Civil construction business and MAT

Section 115J was included in the I-T Act, 1961, for companies to provide for minimum tax on book profits of companies, who were, otherwise, prosperous, paying handsome dividends to shareholders, but not paying tax, because of various tax incentives and concessions available to them under the Act.

The section involved two processes. Firstly, an assessing authority had to determine the income of the company under the provisions of the Act.

Secondly, the book profit had to be worked out in accordance with the Explanation to Section 115J (1) and it had to be seen if the income determined under the first process was less than 30 per cent of the book profit.

Section 115J would be invoked if the income determined under the first process was less than 30 per cent of the book profit. The Explanation to sub-section (1) of Section 115J gives the definition of “book profit” by incorporating the requirement of Section 205 of the Companies Act, in the computation of the book profit.

The tax so calculated, Minimum Alternate Tax (MAT), applied to companies only. This gave incentives for taxpayers to not register as companies and work like firms, Association of Persons (AoPs) or a Body of Individuals (BoI), etc.

Real estate sector

Considering the steady growth in construction activity, a number of tax concessions given to entities in this sector and rapid urbanization, the Comptroller & Auditor General of India (CAG) selected this sector for examination in regard to its income-earning activities and income-tax assessments.

The purpose was to see how the tax benefits given are helping the sector in achieving the desired goals. The period covered has been Financial Years 2006-07 to 2009-10 (upto June, 2010).

The MAT (levied vide Section 115JB) is intended to ensure that companies having huge profits and declaring substantial dividends to its shareholders, but not contributing any part of it to the Government by way of corporate tax, pay at least a certain percentage of book profit as MAT. However, the said provision isn't applicable for Firms /AoPs, etc.

The CAG's study has shown that a number of construction entities were registered as firms/AOPs and the turnover and profits of some of these entities were comparable to companies of similar size.

However, with the MAT provisions being inapplicable to these entities, the revenue collected from them was nil or low. The CAG in Mumbai realised that deductions under Section 80IB (10) aggregating Rs 295.37 crore, were allowed in case of assessments of 66 partnership firms/AoP.

As these deductions formed a major portion of taxable income of these firms, they got away by paying nil or minimal tax, and the Government couldn't collect revenue from them, despite substantial profits from their business. The revenue implication of non-applicability of MAT provisions to firms amounted to Rs 24.87 crore.

SUMMING UP

The real estate sector is one of the sectors, where unaccounted (black) money is being witnessed in a large scale and the Government isn't able to take any effective action to check it. The failures of Chapters XXA & XXC in the Act clearly support this view. However, there seems to be no reason why super profits, being earned in the real estate sector by non-company assessees, shouldn't be tapped by imposition of MAT in their cases.

Such tax has been levied in the Limited Liability Firms (LLFs) by the Finance Act, 2011. Similar tax on some other entities too needs to be introduced in view of the remarks of the CAG in his report for the Financial Year 2009-10.

(The author is a former chairman of CBDT.)

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