The Hindu Business Line : Retrospective liability under the MAT

The Finance Bill, 2008 has laid down that in computing book profits, the amount of deferred tax and the
provision thereof will also be added back, if debited
to the P&L account.

T. C. A. Ramanujam

Finance Bill, 2008, has brought in one more amendment to Section 115JB of the Income-Tax Act, 1961 with regard to computation of book profits for levy of Minimum Alternate Tax (MAT). The term “book profit” is defined to mean net profit as shown in the profit and loss (P&L) account prepared in accordance with the provisions of Parts II and III of Schedule VI to the Companies Act, 1956 as increased or reduced by certain adjustments specified in that Section under 115JB.

The Explanation also provides that the book profits shall be increased by the amount of income tax paid or payable and the provision for tax, if any, debited to the P&L account. There arose a controversy as to whether deferred tax will be included in the term “income-tax”.

Current vs deferred

Accounting Standard (AS) 22 on income issued by the Institute of Chartered Accountant in India (ICAI) distinguishes between current tax and deferred tax. There is always a mismatch between accounting income and taxable income. Deferred tax charged is not the same as income-tax. It is not a reserve. It cannot be used for issue of bonus share or declaration of dividend. It is expenditure for the period for which it is charged.

It is not a contingent liability. In several cases the questions arose whether income-tax will include deferred tax for computing book profits. The Income Tax Appellate Tribunal (ITAT) has held in a number of cases that deferred tax charged has to be deducted in the computation of book profits. There was of course a contrary view also but the predominant view was in favour of the taxpayer.

The same situation obtained with regard to Dividend Distribution Tax (DDT).

The Finance Bill, 2008 amends Section 115JB to override the rulings of courts. It is now laid down that in computing book profits, the amount of deferred tax and the provision thereof will also be added back, if debited to the P&L account. Again income-tax shall include tax on distributed profits or on distributed income under Section 115O or Section 115R and interest charged under the Act, surcharge, education cess and secondary and higher education cess.

Even as the Finance Bill was amending the law on the subject, the Calcutta High Court dismissed the departmental appeal against the Tribunal order in CIT vs Balrampur Chimneys Ltd (214 CTR Calcutta 684).

The above amendment made by Clause 20 of the Finance Bill will take retrospective effect from April 1, 2001, and apply in relation to the assessment year 2001-02 and the subsequent year. Section 115JB in its present form was inserted by the Finance Act, 2000 w.e.f. April 1, 2001. The amendment does not take into account the corresponding allowance of deferred tax assets credited to the P&L account.

An anomalous situation arises. In computing book profits, Fringe Benefit Tax (FBT) is deductible as per CBDT Circular No. 8 of August 9, 2005. DDT is similar to FBT. Why should there be different treatment for the two taxes in the computation of book profits?

Advance Tax Interest

Retrospective amendment can create problems. Assessing officers (AOs) can reopen assessments in order to apply the amended law in computing book profits. This can create problems for companies whose assessments have been finalised on the basis of the then prevailing law.

They can be visited with interest under Sections 234B and 234C for short payment of advance tax. The Supreme Court had decided in Kwality Biscuits Ltd (284 ITR 434) that no interest is payable on shortfall in payment of advance tax in respect of liability for book profits under Section 115J.

Even before companies could heave a sigh of relief, came the Karnataka High Court judgments in Jindal Thermal Power Company Ltd (286 ITR 182), choosing not to follow the Supreme Court ruling. It referred to the difference in the wordings of Sections 115J and 115JB. It upheld the charging of interest retrospectively under Section 115JB read with Section 234B and 234C.

It however directed that the company may seek relief as per the CBDT Notification of May 23, 1996. It should be remembered at this stage that the CBDT had issued Circular No. 13 dated November 9, 2001, with regard to the interpretation of Section 115JB introduced by the Finance Act, 2000.

In Para 4, the Board observed that all companies are liable for payment of advance tax having regard to the provisions contained in Section 115JB. The provisions of Sections 234B and 234C, for interest on defaults in payment of advance tax and deferment of advance tax, would also be applicable where the facts of the case warrant.

The CBDT should advise its officers not to levy interest in cases that are governed by the amended law.

(The author is a former Chief Commissioner of Income-Tax.)