Corporate Tax in India | Taxation of Companies with Illustrations

Table of Content:

1. Carry forward and set-off of losses in the cases of certain companies [Sec. 79]
2. Case studies
3. Taxable income – How computed
4. Tax liability – How computed
5. Minimum alternate tax [Sec. 115JB]

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1. Carry forward and set-off of losses in the cases of certain companies [Sec. 79]

Section 79 is applicable if a closely held company (i.e., a company in which the public are not substantially interested) wants to carry forward and set off of losses. Restrictions provided by section 79 may be grouped under the following categories –

Category 1 – Normal provisions.

Category 2 – Special provisions.

These provisions are applicable as follows –

Closely held companies (but other than an eligible start-up covered by section 80-IAC)	An eligible start-up covered by section 80-IAC
	For assessment years 2018-19 and 2019-20	From the assessment year 2020-21
Normal provisions are applicable	Special provisions are Applicable	Normal provisions or special provisions, at the option of taxpayer

Normal Provisions

Normal provisions are applicable if the following conditions are satisfied –

Condition 1 – The taxpayer is a company in which the public are not substantially interested.

Condition 2 – The persons beneficially holding 51 per cent of the voting power on the following two dates are different :

a. on the last day of the previous year in which the loss was incurred;

b. on the last day of the previous year in which the company wants to set off the brought forward loss.

If the above two conditions are satisfied, brought forward loss cannot be set off.

Special provisions

Special provisions are applicable if the following conditions are satisfied –

1. 1. The assessee is a company in which public are not substantially interested.
   2. It is an eligible start-up as referred to section 80-IAC.
   3. Loss is incurred by the assessee-company during the period of 7 years (beginning from the year in which the company is incorporated).

If the above conditions are satisfied, brought forward loss can be set off against current year’s income only if all the shareholders of the company (who held shares carrying voting power) on the last day of the previous year in which the loss was incurred, continue to hold shares on the last day of the current year.

Exceptions

Normal provisions or special provisions are not applicable in the following cases –

• Change in voting power because of death or gift – Where a change in voting power takes place in a previous year consequent upon the death of a shareholder or on account of transfer of shares by way of gift to any relative of the shareholder making the gift, the aforesaid restriction contained under section 79 will not apply.
• Unabsorbed depreciation – Provisions of section 79 are applicable only in the case of carry forward of losses. As carry forward of unabsorbed depreciation allowance, capital expenditure on scientific research or family planning stands on altogether different footings, their carry forward and set off are not governed by section 79—CIT v. Concord Industries Ltd. [1979] 119 ITR 458 (Mad.), CIT v. Shri Subhulaxmi Mills Ltd. [2001] 119 Taxman 281 (SC).
• Amalgamation/merger of foreign holding company – If the following conditions are satisfied, provisions of section 79 are not applicable—

Condition 1 – The taxpayer (i.e., the company in which loss is incurred) is an Indian company in which public are not substantially interested.

Condition 2 – It is subsidiary of a foreign company.

Condition 3 – The foreign company is amalgamated/demerged with another foreign company.

Condition 4 – Persons holding 51 per cent or more shares in the amalgamating/demerged foreign company become shareholders in the amalgamated/resulting foreign company.

If all the conditions are satisfied, the provisions of section 79 shall be ignored and brought forward loss can be set off and carry forward.

• Company seeking insolvency resolution under Insolvency and Bankruptcy Code – The above provisions of section 79 are not applicable to a company where a change in the shareholding takes place in a previous year pursuant to approved resolution plan under the Insolvency and Bankruptcy Code, 2016, after affording a reasonable opportunity of being heard to the jurisdictional Principal CIT/CIT.
• Distressed companies – The provisions of section 79 are not applicable to such companies, and their subsidiary and the subsidiary of such subsidiary, where –

– the National Company Law Tribunal (NCLT) on a petition moved by the Central Government under section 241 of the Companies Act has suspended the Board of Directors of such company and has appointed new directors, who are nominated by the Central Government, under section 242 of the Companies Act; and

– a change in shareholding of such company, and its subsidiaries and the subsidiary of such subsidiary, has taken place in a previous year pursuant to a resolution plan approved by NCLT under section 242 of the Companies Act, after affording a reasonable opportunity of being heard to the jurisdictional PCIT/CIT.

• Transfer in a re-location of capital asset by original fund to resulting fund – The provisions of section 79 are not applicable (with effect from the assessment year 2022-23) to a case to the extent that a change in the shareholding takes place during the previous year on account of relocation referred to in section 47(viiac)/(viiad).

2. Case studies

Problem 1

X and Y are two shareholders of Z Ltd., a closely held company. X holds 55 per cent share capital. On January 30, 2021, X transfers his shares to A. Z Ltd. wants to set off brought forward loss of Rs. 4,00,000 (business loss : Rs. 1,00,000; unadjusted depreciation : Rs. 3,00,000) of the previous year 2019-20 against the income of the previous year 2020-21 (i.e., Rs. 9 lakh). Can it do so?

Solution 1

Z Ltd. is a company in which the public are not substantially interested and in which shareholders having 51 per cent voting right on March 31, 2020 and March 31, 2021 are not the same. Consequently, section 79 is applicable. Unadjusted depreciation can be set off but not brought forward loss. Income of the previous year 2020-21 will be Rs. 6 lakh (i.e., Rs. 9 lakh—Rs. 3 lakh).

Problem 2

XYZ (P.) Ltd. is a company which was started on April 1, 1999 and in which there are only equity shares. The shares are held throughout by X, Y and Z equally. The company has made losses/profits in the past as under and the same have been accepted in the income-tax assessments:

Assessment year	Business loss		Unabsorbed depreciation		Total
	Rs.		Rs.		Rs.
2017-18	Nil		30,00,000		30,00,000
2018-19	Nil		18,00,000		18,00,000
2019-20	9,50,000		8,70,000		18,20,000
Total	9,50,000		56,70,000		66,20,000

During the previous year ending March 31, 2020, X transferred his shares to P and during the previous year ended March 31, 2021, Y transferred his shares to Q. During the previous year ended March 31, 2020, the company made a profit of Rs. 12,00,000 (before debiting Rs. 6,00,000 for depreciation) and during the previous year ended March 31, 2021, the company made a profit of Rs. 80,00,000 (before debiting Rs. 5,00,000 for depreciation).

Compute the taxable income of the company for the assessment year 2021-22. Workings should form part of your answer.

Solution 2

X, Y and Z are three shareholders in XYZ (P.) Ltd. The shareholding pattern of the company on March 31, 2019, March 31, 2020 and March 31, 2021 are as follows :

	X	Y	Z	P	Q
March 31, 2019	33.33%	33.33%	33.33%	—	—
March 31, 2020	—	33.33%	33.33%	33.33%	—
March 31, 2021	—	—	33.33%	33.33%	33.33%

As is evident from the data given above, shareholders having at least 51% of voting power on March 31, 2019 and March 31, 2020 are the same. Consequently, the restriction imposed by section 79 is not applicable. Income for the assessment year 2020-21 will be determined as under :

	Rs.
Business profit	12,00,000
Less : Current depreciation	6,00,000
Balance	6,00,000
Less : Brought forward business loss of the assessment year 2019-20	6,00,000
Net income	Nil

The assessee can carry forward the unabsorbed depreciation (i.e., Rs. 56,70,000) and business loss of Rs. 3,50,000 of earlier years.

Shareholders holding 51 per cent of the voting right on March 31, 2019 and March 31, 2021 are not the same. Consequently, the restriction imposed by section 79 is applicable and business loss of the assessment year 2019-20 cannot be set off against profit of the assessment year 2021-22. However, in the given problem unabsorbed depreciation of Rs. 56,70,000 pertaining to the assessment year 2019-20 and earlier years can be set off against the income of the assessment year 2021-22, as section 79 is not applicable in the case of carry forward of unabsorbed depreciation. Consequently, income of the assessment year 2021-22 will be determined as under :

	Rs.
Business profit	80,00,000
Less : Current depreciation	5,00,000
	75,00,000
Less : Unabsorbed depreciation	56,70,000
Net income	18,30,000

Note : The unadjusted business loss of Rs. 3,50,000 cannot be set off against the above income, as section 79 provisions are applicable.

Problem 3

Suppose in problem 40-P2, Y and Q are relatives and shares are transferred by Y to Q by way of gift during the previous year ending March 31, 2021.

Solution 3

Section 79 is not applicable if shareholding changes due to death of a shareholder or gift of shares to a relative. Consequently, brought forward business loss of Rs. 3,50,000 can be set off against the income of Rs. 18,30,000 [net income of the assessment year 2021-22 : Rs. 14,80,000 (i.e., Rs. 18,30,000—Rs. 3,50,000)].

3. Taxable income – How is it computed?

It is determined as follows —

1. First ascertain income under the different heads of income.

2. Income of other persons may be included in the income of the company under sections 60 and 61.

3. Current and brought forward losses should be adjusted according to the provisions of sections 70 to 80. Provisions of section 79 regarding set off and carry forward of losses of closely held companies are given in para 40.

4. The total of income computed under different heads is gross total income.

5. From the gross total income so computed, the following deductions are permissible under sections 80C to 80U —

Section	Nature of deduction
80G	Donations to charitable institutions and funds
80GGA	Donations for scientific research or rural development
80GGB	Contribution to political parties
80-IA	Profits and gains from industrial undertakings engaged in infrastructure, etc.
80-IAB	Profits and gains by an undertaking or enterprise engaged in development of Special Economic Zone
80-IAC	Profits and gains derived from eligible start-up
80-IB	Profits and gains from certain industrial undertakings other than infrastructure development undertakings
80-IBA	Profits and gains from housing projects
80-IC	Profits and gains of certain undertakings in certain States
80-ID	Profits of hotels and convention centres
80-IE	Profits of undertakings in North Eastern States
80JJA	Profits from the business of collecting and processing of bio-degradable waste
80JJAA	Employment of new employees
80LA	Income of Offshore Banking Units

1. 6. The resulting sum is net income.

4. Tax liability – How is it computed?

Tax liability of a company is calculated as follows —

Computation 1 – Under normal provisions	Computation 2 – Under minimum alternate tax
Step 1 – Find out taxable income under normal provisions	Step 8 – Find out book profit [see para 336.2]
Step 2 – Find out income-tax at the rate of 30 per cent (40 per cent in the case of a foreign company) of income computed under (1) supra [see para 334.2]. There is no exemption limit	Step 9 – Find out 15 per cent‡ of book profit
Step 3 – Add: Surcharge†	Step 10 – Add: Surcharge†
Step 4 – Find out (2) + (3)	Step 11 – Find out (9) + (10)
Step 5 – Add HEC at the rate of 4 per cent of (4)	Step 12 – Add HEC at the rate of 4 per cent of (11)
Step 6 – Deduct tax rebate or tax credit under	Step 13 – Find out (11) + (12) sections 86, 90, 90A and 91

Step 7 – Find out (4) + (5) — (6) [it cannot be less than zero]

Tax liability of a company is (7) or (13), whichever is more.

Income taxable at special rate

There are a few cases where income is taxable at special rates given under different provisions of the Act. For instance, long-term capital gains are taxable at the rate of 20 per cent by virtue of section 112. Short-term capital gains (if securities transaction tax is applicable) is taxable at the rate of 15 per cent under section 111A. Royalty income in certain cases is taxable in the hands of a foreign company at the rate of 10 per cent. Complete list of such cases is narrated in para 0.1-6 of Annex 1. However, a few cases are given below –

DIVIDEND RECEIVED FROM A FOREIGN SPECIFIED COMPANY

By virtue of section 115BBD, where total income of an Indian company includes any income by way of dividends declared, distributed or paid by a foreign specified company, then such dividends shall be taxable at the rate of 15 per cent (+SC+ HEC) on the gross amount of dividends. No expenditure in respect of such dividends shall be allowed. Foreign specified company means a foreign company in which the Indian company holds 26 per cent or more in nominal value of the equity share capital of the company.

5. Minimum alternate tax [Sec. 115JB]

These provisions are as follows —

• • Find out the normal tax liability ignoring provisions of minimum alternate tax
  • Find out book profit
  • Find out minimum alternate tax
  • If tax computed is more than (or equal to) tax computed at Step 13, the provisions of minimum alternate tax are not applicable.

When applicable

If tax computed is less than tax computed, the provisions of minimum alternate tax are applicable as follows—

1. 1. It will be assumed that “book profit” of the company is taxable income.
   2. 15 per cent‡ of book profit [+ SC + HEC] is tax liability of the company
   3. Tax computed is the minimum alternate tax which the company is liable to pay.
   4. The extra tax which the company has to pay because of minimum alternate tax will be available for “tax credit” under section 115JAA. Tax credit can be set off against future tax liability of the company subject to a few conditions. However, the tax credit is available only in that year in which tax computed is more than tax computed.

• Exceptions – The provisions of minimum alternate tax are not applicable in the following cases –

Nature of income	Time frame when MAT provisions are not applicable
1. Income from any business/services in the hands of entrepreneur/developer in a special economic zone	Income arising after March 31, 2005 but before April 1, 2011
2. Income of a shipping company which is subject to the provisions of “tonnage income” of Chapter XII-G (i.e., sections 115V to 115VZC)	Income arising after March 31, 2004 (i.e., assessment year 2005-06 onwards)
3. Income which accrues and arises to a company from life insurance business referred to in section 115B	Income arising after March 31, 2000 (i.e., assessment year 2001-02 onwards)
4. In the case of a foreign company where its total income comprises solely of profits and gains referred to in sections 44B, 44BB, 44BBA and 44BBB	Income arising after March 31, 2000 (i.e., assessment year 2001-02 onwards)

• Foreign company – The provisions of minimum alternate tax are not applicable to a foreign company in the following two cases –

a) the assessee is a resident of a country/specified territory with which India has an agreement under section 90/90A and the assessee does not have a permanent establishment in India in accordance with the provisions of such agreement;

b) the assessee is a resident of a country with which India does not have an agreement referred to above and the assessee is not required to seek registration under any law for the time being in force relating to companies.

Book profit – How to determine [Sec. 115JB]

Net profit as per statement of profit and loss (after a few adjustments) is book profit. For this purpose, statement of profit and loss shall be prepared within the parameters of Schedule III to the Companies Act, 2013. However, in the case of an insurance company/banking company/company engaged in the generation or supply of electricity/any other class of company (for which a form of financial statement has been specified in or under the Act governing such class of company), statement of profit and loss shall be prepared in accordance with the provisions governing such company. For computation of book profit, one may proceed as follows –

• • Step 1 – Find out net profit [before other comprehensive income (OCI)] as per statement of profit and loss of the company
  • Step 2 – Make adjustments which are given under Explanation 1 to section 115JB(2)
  • Step 3 – Make specific adjustments in the case of demerger as given by new sub-section (2B) to section 115JB
  • Step 4 – Make further adjustment pertaining to OCI items that will be permanently recorded in reserves (i.e., never to be reclassified to the statement of profit and loss)

Assessing Officer’s power to alter net profit

Only in the following two cases, the Assessing Officer can rewrite the statement of profit and loss —

• • If statement of profit and loss is not prepared according to the Companies Act – If it is discovered that the statement of profit and loss is not drawn up in accordance with the provisions of the Companies Act, the Assessing Officer can recalculate the net profit. If there is no allegation of fraud or misrepresentation but only a difference of opinion as to the question whether a particular amount should be properly shown in the statement of profit and loss or in the balance sheet, the provisions of section 115JB do not empower the Assessing Officer to disturb the profit as shown by the assessee.
  • If accounting policies, accounting standards or rates or method of depreciation are different – The accounting policies, the accounting standards adopted for preparing such accounts, the method and rates of depreciation which have been adopted for preparation of the statement of profit and loss laid before the annual general meeting, should be followed while preparing statement of profit and loss for the purpose of computing book profit under section 115JB.

Some companies follow an accounting year under the Companies Act which is different from financial year (i.e., previous year ending March 31) under the Income-tax Act. These companies generally prepare two sets of accounts—one for the Companies Act and another for the Income-tax Act. Different accounting policies/standards, and method or rate of depreciation are adopted in two sets of account so that higher profits is reported to shareholders and lower profit is disclosed to tax authorities.

To curb the aforesaid practice, it has been provided that accounting policies, accounting standards, depreciation method and rates of depreciation for two sets of account shall be the same. In case it is not so, the Assessing Officer can recalculate net profit after adopting the same accounting policies, accounting standards and depreciation method and rates which have been adopted for reporting profit to shareholders.

Adjustments to net profit to convert it into book profit

Net profit as shown in statement of profit and loss shall be adjusted as follows :

Barring the adjustment given below, no other adjustment is permitted by law. None of the adjustment given below provides for the increase or decrease of the book profits by extraordinary items—Gulf Oil Corpn. Ltd. v. CIT [2008] 111 ITD 124 (Hyd.).

Likewise, none of the adjustments given below provides for adjustment in respect of expenses on prior period/extraordinary items, which are business expenditure, but have been shown separately in statement of profit and loss due to specific requirement of Accounting Standards prescribed by the Institute of Chartered Accountants of India—CIT v. Khaitan Chemicals & Fertilizers Ltd. [2008] 175 Taxman 195 (Delhi).

• Positive adjustments – Net profit as shown in statement of profit and loss (prepared in accordance with the provisions of the Companies Act) is to be increased by the following amounts if debited to the statement of profit and loss—

Amount to be added back if debited to statement	Comments of profit and loss
1. Income-tax paid or payable and the provisions therefor	Income-tax, interest under the Income-tax Act, dividend tax under section 115-O, distribution tax under section 115R including surcharge, education cess, secondary and higher education cess and health and education cess if debited to statement of profit and loss shall be added back.
	No adjustment is required in respect of the following taxes (including interest, penalty, fine, surcharge, education cess, etc.)—Securities transaction tax, banking cash transaction tax, wealth-tax, gift-tax, fringe benefit tax, indirect taxes.
	Moreover, no adjustment is required in respect of penalty/fine under the Income-tax Act.
2. Amounts carried to any reserves, by whatever name called	No adjustment is required in respect of reserve created under section 35AC.
3. Amount or amounts set aside to provisions made for meeting liabilities, other than ascertained liabilities
4. Amount by way of provision for losses of subsidiary companies
5. Amount or amounts of dividends paid or proposed
6. Amount of expenditure relatable certain incomes (if such income is not subject to minimum alternate tax)	Expenses pertaining to income given under point 10 below, if debited to statement of profit and loss, shall be added back.
7. The amount of depreciation
8. Amount of deferred tax and the provisions therefor and the amount set aside as provision for diminution in the value of any asset
8A. Amount standing in revaluation reserve relating to revalued asset on the retirement or disposal of such asset
8B. Amount of income/loss in the case of units referred to in section 47(xvii)

• Negative adjustments – Net profit as shown in the statement of profit and loss is to be reduced by the following amounts :

Amount to be deducted from net profit	Comments
9. Amount withdrawn from reserves or provisions, if any such amount is credited to the statement of profit and loss
10. Income exempt from tax	The following income, if credited to statement of profit and loss, shall be deducted — a. long-term capital gain exempt under section 10(38) for the  assessment years 2005-06 and 2006-07; b. income exempt under section 10(23G) up to the assessment year 2004-05; c. income exempt under other clauses of section 10; d. income exempt under sections 10A and 10B up to the assessment year 2007-08; e. income exempt under sections 11 and 12.         f.   share of profit from an AOP on which no income-tax is payable in accordance with the provisions of section 86. g. (in the case of a foreign company) interest, royalty or dividend or technical fees chargeable to tax under sections 115A to 115BBE, or capital gain arising on transactions in securities, if income-tax payable in respect of these incomes under normal provisions (other than provisions governing MAT) is less than the rate of MAT; and h. royalty in respect of patent chargeable to tax under section 115BBF. The above incomes are not subject to minimum alternate tax. Moreover, there is no minimum alternate tax (a) in respect of income arising after March 31, 2005 but before April 1, 2011 from special economic zone to a developer or entrepreneur, (b) income of shipping companies subject to the provisions of “tonnage income” and (c) income from life insurance business of a company (arising after March 31, 2000).
11. Depreciation (other than because of revaluation of assets) debited to statement of profit and loss
12. Amount withdrawn from revaluation reserve credited to statement of profit and loss to the extent it does not exceed the amount of depreciation on account of revaluation of assets.
12A. Aggregate amount of unabsorbed depreciation and loss brought forward if corporate insolvency resolution process has been started
13. Amount of loss brought forward or unabsorbed depreciation, whichever is less, as per books of account
14. Profit of sick industrial unit
15. The amount of deferred tax, if any such amount is credited to the statement of profit and loss.
15A. Amount of income/loss in the case of units referred to in section 47(xvii)

Note – Sub-section (2D) has been inserted in section 115JB (with effect from the assessment year 2021-22) to provide that where in the case of the company there is an increase in book profit of the previous year due to income of past year (or years) included in the book profit on account of an advance pricing agreement [sec. 92CC] or on account of secondary adjustment [sec. 92CE], the Assessing Officer shall, on an application made by the assessee, recompute the book profit of the past year (or years) and tax payable, if any, by the assessee during the previous year under section 115JB(1), in manner prescribed by rule 10RB. The time-limit under section 154 of 4 years shall be reckoned from the end of the financial year in which the said application is received by the Assessing Officer. However, benefit of this provision shall apply only if the assessee has not utilised MAT credit in any subsequent assessment year under section 115JAA. Moreover, the provisions of section 115JB(2D) shall also apply to the assessment year 2020-21 (or earlier years) but no interest shall be payable to such assessee on the refund arising on account of this provision.

Reserves credited to statement of profit and loss

The amount withdrawn from reserves and credited to statement of profit and loss shall be reduced as follows—

a. the amount withdrawn from any reserve created before April 1, 1997 otherwise than by way of a debit to the statement of profit and loss, shall not be reduced from the book profits; and

b. the amount withdrawn from any reserves or provisions created on or after April 1, 1997, which are credited to the statement of profit and loss, shall not be reduced from the book profits, unless the book profits were increased by the amount transferred to such reserves or provisions in the year of creation of such reserves (out of which the said amount was withdrawn).

Brought forward loss/depreciation

43.2-2b Section 115JB provides that in computing book profit, the amount of loss brought forward or unabsorbed depreciation, whichever is less as per books of account, shall be reduced from net profit.

• Adjustment only when there is unadjusted “loss” before depreciation as well as unabsorbed depreciation pertaining to earlier years – For this purpose, “loss” does not include depreciation and, therefore, in a case where an assessee has shown profit in a year, but after adjustment of depreciation, it results in loss, no adjustment in book profit is allowed. In other words, where a company does not have both brought forward losses (before depreciation) and unabsorbed depreciation but has only one of them, nothing is deductible, since one of the two figures is nil. Loss (before depreciation) as per the books of account of the assessee, has to be considered, irrespective of the fact whether the same is allowable (or not) under section 79.

The table below highlights the above provisions —

(Rs. in thousand)

	Brought forward loss before depreciation as per books of account	Brought forward depreciation as per books of account	Brought forward loss after depreciation as per books of account	Amount to be deducted from net profit to convert it into book profit
Case 1	–40	–10	–50	10
Case 2	–30	–40	–70	30
Case 3	–25	0	–25	0
Case 4	0	–10	–10	0
Case 5	+5	–70	–65	0

• Consolidated loss and depreciation for earlier years in totality to be considered – The reference to the “amount of brought forward loss or unabsorbed depreciation, whichever is less” shows the intention of the legislature for considering one consolidated figure of brought forward loss or unabsorbed depreciation for the earlier years in totality and not on year to year basis—Amline Textiles Pvt. Ltd. v. ITO [2009] 27 SOT 155 (Mum.).
• Adjustment is required even if deduction is not permissible under the Income-tax Act – In arriving at book profit, lower of amount of brought forward loss or unabsorbed depreciation which is appearing in books of account of assessee has to be allowed, irrespective of the fact whether or not the same is allowable under other provisions of the Income-tax Act—Fascel Ltd. v. ITO [2008] 117 TTJ (Ahd.) 891.

PROFIT OF SICK  INDUSTRIAL UNDERTAKING

Profit of sick industrial undertaking is not subject to the provisions of minimum alternate tax. Consequently, if such profit appears in the statement of profit and loss, it shall be deducted from net profit to find out book profit.

This adjustment is required only in respect of the amount of profits of sick industrial company for the assessment year —

a. commencing from the assessment year relevant to the previous year in which the said company has become a sick industrial company under section 17(1) of the Sick Industrial Companies (Special Provisions) Act, 1985; and

b. ending with the assessment year during which the entire net worth (i.e., paid-up capital plus free reserves) of such company becomes equal to or exceeds the accumulated losses.

“Free reserves” for this purpose means all reserves created out of the profits and share premium account but does not include reserves credited out of revaluation of assets, write back of depreciation provisions and amalgamation.

DEPRECIATION

Depreciation debited to statement of profit and loss shall be added back. However, depreciation (not being depreciation which arises because of revaluation of assets) shall be deducted.

The cumulative impact of the addition and deduction is that book profit will be increased by depreciation (pertaining to revaluation of assets). Some relief is available if there is a withdrawal from the revaluation reserve account and it appears on the credit side of the statement of profit and loss.

Provisions illustrated – Statement of profit and loss of 5 companies are given below —

(Rs. in lakhs)

Debit side						Credit side
	A	B	C	D	E		A	B	C	D	E
Purchase	37	37	37	37	37	Sales	90	90	90	90	90
Depreciation (normal)	6	6	6	6	6	Withdrawal from reserve (1)	10	10	10	10	10
Depreciation (because of	4	4	4	4	0	Withdrawal from reserve (2)	9	9	9	9	9
revaluation)
Other expenses	5	5	5	5	5	Withdrawal from revaluation	0	4	1	11	11
						reserve
Net profit	57	61	58	68	72
	109	113	110	120	120		109	113	110	120	120

Reserve (1) was initially created on January 3,1998 by debiting statement of profit and loss. However, reserve (2) was initially created on April 2, 1990 without debiting statement of profit and loss.

Computation of book profit —

	Adjustment	A	B	C	D	E
	No.
Net profit as per statement of profit and loss		57	61	58	68	72
Add: Depreciation debited to statement of profit and loss (total—normal as well as extra because of revaluation) (Rs. 6 lakh + Rs. 4 lakh)	(7)	10	10	10	10	6
Less: Withdrawal from reserve which was initially created by debiting statement of profit and loss	(9)	10	10	10	10	10
Less: Depreciation (normal)	(11)	6	6	6	6	6
Less: Withdrawal from revaluation reserve to the extent it does not exceed revaluation depreciation	(12)	0	4	1	4	0
Book profit		51	51	51	58	62

GAIN/LOSS ON TRANSFER OF SHARES IN SPV TO BUSINESS TRUST

The following income will not be subject to MAT –

a. notional capital gain on transfer of a share in a special purpose vehicle (SPV) to a business trust in exchange of units allotted by that trust referred to in section 47(xvii); or

b. notional gain resulting from any change in carrying amount of said units.

The above incomes shall be excluded while computing book profit (if these are credited to statement of profit and loss). Any notional loss [pertaining to (a) or (b) (supra)] shall be added back to convert net profit into book profit (whether or not such notional losses are debited to statement of profit and loss).

• Gain or loss on transfer of units referred to in section 47(xvii) – In respect of transfer of units referred to in section 47(xvii) the following adjustments will be made –

1. 1. Gain on transfer of units referred to in section 47(xvii) shall be deducted from net profit (if it is credited to statement of profit and loss).
   2. Loss on transfer of units referred to in section 47(xvii) shall be added to net profit (whether or not it appears in statement of profit and loss).
   3. The amount of loss on transfer of units referred to in section 47(xvii) computed by taking into account the cost of the shares exchanged with units referred to in the said clause or the carrying amount of the shares at the time of exchange where such shares are carried at a value other than the cost through profit or loss account, as the case may be, shall be deducted from net profit to convert it into book profit.
   4. Amount of gain [if any, pertaining to transaction mentioned in (3) (supra)] shall be added to net profit to convert it into book profit as per statement of profit and loss.

Provisions illustrated

A Ltd. holds 100 shares in B Ltd. [i.e., a Special Purpose Vehicle (SPV)]. In the books of A Ltd., these shares are recorded at Rs. 2,000 per share as on April 1, 2016. During the financial year 2016-17, these 100 shares are exchanged with the 100 units of DEF Trust (i.e., a business trust) and the exchange transaction is recorded (as per Accounting Standard 13) at the fair value of Rs. 3,000 per share. Consequently, it results into a notional gain of Rs. 1,000 per share. At the end of financial year 2017-18, the carrying amount of the units of business trust has been recorded at Rs. 2,500 per unit (which results into a notional loss of Rs. 500 per unit). During the financial year 2018-19, these units are transferred for Rs. 4,000 per unit.

In this case, the notional gain of Rs. 1,000 per share shall be excluded from the book profit of the financial year 2016-17. Similarly, the notional loss of Rs. 500 per unit shall be excluded from the book profit of the financial year 2017-18. For computation of book profit for the financial year 2018-19, the actual gain of Rs. 2,000 per share [i.e., actual sale price : Rs. 4,000 per unit minus cost of share : Rs. 2,000 per share] shall be included in section 115JB.

IN CASE OF CORPORATE INSOLVENCY/SUSPENSION OF BOARD OF DIRECTORS

The aggregate amount of unabsorbed depreciation and loss brought forward (before depreciation) shall be excluded in the following cases –

– Company, and its subsidiary and the subsidiary of such subsidiary, where, the Tribunal, on an application moved by the Central Government under section 241 of the Companies Act has suspended the Board of Directors of such company and has appointed new directors (who are nominated by the Central Government under section 242 of the said Act).

– Company against whom an application for corporate insolvency resolution process has been admitted by the Adjudicating Authority under section 7/9/10 of the Insolvency and Bankruptcy Code.

MAT on Ind AS compliant financial statement

These provisions are briefly given below –

• No further adjustments to the net profit (before other comprehensive income of an Ind AS compliant company), other than those already specified under section 115JB, shall be made.
• The other comprehensive income includes certain items that will permanently be recorded in reserves and hence shall never be reclassified to the statement of profit and loss included in the computation of book profit. These items shall be included in book profit for MAT purposes at the point of time as specified in the table (infra) —

Different items	Point of time
Changes in revaluation surplus of PPE (property, plant or equipment) and intangible assets	l Revaluation reserve credited/debited to other comprehensive income shall not be adjusted in the book profit in which it is debited or credited [first proviso to section 115JB(2A)]
(Ind AS 16 and Ind AS 38)	l It shall be included in book profit of the year in which the asset/investment is retired, disposed, realised or otherwise transferred [second proviso to section 115JB(2A)]
Gains and losses from investments in equity instruments designated at fair value through other comprehensive income (Ind AS 109)	l Gain or loss from such investments debited/credited to other comprehensive income shall not be adjusted in the book profit in the year in which it is credited/debited [first proviso to section 115JB(2A)] l It shall be added in book profit in the year in which the investment is retired/disposed/realised [second proviso to section 115JB(2A)]
Remeasurements of defined benefit plans (Ind AS 19)	To be included in book profits every year as the remeasurements gains and losses arise
Any other item	To be included in book profits every year as the gains and losses arise

• Appendix A of Ind AS 10 provides that any distributions of non-cash assets to shareholders (for example, in a demerger) shall be accounted for at fair value. The difference between the carrying value of the assets and the fair value is recorded in the profit and loss account. Correspondingly, the reserves are debited at fair value to record the distribution as a “deemed dividend” to the shareholders. As there is a corresponding adjustment in retained earnings, this difference arising on demerger shall be excluded from the book profits. However, in the case of a resulting company, where the property and the liabilities of the undertaking or undertakings being received by it are recorded at values different from values appearing in the books of account of the demerged company immediately before the demerger, any change in such value shall be ignored for the purpose of computing of book profit of the resulting company.

MAT on first time adoption

The adjustments arising on account of transition to Ind AS from existing Indian GAAP are required to be recorded directly in Other Equity at the date of transition to Ind AS. Several of these items would subsequently never be reclassified to the statement of profit and loss or included in the computation of book profits. Accordingly, the following adjustments will be made –

• Those adjustments recorded in OCI and which would subsequently be reclassified to the profit and loss, shall be included in book profits in the year in which these are reclassified to the profit and loss;
• Those adjustments recorded in OCI and which would never be subsequently reclassified to the profit and loss shall be included in book profits as given in the Table (infra) –

Different items	Point of time
Changes in revaluation surplus of PPE and intangible assets (Ind AS 16 and Ind AS 38)	To be included in book profits at the time of realisation/disposal/retirement or otherwise transferred
Gains and losses from investments in equity instruments designated at fair value through OCI (Ind AS 109)	To be included in book profits at the time of realisation/disposal/retirement or otherwise transferred
Remeasurements of defined benefit plans (Ind AS 19)	To be included in book profits equally over a period of 5 years starting from the year of first time adoption of Ind AS
Any other item	To be included in book profits equally over a period of five years starting from the year of first time adoption of Ind AS

• All other adjustments recorded in Reserves and Surplus (excluding Capital Reserve and Securities Premium Reserve) as referred to in Division II of Schedule III of Companies Act, 2013 and which would otherwise never subsequently be reclassified to the profit and loss account, shall be included in the book profits, equally over a period of 5 years starting from the year of first time adoption of Ind AS subject to the following—

PPE AND INTANGIBLE ASSETS AT FAIR VALUE AS DEEMED COST

An entity may use fair value in its opening Ind AS Balance Sheet as deemed cost for an item of PPE or an intangible asset as mentioned in paragraphs D5 and D7 of Ind AS 101. In such cases the treatment shall be as under—

• The existing provisions for computation of book profits under section 115JB provide that in case of revaluation of assets, any impact on account of such revaluation shall be ignored for the purposes of computation of book profit. Further, the adjustments in retained earnings on first time adoption with respect to items of PPE and intangible assets shall be ignored for the purposes of computation of book profits.
• Depreciation shall be computed ignoring the amount of aforesaid retained earnings adjustment.
• Similarly, gain/loss on realisation/disposal/retirement of such assets shall be computed ignoring the aforesaid retained earnings adjustment.

INVESTMENTS IN SUBSIDIARIES, JOINT VENTURES AND ASSOCIATES AT FAIR VALUE AS DEEMED COST

An entity may use fair value in its opening Ind AS Balance Sheet as deemed cost for investment in a subsidiary, joint venture or associate in its separate financial statements as mentioned in paragraph D15 of Ind AS 101. In such cases, retained earnings adjustment shall be included in the book profit at the time of realisation of such investment.

CUMULATIVE TRANSLATION DIFFERENCES

An entity may opt for a choice whereby the cumulative translation differences for all foreign operations are deemed to be zero at the date of transition to Ind AS. Further, the gain or loss on a subsequent disposal of any foreign operation shall exclude translation differences that arose before the date of transition to Ind AS and shall include only the translation differences after the date of transition.

• In such cases, to ensure that such cumulative translation differences on the date of transition which have been transferred to retained earnings, are taken into account, these shall be included in the book profits at the time of disposal of foreign operations as mentioned in paragraph 48 of Ind AS 21.
• All other adjustments to retained earnings at the time of transition (for example, decommissioning liability, asset retirement obligations, foreign exchange capitalisation/decapitalization, borrowing costs adjustments, etc.) shall be included in book profits, equally over a period of 5 years starting from the year of first time adoption of Ind AS.
• Section 115JB already provides for adjustments on account of deferred tax and its provision. Any deferred tax adjustments recorded in reserves and surplus on account of transition to Ind AS shall also be ignored.

Reference year for first time adoption adjustments

In the first year of adoption of Ind AS, the companies would prepare Ind AS financial statement for reporting year with a comparative financial statement for immediately preceding year. As per Ind AS 101, a company would make all Ind AS adjustments on the opening date of the comparative financial year. The entity is also required to present an equity reconciliation between previous Indian GAAP and Ind AS amounts, both on the opening date of preceding year as well as on the closing date of the preceding year. For the purposes of computation of book profits of the year of adoption and the adjustments, the amounts adjusted as of the opening date of the first year of adoption shall be considered. For example, companies which adopt Ind AS with effect from April 1, 2016 are required to prepare their financial statements for the year 2016-17 as per requirements of Ind AS. Such companies are also required to prepare an opening balance sheet as of April 1, 2015 and restate the financial statements for the comparative period 2015-16. In such a case, the first time adoption adjustments as of March 31, 2016 shall be considered for computation of MAT liability for previous year 2016-17 (assessment year 2017-18) and thereafter. Further, in this case, the period of 5 years (as stated in some of the adjustments given above) shall be previous years 2016-17, 2017-18, 2018-19, 2019-20 and 2020-21.

OTHER POINTS

One should also keep in view the following points—

1. The Assessing Officer while computing the income under section 115JB has only the power of examining whether the books of account are certified by the authorities under the Companies Act as having been properly maintained in accordance with the Companies Act. The Assessing Officer thereafter has the limited power of making increases and reductions as provided in para 43.2-2. To put it differently, the Assessing Officer does not have the jurisdiction to go behind the net profit shown in the statement of profit and loss except to the extent given in paras 43.2-1 and 43.2-2.
2. Provision for gratuity on the basis of actuarial calculations is an ascertained liability.
3. If a sum is debited to statement of profit and loss under the provisions of the Companies Act, it will not be added to compute book profit, even if the same is disallowed under section 37 or under any other provision of the Income-tax Act.
4. Amount (debenture redemption reserve) set apart to redeem debentures cannot be added to net profit of assessee to compute book profits.
5. Capital profit credited to statement of profit and loss is part of book profit, even if it is exempt under section 54EC.
6. Provision for liability to pay wealth-tax cannot be added back to net profit for computing book profit.
7. For purpose of computing book profits no adjustment can be made by way of reduction of interest on borrowed capital, which is not debited in statement of profit and loss.
8. No addition for the purpose of computation of total income of the assessee under section 115JB can be made with regard to share of loss from a firm which is debited to statement of profit and loss.
9. Where entire income by way of interest on zero coupon bonds has not accrued to the assessee during relevant previous year, notional income by way of interest on zero coupon bonds is not liable to be included while computing book profits as per section 115JB.
10. Loss on sale of car/trucks debited to statement of profit and loss cannot be added back.
11. Provision made by an assessee-leasing company for lease equalization charges in its books of account as per guidance note issued by ICAI cannot be regarded as an amount transferred to ‘reserves’—GE Capital Transportation Financial Services Ltd. v. CIT [2007] 17 SOT 173 (Delhi), Goodwill India Ltd. v. CIT [2008] 114 ITD 665 (Delhi).
12. Provisions of section 115JB cannot be applied to a banking company. The provisions of section 115JB can only come into play when the assessee is required to prepare its statement of profit and loss in accordance with the provisions of the Companies Act. However, accounts of a banking company are required to be prepared in accordance with the provisions of the Banking Regulation Act. Consequently, the provisions of section 115JB cannot be applied to the case of a banking company.
13. Provision for reduction in ship repair bills, provision for obsolescence of materials, provision for future losses, provision for liquidated damages payable for delay in handing over of ship and provision for leave encashment are ascertained liabilities and hence fall outside the purview of Explanation to section 115JA. However, provision for guaranteed repairs falls in category of unascertained liability and will be includible in book profit.
14. Current year’s depreciation, which has not been charged to statement of profit and loss but has been disclosed in notes appended to accounts, would be deducted from net profit in determining book profit for purpose of section 115JB.
15. The assessee-company made 5 per cent provision towards performance warranty and as regards computation of book profit, whether such liability is to be added to the net profit, became an issue. The Tribunal held that the amount set aside towards warranty provision was an ascertained liability and, hence, the Assessing Officer was precluded from making any addition thereof to the net profit while computing book profit—Indian Oiltanking Ltd. v. ITO [2009] 120 ITD 237 (Mum.).
16. Once income is found to be covered by principle of mutuality, the same cannot be brought to tax even under provisions of section 115JB—Delhi Gymkhana Club Ltd. v. CIT [2010] 35 SOT 335 (Delhi).

Minimum income and tax

In the case of a company if tax payable as computed under other provisions (i.e., all provisions ignoring section 115JB) is lower than the amount given below, then book profit is taken as taxable income and the amount given below is taken as tax payable by the company for the assessment years 2021-22 and 2022-23—

If book profit does not exceed

If book profit is in the range of

If book profit exceeds

Rs. 1 crore

Rs. 1 crore – Rs. 10 crore

Rs. 10 crore

IT

SC

HEC

Total

IT

SC

HEC

Total

IT

SC

HEC

Total

Domestic company

15†

–

0.60

15.60

15†

1.05

0.642

16.692

15†

1.80

0.672

17.472

Foreign company

15†

–

0.60

15.60

15†

0.30

0.612

15.912

15†

0.75

0.63

16.38

Note – If book profit of a company exceeds Rs. 1 crore but does not exceed Rs. 10 crore, the minimum alternate tax cannot exceed the following : (Rs. 15 lakh + book profit – Rs. 1 crore) + HEC. If, however, book profit exceeds Rs. 10 crore, the minimum alternate tax cannot exceed the following –

a. in the case of domestic company, (Rs. 160.50 lakh + book profit – Rs. 10 crore) + HEC; or

b. in the case of a foreign company, (Rs. 153 lakh + book profit – Rs. 10 crore) + HEC.

Report from a chartered accountant

Every company to which section 115JB applies, shall furnish a report (in Form No. 29B) from a chartered accountant certifying that the book profit has been computed in accordance with the provisions of section 115JB. Report in Form No. 29B should be uploaded one month prior to the due date of submission of return of income.

Carry forward and set-off of tax credit

The amount of tax credit under section 115JAA shall be carried forward and set off subject to the following propositions—

1. No interest is payable in respect of tax credit.
2. Tax credit shall be allowed to set off in a future year in which tax becomes payable on the total income computed in accordance with the provisions other than section 115JB. In other words, it can be set off in that year when tax computed under normal provisions is more than minimum alternate tax
3. Set off in respect of brought forward tax credit will be allowed for any assessment year to the extent of—

a. tax computed on total income under normal provision; minus

b. 15 per cent† [+ SC + HEC] of book profit

It may be noted that set off is not allowed in the year in which tax computed under (a) supra is lower than (b) supra.

4. Carry forward shall not be allowed beyond the period given below:

Section	Minimum alternate tax paid in	Time-limit for carry forward	Last assessment year for
	the following assessment year –	of MAT credit	adjustment of MAT credit
115JB	2009-10	10 years	2019-20
115JB	2010-11	10 years	2020-21
115JB	2011-12	10 years	2021-22
115JB	2012-13	10 years	2022-23
115JB	2013-14	10 years	2023-24
115JB	2014-15	10 years	2024-25
115JB	2015-16	10 years	2025-26
115JB	2016-17	10 years	2026-27
115JB	2017-18	10 years	2027-28
115JB	2018-19	15 years	2033-34
115JB	2019-20	15 years	2034-35
115JB	2020-21	15 years	2035-36
115JB	2021-22	15 years	2036-37

5. There is no other condition to claim the benefit of set-off of tax credit. For instance, there is no provision for submission of return of income within the time-limit prescribed by section 139, or for payment of tax in time. Tax credit is allowed even if tax was paid late. Moreover, there is no provision that the Assessing Officer should determine the tax credit which shall be carried forward.
6. Carry forward and set off of MAT credit shall not apply to a limited liability partnership which has been converted from a private company or unlisted public company. This rule will be applicable whether or not conversion takes place by satisfying the requirement of section 47(xiiib).

Case study

The following case study is given to have a better understanding of the provisions of the minimum alternate tax discussed above.

	Assessment years					(Rs. in thousand)
	2006-07	2007-08	2008-09	2009-10	2010-11	2011-12	2012-13
1. Book profit	670	750	1200.97	171.55	925.95	296.82	750.78
2. Taxable income (ignoring section 115JB)	120	150	420.46	(-)40	435.73	186.28	648.16
3. Tax on (1) @ 7.5%1/10%2/15%3/18%4/18.5%5 (+SC+EC+SHEC)	56.38	84.15	123.70	17.67	143.06	55.03	143.06
4. Tax on (2) @ 30% (+SC+EC+SHEC)	40.39	50.49	129.93	Nil	134.64	57.56	200.28
5. Whether tax credit is available	Yes	Yes	No	Yes	Yes	No	No
(up to which year)	(2016-17)	(2017-18)		(2019-20)
6. Amount of credit which is available
[i.e., (3)—(4)]	15.99	33.66	Nil	17.67	8.42	NA	NA
7. Cumulative credit for being set off	15.99	49.65	49.65	61.09	69.51	69.51	66.98
8. Whether brought forward tax credit
can be set off during the current year
[only if (4) is more than (3)]	NA	NA	Yes	NA	NA	Yes	Yes
9. Maximum amount which can be set
off during the current year [i.e., the
excess of (4) over (3), subject to maxi-
mum of (7)]	NA	NA	6.23	NA	NA	2.53	57.22
10. Credit which is lapsed	NA	NA	Nil	NA	NA	Nil	Nil
11. How much can be carried forward
[i.e., (7)—(9)—(10)]	15.99	49.65	43.42	61.09	69.51	66.98	9.76
12. Tax payable for the current year	56.38	84.15	123.7	17.67	143.06	55.03	143.06

Quantification of mat credit when foreign tax credit is claimed

The amount of tax credit in respect of MAT shall not be allowed to be carried forward to subsequent year to the extent such credit relates to the difference between the amount of foreign tax credit (FTC) allowed against MAT and FTC allowable against the tax computed under regular provisions of Act (other than the provisions relating to MAT). Similar provisions are given in rule 128(7).

Case study

X Ltd., an Indian company, gives following data. Find out tax payable for the assessment year 2021-22 and amount of MAT credit.

		Rs. in crore
Tax payable under normal provisions (ignoring section 115JAA)	(a)	1
Tax payable under section 115JAA	(b)	50
Tax paid in a foreign country (which is otherwise eligible for claiming as tax credit under section 90/90A/91)	(c)	45

 

Tax payable before foreign tax credit [(a) or (b), whichever is higher]		(d)	50
Less: Foreign tax credit (c)		(e)	45
Tax payable for the assessment year 2021-22 [(d) – (c)]		(f)	5
MAT credit (before amendment) [excess of (b) over (a)]		(g)	49
Recalculation of MAT credit (after amendment) (i.e., ignore MAT provisions and find out how much foreign tax credit is available) –
–	Tax payable under normal provisions (a)	(h)	1
–	Foreign tax credit which can be utilised to pay normal tax [(a) or (c),
	whichever is lower]	(i)	1
–	How much foreign tax credit is utilized to pay MAT (e)	(j)	45
–	Extra foreign tax credit utilized only because of MAT provisions [(j) – (i)]	(k)	44
MAT credit (after amendment) to be carried forward to next 15 years [(g) –(k)]		(l)	5

Note – After amendment, MAT credit (to be carried forward) will always be MAT credit (which was available before amendment) or tax actually paid, whichever is lower [i.e., (g) or (f), whichever is lower].

_____________________________

† Surcharge is as follows –

	Net income range	Assessment years 2021-22
		and 2022-23
Domestic company	0 – Rs. 1 crore	Nil
	Rs. 1 crore – Rs. 10 crore	7%
	Above Rs. 10 crore	12%
Foreign company	0 – Rs. 1 crore	Nil
	Rs. 1 crore – Rs. 10 crore	2%
	Above Rs. 10 crore	5%

‡ 9 per cent, if the assessee is a unit located in an International Financial Services Centre and derives its income solely in convertible foreign exchange.

‡ 9 per cent, if the assessee is a unit located in an International Financial Services Centre and derives its income solely in convertible foreign exchange.

† 9 per cent, if the assessee is a unit located in an International Financial Services Centre and derives its income solely in convertible foreign exchange.

1. 7.5% for the assessment year 2006-07.
2. 10% for the assessment years 2007-08 to 2009-10.
3. 15% for the assessment year 2010-11.
4. 18% for the assessment year 2011-12.
5. 18.5% for the assessment year 2012-13.