Yesterday’s Judgement Today in TIOL
Income Tax – MAT - amount transferred from revaluation reserve and set off against the amount of depreciation debited to P & L Account cannot be excluded
A Larger Bench of the Supreme Court yesterday delivered an important judgement on MAT, in favour of Revenue.
History of MAT: The Supreme Court observed,
MAT is applicable only where the normal total income computed is less than 30% of the book profit.
MAT was introduced by the Finance Act of 1996 w.e.f. 1.4.1997. This was necessary due to a rise in the number of zero-tax companies paying marginal tax which situation arose in view of preferences granted in the form of exemptions, deductions and high rates of depreciation. The rate of minimum tax was kept at 30% of the book profit as deemed total income. MAT was levied under Section 115JA from assessment year 1997-98. Section 115JA is made inoperative w.e.f. 1.4.2001. In its place, the Finance Act, 2000 inserted Section 115JB. The new provision provides that all companies having book profit under the Companies Act, shall be liable to pay MAT at a specified rate of the book profit. It further provides that every MAT company shall follow same accounting policies and standards as are followed for preparing its statutory account.
For the purposes of the provision, "book profit" means the net profit as shown in the P & L Account in the relevant previous year in accordance with the provisions of Part II and Part III of the Schedule VI to the Companies Act, subject to certain adjustments which increases or decreases the book profit. Thus, even under Section 115J, certain adjustments were to be made to the net profits as shown in the P & L Account. One such adjustment stipulates that the net profit shall be decreased by the amount withdrawn from any reserves, if any such amount is credited to the P & L Account. Some companies have taken advantage of Section 115J by decreasing their net profit by the amount withdrawn from the reserve created in the same year itself, though the reserve when created had not gone to increase the book profit. Such adjustments led to lowering of profits and, consequently, the quantum of tax payable got reduced. Thus, by amending Section 115J, it was provided that "book profit" will be allowed to be decreased by the amount withdrawn from any reserves only in two cases:
(i) if such reserve has been created in the previous year relevant to the assessment year commencing w.e.f. 1.4.1998 OR
(ii) if the reserve so created in the previous year has gone to increase the book profit in any year when Section 115J was applicable.
The Finance Act, 2002 now specifically provides vide Section 115JB that the amounts withdrawn from any reserves, if credited to the P & L Account, shall be reduced from the book profit. It also provides that any amount withdrawn from such reserves created on or after 1.4.1997 and which is credited to P & L Account shall not be reduced from the book profit, unless the book profit in the year of creation of such reserves stood increased by the amount transferred to such reserves at that time.
True to the TIOL tradition, We bring you yesterday’s judgement today.
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