions to be satisfied for addition under clause (b) of Explanation Reserve contemplated by clause (b) Amounts carried to debenture redemption reserve/ loan redemption reserve Position prior to assessment year (under the Old Schedule VI) Position with effect from assessment year (under Revised Schedule VI/Schedule III) Profit on sale of land directly credited to capital reserve Profit on redemption of investments (mutual fund units) taken to capital reserve without routing it through profit and loss account Gain on repossession of vessels by creditor on assessee-company s default credited directly by assessee to capital reserve Impact of Revised Schedule VI [now Schedule III] on addition to net profits of amounts carried to reserves 65

5 I-11 CONTENTS 5 UNASCERTAINED LIABILITIES 5.1 Unascertained liabilities to be added to net profits Ascertained liabilities of a capital nature to be added to net profits Ascertained liability - Connotation of Liability other than ascertained liability (i.e., contingent liability) Is provision for product warranties an ascertained liability? Where assessee suffered losses due to earthquake and made provision for repairs as per Government agency s estimates Where provision for ascertained liability made in a year different from the year in which the liability arose Distinction between condition precedent to creating a liability & condition precedent to discharging a liability Provision for gratuity made on the basis of actuarial valuation Provision for bonus Where provisions for ascertained liabilities erroneously credited to Reserves Provision for future losses Provisions for liquidated damages 77 6 PROVISION FOR LOSSES OF SUBSIDIARY COMPA- NIES 6.1 Addition of provision for losses of subsidiary companies to net profits Impact of Revised Schedule VI on additions of provisions of losses of subsidiary companies Share of loss from a firm 78

6 CONTENTS I-12 7 DIVIDENDS PAID OR PROPOSED 7.1 Addition to net profits of dividends paid or proposed Impact of Revised Schedule VI [now Schedule III] on additions to net profit of proposed dividend/dividends paid 80 8 EXPENDITURES RELATED TO TAX-FREE INCOMES 8.1 Addition of expenditures related to tax-free incomes to net profit Impact of Revised Schedule VI [now Schedule III] on addition of expenditures relatable to tax-free incomes Share of loss from firm 82 9 AMOUNT OF DEPRECIATION 9.1 Accounting for depreciation Position under the Companies Act, Adjustments to net profit related to depreciation Arrears of depreciation for past years debited due to change in method of depreciation from SLM to WDV AMOUNT OF DEFERRED TAX AND PROVISION THEREFOR 10.1 Addition to/deduction from net profits of deferred tax Impact of Revised Schedule VI [now Schedule III] on additions to/deductions from net profit of deferred taxes 89

7 I-13 CONTENTS 11 AMOUNT OR AMOUNTS SET ASIDE AS PROVI- SION FOR DIMINUTION IN THE VALUE OF ANY ASSET 11.1 Amount or amounts set aside as provision for diminution in the value of any asset Examples of provisions for diminution in the value of assets Write-off of Bad Debts v. Provision for Doubtful Debts Withdrawals from provisions for diminution in assets/ reversals of such provisions Impact of Revised Schedule VI [now Schedule III] on additions to net profit in respect of diminution in the value of assets WITHDRAWALS FROM RESERVES OR PROVI- SIONS 12.1 Deduction of withdrawals from reserves/provisions from net profit Reduction from net profit of withdrawals from reserves Meaning of credit to profit and loss account Reduction from net profit of withdrawals from provisions Intent behind clause (i) of Explanation Write-back of excess provision for depreciation consequent to change of method as per AS Impact of Revised Schedule VI [now Schedule III] on deduction from net profit of withdrawals from reserves or provisions TAX-FREE INCOMES UNDER SECTION 10/11/ Tax-free incomes - Deduction from net profit 99

8 CONTENTS I Profit on sale of rural agricultural land If any such amount is credited to the profit and loss account Impact of Revised Schedule VI [now Schedule III] on deduction of tax-free incomes from net profit LOSS BROUGHT FORWARD OR UNABSORBED DEPRECIATION 14.1 Loss brought forward/unabsorbed depreciation to be deducted from net profit Where company does not own any depreciable asset Where arrears of depreciation charged in current year s P&L Account Whether arrears of depreciation disclosed in notes to accounts can be considered for the purposes of clause (iii) of Explanation 1? Impact of Revised Schedule VI [now Schedule III] on deducting arrears of depreciation disclosed in notes to accounts Set off of losses of amalgamating company Whether deduction under clause (iii) can be denied by resorting to section 79 of the Act? Brought forward losses at the beginning of the year becomes nil at the end of year due to reduction of capital PROFITS OF A SICK INDUSTRIAL COMPANY 15.1 Profits of sick industrial company to be deducted from net profits Net worth Impact of Revised Schedule VI [now Schedule III] on deduction of profits of sick industrial company for working out book profits 113

9 I-15 CONTENTS 16 REVALUATION RESERVE IN RESPECT OF ASSET RETIRED/DISPOSED OF 16.1 Revaluation reserve balance in respect of asset disposed of retired The amount standing in revaluation reserve Revaluation Reserve On the retirement or disposal of such asset Revaluation reserve balance should be relating to revalued asset retired or disposed of Such amount is not credited to profit and loss account Objective of clause (j) Case Studies and Illustrations on MAT MAT CREDIT 17.1 Principles governing carry forward and set off of MAT credit What happens to unutilised MAT credit when company converts itself into a LLP How should the advance tax be calculated when the company has MAT credit? APPLICABILITY OF AUDIT UNDER SECTION 115JB 18.1 Applicability of audit u/s 115JB Every company to whom this section applies Scope of audit under section 115JB Report under section 115JB i.e. Form No. 29B Respective responsibilities of the accountant and the company Scope of examination 129

10 CONTENTS I AUDIT REPORT : PARA 1 OF FORM NO. 29B 19.1 Examination of accounts and records Nature of business Where statutory audit under Companies Act/tax audit is not complete AUDIT REPORT : PARA 2(a) OF FORM NO. 29B 20.1 Certification of computation of book profit and income-tax payable under section 115JB Reporting against para 2(a) AUDIT REPORT : PARA 3 OF FORM NO. 29B 21.1 Certification of particulars in Annexure A True and correct AUDIT REPORT : ANNEXURE A TO FORM NO. 29B 22.1 Columns 1 to 4 of Annexure A - Routine Details Column 5 - Total income of the company under the Income-tax Act Column 6 - Income-tax payable on total income Column 7 - Whether profit and loss account is prepared in accordance with the provisions of Parts II & III of Schedule VI to the Companies Act, 1956 (1 of 1956) [now Part II of Schedule III to the Companies Act, 2013] Column 8 - Differences/variation in accounting policies, accounting standards, methods and rates of depreciation Column No. 9 - Net profit according to profit and loss account referred to in (7) above 140

11 I-17 CONTENTS 22.7 Column Nos. 10 and 11 - Adjustments to net profit as per Explanation Columns 12 & 13 - Book profit figure and MAT Liability Column 14 - Where income-tax payable by company in column 6 is less than 18.5% of book profits Signing of Form No. 29B by CA (Partner/proprietor of CA firm) AUDIT REPORT : MODEL AUDIT REPORT IN FORM NO. 29B u Model audit report in Form No. 29B 143 DIVISION TWO ALTERNATE MINIMUM TAX (AMT) 24 AMT REGIME - AS APPLICABLE ONLY TO LLPs FOR A.Y Introduction of AMT Regime for only LLPs by Finance Act, Comparison of MAT and AMT Constitutional Validity of AMT Provisions Limited Liability Partnership When AMT applicable to LLPs? Steps for computing AMT, in case of LLP Regular income tax Alternate Minimum Tax Adjusted Total Income Tax credit for AMT Variation of tax credit Whether AMT credit treated as advance tax paid for sections 234A, 234B and 234C 168

12 CONTENTS I Certificate required from accountant Application of other provisions of this Act - Section 115JE Advance tax Surcharge and education or higher secondary education cess Application of the other provisions of the Act, consequences and scope AMT REGIME APPLICABLE TO ALL NON-CORPO- RATE ASSESSEES FROM A.Y Extension of AMT to all non-corporate assessees w.e.f. A.Y Precondition for applicability of AMT to firms and LLPs Alternate minimum tax regime extended by Finance (No. 2) Act, 2014 to non-corporate assessees availing investment-linked incentives Precondition for applicability of AMT to non-corporate assessees other than firms and LLPs AMT credit to be allowed even in a year where total income does not exceed ` 20 lakhs or there is no claim of profit-linked/investmentlinked incentives Applicability of AMT to co-operative societies Whether AMT applicable if total income is nil and no regular income tax is payable? Steps for calculating AMT for LLPs and firms Steps for calculating AMT for individuals, HUFs, AOPs, BOIs and AJPs Deductions under Chapter VIA-C Tax credit for AMT Carry forward of tax credit (AMT) in case of conversion of firms into LLPs/conversion of firms/llps into companies Impact of conversion of partnership firm into LLP on unavailed AMT credit of the firm 191

13 I-19 CONTENTS Impact of conversion of partnership firm into company on unavailed AMT credit of the firm Variation of tax credit Whether AMT credit treated as advance tax paid for sections 234A, 234B and 234C Certificate required from accountant Application of other provisions of this Act - Section 115JE Advance tax Surcharge and education or higher secondary education cess Application of the other provisions of the Act, consequences and scope Whether AMT credit treated as advance tax paid for sections 234A, 234B and 234C APPLICABILITY OF AUDIT U/S 115JC(3) 26.0 Form No. 29C Notified for Audit Report u/s 115JC(3) Form 29C - Auditor s report under section 115JC Comparison of Form No. 29B and Form No. 29C Scope of audit u/s 115JC(3) Respective responsibilities of the accountant and the company Scope of examination AUDIT REPORT : PARA 1 OF FORM NO. 29C 27.1 Examination of accounts and records Nature of business AUDIT REPORT : PARA 2(a) OF FORM NO. 29C 28.1 Certification of computation of ATI and AMT Reporting against Para 2(a) 212

14 CONTENTS I AUDIT REPORT : PARA 3 OF FORM NO. 29C 29.1 Certification of particulars in Annexure A AUDIT REPORT : ANNEXURE A TO FORM NO. 29C 30.1 Columns 1 to 4 of Annexure A - Routine details Column 5 - Total income of the assessee computed before giving effect to Chapter XII-BA Column 6 - Income-tax payable on total income referred to in column Column 7 - Amount of deduction claimed under any section included in Chapter VI-A under the heading C. Deductions in respect of certain incomes Column 8 - Amount of deduction claimed under section 10AA Column 9 - Adjusted total income of the assessee ( ) Alternate minimum tax (18.5% of adjusted total income computed in column 9 above) AUDIT REPORT : MODEL AUDIT REPORT IN FORM NO. 29C u Model audit report in Form No. 29C 220 APPENDICES u APPENDIX 1 : RELEVANT EXTRACTS OF INCOME-TAX ACT, u APPENDIX 2 : SCHEDULE III OF COMPANIES ACT, u APPENDIX 3 : RELEVANT EXTRACTS OF OLD SCHEDULE VI OF COMPANIES ACT, u APPENDIX 4 : RELEVANT FORMS OF INCOME-TAX RULES, u APPENDIX 5 : RELEVANT EXTRACTS OF COMPANIES ACT, u APPENDIX 6 : RELEVANT EXTRACTS OF COMPANIES ACT,

1 APPLICABILITY OF MAT

CONTENTS Chapter-heads I-5 MAT/AMT Ready Reckoner I-21 DIVISION ONE MINIMUM ALTERNATE TAX (MAT) 1 APPLICABILITY OF MAT 1.1 History of Minimum Alternate Tax (MAT) 3 1.1-1 Comparative study of sections 115J,