Minimum Alternative Tax (MAT) and Computation of Book Profits

Provisions of MAT for payment of tax by certain companies (Section 115JB]

Tax payable for any assessment year cannot he less than 15% of book profit: Where in the case of a company, the income-tax payable on the total income as computed under the Income-tax Act, is less than15% of its book profit, such book profit shall be deemed to be the total income of the assessee and the tax payable by the assessee on such total income (book profit) shall be the amount of the income-tax at the rate of 15%.

Allowing tax credit in respect of tax paid on deemed income under MAT provisions against tax liability in subsequent years (Section 115JAA]

Where any amount of tax is paid under section 115J B (1) of Income Tax Act by a company for any assessment year beginning on or after 1-4-2006, credit in respect of the taxes so paid for such assessment year shall be allowed on the difference of the tax paid under section 115J8 of Income Tax Act and the amount of tax payable by the company on its total income computed in accordance with the other provisions of the Act.

The amount of tax credit so determined shall be allowed to be carried forward and set off in a year when the tax becomes payable on the total income computed under the regular provisions. However, no carry forward shall be allowed beyond the seventh assessment year immediately succeeding the assessment year in which the tax credit becomes allowable. The set off in respect of the brought forward tax credit shall be allowed for any assessment year to the extent of the difference between the tax on the total income and the tax which would have been payable under section 115JB for that assessment year.  No credit will be allowed in respect of MAT paid in any assessment year prior to 2006-07.

However, no interest shall be allowed on the amount of tax credit available under section 115JAA.

How to compute book-profits [Explanation to l15JB (1) and (2)]

Step 1: The net profit as shown in the profit and loss account (prepared as per Part II and III of Schedule VI of Income Tax Act) for the relevant previous year, shall be increased by the following, if debited to the Profit and Loss Account:

(a)     the amount of income-tax paid or payable, and the provision therefore or

(b)     the amounts carried to any reserves by whatever name called; or

(c)     the amount or amounts set aside to provisions made for meeting liabilities, other than ascertained liabilities; or

(d)    the amount by way of provision for losses of subsidiary companies; or

(e)     the amount or amounts of dividends paid or proposed; or

(f)    the amount or amounts of expenditure relatable to any income to which section 10 (excluding the income referred to in clause (38) thereof, relating to long-term capital gain on transfer of shares through a recognised stock exchange), 11 or 12 applies (i.e. incomes which are exempt from tax);or

(g)    the amount of depreciation.

Step 2: The profit as per the Profit and Loss Account shall be reduced by the following:

(i)  the amount withdrawn from any reserves or provisions, if any, such amount is credited to the profit and loss account.

However, the amount withdrawn from any reserve, credited before 1-4-1997, shall not be reduced from the net profit unless the same was debited to the profit and loss account at the time when such reserve was created.

Similarly, the amount withdrawn from the reserve created on or after 1-4-1997 and credited to the profit and loss account shall not be deducted while computing book profit unless the book profit in the year of creation of such reserve was increased by such reserve at that time; or

(ii) the amount of income to which any of the provisions section 10 (excluding the income referred to in section 10(38)), II or 12 or 80-IAB applies, if any such amount is credited to the profit and loss account; or            ­

(iii)  the amount of depreciation debited to the profit and loss account (excluding the depreciation on account of revaluation of assets); or

(iv)  the amount withdrawn from revaluation reserve and credited to the profit and loss account, to the extent it does not exceed the amount of depreciation on account of revaluation of assets referred to in clause (iii) above; or

(v)  the amount of loss brought forward or unabsorbed depreciation, whichever is less as per books of account. The loss shall, however, not include depreciation. Further the provision of this clause shall not apply if the amount of brought forward loss or unabsorbed depreciation is Nil; or

(vi) the amount of profits of sick industrial company for the assessment year commencing from the assessment year relevant to the previous year in which the said company has become a sick industrial company under sub-section (1) of section 17 of the Sick Industrial Companies (Special Provisions) Act, 1985 and ending with the assessment year during which the entire net worth of such company becomes equal to or exceeds the accumulated losses.

Net worth means the sum total of the paid up capital and free reserves.

“Free reserve” means all reserve credited 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 amalgamations.

(vii) the amount of profit derived from the activities of a tonnage tax company [Section 115YO].

(viii) the amount of deferred tax, if any such amount is credited to the profit and loss account   (inserted by the Finance Act, 2008)

The amount computed after increasing or decreasing the above in Step I and Step 2, respectively, is known as Book-profit.