Taxmann's Guide to Minimum Alternate Tax (MAT) & Alternate Minimum Tax (AMT)

CHAPTER-HEADS

PAGE

DIVISION ONE MINIMUM ALTERNATE TAX (MAT) CHAPTER 1

: INTRODUCTION

3

CHAPTER 2

: WHO IS LIABLE TO PAY MAT

CHAPTER 3

: BOOK PROFIT

115

CHAPTER 4

: NET PROFIT AS PER PROFIT AND LOSS ACCOUNT

125

CHAPTER 5

: INCOME-TAX PAID/PAYABLE/PROVISION FOR INCOME-TAX

173

CHAPTER 6

: AMOUNTS CARRIED TO RESERVES

177

CHAPTER 7

: PROVISIONS FOR UNASCERTAINED LIABILITIES

184

CHAPTER 8

: PROVISION FOR LOSSES OF SUBSIDIARY COMPANIES

200

CHAPTER 9

: DIVIDENDS PAID OR PROPOSED

202

13

CHAPTER 10 : EXPENDITURES RELATED TO TAX-FREE INCOMES

203

CHAPTER 11 : EXPENDITURE RELATABLE TO SHARE OF INCOME IN AOP/BOI

215

CHAPTER 12 : EXPENDITURE RELATABLE TO INCOME OF FOREIGN COMPANY TAXABLE AT LESS THAN MAT RATE

218

CHAPTER 13 : NOTIONAL LOSS OF SPONSORS OF REITs AND InVITs ON EXCHANGE OF SHARES IN SPV FOR UNITS OF REIT/InVIT OR DUE TO CHANGE IN VALUE OF UNITS OR LOSS ON TRANSFER OF UNITS

221

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CHAPTER-HEADS

PAGE

CHAPTER 14 : EXPENDITURE RELATABLE TO ROYALTY INCOME IN RESPECT OF PATENTS TAXABLE UNDER SECTION 115BBF

223

CHAPTER 15 : AMOUNT OF DEPRECIATION

226

CHAPTER 16 : AMOUNT OF DEFERRED TAX AND PROVISION THEREFOR

230

CHAPTER 17 : AMOUNT OR AMOUNTS SET ASIDE AS PROVISION FOR DIMINUTION IN THE VALUE OF ANY ASSET

233

CHAPTER 18 : REVALUATION RESERVE IN RESPECT ASSET RETIRED/DISPOSED OF

OF

242

CHAPTER 19 : GAIN TO SPONSOR OF REIT/InVIT ON TRANSFER OF UNITS

249

CHAPTER 20 : WITHDRAWALS FROM RESERVES OR PROVISIONS

251

CHAPTER 21 : TAX-FREE INCOMES UNDER SECTION 10/11/12

258

CHAPTER 22 : SHARE OF INCOME FROM AOP/BOI OF WHICH THE COMPANY IS A MEMBER

262

CHAPTER 23 : INCOME OF FOREIGN COMPANY TAXABLE AT LESS THAN THE MAT RATE

267

CHAPTER 24 : NOTIONAL GAIN ON EXCHANGE OF SHARES OF SPV FOR UNITS OF REIT/InVIT & ACTUAL GAIN FROM TRANSFER OF SUCH UNITS

268

CHAPTER 25 : LOSS TO SPONSOR OF REIT/InVIT ON TRANSFER OF UNITS

270

CHAPTER 26 : ROYALTY INCOME OF PATENTEE - COMPANY TAXABLE U/S 115BBF @ 10%

272

CHAPTER 27 : UNABSORBED DEPRECIATION AND LOSS BROUGHT FORWARD IN CASE OF A COMPANY WHOSE BOARD OF DIRECTORS HAS BEEN SUSPENDED BY NCLT

276

CHAPTER 28 : LOSS BROUGHT FORWARD (EXCLUDING UNABSORBED DEPRECIATION) AND UNABSORBED DEPRECIATION IN CASE OF A COMPANY WHOSE CIRP APPLICATION HAS BEEN ADMITTED UNDER IBC

278

CHAPTER 29 : LOSS BROUGHT FORWARD OR UNABSORBED DEPRECIATION

280

CHAPTER 30 : PROFITS OF A SICK INDUSTRIAL COMPANY

293

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CHAPTER-HEADS PAGE

CHAPTER 31 : AMOUNT OF DEFERRED TAX CREDITED TO P&L ACCOUNT

295

CHAPTER 32 : ADJUSTMENTS TO BOOK PROFIT REQUIRED IN CASE OF IND AS COMPANIES

297

CHAPTER 33 : COMPUTATION OF BOOK PROFIT OF THE ‘RESULTING COMPANY’ IN CASE OF A DEMERGER

304

CHAPTER 34 : MAT CREDIT

308

CHAPTER 35 : APPLICABILITY OF AUDIT UNDER SECTION 115JB

313

CHAPTER 36 : AUDIT REPORT : PARA 1 OF FORM NO. 29B

324

CHAPTER 37 : AUDIT REPORT : PARA 2 OF FORM NO. 29B

326

CHAPTER 38 : AUDIT REPORT : PARA 3 OF FORM NO. 29B

329

CHAPTER 39 : AUDIT REPORT : ANNEXURE TO FORM NO. 29B

331

DIVISION TWO ALTERNATE MINIMUM TAX (AMT) CHAPTER 40 : AMT REGIME - APPLICABLE TO ALL NON-CORPORATE ASSESSEES

345

CHAPTER 41 : APPLICABILITY OF AUDIT UNDER SECTION 115JC(3)

371

CHAPTER 42 : AUDIT REPORT : PARA 1 OF FORM NO. 29C

380

CHAPTER 43 : AUDIT REPORT : PARA 2(a) OF FORM NO. 29C

383

CHAPTER 44 : AUDIT REPORT : PARA 3 OF FORM NO. 29C

385

CHAPTER 45 : AUDIT REPORT : ANNEXURE A TO FORM NO. 29C

387

APPENDICES APPENDIX 1

: RELEVANT EXTRACTS OF INCOME-TAX ACT, 1961

395

APPENDIX 2

: COMPANIES (INDIAN ACCOUNTING STANDARDS) RULES, 2015

415

APPENDIX 3

: REPORT OF MAT-IND AS COMMITTEE

422

APPENDIX 4

: RELEVANT FORMS OF INCOME-TAX RULES, 1962

430

CONTENTS PAGE

DIVISION ONE MINIMUM ALTERNATE TAX (MAT)

1 INTRODUCTION 1.1

History of Minimum Alternate Tax (MAT)

3

1.2

Rationale for MAT

4

1.3

Salient features of MAT Regime u/s 115JB

5

1.4

MAT payable

9

2 WHO IS LIABLE TO PAY MAT 2.1

Who is liable to pay MAT

13

2.2

“Company”

17

2.3

MAT is applicable to LLPs incorporated outside India (Foreign LLPs), not to Indian LLPs

18

2.4

Applicability of MAT to Foreign Companies

18

2.5

MAT not applicable to income from life insurance business

22

2.6

Company exempted from MAT if it has opted for the tax regime under section 115BAA or section 115BAB

22

2.7

Section 115BAA : Tax on income of certain domestic Companies

23

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2.8

Low tax rate regime under section 115BAB for new manufacturing companies?

37

2.9

Applicability of MAT to shipping companies covered by Tonnage Tax Scheme

103

2.10

Where company has no taxable income but has a positive book profit

103

2.11

Where company has negative net profit as per its P&L account but has a positive book profit

103

2.12

Where company has positive net profit and taxable income but negative book profit

103

2.13

Applicability to assessees covered by presumptive tax provisions

103

2.14

Exemption to sick industrial companies

104

2.15

MAT not applicable where company incurring commercial losses not attributable to tax incentives

105

2.16

Applicability of MAT to section 25 companies (now section 8 Companies) and mutual concerns

105

2.17

Applicability of MAT to company eligible for tax holiday

108

2.18

Applicability of MAT to company whose total income is Nil

112

2.19

When liability to MAT arises?

114

3 BOOK PROFIT 3.1

Definition of ‘book profit’

115

3.2

Computation of book profit

118

3.3

Recomputation of book profit to account of additional income of past years included in books of account of current year on account of secondary adjustment or on account of APA

121

3.4

Implicit relationship of ‘book profit’ with distributable profit i.e. profit available for distribution or appropriation

123

3.5

‘Book profit’ quarantined from ‘total income’

124

3.6

Auditor’s certificate

124

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4 NET PROFIT AS PER PROFIT AND LOSS ACCOUNT 4.1

“Net profit as shown in the profit and loss account”

125

4.2

Preparation of Profit and Loss Account in accordance with section 115JB(2)

125

4.3

Relevance of section 198 of the Companies Act, 2013 for calculating net profits for section 115JB purposes

137

4.4

Profit and Loss account as per Schedule III to the Companies Act, 2013

141

4.5

Prior Period Items and extraordinary items

142

4.6

Would an item of receipt not falling under definition of income be excluded from “Book Profit”?

145

4.6A

Gain/loss due to restatement at the balance sheet date of foreign currency term loan

151

4.7

Profit on sale of assets credited to profit & loss account being long-term capital gain eligible for section 54EC benefit

151

4.8

Treatment of the cessation of liability on account of settlement loan liability with bank for the purpose of book profits

152

4.9

Income received by assessee, which had earlier been written off as a bad debt

153

4.10

Deduction under section 80-IB cannot be allowed while computing book profit under section 115JB

153

4.11

Accumulated depreciation standing in provision for depreciation account as credit balance in respect of assets sold or disposed of

157

4.12

Capital gains exempt under section 47(iv)

158

4.13

Interest on borrowed capital not debited to P&L account

159

4.14

Income by way of interest on Zero Coupon Bonds not accrued during previous year

160

4.15

Loss on sale of fixed assets debited to P&L account

160

4.16

Income covered by the principle of mutuality

161

4.17

Waiver of loan and interest by the lender (gains)

162

CONTENTS

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4.18

Central Govt. grant for modernization of machinery and compensation from State Govt. for loss of assessee company’s compound wall

162

4.19

Amount received on transfer of marketing rights and technical know-how

164

4.20

Reimbursement of advance tax by parties

164

4.21

Profit on sale of shares received by company under family arrangement

164

4.22

Gains arising on pre-payment of deferred sales tax loans at NPV as per State Govt. Schemes

168

4.23

Notional difference in maintenance expenditure on account of change in accounting procedure

169

4.24

Loan admitted as income by assessee

170

4.25

Where the Company Revises its accounts which were adopted by AGM and submits revised return

170

4.26

Change in accounting policy from treating preliminary expenses as deferred revenue to writing off in one go and qualified by auditor - Whether violation of Schedule III?

171

4.27

Revised accounts pursuant to scheme of amalgamation which has retrospective effect

171

4.28

Loss incurred on account of redemption of mutual fund

171

4.29

Security Transaction Tax (STT)

172

4.30

Lease equalization charges

172

5 INCOME-TAX PAID/PAYABLE/PROVISION FOR INCOME-TAX 5.1

Addition to net profit of income-tax amount

173

5.2

“Amount of income-tax”

173

5.3

Deferred tax

174

5.4

Provision for wealth-tax - Whether can be added to net profit?

175

5.5

Fringe Benefit Tax

175

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5.6

Security Transaction Tax (STT)

176

5.7

Foreign income tax

176

6 AMOUNTS CARRIED TO RESERVES 6.1

Addition to net profit of amounts carried to reserves

177

6.2

Conditions to be satisfied for addition under clause (b) of Explanation 1

177

6.3

“Reserve” contemplated by clause (b)

178

6.4

Amounts carried to debenture redemption reserve/loan redemption reserve

179

7 PROVISIONS FOR UNASCERTAINED LIABILITIES 7.1

Unascertained liabilities to be added to net profits

184

7.2

Ascertained liability - Connotation of

185

7.3

Liability other than ascertained liability (i.e., contingent liability)

186

7.4

Distinction between ‘condition precedent to creating a liability’ & ‘condition precedent to discharging a liability’

187

7.5

Is provision for product warranties an ascertained liability?

191

7.6

Ascertained liabilities of a capital nature to be added to net profits

192

7.7

Provision for gratuity made on the basis of actuarial valuation

193

7.8

Provision towards leave encashment of employees

194

7.9

Provision for site restoration expenses

194

7.10

Where assessee suffered losses due to earthquake and made provision for repairs as per Government agency’s estimates

195

7.11

Where provision for ascertained liability made in a year different from the year in which the liability arose

197

CONTENTS

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7.12

Provision for bonus

197

7.13

Where provisions for ascertained liabilities erroneously credited to Reserves

197

7.14

Provision for future losses

198

7.15

Provisions for liquidated damages

198

7.16

Provision towards electricity tariff adjustment

198

7.17

Forward Foreign exchange contract

199

8 PROVISION FOR LOSSES OF SUBSIDIARY COMPANIES 8.1

Addition of provision for losses of subsidiary companies to net profits

200

8.2

Share of loss from a firm

200

9 DIVIDENDS PAID OR PROPOSED 9.1

Addition to net profits of dividends paid or proposed

202

10 EXPENDITURES RELATED TO TAX-FREE INCOMES 10.1

Addition of expenditures related to tax-free incomes to net profit

203

10.2

Share of loss from firm

203

10.3

No basis for the argument that only direct expenses have to be added back

203

10.4

Which amount to be added to book profit-amount debited to P&L or disallowance computed under rule 8D?

204

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11 EXPENDITURE RELATABLE TO SHARE OF INCOME IN AOP/BOI 11.1

Expenditure relatable to company’s share of income in any AOP or BOI

215

11.2

“Relatable to”

216

12 EXPENDITURE RELATABLE TO INCOME OF FOREIGN COMPANY TAXABLE AT LESS THAN MAT RATE 12.1

Expenditure relatable to foreign company’s income taxable at less than MAT rate of 15%

218

12.2

“Relatable to”

219

13 NOTIONAL LOSS OF SPONSORS OF REITs AND InVITs ON EXCHANGE OF SHARES IN SPV FOR UNITS OF REIT/InVIT OR DUE TO CHANGE IN VALUE OF UNITS OR LOSS ON TRANSFER OF UNITS 13.1

Notional Loss/Actual Loss to Sponsor Co. from exchange of its shares in SPV for units in REIT/InVIT/notional loss from change in carrying amount of such units/actual loss from transfer of such units, if debited to P&L A/c

221

14 EXPENDITURE RELATABLE TO ROYALTY INCOME IN RESPECT OF PATENTS TAXABLE UNDER SECTION 115BBF 14.1

Expenditure relatable to resident company’s royalty income from patents chargeable to tax u/s 115BBF @10% (i.e. at less than MAT rate of 15%)

223

CONTENTS

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14.2

“Relatable to”

224

15 AMOUNT OF DEPRECIATION 15.1

Background

226

15.2

Position under the Companies Act, 2013

226

15.3

Adjustments to net profit related to depreciation

228

15.4

Where assessee adopted rate of depreciation as per Income-tax Act instead of Companies Act in P&L account laid before the AGM

229

16 AMOUNT OF DEFERRED TAX AND PROVISION THEREFOR 16.1

Addition to/deduction from net profits of deferred tax

230

16.2

“Deferred tax” does not refer to deferred sales tax

231

17 AMOUNT OR AMOUNTS SET ASIDE AS PROVISION FOR DIMINUTION IN THE VALUE OF ANY ASSET 17.1

Amount or amounts set aside as provision for diminution in the value of any asset

233

17.2

Constitutional validity of retrospective amendment inserting clause (i) in Explanation 1

234

17.3

Examples of provisions for diminution in the value of assets

235

17.4

Write-off of Bad Debts v. Provision for Doubtful Debts

237

17.5

Withdrawals from provisions for diminution in assets/ reversals of such provisions

241

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18 REVALUATION RESERVE IN RESPECT OF ASSET RETIRED/DISPOSED OF 18.1

Revaluation reserve balance in respect of asset disposed off or retired

242

18.2

Objective of clause (j)

246

18.3

Case Studies and Illustrations

247

19 GAIN TO SPONSOR OF REIT/InVIT ON TRANSFER OF UNITS 19.1

Gain to Sponsor of REIT/InVIT on transfer of units carried in books at Fair Value, Computed in accordance with the Act

249

20 WITHDRAWALS FROM RESERVES OR PROVISIONS 20.1

Deduction of withdrawals from reserves/provisions from net profit

251

20.2

Reduction from net profit of withdrawals from reserves

252

20.3

Meaning of ‘credit to profit and loss account’

252

20.4

Reduction from net profit of withdrawals from provisions

254

20.5

Intent behind clause (i) of Explanation 1

254

20.6

Withdrawals from provisions-when deductible from net profit for computing book profit?

255

20.7

Withdrawal from revaluation reserve created on or after 1-4-1997

256

20.8

Where withdrawal is from a provision or reserve created prior to 1-4-1997

256

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21 TAX-FREE INCOMES UNDER SECTION 10/11/12 21.1

Tax-free incomes - Deduction from net profit

258

21.2

“If any such amount is credited to the profit and loss account”

258

21.3

Profit on sale of rural agricultural land

259

22 SHARE OF INCOME FROM AOP/BOI OF WHICH THE COMPANY IS A MEMBER 22.1

Backdrop

262

22.2

Clause (iic) will apply retrospectively as it is remedial in nature

264

22.3

Share of income from AOP/BOI to be excluded from book profit

266

23 INCOME OF FOREIGN COMPANY TAXABLE AT LESS THAN THE MAT RATE 23.1

Applicability of clause (iid) of Explanation 1

267

23.2

Conditions for exclusion of income of foreign company from MAT

267

24 NOTIONAL GAIN ON EXCHANGE OF SHARES OF SPV FOR UNITS OF REIT/InVIT & ACTUAL GAIN FROM TRANSFER OF SUCH UNITS 24.1

Notional/Actual gain from units of REIT/InVIT (In case of sponsor-company)

268

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CONTENTS PAGE

25 LOSS TO SPONSOR OF REIT/InVIT ON TRANSFER OF UNITS 25.1

Loss to sponsor of REIT/InVIT on transfer of units of REIT/InVIT carried at fair value computed in accordance with the Act

270

26 ROYALTY INCOME OF PATENTEE - COMPANY TAXABLE U/S 115BBF @ 10% 26.1

Concessional rate of tax @ 10% on royalty income from patent

272

26.2

MAT Treatment of royalty income taxable u/s 115BBF @ 10%

274

27 UNABSORBED DEPRECIATION AND LOSS BROUGHT FORWARD IN CASE OF A COMPANY WHOSE BOARD OF DIRECTORS HAS BEEN SUSPENDED BY NCLT 27.1

Unabsorbed depreciation and loss brought forward in case of a company whose board of directors has been suspended by NCLT, to be deducted from net profit

276

28 LOSS BROUGHT FORWARD (EXCLUDING UNABSORBED DEPRECIATION) AND UNABSORBED DEPRECIATION IN CASE OF A COMPANY WHOSE CIRP APPLICATION HAS BEEN ADMITTED UNDER IBC 28.1

Loss brought forward (excluding unabsorbed depreciation) and unabsorbed depreciation to be deducted from net profit in case of a company in whose case CIRP application has been admitted under IBC

278

CONTENTS

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29 LOSS BROUGHT FORWARD OR UNABSORBED DEPRECIATION 29.1

Loss brought forward/unabsorbed depreciation to be deducted from net profit

280

29.2

Where company does not own any depreciable asset

287

29.3

Where arrears of depreciation charged in current year’s P&L Account

287

29.4

Whether arrears of depreciation disclosed in notes to accounts can be considered for the purposes of clause (iii) of Explanation 1 ?

288

29.5

Set off of losses of amalgamating company

290

29.6

Whether deduction under clause (iii) can be denied by resorting to section 79 of the Act?

290

29.7

Brought forward losses at the beginning of the year becomes nil at the end of year due to reduction of capital

292

29.8

Levy of penalty u/s 271(1)(c) for excessive claim of unabsorbed depreciation while computing book profits

292

30 PROFITS OF A SICK INDUSTRIAL COMPANY 30.1

Profits of sick industrial company to be deducted from net profits

293

30.2

Net worth

294

31 AMOUNT OF DEFERRED TAX CREDITED TO P&L ACCOUNT 31.1

Deferred Tax to be deducted only if credited to P&L

295

31.2

Clause (viii) of Explanation 1 not applicable to deferred sales tax

295

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CONTENTS PAGE

32 ADJUSTMENTS TO BOOK PROFIT REQUIRED IN CASE OF IND AS COMPANIES 32.1

Further adjustments to ‘book profit’ required in case of Ind AS Companies

297

32.2

Adjustments required to book profit in the case of Ind AS Companies u/s 115JB(2A)

297

32.3

‘Transition amount’ adjustment required to be made to book profit in year of convergence and each of the four following previous year

300

33 COMPUTATION OF BOOK PROFIT OF THE ‘RESULTING COMPANY’ IN CASE OF A DEMERGER 33.1

Computation of ‘book profit’ of the ‘resulting company’

304

34 MAT CREDIT 34.1

Principles governing carry forward and set off of MAT credit

308

34.2

What happens to unutilised MAT credit when company converts itself into a LLP

311

34.3

How should the advance tax be calculated when the company has MAT credit?

311

35 APPLICABILITY OF AUDIT UNDER SECTION 115JB 35.1

Applicability of audit u/s 115JB

313

35.2

Scope of audit under section 115JB

321

CONTENTS

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35.3

Report under section 115JB i.e. Form No. 29B

321

35.4

Respective responsibilities of the accountant and the company

322

35.5

Scope of examination

322

36 AUDIT REPORT : PARA 1 OF FORM NO. 29B 36.1

Examination of accounts and records

324

36.2

Nature of business

325

36.3

Where statutory audit under Companies Act/tax audit is not complete

325

37 AUDIT REPORT : PARA 2 OF FORM NO. 29B 37.1

Certification of computation of ‘book profit’ and incometax payable under section 115JB

326

37.2

Reporting against para 2

327

38 AUDIT REPORT : PARA 3 OF FORM NO. 29B 38.1

Certification of particulars in the Annexure

329

38.2

‘True and correct’

329

39 AUDIT REPORT : ANNEXURE TO FORM NO. 29B 39.1

Columns 1 to 4 of Part A the Annexure - Routine Details

331

39.2

Column 5 - Financial year adopted by the company under the Companies Act, 2013 (18 of 2013)

331

39.3

Column 6 of Part A of the Annexure - Total income of the company under the Act

333

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CONTENTS PAGE

39.4

Column 7 of Part A of the Annexure - Income-tax payable on total income

333

39.5

Column 8 of Part A of the Annexure - Whether statement of profit and loss is prepared in accordance with the provisions of Schedule III to the Companies Act, 2013

334

39.6

Column 9 of Part A of the Annexure - Differences/ variation in accounting policies, accounting standards, methods and rates of depreciation but financial year in column 5 is the same as relevant previous year

334

39.7

Column 10 - Where the financial year referred to in Sl. No. 5 is not the same as the relevant previous year

335

39.8

Column No. 11 of Part A of the Annexure - Net profit according to profit and loss account referred to in (8) above

336

39.9

Column Nos. 12 and 13 of Part A of the Annexure Adjustments to net profit as per Explanation 1

339

39.10 Column Nos. 14, 15, 16 and 17 of Part A of the Annexure: Adjustments to be made to book profit in case of Ind AS companies

340

39.11 Columns 18 & 19 of Part A of the Annexure - Book profit figure and MAT Liability @ 15% of book profit figure

341

39.12 Column 20 of Part A of the Annexure - Where income-tax payable by company in column 7 is less than 15% of book profits

342

39.13 Part B and Part C of Annexure

342

39.14 Signing of Form No. 29B by CA (Partner/proprietor of CA firm)

342

DIVISION TWO ALTERNATE MINIMUM TAX (AMT)

40 AMT REGIME - APPLICABLE TO ALL NON-CORPORATE ASSESSEES 40.1

Legislative History of Alternate Minimum Tax (AMT)

345

CONTENTS

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40.2

When is a non-corporate assessee liable for Alternate Minimum Tax (AMT)?

349

40.3

Are there any exemptions provided from AMT?

353

40.4

Generally only non-corporate assessees having business income would be covered under section 115JC

355

40.5

Precondition for applicability of AMT to firms and LLPs

355

40.6

Precondition for applicability of AMT to individuals and HUFs

357

40.7

Preconditions for applicability of AMT to AOPs, BOIs, AJPs

358

40.8

Applicability of AMT to co-operative societies

358

40.9

AMT not applicable to LLPs incorporated abroad

358

40.10 Applicability of AMT to assessees covered by presumptive tax under section 44AD

359

40.11 Applicability of AMT to assessees covered by presumptive tax under section 44ADA [i.e. professionals covered by section 44AA(1)]

359

40.12 Applicability of AMT to assessees covered by presumptive tax under sections 44AE, 44B, 44BB, 44BBA and 44BBB

360

40.13 Whether AMT applicable if total income is ‘nil’ and no regular income tax is payable?

360

40.14 Steps for calculating AMT for LLPs and firms

361

40.15 Steps for calculating AMT for individuals, HUFs, AOPs, BOIs and AJPs

362

40.16 Deductions under Chapter VIA-C

362

40.17 Tax credit for AMT

363

40.18 Variation of tax credit

365

40.19 Whether AMT credit treated as advance tax paid for sections 234A, 234B and 234C

367

40.20 Application of other provisions of this Act - Section 115JE

367

40.21 Whether AMT credit treated as advance tax paid for sections 234A, 234B and 234C

370

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41 APPLICABILITY OF AUDIT UNDER SECTION 115JC(3) 41.1

Form No. 29C Notified for Audit Report u/s 115JC(3)

371

41.2

Form No. 29C - Auditor’s report under section 115JC

371

41.3

Scope of audit u/s 115JC(3)

373

41.4

Respective responsibilities of the accountant and the company

377

41.5

Scope of examination

377

42 AUDIT REPORT : PARA 1 OF FORM NO. 29C 42.1

Examination of accounts and records

380

42.2

Nature of business

382

43 AUDIT REPORT : PARA 2(a) OF FORM NO. 29C 43.1

Certification of computation of ATI and AMT

383

43.2

Reporting against Para 2(a)

383

44 AUDIT REPORT : PARA 3 OF FORM NO. 29C 44.1

Certification of particulars in Annexure A

385

45 AUDIT REPORT : ANNEXURE A TO FORM NO. 29C 45.1

Columns 1 to 4 of Annexure A - Routine details

387

CONTENTS

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45.2

Column 5 - Total income of the assessee computed before giving effect to Chapter XII-BA

388

45.3

Column 6 - Income-tax payable on total income referred to in column 5

389

45.4

Column 7 - Amount of deduction claimed under any section included in Chapter VI-A under the heading ‘C’.— “Deductions in respect of certain incomes”

389

45.5

Column 8 - Amount of deduction claimed under section 10AA

390

45.6

Column 9 - Adjusted total income of the assessee (5 + 7 + 8)

390

45.7

No column in the annexure for section 35AD deduction

390

45.8

Column 10 - Alternate Minimum Tax (18.5% of adjusted total income computed in column 9 above)

391

APPENDICES Appendix 1 : Relevant Extracts of Income-tax Act, 1961

395

Appendix 2 : Companies (Indian Accounting Standards) Rules, 2015

415

Appendix 3 : Report of MAT-Ind AS Committee

422

Appendix 4 : Relevant forms of Income-tax Rules, 1962

430

C

H

A

P

T

E

R

Unless specifically exempted from MAT provisions, every company including foreign company whose tax payable on total income in respect of any assessment year is less than 15% of book profit is liable to pay MAT at the rate of 15% of its book profit.

The following companies are exempted from applicability of MAT :

Foreign company which (a) is a resident of a country with which India has a DTAA and (b) does not have a permanent establishment in India in accordance with the provision of such DTAA [Clause (i) of Explanation 4 to section 115JB(2)] [Para 2.4]

Foreign company which is (a) resident of a country with which India does not have a DTAA and (b) such foreign company is not required to seek registration under section 380 of the Companies Act, 2013 [Clause (ii) of Explanation 4 to section 115JB(2)] [Para 2.4]

Foreign company whose total income comprises solely of profits and gains from business referred to in section 44B or section 44BB or section 44BBA or section 44BBB and such income has been offered to tax at the rates specified in those sections [Explanation 4A to section 115JB(2)] [Para 2.4]

Life insurance company [Section 115JB(5A)(i)] [Para 2.5] 13

Para 2.1

14

WHO IS LIABLE TO PAY MAT

A company which has exercised the option under section 115BAA [Section 115JB(5A)(ii)] [Para 2.7]

A company which has exercised the option under section 115BAB [Section 115JB(5A)(ii)] [Para 2.8]

A shipping company which has opted for the Tonnage Tax Scheme [Section 115VO] [Para 2.9]

In terms of sub-section (7) of section 115JB, if the company is a unit located in an International Financial Services Centre which derives its income solely in convertible foreign exchange . MAT at the rate of 9% of book profit shall apply to such company for any assessment year in which tax on total income is less than 9% of book profit.

When taxable income is computed under section 115JB, no penalty can be imposed under section 271(1)(c) for additions made under normal provisions [Unison Hotels Ltd. v. Deputy Commissioner of Income-tax [2013] 40 taxmann.com 237 (Delhi)] ­

Where assessee-company incurred loss and paid tax on book profit computed under MAT provision and it was found that after making proposed addition to income, assessee would still be governed by provisions of section115JB and be assessed on same book profit, there would be no excess tax liability under MAT provision, reassessment could not be initiated [Motto Tiles (P.) Ltd. v. ACIT [2016] 73 taxmann.com 176 (Gujarat)]

In Deputy Commissioner of Income-tax, Circle-4 v. iGate Global Solutions Ltd. [2019] 111 taxmann.com 192 (Pune - Trib.), it was held that

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WHO IS LIABLE TO PAY MAT

Para 2.1

assessee is entitled to credit for the tax paid in foreign countries only to the extent of the doubly taxed income and not the remaining amount, whose corresponding income is not a part of the computation of income under section 115JB. If the doubly taxed income was subjected to tax in the other country at a rate higher than the MAT rate, then the amount of foreign tax credit should be restricted to the amount arrived at by applying MAT rate to doubly taxed income. If the doubly taxed income was subjected to tax in the other country at a rate higher than the MAT rate, then the amount of foreign tax credit should be restricted to the rate of tax paid in foreign country on doubly taxed income.

The Tribunal, analysing the provisions of section 90 and section 115JB, explained as under:

Under section 90(1)(a)(i), relief is to be allowed in respect of income on which tax has been paid in India and the other country.

The assessee admitted before the Assessing Officer that the income which suffered double taxation both in foreign countries and India is Rs. 10.13 crore.

In that view of the matter, it becomes clear that the relief under section 90(1)(a)(i) has to be granted only to the extent of such doubly taxed income and not beyond that.

The assessee paid total taxes in foreign countries to the tune of Rs. 1.91 crore.

The amount of doubly taxed income is Rs. 10.13 crore. As the income of the assessee has been finally computed under section 115JB and it is not the case of the Assessing Officer that such income of Rs.10.13 crores is not fully part of the book profits computed under section 115JB, it is this amount of income which would require exclusion from the amount of income computed under section 115JB.

Therefore, it is to be held that the assessee is entitled to credit for the tax paid in foreign countries only to the extent of the doubly taxed income and not the remaining amount, whose corresponding income is not a part of the computation of income under section 115JB.

Para 2.1

WHO IS LIABLE TO PAY MAT

16

The language of section 90(1)(a)(i) which talks of granting relief in respect of doubly taxed ‘income’. Similarly, it is to be noted that Article 25(2) of the DTAA between India and the USA provides for deduction from the tax on the income of an amount equal to the income tax paid in the USA.

On a conjoint reading of the above provisions, following two things emerge. First is that it is the amount of doubly taxed income which has to be excluded from the income chargeable to tax in India. Once such doubly taxed income is excluded from the income computed under the Act, then whatever is the amount of tax and surcharge thereon will get automatically excluded from the total tax liability computed under the Act. Second is that the deduction from the income tax liability under the Act has to be restricted to the amount of income tax paid in the USA on such doubly taxed income.

The above two propositions, when applied to the factual panorama of the instant case, leads to the inevitable conclusion that once the doubly taxed income is to be excluded, it would mean that the foreign tax credit will have to be allowed on it at the rate at which such income attracted taxation under the Act, which is 11.33 per cent under section 115JB. If however, the amount of tax paid in the other country is less than 11.33 per cent, then the deduction should be limited to the amount of tax paid on such doubly taxed income in the other country. The Assessing Officer has noted in the assessment order that the assessee paid foreign tax at the rates ranging from 10 per cent to 40 per cent.

Thus, if the doubly taxed income was subjected to tax in the other country at the rate of 10 per cent, then tax credit should be restricted to 10 per cent and in case it was subjected to foreign tax in the other country at a rate higher than 11.33 per cent (say, 15 per cent or 20 per cent or 40 per cent), then the amount of foreign tax credit should be restricted to 11.33 per cent of the concerned doubly taxed income.

The Assessing Officer is to be directed to verify the respective tax rates in Netherland, France, US, UK and Belgium for the year under consideration on which the assessee paid taxes and then allow the benefit accordingly.

17

COMPANY

Para 2.2

The term “company” is defined by section 2(17) of the Act to mean: (i) any Indian company, or (ii) any body corporate incorporated by or under the laws of a country outside India, or (iii) any institution, association or body which is or was assessable or was assessed as a company for any assessment year commencing on or before the 1st day of April, 1970, or (iv) any institution, association or body, whether incorporated or not and whether Indian or non-Indian, which is declared by general or special order of the Board to be a company. Such institution, association or body shall be deemed to be a company only for such assessment year or assessment years as may be specified in the declaration.

Section 2(26) of the Act defines “Indian company” means a company formed and registered under the Companies Act, 1956. The term also includes— (i) a company formed and registered under any law relating to companies formerly in force in any part of India [other than the State of Jammu and Kashmir1 and the Union territories specified in sub-clause (iii) of this clause]; (ia) a corporation established by or under a Central, State or Provincial Act; (ib) any institution, association or body which is declared by the Board to be a company under clause (17) ; (ii) in the case of the State of Jammu and Kashmir1, a company formed and registered under any law for the time being in force in that State; (iii) in the case of any of the Union territories of Dadra and Nagar Haveli2, Goa3, Daman and Diu, and Pondicherry, a company 1. Now the Union Territories of Jammu & Kashmir and Ladakh as per the Jammu and Kashmir Reorganization Act, 2019.

2. ‘Dadra and Nagar Haveli and Daman and Diu’ as per the Dadra and Nagar Haveli and Daman and Diu (Merger of Union Territories) Act, 2019.

3. Now the State of Goa.

Para 2.4

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18

formed and registered under any law for the time being in force in that Union territory : Provided that the registered or, as the case may be, principal office of the company, corporation, institution, association or body in all cases is in India.

From the definitions given in clauses (17) and (26) of section 2 of the Act, it can be seen that the term “company” as defined in the Act is a much wider term than the definition given in Companies Act, 2013. It not only covers companies registered under the Companies Act but also foreign companies and statutory corporations. The expression “any body corporate incorporated by or under the laws of a country outside India” in Section 2(17)(ii) will also cover Limited Liability Partnerships [LLPs] incorporated abroad. LLP incorporated in India under LLP Act, 2008 is a “firm” as per the definition given in section 2(23) and is not a company. Hence, LLP incorporated in India will not be liable for MAT. However, foreign LLP is a company within the meaning of section 2(17)(ii) and will be treated as foreign company and will be liable for MAT, unless exempted under Explanation 4 or Explanation 4A in section 115JB(2).

MAT provisions shall apply to a foreign company, unless exempted in terms of Explanation 4/Explanation 4A to section 115JB(2) or section 115JB(5A)(i). The exemption in Explanation 4/Explanation 4A is specifically applicable to foreign companies. Exemption in section 115JB(5A)(i) (applicable to life insurance companies) applies to all companies whether Indian or foreign.

Explanation 4A to section 115JB(2) clarifies that for the removal of doubts, the provisions of this section shall not be applicable and shall be deemed never to have been applicable to an assessee, being a foreign company, where (a) its total income comprises solely of profits and gains from business referred to in section 44B or section 44BB or section 44BBA or section 44BBB and

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APPLICABILITY OF MAT TO FOREIGN CO.

Para 2.4

(b) such income has been offered to tax at the rates specified in those sections.

Where foreign company is not eligible for exemption from MAT in terms of Explanation 4A, then it has to be seen if it is exempt in terms of Explanation 4 to section 115JB(2) Explanation 4 clarifies that the provisions of this section shall not be applicable and shall be deemed never to have been applicable to an assessee, being a foreign company, if (i) the assessee is a resident of a country or a specified territory with which India has an agreement referred to in sub-section (1) of section 90 or the Central Government has adopted any agreement under sub-section (1) of section 90A and the assessee does not have a permanent establishment in India in accordance with the provisions of such agreement; or (ii) the assessee is a resident of a country with which India does not have an agreement of the nature referred to in clause (i) and the assessee is not required to seek registration under any law for the time being in force relating to companies.

Explanation 4 was inserted in the Act by the Finance Act, 2016 w.r.e.f.

AY 2001-02 as it became necessary to clarify the legal position in view of conflicting rulings by AAR in the cases of Timken and Castleton.

In Timken Co., In re [2010] 193 Taxman 20 (AAR - New Delhi), the AAR held that section 115JB would not be applicable to a foreign company which has no presence or PE in India. The AAR held that as the applicant Foreign Company does not have a place of business in India, it is not required to prepare its account under section 594, read with section 591, of the Companies Act, 1956*. That being so, the applicant could not have prepared its accounts in accordance with the provisions of Schedule VI to the Companies Act, 1956 [now Schedule III to the Companies Act, 2013]. Therefore, section 115JB is not designed to be applicable to the case of the applicant, a foreign company, who has no presence or PE in India.

However, in a subsequent decision in Castleton Investment Ltd., In re [2012] 24 taxmann.com 150, the AAR gave an opinion which was completely contrary to the opinion given in Timken (supra). In Castleton, *Corresponding sections of the Companies Act, 2013 (sections 351 and 379).

Para 2.4

WHO IS LIABLE TO PAY MAT

20

the AAR held that section 115JB overrides sections 34 to 48. So by reading section 115JB as confined in its operation to domestic companies alone, one may be doing violence to the special scheme of taxation adopted for taxing certain companies. Unless there are compelling reasons no such interpretation is justified. There is no compelling reason to jettison the scheme of taxation adopted by the Act by reading down section 115JB as confined in its application to domestic companies alone. Therefore, section 115JB(1) would equally apply to a foreign company.

In the appeal against the above Castleton ruling of AAR filed under Article 136 of the Constitution, the Supreme Court took note of the Press Release of Government of India dated 24-9-2015 wherein it was clarified that: “the Government has decided that with effect from 1-4-2001 the provisions of section 115JB shall not be applicable to a foreign company if— the foreign company is a resident of a country having DTAA with

India and such foreign company does not have a permanent establishment within the definition of the term in the relevant DTAA, or the foreign company is a resident of a country which does not

have a DTAA with India and such foreign company is not required to seek registration under section 592 of the Companies Act, 1956 or section 380 of the Companies Act, 2013.

An appropriate amendment to the Income-tax Act in this regard will be carried out.”

The Learned Attorney General assured the Supreme Court that the Government shall abide by the Press Release dated 24-9-2015.

Accordingly, the Supreme Court disposed of the SLP with the consent of the appellant and respondent Government of India.

Pursuant to the solemn assurance given to the Supreme Court to abide by the Press Release dated 24-9-2015, the Finance Act, 2016 has inserted a new Explanation 4 with retrospective effect from assessment year 2001-02 which embodies the above clarification in Press Release dated 24-9-2015. Accordingly, the new Explanation 4 clarifies that “…the provisions of this section shall not be applicable and shall

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APPLICABILITY OF MAT TO FOREIGN CO.

Para 2.4

be deemed never to have been applicable to an assessee, being a foreign company, if— (i) the assessee is a resident of a country or a specified territory with which India has an agreement referred to in sub-section (1) of section 90 or the Central Government has adopted any agreement under sub-section (1) of section 90A and the assessee does not have a permanent establishment in accordance with the provisions of such agreement. (ii) the assessee is a resident of a country with which India does not have an agreement of the nature referred to in clause (i) and the assessee is not required to seek registration under any law for the time being in force relating to companies”.

The Explanatory Memorandum to the Finance Bill, 2016 explains the above amendment as under: Applicability of Minimum Alternate Tax (MAT) on foreign companies for the period prior to 1-4-2015. **

**

**

Issues were raised regarding the applicability of this provision to Foreign Institutional Investors (FIIs) who do not have a permanent establishment (PE) in India. Vide Finance Act, 2015 of the provisions of section 115JB were amended to provide that in case of a foreign company any income chargeable at a rate lower than the rate specified in section 115JB shall be reduced from the book profits and the corresponding expenditure will be added back.

However, since this amendment was prospective w.e.f. assessment year 2016-17, the issue for assessment year prior to 2016-17 remained to be addressed.

A Committee on Direct Tax matters headed by Justice A.P. Shah, set up by the Government to look into the matter, recommended for an amendment of section 115JB to clarify the applicability of Minimum Alternate Tax (MAT) provisions to Foreign Institutional Investors/ Foreign Portfolio Investors (FIIs/FPIs) in view of the fact that FIIs and FPIs normally do not have a place of business in India.

In view of the recommendations of the committee and with a view to provide certainty in taxation of foreign companies, it is proposed to amend the Income-tax Act so as to provide that with effect from 1-4-2001, the provisions of section 115JB shall not be applicable to a foreign company if—

Para 2.6

22

WHO IS LIABLE TO PAY MAT

(i) the assessee is a resident of a country or a specified territory with which India has an agreement referred to in sub-section (1) of section 90 or the Central Government has adopted any agreement under sub-section (1) of section 90A and the assessee does not have a permanent establishment in India in accordance with the provisions of such Agreement; or (ii) the assessee is a resident of a country with which India does not have an agreement of the nature referred to in clause (i) above and the assessee is not required to seek registration under any law for the time being in force relating to companies.

This amendment is proposed to be made effective retrospectively from the 1st day of April, 2001 and shall accordingly apply in relation to assessment year 2001-02 and subsequent years.

Explanation 4 to section115JB clarifying that provisions of this section shall not be applicable to a foreign company if the applicant is a resident of the country with which India has an agreement under section 90(1) and the applicant does not have a permanent residence in India in accordance with the provisions such agreement. It has been admitted by the assessee that for assessment year 2012-13 when the buy back had taken place applicant had a supervisory PE in India and that for assessment year 2014-15 the department had treated PQR India itself as PE in India. In view thereof and express provisions, the Assessing Officer was required to compute the book profits of the supervisory PE and the MAT liability would be restricted to the profit attributable to PE for relevant assessment year [PQR Gmbh., In re [2021] 125 taxmann.com 411 (AAR - Mumbai)]

The Finance Act, 2012 inserted sub-section (5A) in section 115JB with retrospective effect from assessment year 2001-02. Sub-section (5A) provides that MAT shall not apply to any income accruing or arising to a company from life insurance business referred to in section 115B.

Clause (ii) of sub-section (5A) of section 115JB provides that the provisions of this section (section 115JB) shall not apply to a person

Guide to Minimum Alternate Tax (MAT) & Alternate Minimum Tax (AMT) AUTHOR PUBLISHER DATE OF PUBLICATION EDITION ISBN NO NO. OF PAGES BINDING TYPE

: : : : : : :

Taxmann TAXMANN MAY 2022 2nd Edition 9789356221062 464 PAPERBACK

Rs. : 995

| USD : 46

Description This book provides a comprehensive analysis of Minimum Alternate Tax (MAT) & Alternate Minimum Tax (AMT).

The Present Publication is the 2nd Edition (2022) authored by Taxmann's Editorial Board. The law stated in this book is amended by the Finance Act 2022, with the following noteworthy features: ·

[Discussions on Liability/Exemption to/from MAT] is included in this book

·

[Discussions on Liability to Pay AMT] is included in this book

·

[Computation of Profit & MAT] is discussed in light of the following:

·

o

Income-tax Act 1961

o

Income-tax Rules 1962

o

Relevant Case Laws

[Clause-wise Analysis of Audit Report in Form 29B] is discussed in this book

·

[Clause-wise Analysis of Audit Report in Form 29C] is discussed in this book

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