The Hindu Business Line : The deferred angle to P&L

Budget 2008 has proposed to retrospectively (w.e.f. April 1, 2001) amend the provisions relating to Minimum Alternate Taxes (MAT), one of them being deductibility of deferred tax charges debited to profit and loss (P&L) account.

Section 115JB levies MAT at 10 per cent of book profits (plus surcharge and cess thereon) if such tax is higher than the tax payable under the normal provisions of the Income-tax Act. Book profits for this purpose, needs to computed by making certain adjustments to the net profit as shown in the P&L account prepared in accordance with the Companies Act and after considering the accounting standards and accounting policies adopted in preparing such P&L account.

In computing the book profits, Section 115JB requires that the net profit as shown in the P&L account needs to be increased, amongst other things, by (a) the income-tax paid or provision thereof; (b) an amount carried to any reserve; (c) provisions for meeting unascertained liabilities.

Hence, a question arose whether the amount debited to the P&L account on account of deferred tax liability is covered under any of the clauses mentioned above and needs to be added to the net profit in computing the book profits for MAT purposes.

Recently, the Kolkata High Court upheld the decision of the Kolkata Tribunal in the Balarampur Chini Mills Ltd case, which had held that the deferred tax charge debited to P&L account need not be added while computing book profits for MAT purposes.

Kolkata Tribunal decision

The Kolkata Tribunal observed that the deferred tax charge cannot be equated with provision for tax but is a provision for tax effect of difference between taxable income and accounting income and deferred tax charge cannot be termed as income-tax paid or payable, which has to be paid out of the profit earned.

The Kolkata Tribunal also observed that the reserves mentioned in Section 115JB is different in the sense that it can be unilaterally transferred back to P&L account or can be utilised for issuing bonus shares or declaring dividend. However, amounts created towards deferred tax charge cannot be so transferred or utilised.

It also observed that the amount of deferred tax charge is not in the nature of unascertained liability as it is measured scientifically as per the strict guidelines of Institute of Chartered Accountants of India (ICAI), issued from time to time.

Further, the Kolkata Tribunal also observed that in case a deferred tax asset is created by crediting the P&L account, it would be considered as part of the book profits and it would result in absurdity if the provision for deferred tax liability is also added back in computing the book profits.

Budget 2008 proposes to include the amount of deferred tax and the provision therefor, charged to the P&L account, as an item to be added in computing the book profits for MAT purposes. This is to negate the above ruling of the Kolkata High Court which had clearly held that the deferred tax charge debited to P&L account need not be added while computing book profits for MAT purposes.

Reopening completed assessments

The above proposal if enacted would allow the assessing officers (AOs) to reopen the completed tax assessments and levy tax.

Interestingly, the Budget proposal is silent on the treatment of deferred tax assets created by crediting to the P&L account, that is, whether the same has to be considered as part of the book profits for MAT purposes. The logical answer would be ‘no’ otherwise, it would result in absurdity as observed by the Kolkata Tribunal.

However, as this is not clearly spelt out in the Budget proposal, and considering the decision of the apex court in the Apollo Tyres Ltd case, where it was held that “the assessing officer does not have the jurisdiction to go behind the net profit shown in the profit and loss account except to the extent provided in the Explanation to Section 115J”, one can expect litigation on this matter.

Therefore, one hopes that the above anomaly would be addressed at the time of enactment of the Finance Bill, 2008, to avoid unnecessary litigation.

(The author is Senior Manager, PricewaterhouseCoopers.)