The concept of MAT has been introduced by way of the Finance Act, 1987 under Section 115JB of the Income Tax Act, 1961 to target mainly those companies who avoid their tax liability by way of claiming the exemptions and deductions available under the Income Tax Act, 1961 and show nil taxable income while continuing to make huge profits and also paying out dividends at the same time. Such companies are to pay the minimum tax of the amount calculated as per this section. MAT is payable at the rate of 15% of the book profits of the company, prepared as per Schedule III of the Companies Act, 2013.
However, the section itself takes into consideration the basic deduction of the lower of the unabsorbed depreciation or the brought forward losses while calculating the minimum alternate tax (MAT) liability under this Section. The ambiguity surrounding the otherwise settled law is whether the applicability of the section specific to MAT calculation can be expanded to the manner of preparation of books of accounts of the company?
In the case of M/s Milan Intermediaries LLP vs the Income Tax Officer, Ward- 2(1)(4), Ahmedabad on 26th July 2018, the learned ITAT was flawed in amplifying the magnitude of the applicability of the said section. The necessary implication of the judgment is that the lower of the two i.e. lower of unabsorbed depreciation or the brought forward losses is to be deducted not only while determining the minimum alternate tax payable by the assessee but also while preparing its books of accounts. The author here differs from the reasoning as well as the order of the Hon’ble ITAT, Ahmedabad in the said case. The main point of discernment is that section 115JB has its scope limited to the calculation of the MAT liability of the assessee and no other. Such a section cannot be made to guide the preparation of books of accounts. Also, there are separate provisions relating to carry forward and set off under the IT Act, 1961 and the books of accounts are to be prepared as per the applicable Accounting Standards.
The substantial issues of law that arise under the said case are:
- Whether the provisions of Section 115JB of the Act and explanation thereto can at all have any application for any purpose other than the calculation of the total income of the assessee and his tax liability in the given previous year in case of applicability of Section 115 JB(i)?
- Whether the provisions of the carry forward of losses and unabsorbed depreciation be guided by the provisions of Section 115JB of the Act even though a separate section with respect to carry forward and set off is in force under the said Act?
- Whether the calculation of book profit in terms of the explanation given to Section 115JB can at all have any impact on the preparation of books of accounts of a company that is to be prepared in accordance with the relevant Accounting Standards?
In the opinion of the author, the answer to all of the above questions is negative. This is because Clause (iii) of Explanation 1 of Section 115JB of the Act lays down the law for the limited purpose of calculation of the tax payable in case the tax payable is less than 15% of the book profits of the company. It only provides for the deduction available to an assessee for the limited purpose of calculation of the tax payable under the section. It does not in any way purport to lay down the procedure for the preparation of books of accounts of a company.
Also, the Act must be read as a whole and when there are separate provisions for the set-off and carry forward of losses and depreciation under the Act, the question of a section 115JB being interpreted in a manner so as to be applicable to the preparation of books of accounts of a company is incomprehensible. This is because all the sections of an Act, unless otherwise provided, are independent of each other and no the particular section can be guided by the wordings of some other section. The purpose and object of Section 115JB are limited to the aspect of calculation of the Minimum Alternate Tax Liability payable by the assessee. Clearly, the legislature could not have intended that a company be guided by the provisions of Section 115JB for the preparation of its books of accounts while a separate provision of Section 32 and Section 72 of the Income Tac Act, 1961 is in place for the said purpose.
In the present case, the assessee had been using the FIFO Method for set-off of brought forward losses and unabsorbed depreciation when preparing its profit and loss statement. Such a method is in line with the Accounting Standards and also the provisions of Section 32 and 72 of the Income Tax Act, 1961. Requiring a company on which MAT becomes payable, even though applicable on all companies, to prepare its books of accounts claiming a lessor set off as against the other companies is irrational and unjust. Such differentiation between companies is unreasonable and against the very spirit of the Constitution of India.
Therefore, the provisions of section 115JB of the Act cannot overshadow the other rules and laws to guide issues unrelated to the concept of MAT as its applicability is limited for that very purpose. An assessee can thus continue to use any method consistent with the Accounting Standards for the preparation of books of accounts and in the present case, the FIFO Method. That having said, the current interpretation of 115JB stands as given by ITAT, Ahmedabad in the case of Milan Intermediaries LLP until the issues are settled by Larger Bench or Superior Court in some other case.
# Scope of Section 115JB of Income Tax Act # Calculation of MAT # Book Profits # Method of preparation of books of accounts
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