The ITAT Chennai in the case of the Deputy Commissioner of Income Tax, Corporate Circle-I, Coimbatore vs. M/s. Western India Cashew Company Pvt. Ltd., 2015 (8) TMI 872, has held that the procedure for the computation of book profit as stated in sub-section (1) of section 115JB of the Income Tax Act should be followed strictly by the department.
Object of section 115JB of the Income Tax Act:
The Law makers observed that many companies disclose huge profit in the accounts in the Annual General Meeting before the shareholder but show nil profit for the purpose of income tax.
The differences between profits according to the Companies Act and that according to the Income Tax Act were due to many allowances of disallowances in both the Acts.
To bring these companies under the income tax net, the law makers formulated the concept of MAT.
The concept of MAT:
MAT is governed by the provisions of section 115JB of Income Tax Act, 1961. MAT was introduced in the AY 1988-89. It was observed that due to various concessions provided in the income tax laws big companies pay zero income tax. To counter this, the system of MAT was framed. According to this concept, all corporate entities should pay a minimum income tax.
Applicability of MAT:
MAT is applicable to all companies including the foreign ones.
Provisions of section 115JB:
Where for a company, the tax payable on the total income as computed under the act for any previous year is less than 18.5% of its book profit, such book profit shall be considered as the total income of the assessee and the tax payable shall be at the rate of 18.5%. This income tax shall be enhanced by a surcharge at the rate of 3%.
In other words, every company shall compute its income tax liability according to two sets of provisions. The set which results in higher income tax liability shall be applicable.
The followings sets of provisions shall be taken into account:
1. Income tax computed according to the usual provisions of the Income Tax Act.
2. Income tax computed according to section 115JB of the Act.
Meaning of Book Profit:
Book Profit is defined in section 115JB of the Act. It is the net profit shown in the profit and loss account for the previous year in question and as increased and decreased by certain items.
To compute book profit, on should take profit and loss account and make additions and deletions.
Meaning of profit and loss account:
For the purpose of book profit, an assessee being a company for which the proviso to sub-section (2) of section 211 of the companies act, 1956 applies, shall prepare a profit and loss account for the concerned previous year as per the provisions of Act for the purpose of section 115JB. However, if the assessee is a company other than a company referred above, it shall prepare the profit and loss account as per the provisions of part-II of schedule-VI to the Companies Act, 1956.
Difference between Regular profit and Book Profit:
There is a difference between Regular profit and Book Profit due to the following reasons –
1. Regular profit is that which is computed by applying the provisions of Tax laws but Book Profit is computed based on the Schedule VI of the Companies Act, 1956.
2. The rate of depreciation is not the same in tax law and Companies Act.
3. In tax laws the actual income is computed, but in the Companies Act deductions are allowed for provisions which lead to computation of conservative income.
4. Tax laws allow many deductions from profits like deduction under section 801A and 801B of the Act but is not so in the Companies Act.