Minimum Alternate Tax & Dividend Distribution Tax – Overview and Key issues

Section I

Minimum Alternate Tax

1

Background

Accepted canon of taxation

levy tax based on ability to pay

Accepted canon of taxation

levy tax based on ability to pay

Minimum Alternate Tax – The Journey

115 JB115 JA115 J

v Introduced by Finance Act 1987 with effect from AY 88-89 to AY 90-91.

v Excludes electricity companies

v Total income equals 30% of book profit.

v No MAT Credit

v No exemption to sick companies

v Introduced by Finance Act 1996 with effect from 1997

v Indirect benefit to power generation companies

v Total income equals 30% of book profit.

v MAT Credit was introduced

v Benefit for sick companies

v Introduced by Finance Act 2000 with effect from 2001

v Total tax equals 18.5 % of book profit.

v No exemption for power generation companies.

v Benefit for SEZ units till AY 2011-12

Budget Speech introducing section 115J

Salient Features of MAT under section 115JB

MAT regime is applicable to every “company” as defined in the Act, unless specifically exempted

Non Obstante Provision - Provisions of section 115JB shall override all the other provisions of the Act

MAT provisions shall apply when tax payable on total income is less than 18.5%* of adjusted book profits. Parallel computation mechanism

“Book Profit” shall be determined by making adjustments to net profit as per P/L Account prepared in accordance with Schedule III to the Companies Act, 2013

When a company pays MAT, difference between MAT paid and tax payable on total income shall be allowed as MAT Credit – section 115JAA

Every company to which this section applies shall furnish a report in Form 29B from an accountant.

Features

*at the rate of 9% for a unit located in an International Financial Services Centre as per SEZ Act,2005

Applicability of MAT

W.r.e.f 01.04.2001, MAT is not applicable for a foreign company being a resident of a DTAA country with no PE in India; a resident of a non-DTAA country who is not required to seek registration under any law(relating to companies) in India

Not Applicable

• Income from life insurance business (115B)

• Profits of sick industrial units exempted

• Company incurring commercial losses not attributable to tax incentives.

• Section 8 Companies

• Shipping Companies covered by tonnage tax scheme (115V-115VZC)

Applicable

• All companies incorporated under Companies Act 2013.

• Banking Companies

• Companies covered by presumptive tax provisions.

• Foreign company subject to conditions.

Amendment by Finance Act 2016

Book Profit

Inclusions Exclusions

Income Tax paid or payable Amount withdrawn from any reserve or provision

Amount carried to any reserve (other than reserve under section 33AC).

Income to which any of the provisions of sec 10 (other than sec 10(38)), sec 11 or sec 12 apply.

Provisions for meeting liabilities other than ascertained liabilities.

Depreciation (excluding depreciation on account of revaluation of assets)

Provision for losses of subsidiary companies. Amount withdrawn from revaluation reserve to the extent of depreciation on revaluation.

Dividend paid or proposed. Income representing share of profits of AOP,BOI, on which no tax is payable as per section 86

Expenditure relatable to any income to which sec 10 (other than sec 10(38)), or sec 11 or sec 12 applies.

Income of a Foreign Company- Capital Gains, Interest, Royalty, FTS. (where tax payable is at a rate less than 18.5%)

Expenditure relating to income of AOP,BOI, on which no tax is payable as per section 86

Notional gains on transfer of shares of SPV, etc. to a business trust

Expenditure relatable to income of a foreign company- Capital Gains, Interest, Royalty, FTS.

Amount of loss on transfer of units referred to in clause (xvii) of section 47.

Book Profit means net profit as shown in P/L Account prepared in accordance with Schedule III of Companies Act, 2013 for the relevant PY as increased by the amount(s) mentioned in clause (a) to (k) and as reduced by the amount(s) covered by clauses (i) to (viii) of Explanation 1.

Book Profit

Inclusions Exclusions

Notional loss on transfer of shares of SPV, etc. to a business trust

Royalty income in respect of patents chargeable to tax under 115BBF.

Expenditure relatable to income by way of royalty in respect of patents chargeable to tax under 115BBF.

Lower of brought Forward loss or unabsorbed depreciation as per books of accounts

Depreciation. Profits of Sick Industrial Company.

The amount of deferred tax or provision thereof. Amount of deferred tax credited to P/L

Expenditure relatable to income by way of royalty in respect of patents chargeable to tax under 115BBF.

Deferred tax asset

Provision for diminution in value of any asset.

Revaluation reserve relating to revalued asset on retirement or disposal of such asset.

Amount of gain on transfer of units referred to in clause (xvii) of section 47.

Deferred tax liability

Issues Under MAT

§ While looking into the accounts of the company, the AO

has to accept the authenticity of accounts scrutinized and

certified by the auditors and filed with the Registrar.

§ It is not open to the AO to rescrutinize the accounts and

satisfy himself that accounts are maintained in

accordance with the Companies Act.

§ AO has no power to disturb Book profits if accounts so

prepared are accepted as presenting a true and fair view

by Statutory Auditors

§ Limited power of making additions and reductions as

provided for in the Explanation to the section.

Facts

§ The assessee company while determining its net

profit for the relevant accounting year has provided

for arrears of depreciation in its profit and loss

account

§ According to the AO, such a treatment is not in

accordance with Parts II and III of Schedule VI to the

Companies Act, 1956

§ Hence, the AO while considering the case of the

assessee company under section 115J of the Act,

recomputed the said profit and loss account of the

company so as to exclude the provisions made for

arrears of depreciation.Apollo Tyres Limited vs CIT [2002] (255 ITR 273) (SC)

Similar principles held in the case Malayala Manorama Co. Ltd v. CIT [2008] 300 ITR 51 (SC)

Can AO question the correctness of the Profit and Loss account prepared by the company and certified by the statutory auditors as having been prepared in accordance with the requirements of Parts II and III of Schedule VI to the Companies Act 1956?

Power of AO to make adjustments outside P/L Account

Wealth taxWealth tax not to be added back - CIT v. Echjay Forgings (P.) Ltd. [2001] 116 taxman 322 (Bom.); Usha Martine Industries Ltd. v. CIT [2003] 81 TTJ (Cal. SB) 518

FBTDefinition of tax under section 2(43) includes FBT. However, FBT is not levied on assessee’s “income” FAQ 103 of CBDT Circular No 8 of 2005 provides FBT can be deductible for MATASB International (P.) Ltd. v Dy. CIT (2012) 54 SOT 140 (URO)(Mum Trib)

Penalty Tax as defined under section 2(43) does not include penalty -Harshad Shantilal Mehta (231 ITR 871)(SC) Tax, interest and penalty used in the Act carry different meanings & connotations - Salgaoncar Mining Industries P. Ltd [287 ITR (AT) 197]

Foreign taxThere is no justification to restrict the scope of the expression 'income-tax' to Indian income-tax only - Bank of India, In re [2007] 165 Taxman 627 (AAR - New Delhi)

Explanation 2 inserted vide Finance Act 2008 w.r.e.f 2001

Dividend Distribution Tax

Any interest charged under the Act

Surcharge

Education cess and Secondary and Higher Education cess

Expressly included in

the definition of Income

Tax

Scope of the term “Income-tax” paid or payable

Whether profit on sale of land carried to capital reserve can be added to book profits?

Facts

Ø The assessee was carrying on business of investment.

Ø The assessee sold a part of its land and treated the income derived as long term capital gains.

Ø As per profit and loss account, the assessee earned a net profit of NR 12 lakhs. However, the assessee did not offer any income under section 115J of the Act.

Ø The assessee contended that under section 115J, one has to take business profits and if any receipt had no commercial profit element, then such receipt would have to be excluded for the purposes of section 115J.

Ø MAT is with reference to total income of the Assessee, which inter alia, includes capital gains

Ø A company is bound to disclose in the P&L the said amount as non-recurring transaction or a transaction of an exceptional nature irrespective of its nature, i.e., whether capital or revenue

Ø It would be inappropriate to directly transfer such amount to capital reserve - the Accounts are not prepared in accordance with the manner provided in Part II and Part III of Schedule VI to the Companies Act.

Ø Thus, profit on sale of fixed assets would form part of the book profit for MAT purposes.

Veekaylal Investment Co. (P.) Ltd. v CIT [2001] 249 ITR 597 (Bombay HC)

Amount directly credited to reserves

Whether profit on sale of land carried to capital reserve can be added to book profits?

§ The company had transferred the proceeds from sale of land to capital reserve and did not

route the same through Profit and Loss Account

§ While computing the book profits under section 115J, the AO does not have the jurisdiction to

go beyond the net profit as shown in the Profit and Loss Account.

§ AO has the authority to examine whether the books of account are certified by the authorities

under the Companies Act. AO has limited power of making additions and reductions as

provided in the section.

§  CIT Vs Vijayashree Finance and Investment Co (P) Ltd [2008] (216 CTR 191)

Madras HC “Profit on sale of land credited to capital reserve cannot be added back to book profits, however if the same is credited to P/L it should be considered for book profit computation.”

Position adopted in the context of section 115J – based on ruling in the case of Apollo Tyres (supra)

“Profit on sale of land credited to capital reserve cannot be added back to book profits, however if the same is credited to P/L it should be considered for book profit computation.”

• However if the profit on sale of land is credited to Profit and Loss Account, the same should be reckoned in computing book profits.

CIT Vs Indo Marine Agencies Kerala (P) Ltd (279 ITR372)

Amount directly credited to reserves

“Profit on sale of land credited to capital reserve cannot be added back to book profits, however if the same is credited to P/L it should be considered for book profit computation.”

Key considerations

v Under the provisions of section 115J the requirement was limited that accounts shall be prepared in accordance with provisions of Part II and Part III of Schedule VI of the Companies Act, 1956 / Schedule III to the Co Act, 2013

v This requirement has been enlarged under section 115JB. As per the 2nd proviso the requirement is that while preparing the accounts it should be ensured that Accounting Policies and Accounting Standard etc., adopted for preparing the accounts shall be the same as per the accounts laid down before the company in its annual general meeting.

v In view of these enlarged requirements, it is held that Assessing Officer has powers to go beyond the accounts and see whether same have been prepared in accordance with the requirements of Part II and Part III of Schedule VI of the Companies Act, 1956 / Schedule III of the Co Act, 2013

v Clause (2) of Part II and Part III of Schedule VI of the Companies Act, 1956 requires that profits from investment are to be credited to the revenue account. Accounting Standard 13, Para 34 also makes it clear that profits from investment have to be credited to the profit & loss account.

v Section 115JB mandate that annual accounts must be prepared in accordance with the Accounting Policies and Accounting Standards which have been followed for preparing accounts which were laid before the company for annual general meeting.

v Accordingly, if this policy is not followed naturally the Assessing Officer can go behind the accounts and recast the accounts or consider the items which are required to be considered as per the requirements of Accounting Policies, Accounting Standard and Schedule III of the Companies Act, 2013.

Amount directly credited to reserves

“Profit on sale of land credited to capital reserve cannot be added back to book profits, however if the same is credited to P/L it should be considered for book profit computation.”

Provision for warranty made on a scientific basis i.e. past historic cost, failure rate experienced in the past, the length of warranty, increase in volumes etc cannot be treated as arbitrary. It is an ascertained liability and should not be added back as a contingent liability for computing book profits - Hewlett Packard India (P) Ltd. 314 ITR 55 (Del HC)

Provision for Warranty

Provision for Gratuity

Provision for gratuity made on the basis of an actuarial valuation should be deductible - CIT v. Hewlett Packard India (P) Ltd 314 ITR 55 (Del), CIT v. Echjay Forgings (P.) Ltd. 251 ITR 15 (Bom.)

Lease Equalisation Charges

Reserve created in accordance with Accounting Standard 19 – not unascertained liability - GE Capital Transportation Financial Services– (2007) 17 SOT 173 (Del), ICICI Venture Funds Mgmt Co Ltd ([2015] 62 taxmann.com 128 (Karnataka HC) ([2014] 49 taxmann.com 491 (Delhi HC)

Amount set aside for meeting provisions for unascertained liabilities

Contentious issues – Provision for doubtful debts, Provision for slow moving / obsolete inventory, Non-performing assets etc.

The basic principle underlying in the present case is that “an amount set apart to meet a known liability cannot be regarded as reserve”

High court in the present case held that, amount which is retained by way of providing for a known liability is not a reserve and, consequently, amount which is set apart as a Debenture Redemption Reserve is not a reserve within meaning of Explanation (b) to section 115JA

Debt redemption reserve was an appropriation for purpose of creating a reserve and was a below a line adjustment and it does not fall in any category of adjustments provided under section 115JB

Thus, the amount which was set apart as a Debenture Redemption Reserve is not a reserve within the meaning of Explanation (b) to Section 115JA of the Income Tax Act, 1961

Raymond Ltd v. Commissioner of Income-tax[2012] 21 taxmann.com 60

(Bom)

No adjustment for Debenture redemption reserve under 115JB

Whether adjustment for Debenture redemption reserve is allowable under 115JB?

A new Explanation 4 was inserted vide Finance Act 2016 to provide that provisions of MAT are

not applicable to a foreign company in the following circumstances

(1) The assessee is a resident of a country or a specified territory with which India has an agreement under

section 90(1) or the Central Government has signed an agreement u/s 90A(1) and that assessee does not have a

permanent establishment in India or

(2) The assessee is a resident of a country with which India does not have an agreement and the assessee is not

required to seek registration under any law for the time being in force relating to the companies .

The Explanation will have retrospective effect from 01.04.2001

Amendment in Finance Act 2016

Amendment in Finance Act 2015

Clause (iid) was inserted vide Finance Act 2015 w.e.f 01.04.2016 which provides as follows:

The amount of income accruing or arising to an assessee, being a foreign company, from,—

(A) the capital gains arising on transactions in securities; or (B) the interest, royalty or fees for technical services

chargeable to tax at the rate or rates specified in Chapter XII,

if such income is credited to the profit and loss account and the income-tax payable thereon in accordance with

the provisions of this Act, other than the provisions of this Chapter, is at a rate less than the rate specified in

sub-section (1)

Applicability of MAT to foreign companies

Treaty override of section 115JB possible in case of foreign company having a PE in India

• Section 115JB of the Act starts with a non-obstante clause – notwithstanding anything contained in the Act – thus by implication overriding all other provisions of the Act, including section 90 of the Act

• Further, as per Section 115JB the provisions relating to MAT shall apply to a taxpayer being a company. A company has been defined in Section 2(17) of the Act to include a FCo. Accordingly, a PE of a FCo would also come within the ambit of MAT provisions going by a literal reading of section 115JB

• The Mumbai Tribunal in the case of Tata Iron & Steel Co Ltd (69 ITD 292) a treaty is an act between two sovereign powers. The terms and conditions prescribed in that treaty have to be strictly followed and any diversion from the same will have to have the stamp of two contracting parties – similar view expressed by SC in Azadi Bachao case (263 ITR 706)

• Therefore, the conflict between treaty and section 115JB should be resolved by the maxim “lex posterior generalis non derogate legi priori speciali” (a subsequent general law does not override a prior special law). As a tax treaty is regarded as “special law”, the provisions of treaty should prevail.

Applicability of MAT to foreign companies

Facts

§ The assessee was in the business of providing passive infrastructure to telecom industry.

§ It had made investments in shares of mutual funds – no exempt income was earned in the year and no actual expenditure was incurred.

§ The AO made adjustment to book profits computed u/s. 115JB with the expenditure as per Rule 8D r.w.s.14A of the Act.”

Whether for the purpose of making addition under clause (f) of section 115JB, the computation mechanism as per section 14A r.w. Rule 8D can be adopted?

§ Clause (f) of Explanation to Sec. 115JB refers to the amount debited to the profit & loss account which can be added back to the book profit while computing book profit u/s. 115JB of the Act.

§ Where no actual expenditure is debited to the Profit and Loss account, the question of adding back to book profits does not arise.

§ Reliance was place in the case of Goetze (India) Ltd. Vs CIT (Delhi Trib.) and it was held that provisions of sub-section (2) & (3) of section 14A cannot be imported into 115JB.

Quippo Telecom Infrastructure Ltd. v. ACIT (Delhi Trib.)

Does the provisions of section 14A read with Rule 8D apply in computing book profits under MAT?

Amount of expenditure relatable to exempt income

Provisions of advance tax are applicable on the companies paying MAT and interest under section 234B/C is levied in case of default by these companies.

CBDT Circular N0

13/2001 – dated 9th

September 2001

This view has been affirmed by the Hon'ble Supreme Court in the case of JCIT vs. Rolta India Ltd. [2011](196 Taxman 594).

Applicability of Advance tax

Prior period Items

Loss brought forward or unabsorbed depreciation, whichever is less as per books of account and net amount as per income tax records should be deducted from net profit in calculating book profits for calculating MAT.

Under the Companies Act, 1956, for accounting purposes, the loss of any year is not segregated into 'business loss' and 'depreciation loss'. Only under the Income-tax Act, the loss computed under the head 'Profits and gains of business or profession' is segregated into 'business loss' and 'depreciation loss'.

It is specifically provided in section 115JB that the loss shall not include depreciation, it becomes necessary to bifurcate the brought forward loss as per books of account into 'Unabsorbed business loss' and 'unabsorbed depreciation'

Sections 70 to 79 provide for set off or carry forward and set off of losses computed under the Act only. The Income-tax Act nowhere prescribes the manner of set off or modalities of carry forward and set off of loss to be followed for book purposes – No restriction in number of years or inter head adjustments

Susi Sea Foods (P.) Ltd. v. ACIT [2011] 15 taxmann.com 232/48 SOT 424 (Vishakha. Trib.)

Lower of brought forward book loss or unabsorbed depreciation

The year-wise relevant business losses and unabsorbed depreciation referred in the decision are as under.

YearBook Profit / (Loss) before depreciation

Book Depreciation

Book Profit / (Loss) after depreciation

Year on Year comparison

1 42,25,696 94,88,756 1,37,14,452 42,25,696

2 44,42,777 1,30,33,168 1,74,75,945 44,42,777

3 44,53,565 -7,30,402 37,23,163 -

4 19,93,456 22,84,195 42,77,651 19,93,456

Total 1,51,15,494 2,40,75,717 3,91,91,211 1,06,61,929

INR 1.51 crores is available for set off Assessee’s contention

INR 1.06 crores is available for set off AO’s contention

Amline Textiles (P.) Ltd. v. ITO [2009] 27 SOT 152 (Mum.)

Whether consolidated figure of loss is to be considered or year on year ?

Lower of brought forward book loss or unabsorbed depreciation

Whether comparison of unabsorbed losses and depreciation should be on year to year basis?Facts:

§ While computing book profit under section 115JB for the assessment year 2003-04, the assessee reduced the aggregate amount of loss brought forward and unabsorbed depreciation relating to earlier years

§ Revenue authorities, however, by relying on provisions of sections 71 to 73, held that loss brought forward or unabsorbed depreciation, was to be considered on year-to-year basis and not as an aggregate figure for all years in unison and, accordingly, disallowed claim of assessee

§ But Mumbai ITAT held , unabsorbed depreciation for all the earlier years is to be clubbed into one amount; and the amount of brought forward loss (before depreciation) is also to be taken by summing up all the figures of loss of earlier years

§ As the aggregate amount of unabsorbed depreciation in respect of the four years is at Rs. 1,51,15,393 which is lower than the aggregate of the loss before depreciation at Rs. 2,40,75,717,the assessee had rightly claimed reduction for the lower amount of Rs. 1.51 crores.

§ Therefore, the assesse’s contention is correct.

Amline Textiles (P.) Ltd. v. ITO [2009] 27 SOT 152 (Mum)

Unabsorbed losses and depreciation should be on year to year basis

What happens to unutilized mat credit when company converts itself into a LLP?

§ In case of conversion of a private company or unlisted public company into a limited liability partnership under the Limited Liability Partnership Act, 2008, the provisions of this section regarding carry forward and set off of MAT credit shall not apply to the successor limited liability partnership.

§ The expressions "private company" and "unlisted public company" shall have the meanings respectively assigned to them in the Limited Liability Partnership Act, 2008.

"Credit in respect of tax paid by a company under section 115JB is allowed only to such company under section 115JAA. It is clarified that the tax credit under section 115JAA shall not be allowed to the successor LLP."

CBDT's Circular No.1/2011, dated 6-4-2011 explains section 115JAA(7) as under:

MAT credit on conversion to LLP

Facts

§ The gas distribution division of the Company was

transferred by way of demerger to the Transferee

Company

§ The Scheme of Arrangement for the demerger was

approved by the HC.

§ Pursuant to the demerger, the Demerged Company

and the Resulting Company had revised their

respective returns of income to claim proportionate

MAT credit.

§ The Scheme of Arrangement, as approved by the

HC, provides for transfer of all assets, properties,

debts, liabilities, duties, obligations and deferred

tax benefits of the Demerged Undertaking from the

Demerged Company to the Resulting Company.

 

Whether MAT credit can be claimed by the resulting company in a demerger?

Held

§ Based on the decision of the Supreme Court, in the

case of Marshall Sons & Company India Ltd.

[223 ITR 809] the Demerged Company is deemed to

have carried on the operations of the Demerged

Undertaking on behalf of the Resulting Company from

the Appointed Date .

§ Given the above legal position, the Resulting Company

would be entitled to claim MAT credit, TDS and

advance tax credit of the Demerged Company.

§ In light of the clauses stated in the Scheme of

Arrangement, the Resulting Company can claim pro

rata MAT credit, TDS and advance tax credit to the

extent pertaining to the Demerged Undertaking

Adani gas Ltd v. ACIT(ITA Nos. 2241 & 2516/Ahd/2011)

Demerger

Recent jurisprudence

Facts

§ A Ltd is a Government of Karnataka undertaking incorporated under the Companies Act, 1956, engaged in the business of providing financial assistance to set up industries.

§ It considered long-term capital gains arrived at by reducing the indexed cost of acquisition for computing tax liability under section 115JB

Whether for computation of income under section 115JB of the Act, long-term capital gain computed under section 48 of the Act is to be included and accordingly, in such computation, whether indexed cost should have been allowed to be reduced?

Decision

§ It was observed that the term, ‘any income’ used in section 10(38) of the Act referred to only the amount of long-term capital gains computed under section 48 of the Act.

§ Reliance was placed in the case of M.S.R & Sons Investment Limited

§ Applying the ratio of this decision, it was held that the taxpayer was entitled to the benefit of indexation while calculating long-term capital gains that had to be considered for the purpose of computing tax liability under section 115JB of the Act

Karnataka State Industrial Infrastructure Development

Corporation Ltd. (Bangalore Tribunal) 76 taxmann.com 360 (2016)

Indexation benefit

Facts

• The assesse filed return claiming exemption under section 54EC.

• The AO did not question the eligibility of the asseesee to such exemption in regular computation.

• However, AO while processing the computation of tax in terms of section 115JB, took a view that the assesee was not entitled to the grant of relief under 54EC.

Decision

• Section 115JB is a self-contained code of assessment. The levy of tax is on the book profits after effecting various upward and downward adjustments as set out in explanation 1 to 115JB.

• Sub-section 5 of section 115JB opens the assessment to the application of all the other provisions contained in the Act.

• Sub-section 5 reads as follows : “Save as otherwise provided in this section, all other provisions of this Act shall apply to every assesee being a company mentioned in this sector.”

• Therefore the adjusted book profits shall be further eligible to the benefits set out in the other provisions of the Act.

• In view of the above it was decided in favour of the assesee that capital gains eligible for section 54EC benefit should be reduced from book profits.

Metal and Chromium Plater (P) Ltd (2016) 76 Taxmann 229 Madras High Court.

Whether Long term capital gains eligible for section 54EC benefit should be considered for section 115JB?

Facts

• The assessee had capital gain arising from sale of factory land and building and the same was credited to profit & loss account.

• The assessee claimed that for MAT purposes, the same is required to be deducted as it represented receipt in nature of income not taxable under section 54EC.

• The AO rejected the claim on the ground that that section 115JB did not mention that capital gain not chargeable to tax by virtue of section 54EC would be reduced from the net profit in order to arrive at book profit under section 115JB.

Decision

• Section 115JB is a self-contained code of assessment.

• Subsection 5 providing that other provisions of the Act shall apply will not mean that the provisions of normal computation of income can be imported into section 115JB.

• Subsection (5) starts with 'save as otherwise provided in this section' which clearly means that the other provisions of the Income tax Act cannot alter or amend the computation of book profit as provided under section 115JB.

• Profit on sale of assets credited to the profit & loss account could not be excluded while computing the book profit under section 115JB even though the capital gains arising from the sale of that asset was not subject to tax under the normal provisions of Act by the virtue of provisions of section 54EC

Technicarts (P) Ltd (2011) 46 SOT 294 Mumbai ITAT

Whether Long term capital gains eligible for section 54EC benefit should be considered for section 115JB?

Facts

§ The assessee company held a parcel of land as its

capital asset and the said land was attached with

development rights.

§ It transferred development rights available on a

portion of above said land, to its wholly owned

Indian subsidiary company.

§ As the provisions of section 47(iv) were applicable

to the transfer made by the assessee to its

subsidiary company, such gain was not regarded as

'Capital gains' under section 45 while computing

total income under normal provisions of the Act.

§ The assessee did not offer the abovesaid amount

while computing the 'book profit' under section

115JB also on the ground that since it was not in the

nature of income, it did not come within purview of

section 115JB.

Held

§ Clause (ii) of Explanation 1 to section 115JB specifically

provides that the amount of income to which any of the

provisions of section 10 (other than the provisions

contained in clause (38) thereof) is to be reduced from

the net profit, if they are credited to the profit and loss

account. Thus the Legislature seeks to maintain parity

between the computation of 'total income' and 'book

profit', in respect of exempted category of income.

§ If the said logic is extended further, an item of receipt

which does not fall under the definition of 'income' at all

and, hence, falls outside the purview of the computation

provisions of Income tax Act, cannot also be included in

'book profit' under section 115JB.

§ Thus the profit arising on transfer of capital asset by

assessee to its wholly owned Indian subsidiary company

is liable to be excluded from the net profit

Shivalik Venture (P.) [2015] 60 taxmann.com 314 (Mumbai Trib.)

Income exempt under section 47 – taxability under MAT

MAT credit

MAT Credit

Particulars Amount (INR)

Year 1

115JB Liability 1600

Normal Tax Liability 400

Credit C/f 1200

Year 2

115 JB Liability 600

Normal Tax Liability 1400

Tax Liability 1400

MAT credit available for set off in Year 2 800

Net Tax Liability for Year 2 600

MAT credit to be c/f 400

Section 115JAA of the Act provides that where tax is paid under section 115JB, credit in respect of such tax paid shall be allowed to the extent of difference in tax paid under MAT provisions and tax payable on total income computed under the normal provisions of the Act.

• Quantum of MAT Credit : MAT paid – Tax paid under normal provisions.

• Tax credit shall be allowed in the year in which tax becomes payable under normal provisions of the Act.

• Brought forward tax credit shall be set off to the extent of difference in Tax paid under normal provisions of the Act and Tax payable under MAT provisions.

• MAT credit to be utilized over a period of 15 years from the AY in which such credit is allowed.

• Finance Bill 2017 proposes to amend the period of c/f from 10 years to 15 years w.e.f AY 2018-19

• Further, MAT credit will not allowed to be carried forward to the extent the credit relates to difference between amount of FTC allowed against MAT and allowable against normal provisions.

• No interest shall be payable on the tax credit allowed.

In CIT Vs Tulsyan NEC Ltd (2011) 196 Taxman 181, the SC illustrated the provisions of MAT credit set off through the above example.

Particulars Reference Assessee’s Approach Revenue’s Approach

Normal Provisions  

Tax liability A 1000 1000

Surcharge B 120 120

Cess C 34 34

Total D=A+B+C 1154 1154

MAT Provisions  

Tax liability E 1500 1500

Surcharge F 180 180

Cess G 50 50

Total H=E+F+G 1730 1730

MAT credit set off I=D-H (Assessee)I = A-E (Revenue)

576 500

Tax liability D-I 1154 1230

Does MAT Credit include Surcharge and Cess?

Richa Global Exports (2012) 54 SOT 185

• Section 115JB stipulates that book profit shall be

deemed to be the total income of the company and

the tax payable there on shall be the amount of

income tax at the specified rates. 

• Section 115JAA does not talk about surcharge or

education cess. Wherever statute has sought income

tax to include surcharge and cess, it has specifically

included it like in explanation 2 to section 115JB

• Therefore it emerges that MAT payable is only

income tax and does not include surcharge or cess.

• Where it is only income tax that is paid as MAT it is

natural that tax credit under 115JAA will only be of

income tax and not surcharge and cess.

Virtusa India (P) Ltd Vs DCIT (2016) 157 ITD 1160

• As per section 115JAA, MAT credit shall be allowed in the year in which tax payable under normal provisions of the Act is higher than tax payable under section 115 JB.

• On perusal of subsection 2A, it can be observed that the tax credit to be allowed is the difference of tax paid under normal provisions and the MAT payable. The important word used here is “tax paid”.

• As per the Apex Court’s decision in case of CIT Vs K. Srinivasan (1972) 83 ITR 346, the term tax paid includes surcharge and education cess.

• As per the amended format of ITR 6 w.e.f AY 2012-13, MAT credit in row 7 is calculated automatically using the prescribed algorithm as the difference between tax liability as per normal provisions and MAT provisions. Both these tax liabilities are calculated with surcharge and cess.

• The AO cannot overlook these formats and interpret it in his own method of calculating tax credit.

Favourable decisions in the following cases: Vacment India (Allahabad HC) [2015], SREI Infrstructure Finance Ltd (Calcutta HC), Saint Gobain Gyproc India Ltd (Chennai ITAT)

Does MAT Credit include Surcharge and Cess?

Other Aspects

Foreign tax credit – allowable in respect of tax paid under section 115JB – Amendment by Finance Act, 2017

No penalty where tax is paid under MAT prior to AY 2016-17 )(CBDT Circular No. 25/2015 dt. December 31, 2015)

On and from AY 2016-17, provisions amended to levy penalty even in cases where tax is payable under MAT

Key changes to MAT provisions as per the Finance Bill 2017

Calculation of book profit

§ Profit for the year before Other Comprehensive Income (OCI) as per Ind AS will be considered as the starting point

§ The net profit would be subjected to normal MAT adjustments§ Further the following adjustments are to be performed to OCI

Items of OCI Treatment

i) Will be reclassified to profit or loss To be included in the computation of book profits of the relevant year

ii) Will not be reclassified to profit or loss

a) Changes in revaluation surplus of property, plant or equipment (PPE) and intangible assets (Ind AS 16 and Ind AS 38)

At the time of realization/disposal/retirement or otherwise transferred

b) Gains and losses from investments in equity instruments designated at fair value through other comprehensive income (Ind AS 109)

At the time of realization/ disposal/ retirement or otherwise transferred

c)Any other item Add back all the amounts credited in OCI/ reduce all the amounts debited in OCI in the computation of book profits of that year

Computation of MAT liability for companies applying Ind AS

Ø Increase/decrease for amounts debited/credited to the statement of profit and loss on the distribution of non-cash assets to shareholders in a demerger in accordance with Appendix A of the Ind AS 10.

Ø In the case of a resulting company, where the property and the liabilities of the undertaking or undertakings being received by it are recorded at values different from the values appearing in the books of account of the demerged company immediately before the demerger, then such change should be ignored for the purpose of computation of the book profit of the resulting company

Computation of MAT liability for companies applying Ind AS

§ The book profit of the year of convergence and each of the following four years should be further increased or decreased, as the case may be, by one-fifth of the “transition amount”.

§ “Transition amount” is the aggregate of amounts adjusted in the other equity(excluding capital reserve and security premium), but not including the following:

Items To be included in book profits

Items referred for previously for adjustment for Ind AS companies

Refer earlier slide

Adjustments relating to items of PPE and intangible assets recorded at fair value as deemed cost as per Ind AS 101

At the time of retirement/disposal/realization

Adjustments relating to investments in subsidiaries, joint ventures and associates recorded at fair value as deemed cost as per Ind AS 101

At the time of retirement/disposal/realization

Adjustments relating to cumulative translation differences of a foreign operation as per Ind AS 101. An entity may elect a choice whereby the cumulative translation differences for all foreign operations are deemed to be zero at the date of transition to Ind AS.

At the time of retirement/disposal/realization

MAT on first time adoption of Ind AS

Issues on mergers and acquisitions

Impact on Companies following Ind AS

Demerger- tax exposures under section 2(19AA) of the Act

§ In a demerger, the transferor company transfers its assets and liabilities to another company in consideration for issue of shares to its shareholders. Appendix A of Ind AS 10 prescribes the accounting treatment for the distribution of non-cash assets by a company to its owners, which requires that such transfers other than common control transactions be recorded at the fair value of the net assets transferred.

§ The gain or loss resulting from the difference between the fair value of such net assets and their carrying value is recognized in the statement of profit or loss. While such unrealized profit is not included in the computation of taxable income, it is likely to be included in book profit and thus will result in having a MAT exposure.

Impact on Companies following Ind AS

Negative goodwill/capital reserve on business combinationsScenario I§ As per Ind AS 103 Business Combinations, when the fair value of net assets acquired is higher than the fair

value of consideration, the difference is considered as a bargain purchase gain.

Such bargain purchase gain is recognized in OCI on the acquisition date and is accumulated in equity as capital reserve under the head “Items that will not be re-classified to profit or loss.”

§ As a result, negative goodwill will be offered for MAT in the year in which the gain is accounted.

Scenario II

§ As per Ind AS 103, if there does not exist clear evidence of the underlying reasons for classifying the business combination as a bargain purchase, the gain should be recognized directly in equity as capital reserve.

Since such adjustments are directly accounted for in equity as capital reserve and not routed through OCI, it is likely that such adjustments will not be included in the MAT calculations as well.

Impact on Companies following Ind AS

• Adjustments to capital reserve have been excluded from the definition of transition amount. Hence, bargain purchase on past business combinations that have been restated as per Ind AS would not be offered for MAT.

Section II

Dividend Distribution Tax

2

Ø Prior to 1997, taxation of dividend was recipient basis.

Ø To avoid multiple tax entities and for the ease of collection, liability was shifted from recipient to payer.

Ø Clause 1A was inserted to section 115-o, to avoid cascading effect of DDT in multiple layers.

Ø Dividend distribution tax (‘DDT’) is a tax which is required to be paid by the domestic company who has declared, distributed or paid any amount as dividend.

Ø Under section 115-O of the Act, DDT is an additional tax payable at rate of 15% (plus applicable surcharge and cess) on gross basis by a domestic company on its distributed profits. The effective DDT rate is 20.36%

Ø DDT is to be paid within 14 days of declaration/ distribution/ payment of dividend (whichever is the earliest),

Background

No dividend tax for a unit of a International Financial Service Center

Ø DDT shall not be leviable on distributed profits of a company that is a unit located in IFSC w.e.f FY 2016-17.

Ø Such company should be deriving income solely in convertible foreign exchange.

Ø Further, such exemption is available both to the payer as well as recipient of such dividend.

Dividend Distribution tax - Key Aspects

No tax on dividend by domestic company to business trust

§ Where a business trust holds 100% of the share capital of a domestic company, DDT shall not be chargeable in respect of any amount declared, distributed or paid by the specified domestic company by way of dividends to the business trust out of its current income on or after the date of acquisition of such holding by the business trust (w.e.f from 1-6-2016).

Dividend Distribution tax - Key Aspects

Ø The amount on which DDT is to be paid shall be reduced by,—

Domestic subsidiary

§ The dividend received from the domestic company can be reduced from the dividend declared by the domestic company, provided the subsidiary has paid DDT on such dividend

Foreign Subsidiary

§ The dividend received by the domestic company from its foreign subsidiary.

§ Provided the domestic company has paid taxes under section 115BBD on such dividend

OR

Provided that the same amount of dividend shall not be taken into account for reduction more than once

Section 115BBDA

Ø Finance Act 2016, has removed the tax exemption on dividends by imposing a tax on the Dividend income in the hands of specified assesses by introducing a new Section 115BBDA.

Ø Monetary ceiling of Rs. 10 lakhs is prescribed, and any aggregate of Dividend received above this limit, the recipient will have to pay tax at a flat rate of 10% u/s 115BBDA.

Ø Further, no deduction in respect of any expenditure or allowance or set off of loss shall be allowed to the assessee in under the Act in computing the income by way of dividends.

Other related Aspects

Issues Under DDT

Ø Computation of DDT – Should it be grossed-up at base rate of 15% or rate inclusive of surcharge and cess (17.3040%)

Particulars Gross up at 15% Gross up at 17.304%

Total Dividend amount 100 100

DDT 15 15

Surcharge 0 1.8

Cess 0 0.504

Total DDT for gross up 15 17.304

Net dividend pay out 85 82.696

Effective DDT tax rate 20.36% 20.924%

Ø The subsection 1B of 115-o, talks about the rate mentioned in the subsection 1, which is 15%. Accordingly a literal interpretation suggests that the grossing up has to be done at 15% rate. Same position illustrated in the Memorandum to the Finance Act (No. 2) 2014

Rate to be used for the purpose of grossing up

Ø Under the provisions the Income tax Act, 1961 if the taxpayer can satisfy to the tax officer that the tax paid by him exceeds the tax payable by him, then the taxpayer shall be entitled to a refund of the excess tax paid by him. The same has also been endorsed by the Apex Court of India in the case of CIT v. Shelly Product [2003] 261 ITR 367/129 Taxman 271.

Ø In this regard, it is important to refer to the judicial precedent in the case of Torrent (P.) Ltd. v.CIT [2013] 35 taxmann.com 300/217 Taxman 149 (Mag.)wherein the High Court of Gujrat analyzed the issue re the refund of DDT paid by a company.

Ø In this case , it was said that if the dividend paying company and the dividend earning companies amalgamate with each other , then it would result in non-payment of dividend.

Ø After analyzing the issue in detail, High court directed for the refund of DDT paid.

Ø Thus , the Government should come out with the clarification that the excess payment of DDT should be refunded to the taxpayer in case there is no other outstanding tax demands. It will also help in creating non adversarial tax environment

Refund of excess Dividend Distribution Tax paid

1. ACo pays Rs 100 dividend to its parent, BCo (holds 100% of A Co) on which DDT is paid. Bco in turn pays Rs 120 dividend to its parent CCo (holds 100% of B Co) on which appropriate DDT is paid. CCo in turn pays Rs 140 dividend to its shareholders, namely the public. On what amount would C Co pay DDT? Assume ACo, BCo and CCo are domestic companies.

(a) Rs 140(b) Rs 40(c) Rs 20

2. ACo, a foreign company pays Rs 80 dividend to B Co (holding 26% of ACo) . BCo in turn pays Rs 100 dividend to its parent CCo (holds 25% of BCo). On what amount would Bco pay DDT?

(a) Rs 100(b) Rs 80(c) Rs 20

Questions

3. FCo pays Rs 100 dividend to its parent, BCo (holds 100% of F Co) on which tax is paid by BCo in foreign country at the rate of 15 percent which is available as FTC. B Co pays Rs 120 dividend to its shareholders, namely the public. On what amount would B Co pay DDT?

(a) Rs 100(b) Rs 120(c) Rs 20 FCo

BCo

100 %

Questions

Some Treaties provide for tax credit in respect of the underlying profits from which dividend is

declared

Ø ACo is a listed company

Ø BCo is a wholly owned subsidiary of Aco

Ø On 01.05.2016, BCo declared and paid interim dividend. BCo also paid DDT.

Ø On 01.08.2016, petition for amalgamation of BCo with ACo filed with High Court post approval of shareholders with appointed date of 1 April 2016.

Ø High Court order sanctioning amalgamation scheme is received in January 2017.

Ø Amalgamation is tax compliant.

Ø Pending HC approval, ACo declared and paid dividend to its shareholders.

Ø Could ACo consider set off of DDT paid by BCo in terms of S.115 - O?

Ø Possibility of refund of DDT paid by BCo?

4

A Co

B Co

Merges w.e.f. 1.4.2016

WOS

Payment of dividend on 1.5.2016

Questions

Thank You