1.1 Present Provision:
115JA, 115JAA and 115JB
It was zero-tax companies,
which were profitable and paid dividends to shareholders but owing to various
deductions/sops available under the tax laws did not have a taxable income and
thus did not pay tax, that caught the attention of the legislators and led to
the introduction of MAT. Under the existing provision a company is liable to
pay minimum tax u/s. 115JB on its book profit @ 10% if the tax payable by such
company on the total income under the other provisions of the Act is less than
the tax payable under MAT. The credit of taxes such paid can be carried
forward u/s. 115 JAA for 7 years to be set off against the tax liability
arising under the other provisions of the Act. At the same time the section
provides for the specific additions and deductions that are to be made to book
profit in order to arrive at the profit as per section 115JB of the Act.
1.2 Increase in Tax Rate
under MAT, restriction on deduction of certain provision & extension of
timeline for availing tax credit:
In an attempt to fill the gap
of revenue collection that may arise by the withdrawal of FBT, the government
has proposed to use the tool of increase in rate of tax under MAT.
As per the proposed amendment
the tax rate u/s. 115JB is proposed to be increased from 10% to 15% on the
book profit. Also, it is also proposed to amend section 115 JAA to allow the
credit of taxes paid u/s. 115JB for 10 years from the existing time limit of 7
years.
It is also proposed to insert
another clause in the existing list of adjustments that were the items debited
to the profit & loss account but the same has to be added to the net profit as
shown in the profit & loss account for the purpose of computation of book
profit under MAT. It is proposed to include any amount or amounts that has
been set aside as provision for diminution in the value of any asset’. The
result is that if the Profit & Loss A/c. prepared as per company law has a
debit for such provision, it will be added back to the book profit.
1.3 Reasons for proposed
amendment
In its give and take relief
exercise the government has increased the rate under MAT, whereas abolishing
the FBT would amount to loss of revenue. Both the provisions will have wide
impact on companies claiming sections 10A, 10B, 80-IA, 80-IB tax holidays and
other entities which have tax losses shield.
The Supreme Court in the case
of CIT vs. HCL Comnet Systems & Services Limited [2008] 305 ITR 409 had held
that bad & doubtful debts should be viewed as a diminution in the value of an
asset, rather than as provision towards an ‘Unascertained liability’. Such a
provision is not a provision for liability because even if the debt is not
recovered, no liability can be fastened on the assessee.
The Supreme Court has also
pointed out that where the books of account are duly certified as having been
maintained in accordance with the Companies Act, the Assessing Officer has
jurisdiction only to make such adjustments as provided in the Explanation to
section 115JA.
This interpretation was
leading to several litigations causing a leakage of the revenue under MAT. To
reverse the aforesaid interpretation, the amendment has been introduced
w.r.e.f. from A.Y. 2001-02 for section 115JB and from A.Y. 1998-99 for section
115JA.
1.4 Effective date of
proposed amendment
The proposal of increase in
the rate of taxation under MAT from 10% to 15% and extension of time period
for availing the said tax credit paid under MAT from 7 years to 10 years is
proposed to take effect from 1st April, 2010 and shall apply in relation to
assessment year 2010-11 and subsequent years.
Whereas the inclusion of
increasing the book profit to disable the provision for diminution in the
value of any asset debited to profit & loss account is proposed to be inserted
retrospectively from 1st April, 1998 for the erstwhile section 115JA and from
1st April, 2001 for section 115JB. Thus, this would be deemed to have been
included with an earlier effect being a retrospective inclusion.
1.5 Comments
Section 115JB requires that
any liability debited to Profit and Loss (P&L) account other than an
ascertained liability needs to be added to the net profit for arriving at book
profits chargeable to MAT. Whether a provision for doubtful debts is an
ascertained liability or not has been disputed widely in the past. Notably,
the Madras High Court rendered a decision in March 2000 in the case of Dy.
CIT vs. Beardsell Ltd. (2000) 244 ITR 256 holding that the provision for bad
debts cannot be termed as an ascertained liability, and therefore needs to be
added back to the net profits for arriving at the book profit subject to MAT.
However, distinguishing this decision, the Special Bench of Kolkata ITAT
rendered a decision in October 2006 in the case of Jt. CIT vs. Usha Martin
Industries Ltd. (2007) 104 ITD 249 It held that the provision for bad debt is
not a liability, per se, as no liability would be fastened upon the tax-payer
even if the underlying debt is not recovered. It, therefore, concluded that
the question whether the provision is an ascertained or unascertained
liability does not arise.
The controversy continued
till September 2008 when the Supreme Court in the case of CIT vs. HCL Comnet
Systems & Services Limited [2008] 305 ITR 409 affirmed the view purported in
Usha Martin’s case allowing the deductibility of provision for doubtful debts.
The Supreme Court has, in fact, held that the provision for doubtful debts is
akin to the provision for diminution in value of assets.
But once after the Supreme
Court had decided an issue it was always exposed to the risk whether the tax
laws will be amended thus overturning this decision and whether such
amendment, if any, will be with retrospective effect. This amendment has come
on expected lines as one of the several efforts made by the budgets to counter
the judicial interpretation of any provision.
The increase in the rate of
MAT has proved that the Finance Minister heard the slogans of tax- payer
wrongly from “MAT Hatao” to “MAT Bhadao”, as Bangla ascent and lingual diction
often leads to such interpretation and our Finance Minister has gone no wrong
in doing that.