I. SPECIAL PROVISION FOR PAYMENT OF TAX BY CERTAIN COMPANIES UNDER SECTION 115 JB:

1.        The provisions of this section apply with effect from 01/04/2001 i.e., Assessment year 2001-02

2.       It modifies the existing scheme of taxation i.e. levy of MAT u/s 115JA

3.       Basis of Charge:

If tax payable on normal income is lower than 7.5% of book profit then the tax payable will be 7.5% of book profit.   (now it is 18.5%)

II.  MAT CREDIT: Section 115JAA:  MAT Credit was allowed under section 115JAA in the year when tax payable under Total Income was more than tax payable under MAT to the extent of difference between the two.  Under the new provisions MAT credit will not be allowed

Brought forward tax credit will be allowed to be setoff against the difference between the tax on Total Income and Special Tax Payable (STP). 

III.  Distinguishing features of section 115JB(STP) vis-à-vis section 115JA(MAT) are as follows:

  a)      Section 115JA deemed 30% of book profit as total income and whereas Section 115JB did not deem any part of book profit or book profit as deemed income.  However, by virtue of an amendment made retrospectively by the Finance Act 2002 with effect from 01/04/2001, where the Income Tax payable on the Total Income is less than 7.5% of the Book Profit; such Book Profit shall be deemed to be the Total Income.

b)      While preparing the annual accounts including the profit and loss account it should be ensured that the accounting policy, accounting standards and the methods and the rates adopted for calculating depreciation should be the same which has been laid before and adopted by the company in its AGM.

c)      Section 115JB requires a report of an accountant in form 29B certifying the correctness of computation of book profits, whereas the same was not required earlier.

d)      The income and expenditure relating to the assessee to whom the provision of Chapter III of the Income tax applied (Section 10,10A,10B, 10C and 11 and 13) which were outside the purview of section 115JA continue to be outside the purview except for Section 10C relating to the Income of Industrial Undertakings located in North-Eastern States, which now have to pay STP

e)      The profit derived from the Industrial Undertakings engaged in Power business, development of infrastructure facilities and those located in industrial backward areas or districts, which were exempt under section 115JA, will now be taxed under section 115JB.

f)      Relief for Companies claiming deduction under section 80HHF is now provided under section 115JB which was earlier taxable under section 115JA. 

IV.  Constitutional Validity of section 115JB:

  The constitutional validity of this section should be studied with respect to case laws pertaining to the earlier section 115J.  The courts have constantly held that the tax on book profits is constitutionally valid and do not subject the assessee to double taxation.

Cases to be referred to:

  1)      National Thermal Power Corporation Ltd., Vs. Union of India (1991) 192 ITR 187(Del)

 2)      Suryalatha Spinning Mills Vs. Union of India (1997) 223 ITR 173(AP)

v.    If no tax is payable on normal Total Income whether the provisions of section 115JB will apply:
By applying the mischief rule the courts can hold a view that no income tax payable on Total Income means Zero tax payable and it being less than 7.5% of book profit section 115JB will apply.

VI.  Whether Income tax Payable includes Surcharge:
The Supreme Court in one of its earlier decisions in the case of CIT Vs. K.Srinivasan (1972) 83 ITR 346 (SC) held that income tax payable will include surcharge. Taking this view into consideration the following interesting situation may arise,

If the basic tax on Total Income of a company is say 7% and after adding surcharge it becomes 7.75%, since the total tax is more than 7.5% of the book profit, tax under the normal provisions will apply, whereas if the basic tax is 6.5% and after including surcharge is 7.475%, then tax will be payable on 7.5% of the book profit. If a surcharge of 15% is added it will result in a total tax payable of 8.625%. As can be seen from the above a company with lesser income may end up paying more tax.

Whether the aforesaid anomaly was intended by the legislator is to be examined.

VII. Whether the MAT applies to companies registered under Part IX of the Companies Act, 1956.

As MAT applies to companies formed and registered in India under the Companies Act as defined in section 2(17) read with section 2(26) of the Income tax Act it may not apply to partnership firms who get themselves registered as joint stock companies under Part IX of the Companies Act as such firms are not formed but are only registered under the Companies Act.

VIII.  Whether STP under section 115JB will apply to a foreign Company.
This issue was considered by the Authority for Advance Ruling in P.No.14 of 1997 234 ITR 335, wherein the authority held that the DTA provisions only limit the quantum of tax payable and does not absolve the applicant from paying any tax and therefore the foreign company was liable to tax on book profit under se

IX.     Whether the provisions of DTA overrides the provisions of the Income tax Act.

The CBDT vide its circular No.333 dated:02/04/1982 has clearly explained that the provisions of the DTA overrides the provisions of the Act.

Further, under section 90(2) of the Act, the provisions of the Act or the DTA, whichever is more beneficial, has to be applied.  This is also explained by the Board, in its Circular No.728, dated:30/10/1995.

Under the aforesaid circumstances the following situations can arise.

  a)“Where tax is computed in terms of the provisions of a DTA, and such tax is less than the STP, DTA would override section 115JB of the Act and accordingly the tax would be payable as per DTA.”

b) Where DTA only provides for taxability of income (in India) and manner of computation but the determination of tax payable is required as per the provisions of the act, and , if the tax payable on Normal Total Income computed in accordance with   the provisions of the act and /or DTA, is less than 7.5% of its book profit it may be held to be liable to STP as per the provision  of section 115JB of the Act.  This is because DTA does not provide for the rate of tax and , accordingly , the provisions of the  Act would apply.

I. Issues on Computation of Book Profit u/s 115JB (2) of the Income tax Act.
a)      Whether items which have been quantified in the notes to accounts and qualified in the audit report can be taken into consideration for increasing or decreasing the book profit

Eg: Non provision of gratuity and leave encashment liability, non provision of interest payable to financial institution, non provision on income accrued on fixed deposit and other investments etc.

Note: Leave Encashment is an ascertained liability and not a contingent liability.

BEML Vs. CIT (245 ITR) 428 (SC).

  b)      The amount of loss brought forward or unabsorbed depreciation, whichever is less. Whether this should be computed from year to year or in aggregate.

Assessment Year Business Loss Un-absorbed Depreciation
 Total Loss
1996-97
 NIL
 -5,00,000
 -5,00,000

1997-98
 -2,00,000
 -3,00,000
 -5,00,000

1998-99
 -3,00,000
 -4,00,000
 -7,00,000

1999-00
 -2,00,000
 -1,00,000
 -3,00,000

2000-01
 -3,00,000
 -2,00,000
 -5,00,000

TOTAL -10,00,000
 -15,00,000
 -25,00,000

If The Profit for the year ended 31/03/2001 i.e., assessment year 2001-02 is Rs.15,00,000 what should be the amount reduced, will it be Rs.10,00,000/-, the aggregate figure of business loss or Rs.8,00,000/- if a year by year comparison is made

It is important to note in this regard that Circular No.495 dated 22.09.1987 issued by the CBDT to explain the earlier provisions of Section 115J has indicated a view that the comparison be made only between accumulated business loss and accumulated unabsorbed depreciation.

A significant amendment made by the Finance Act 2002 retrospectively with effect from 01/04/2001, also clarifies that no reduction will be allowed from the Book Profit where the business loss or unabsorbed depreciation loss for the earlier years are “NIL”

c)      Profit eligible for deduction u/s 80HHC, 80HHE and 80HHF

In para 99 of the Finance Minister’s Speech during the presentation of Finance bill 1997 on 28/02/1997 in the Parliament, the Finance Minster Sri .P.Chidambaram clearly mentioned as follows:

  “ I therefore propose to make the following changes in the provisions of MAT:

Export profits will be exempt from MAT and will be eligible for full deduction under section   80HHC”.

Unfortunately the provisions of section 115JA earlier and 115JB now do not grant exemption as intended by parliament.  This is because of the following reasons.

  i) The section specifies the deduction from export profit under section 80HHC, 80HHE and 80HHF to be computed under sub section 3 and 3A of the respective sections.

  ii)  A portion of section 3 of section 80HHC is reproduced below

“Where the export out of India is of goods or merchandise manufactured by the assessee, the profits derived from such export shall be the amount which bears to the profits of the business, the same proportion as the export turnover in respect of such goods bears to the total turnover of the business carried on by the assessee.”

From the above wording it is clear that the profit derived from  export has to be linked to the term “Profit of the Business”.  The term “Profit of the Business” has been defined in explanation, {(baa)} of section 80HHC as follows:

           “Profits of the business” means the profits of the business as computed under the head “Profits and gains of business or profession” as reduced by:

Ninety per cent of any sum referred to in clauses (iiia), (iiib) and (iiic) of section 28 or of any receipts of by way of brokerage, commission, interest, rent, charges or any other receipt of a similar nature included in such profits and The profits of any branch, office , warehouse or any other establishment of the assessee situated outside India.

  iii) As can be seen from the example given below the profits of the business can be a very low figure or a negative figure in some cases as it has to be computed under the head “Profits and gains of business or profession”.  The deduction under section 80HHC will also be low or nil as the case may be.  In such cases, where a company has substantial book profits but low or nil taxable income  the assessee will not get the benefit of the section 80HHC

iv) Therefore, as a tax planning measure, a company should be forced to resort to  voluntarily disallowance in its statement of total income like disallowance of personal expenditure, disallowance under section 43B etc., so that its taxable income is higher than  the book profit thereby getting higher deduction under section 80HHC.

  EXAMPLE - I

Net Profit as per Profit & Loss Account   10,00,000/- 
Add : Depreciation as per books  3,00,000   
          Disallowance u/s 43 B  1,00,000   
  ----------  4,00,000/-
   ------------- 
   14,00,000/-
Less:Depreciation as per Income Tax    7,00,000  
Disallowance u/s 43B in the Earlier year allowed on payment Basis 3,00,000
Weighted deduction u/s 35{(2AB)} On scientific research  2,00,000
  ----------  12,00,000/- 
   ------------- 
  Total Income  2,00,000/-
  (Profit of the Business) 
 Less: Deduction u/s 80HHC   2,00,000/- 
 Taxable income         NIL    

  EXAMPLE - II

Net Profit as per Profit & Loss Account      10,00,000/- 
Add: Depreciation as per books    3,00,000   
Disallowance u/s 43 B    1,00,000   
Loss on sale of Fixed Assets    50,000   
Preliminary expenditure written Off completely in the book of accounts    1,00,000   
1/4th of Depreciation for Motor Car relating to personal use    20,000
1/4th of Insurance of Motor Car relating to personal use 5,000
  ----------           5,75,000/-
    -------------
    15,75,000/- 
Less:Depreciation as per Income Tax    7,00,000   
Disallowance u/s 43B in the Earlier year allowed on payment Basis  3,00,000 
Weighted deduction u/s 35{(2AB)} On scientific research 2,00,000 
Preliminary expenditure allowed as per Section 35D 20,000
    ---------- 12,20,000
    Total Income 3,55,000/-
  (Profit of the Business)   
  Less: Deduction u/s 80HHC  3,55,000/- 
  Taxable income       NIL    

                                                                                                                                                                

However, as per example I under section 115JB the book profit will be Rs.8,00,000/- i.e., Rs.10,00,000/- minus Rs.2,00,000/- deduction u/s 80HHC and this being higher than the normal taxable income it should be taken into consideration for tax purpose

However, as can be seen in example II, under section 115JB the book profit will be Rs.6,45,000/- i.e., Rs.10,00,000/- minus Rs.3,55,000/- deduction u/s 80HHC and this being higher than the normal taxable income it should be taken into consideration for tax purpose.

Due to the aforesaid anomaly in the provisions there may be cases where a 100% export company will have to pay tax on book profit.Whether this is a case for invoking the doctrine of promissory estoppel is a matter to be examined and to be debated.

Doctrine of Promissory estoppel:

Held NO by the Supreme Court in the case of Motilal Sugar Mills Co. Ltd Vs. State of UP (1979) 118 ITR 326 (SC) which held that there can be no promissory estoppel against the exercise of legislative power.

v) It is common knowledge that the Finance Act 2000 amended the provisions of section 80HHC, 80HHE & 80HHF resulting in restricting the deduction to 80% of the profits eligible for deduction under the aforesaid sections with effect from 2001-02. It is to be noted that the extent of deduction has been provided in subsection 1B of section 80HHC, 80HHE & subsection 1A of section 80HHF.

Under Section 115JB the amount of profits eligible for deduction u/s 80HHC (3) or 80HHC (3A), 80HHE (3) or 80HHE (3A) and 80HHF (3) are allowed to be reduced from book profits subject to other conditions specified in the respective sections.

As the restriction of deduction to 80%, 70%, 50% or 30% of the profits as the case may be has been provided only in subsection 1B of 80HHC and 80HHE & 1A of 80HHF and not under sub section 3 of the respective sections, it can be argued that the entire amount of export profits as computed under subsection 3 or 3A will be available for deduction from book profits.

However, it has also to be examined whether the restriction of deduction under subsection 1B of 80HHC and 80HHE & 1A of 80HHF is a ‘Condition’ under the respective sections.

d) Whether income from sources other than business such as capital gains, interest income etc., should be included for the purpose of calculating the “book profit”?

Sec 115JB requires the book profit to be computed as per the profit & loss account prepared in accordance with the provisions of Part II & Part III of Schedule VI the Companies Act 1956.

  Part II & Part III of Schedule VI states that the profit & loss account-

1.   shall be made out as clearly to disclose the result of the working of the company during the period covered by the account; and

2.   shall disclose every material feature, including credits or receipts and debits or expenses in respect of non – recurring transactions  or transactions of an exceptional nature.

From the above it is clear that, even in the case of profit on sale of fixed assets which are credited to the Profit & Loss, the same cannot be excluded for the purpose of computation of book profit under section 115JB.

This view is supported by the decision of Bombay High Court in the case of CIT. v. Veekaylal Investment Co. Pvt. Ltd. & Hotel Hiramani Private Limited reported in 249 I.T.R. page 597.The ratio of the aforesaid decision can definitely be made applicable for the book profits u/s. 115JB although it was rendered with regard to provisions of Sec.115J of the Act.

Keeping the aforesaid provisions of the Section and the aforesaid decision of Bombay High Court, it should be examined in the case of sale of Land and other depreciable Fixed Assets whether a revaluation of such assets can be made just prior to the sale and difference credited to the Capital Reserve instead of the Profit and Loss Account, thereby reducing the book profit and it’s consequential tax effec

e) Whether a report of an accountant as prescribed under subsection 4 of Section 115JB read with Rule 40B to be given in Form 29B is required even when tax is not being paid on book profit?

Subsection 4 of Section 115JB of the Income Tax Act, 1961 reads as follows:

“ Every company to which this section applies, shall furnish a report in the prescribed form from an accountant as defined in the Explanation below subsection (2) of section 288, certifying that the book profit has been computed in accordance with the provisions of this section along with the return of income filed under subsection (1) of section 139 or along with the return of income furnished in response to a notice under clause (i) of subsection (1) of section 142.”

On a plain reading of the aforesaid provisions there is a doubt cast as to whether every company with a book profit should get a report certified by an accountant as mentioned above.

As the clause starts with the words “Every company to which this Section applies,” the same has to be read with subsection 1 of Section 115JB which clearly states that if the tax on total income is less than 7.5% of the book profit, then the tax payable shall be deemed to be 7.5% of book profits. Therefore in the light of the aforesaid discussion it can be concluded that a report of an accountant will be required only when the tax payable on the total income of the company is less than 7.5% of it’s book profits

f)      Whether a company which has granted the status under section 10A and 10B from the middle of the year will be given the benefits under section 115JB?

g)      Whether only unabsorbed depreciation under section {32(2)} can be set off from the business income to compute normal taxable income.  This is because section {32(2)} falls within the Chapter IV D, whereas carry forward business loss falls under Chapter VI.  Reference in this regard can be made to the following decisions.

Decision in favour of Assessee:

  1)       CIT Vs. Gogineni Tobacco Ltd (1999) (238 ITR 970) AP.

 2)      CIT Vs. Tarun Udyog (1991) (191 ITR 688) ORI.

  Decision against the Assessee:

1)       CIT Vs. Kotagiri Industries Coop Tea Factor Ltd.(1997)(224ITR 604) SC.

2)      CIT Vs. M.K.Raju Consultant Pvt.Ltd (1999) (239 ITR 232) MAD

3)      CIT Vs. Yenpeyes Rubber Pvt.Ltd. (1999) (239 ITR 734)

4)       CIT Vs. Veeraraghavan Textiles Pvt.Ltd (1998) (234 ITR 529).

5)      CIT Vs. Venkateshwara Transmission Ltd (1995) (216 ITR 510) AP

6)      Pushpak Ltd Vs. CIT (1994) (210 ITR 535) GUJ.

7)      CIT Vs. Loonkar Tools Ltd (1995) (213 ITR 721) RAJ

8)      M/s.Motilal Pesticides (I) Pvt.Ltd Vs. CIT (243 ITR 26) SC.

  h)      PAYMENT OF ADVANCE TAX ON BOOK PROFITS

There is a divided opinion whether advance tax is to be paid on book profits.  It is to be note that the Karnataka High Court in the case of CIT Vs. M/s.Kwality Biscuits 243 ITR page no.519 held at interest u/s 234 A and B was not liable on advance tax on book profits as it was not possible to compute the book profit till the profit and Loss account for the year was prepared and the profit determined which can be usually done only after the end of the year.  There is a contrary view on the aforesaid issue by the Guwahati High Court in the case of Assam Bengal Carriers Limited Vs. CIT 239 ITR 862.

However, the aforesaid decisions were rendered in the context of the earlier section 115J and with the introduction of the new sub-section 4 to section 115JB the decision of the Karnataka High Court may not be good law for the future.

XI -OTHER POINTS:

1.    It has been held in CIT Vs. Echay Forbes (P) Ltd 251 ITR (pg 15) (BOM) that Wealth Tax Liability, Provision for Doubtful Debts, Provision for Gratuity, Provision for Bonus, Loss on Foreign Exchange Fluctuation cannot be added back to the Book Profit.

2.    It has been held by the Bombay Tribunal in the case of ACIT Vs Skypack Courier (P) Ltd., (78 ITD page 141) that for the purpose of section 115J a company can cast its accounts on the accrual system of accounting only.

3.    It is to be noted that while filing up the Audit Report in Form 29 B when the figures on Income Tax payable on normal income and tax on book profit are to be indicated in the respective columns the same should be indicated without adding surcharge.

However, the surcharge should be separately indicated in answer to Column 14 so as to make the position clear.

4.   In a landmark judgement relating to the provisions of Section 115J which will equally to the existing provisions of Section 115JB, the Supreme Court in the case of Apollo Tyres Ltd., Vs. CIT, 255 ITR, page 273 has held that the Assessing Officer does not have the power to recompute the Book Profits, except for the adjustments to the net profit prepared in accordance with Part II and Part III of Schedule VI as specifically provided in the explanation to Section 115 J (now Section 115JB)

This decision can be used to highlight to following issues:

1.   The depreciation of Leased Assets which will be claimed by the Lessee in accordance with the Principles enshrined in AS – 19 read with Section 211 of the Companies Act, cannot be added back to the Net Profit by the Assessing Officer, as the same has been prepared in accordance with the Part II and Part III of Schedule IV,inspite of the stand taken by the CBDT on the issue.

2.   The expenditure on Intangible Assets like royalty, patent, trademarks, goodwill etc., which may be debited to the Profit and Loss account as deferred revenue expenditure cannot be added back even though the same has been treated as intangible assets for the purpose claiming depreciation under the Income tax.

The same principle will apply to the “Loss on Sale of Fixed Assets Debited to the Profit and Loss account.

CONCLUSION:

This article has attempted to examine the provisions relating to the book profit under section 115JB of the Income tax Act, and also consider certain relevant issues and decisions under the earlier similar provisions under section 115JA and 115JB of the Income tax Act