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The levy of Minimum Alternate Tax (MAT) on companies making sizable profits and declaring dividends but taking advantage of tax incentives to pay zero tax has invited the maximum controversy in tax litigation.
The evaluation of the current income and determination of the assessable income had to be made in terms of a statutory scheme comprising Sections 115JA and 115JB of the Income Tax Act, 1961.
These were special provisions which provided that in the case of a company, if the total income as computed under the Act is less than 30 per cent of the book profit, the total income shall be deemed to be an amount equal to 30 per cent of such book profits. The object is to tax zero tax companies. Section 115J was inserted in 1987 with effect from April 1, 1988. It gave place to 115JA with effect from April 1, 1997. Section 115JB was inserted by the Finance Act, 2000, with effect from April 1, 2001.
Amendments were made providing for payment of advance tax under Section 115JA and 115JB.
Controversies arose about the charging of interest for under payment of advance tax by zero tax companies. Arguments were advanced to the effect that the company may not be in a position to estimate its profits before the end of March 31.
The Karnataka High Court had held that interest was not leviable in cases where Section 115J applied. Other High Courts did not agree.
The very same Karnataka High Court distinguished its earlier ruling in the Kwality Biscuit's case and held that in cases governed by Section 115JB, default in payment of advance tax would attract interest under Section 234B and 234C.
The Supreme Court settled the issue in favour of Revenue in the leading case of Rolta India Ltd, 330 ITR 470 followed in CIT Vs. Steel Steips Leasing Ltd, 338 ITR 455 and Amtek Auto Ltd Vs. CIT, 338 550 and also CIT Vs. Sankala Polymers Ltd, 338 ITR 617
MAT Credit
For charging interest, is it necessary that the credit under Section 115JAA should be reduced from the amount of tax payable?
The tax department relied upon the format in the tax return for calculation of tax without reckoning the tax credit. A battery of lawyers argued the issue before the Supreme Court. The Supreme Court pointed out that the form of return, though prescribed under the Rules, cannot have effect on the interpretation or operation of the statute. In the leading case of Tulsyan NEC Ltd, 330 ITR 226 (SC), the Supreme Court held that credit for MAT has to be set off from the tax payable before levying interest under the Act.
Revaluation Reserve
The amount drawn from the revaluation reserve cannot form part of book profits and will have to be reduced. However, if it had been added back in the year in which the revaluation amount was debited in the accounts for arriving at the book profits, it cannot be excluded from book profits, Indo Rama Synthetics Ltd, 330 ITR 363 (SC).
Diminution in Value of Assets
Steriplate (P) Ltd had made a provision of Rs 91,80,973 towards diminution in the value of investments and computed nil book profits for purpose of Section 115JB.
The claim was disallowed. The Punjab and Haryana High Court pointed out that there has been retrospective amendment with effect from April 1, 2001, made by Finance (No.2) Act, 2009, under which such provisions will not go to reduce book profits. Explanation 1 to Section 115 JB (2) clarifies the law in this regard 338 ITR 547.
Bad and Doubtful Debts
The question whether the provision for bad and doubtful debts should or should not be added back to book profits for the purpose of computation under Section 115JB is still hanging fire. The Supreme Court had held that such provision cannot be added back 305 ITR 409 (SC). It was relying on its own ruling in the Apollo Tyre's case.
However, the law was amended with retrospective effect from April 1, 2001, by Finance (No.2) Act, 2009. The question whether the provision for bad and doubtful debts will be hit by the amended law is now being considered afresh by the department on directions from the Punjab and Haryana High Court in 338 ITR 614 Also see CIT vs. Ilpea Paramount P. Ltd, 336 ITR 54 (Delhi) in favour of Revenue.
Set Off of Past Losses
Setting off past losses is a statutory right. Even if the losses are wiped off because of reduction in share capital, the right to set off past losses from book profits cannot be denied.
What is carried forward in the preceding year should be available for set off in the current year in computing book profits CIT vs. Sumi Motherson Innovative Engineering Ltd, 336 ITR 321 (Delhi).
There are never ending controversies in the computation of book profits. Will the DTC enact provisions that will rid the computation of all controversies? That will call for synchronisation of tax law with company law. Too tall an order!
(The author is a former Chief Commissioner of Income-Tax.)
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