Introduction

India is a developing country. To make it a developed one, government requires

funds. In order to generate funds government levy taxes. Government also levy
taxes so as to spread equality of income in the country. More the person earns
more he has to pay tax.
In India two type of tax system prevails: Direct Taxation and Indirect Taxation.
Under the system of Indirect taxation one person collects from many people and
pays it to government. Excise duty, service tax, sales tax are very common
examples of indirect taxation. Under the system of Direct Taxation, tax is levied
directly on the person who has to pay it more, commonly said as Income Tax.
Every year government collects crores of rupees through levying taxes.
Since Indirect Taxation is not ones concern (as he cannot do anything in that) in
my project I will mainly deal in Direct Taxation on company i.e. Income-
Tax system of company.
In India, Constitution is the parent law. All other laws should be enacted without
exceeding the framework of the constitution and subject to the norms laid down
terein. The constitution of India empowers Central Government to levy tax on
income. By virtue of this power and to achive this objective, the income tax Act,
1961 was enacted in the place of the income-tax Act, 1922 which was prevalent
earlier.
According to Sec.1 of the Income tax Act, the Act is to be called as “the income-
tax Act, 1961” and it extends to the whole of india. It came into force on the 1 st day
of April 1962, i.e., from assessment year 1962-63 onwards.

According to Income Tax Act 1961, every person, who is an assessee and whose
total income exceeds the maximum exemption limit, shall be chargeable to the
income tax at the rate or rates prescribed in the finance act. Such income tax shall
be paid on the total income of the previous year in the relevant assessment year.
 BASIC CONCEPTS

Assessment Year [sec. 2(9)]

“Assessment Year” means the period starting from April 1 and ending on March 31 of
the next year. For instance, the assessment year 2009-10 which will commence on April
1, 2009, will end on March 31, 2010.

Previous year [sec. 3]

The year in which income is earned is known as previous year.

In other words, it can be said that income earned during the previous year 2008-09 is
taxable in the immediately following assessment year ( i.e 2009-10).

There are certain exceptions-

When income of pervious year is not taxable in the immediately following assessment
year.

a. Income of non-resident from shipping;

b. Income of person leaving india either permanently or a long period of time;

c. Income of bodies formed for short duration;

d. Income of a person trying to alienate his assets with to avoiding payment of tax;
and

e. Income of a discontinued business.

Assessee [Sec. 2(7)]

Income Tax Act 1961 (Act no. 43) defines 'assessee' as a person by whom any tax or any
other sum of money is payable under this Act, and includes -
• Every person in respect of whom any proceeding under this Act has been taken for
the assessment of his income or of the income of any other person in respect of
which he is assessable, or of the loss sustained by him or by such other person, or
the amount of refund due to him or to such other person;
• Every person who is deemed to be an assessee under any provision of this Act;
• Every person who is deemed to be an assessee in default under any provision of
this Act;
Person [sec. 2 (31)]
The term “person” includes:

a. an individual ;
 b. a Hindu undivided family (HUF) ;

c. a company ;

d. a firm;

e. an association of persons(AOP) or a body of individuals(BOI), whether

incorporated or not;

f. a local authority ; and

g. every artificial juridical person, not falling within any of the preceding categories.

These are seven categories of persons chargeable to tax under the Act. The aforesaid
definition is inclusive, and not exclusive. Therefore, any person not falling in the
abovementioned categories, may still fall in the four corners of the “person” and
according may be liable to tax under section 4.

Income[Sec.2(24)]
In order to tax the income of a person the term itself is designed under the Income Tax
Act. As per the Act the term Income includes:

a. Profits and gains of Business or Profession: This includes income from carrying
on a business or income earned by doing any profession.

b. Dividend:

c. Profit in lieu of Salary, perqusite: This includes any amount received by an

employee from his employer other then the salary amount.

d. Allowances granted to the assesse to meet his expenses incurred for performance
of his duties: This includes allowances such as HRA, Medical allowance, etc
given by an employer to his employee.

e. Any capital gains: This means any profit dericed on sale of any capital asset.

f. Winning from lotteries, crossword puzzles, races, card game, T.V. Show , etc

g. Any sum received for fund created for welfare of employees.

One interesting thing in the defination of income is that it can be received in cash or in
kind. More over the Income Tax Act does not make distinction between legal source of
income or illegal source of income. This means that gambling, smugling income is also
chargeable to tax under the Income Tax act. More over gifts of personal nature for eg.
birthday/ marriage gifts are not treated as income (but there are some exceptions in this ).

In all tis one more thing is that the term income does not only means profits but there is a
concept of negative income also.

TYPES OF HEAD
Income chargeable to income-tax shall be classified under five heads of income
for the purpose of taxable amount subject to certain exemptions and deductions.
Section 14 stipulates that computation shall be under the five heads of the income

1. Income from Salaries.[sec.15 to 17]

2. Income from house property.[sec.22 to 27]
3. Income from business or profession.[sec.28 to 44DA]
4. Income from Capital gains.[sec.45 to 55A]
5. Income from other sources.[sec.56 to 59]

Details of heads:

1. Income from Salaries:

Remuneration for work done in India is taxable irrespective of the place of receipt.

Remuneration includes:

• Tax upon salaries and wages

• Tax upon pension

• Tax upon bonus, fees & commissions

• Tax upon Gratuity

• Tax upon Annuity

• Tax upon profits in lieu of or in addition to salary

• Tax upon advance salary and perquisites

 Others:

• Tax upon Allowances

• Tax upon Deferred compensation

• Tax equalization

1. Income from house property:

The annual value of property, consisting of any buildings or lands appurtenant

thereto of which the assessee is the owner, other than such portions of such
property as he may occupy for the purposes of any business or profession carried
on by him, the profits of which are chargeable to income tax, shall be chargeable
to income tax under the head "Income from House Property".

2. Income from business or professions:

For charging the income under the head "Profits and Gains of business," the
following conditions should be satisfied:

• There should be a business or profession

• The business or profession should be carried on by the assessee.

• The business or profession should have been carried on by the assessee at any time
during the previous year.

1. Income from capital gains

Capital asset means property of any kind held by an assessee whether or not
connected with his business or profession.

2. Tax upon Income from other sources

Income of every kind, which is not chargeable to income tax under the heads

• salary

• income from house property,

• Income from business and profession,

• capital gains can be taxed under the head "income from other sources".
However such income should also not fall under income not forming part of total income
under the IT Act.

The several heads into which income is divided under the Act do not make different
kinds of taxes. Tax is always one; but it may arise under different heads to which the
different rules of computation have to be applied. These head are in a sense exclusive to
one another and income which falls within one head cannot be assigned to or taxed under
another head.

Gross total income

Under the scheme of computation of total income under the Income Tax Act, the income
falling under each head is to be computed as per the relevant provisions of the Act
relating to computation of income under that head. The aggregate of income under each
head is after giving the effect to set off of current year and brought forward losses shall
be known as 'Gross Total Income'.

to set off of current year and brought forward losses

Total income.
Total income of an assessee is gross total income as reduced by amount deductible under
section 80C to 80U.

A) DEDUCTIONS IN RESPECT OF CERTAIN PAYMENT

SECTION NATURE OF EXPENDITURE

80 C Life Insurance premium, Contribution to Provident fund etc.

80 D Medical Insurance Premium.

80 DD Maintenance including medical treatment of a dependent.

80 DDB Medical treatment etc. of a dependent.

80 E Repayment of a loan taken for higher education.

80 G Donation to certain funds, charitable institutions etc.

Donation for Scientific Research or Rural Development.

 80 GGA Contribution by companies to political parties.

80 GGB Contribution by any person to political parties.

80 GGC
B) DEDUCTIONS IN RESPECT OF INCOME

SECTION NATURE OF EXPENDITURE

80 P Deduction in respect of income of co-operative societies.

80 U Income of a person with disability.

Rounding – off of income[sec.228A]- The taxable income shall be round off to the
nearest multiple of ten rupees and for this purpose any of a rupee consisting of paise shall
be ignored and thereafter if such amount in not a multiple of ten, then if the last figure in
that amount is five or more, the amount shall be increase to the next higher amount which
is a multiple of ten and if the last figure is less than five, the amount shall be reduced to
the next lower amount which is a multiple of ten.

Tax liability
Income-tax shall be calculated according to the rates given in relevant Finance Act. For
the assessment year 2009-10, tax is calculated for the purpose of this book at the rates
prescribed by finance Act, 2008. In this book, these rates are gived in annex 1. Different
assessees are taxable at different rates.

 Special tax rates- Tax rates are given in Finance Act, 2008. Besides these tax
rates, some incomes are taxable at special rates given under the income-tax [these
rates are gv in the bk in annx 1 para 0.1-6]. For instance, long term capital gains
are taxable at the rates of 20 %*[sec 112}, winnings from lotteries, race, card
games, etc., are taxable at the rate of 30 %*[sec 115bb] royalty income in the
hands of a foreign company is taxable at the rate of 10 % 0r 20 % or 30 %.
  Surcharge - surcharge rates are given in Finance Act, 2008. Surcharge is charged
on income-tax. Different rates are charged on income tax or minimum alternate tax
or fringe benefits tax or Dividend tax and distribution tax [seehh]. In some cases
marginal relief is also available.[bbb].

 Education cess and secondary and higher education cess- education cess is 2% of
income-tax and surcharge and secondary and higher education cess is 1% of
income and surcharge.

Rounding off of tax[sec.228B]- Any sum payable by an assessee and the amount of
refund due, under the provision of the Act shall be rounded off to the nearest ten
rupees(with effect from July 13, 2006).

The scheme of computation of total income and tax liability thereon can be easily
understood with the help of the following chart:

Computation of Gross total income RS RS

1. Income from salaries

Income from salary

Income by way of allowance

Taxable value of perquisite

Gross salary
 Less: Deduction under section 16 :

Entertainment allowance

Professional tax

Taxable income under the head “salaries”

1. Income from house property

Adjusted net annual value
Less: Deductions under section 24
Taxable income under the head “Income from house
property”
2. Profit and gains of business or profession
Net profit as per Profit and Loss Account
Add: Amount which are debited to P&L A/c but are not
allowable as deduction under the Act
Less: Expenditures which are not debited to P&L A/c but
allowable as deduction under the Act.
Less: Incomes which are credited to P&L A/c but are exempt
under sections 10 to 13A or are taxable under other heads of
income.
Add: Those incomes which are not credited to P&L A/c but
are taxable under the head “profit and gains of business or
profession”
Taxable income under the head “profit and gains of business
or profession”
3. Capital gains
Amount of capital gains
Less: Amount exempt under section 54, 54B, 54D, 54EC,
54ED, 54F, 54G and 54GA.
Taxable income under the head “Capital gains”
4. Income from other source
Gross income
Less: Deduction under section 57.
Taxable income under the head “Income from other sources”

Total[i.e., (1)+(2)+(3)+(4)+(5)]

Less: Adjustment on account of set-off and carry forward of

 losses

GROSS TOTAL INCOME

TAX LIABILITY

RS RS

1. Find out gross total income

2. Less Deductions under section 80C to 80U
3. Find out net income [(1)-(2)]
4. Divide net income into the following-
4.1 Income subject to special tax rates
4.2 Remaining income subject to normal income
5. Find out income-tax on net income-
5.1 Tax on income specified in 4.1 (supra) at the rate given in
para xyz
5.2 Tax on remaining income at normal rate given in para abc
6. Add surcharge @ 0%,10%,or 2.5%
7. Find out the total [(5)+(6)]
8. Add: education cess [2% of(7)]
9. Add: secondary and higher education cess[1%of(7)]
10. Find out total[(5)+(6)+(7)]
11. Deduct :Rebate under section 86, 89, 90, 90A or 91
12. Tax liability [(10)-(11)]
13. Add: Interest/penalty, etc.
14. Less: Pre-paid taxes
15. Tax payable[(12)+(13)-(14)]
 2(17)
COMPANY

Company
The various types of companies to be identified and recognized for tax
provision can be brought out by the following chart before the relevant
definition are studied:-

Sec. 2(22A) Domestic (includes) Indian

companies u/s 2(26) & foreign companies
which fulfill prescribed requirements as per
sec. 194 read with rule 27
 Sec. 2(23A) Foreign
Company

Sec.2 (18) Company in which public are Other companies (commonly)

substantially interested (known as widely known as closely held
held companies company

I. Company [sec.2 (17)] - Under section 2(17), the expression

the following “company” is defined to means the following;
A. Any Indian company ; or
B. Any body corporate incorporated under the laws of a foreign
company ; or
C. Any institution, association or a body which is assessed or was
assessable / assessed as a company for assessment year
commencing on or before April 1,1970; or
D. Any institution association or a body, whether incorporated or not
and whether Indian or non Indian, which is declared by general or
special order of the Central Board of Direct Tax to be a company.
A. Indian company [sec.2(26)]- An Indian company means a
company means a company formed and registered under the
Company Act, 1956. Besides it includes the following:
a) A company formed and Registered under any law relating to
companies formerly in force in any part of India other than the
State of Jammu and Kashmir and Union territories specified in (e)
infra ;
b) A corporation established by or under a Central, State or
Provision Act ;
c) Any institution, association or body which is declared by Board to
be a company under section 2(17) ;
d) A company formed and registered under any laws in force in the
State if Jammu and Kashmir ;
e) A company formed and registered under any law for the time
being in force in the Union territories of Dadra and Nagar haveli,
Goa *, Daman and Diu and Pondicherry.
 In the aforesaid cases, a company, corporation institution
association or body will be treated as an Indian company only if
registered office is in India
A. Domestic company[sec.2(22A)]--- means
1. An Indian company
2. Any other company which in respect of its income liable to tax
under the Act has made prescribed arrangement for the
declaration and payment of dividends within India in
accordance with section 194.
i.The share register to the company for all
shareholders should be regularly maintained at its
principal place of business in India, in respect of
any assessment year, at least from April 1 of the
relevant assessment year.
ii.The general meeting for passing of account of the
relevant previous year and for declaring dividends
in respect there of should be held only at a place
within India.
iii.The dividends declared, if any, should be payable
only within India to all shareholders.

In other words, if a Company is an Indian company, it will

automatically be considered as a domestic company and the
above mentioned conditions are relevant only for other than
Indian companies.
A. Foreign company [sec, 2(23A]-means a company which is
not a domestic company.
B. Widely-held company- A company in which the public are
substantially interested.
Company in which the public are substantially
interested [Sec. 2(18)]- A company is regarded as a company in
which the public substantially interested in the following cases-
1. Owned by Government /RBI- A Company owned by the
Government or the Reserve Bank of in which not less than 40
percent shares in terms of value are held by the Government or
the Reverse Bank or a corporation owned by the Reverse Bank.
2. Section 25 companies- A company registered under section 25 of
the companies Act 1956, namely companies for promotion of
commerce, art, science, religion, charity and prohibiting the
payment of any dividends to its members.
 3. Company without share capital- A company having no share
capital and declared by the Central Board of Direct Taxes to be a
company in which the public are substantially interested.
4. Nidhi of Mutual Benefit Society- A company which carries on, as
its principal business, the business of acceptance of deposits
from its members and which is declared by the Central
Government u/s 620A of the Companies Act to be a Nidhi of
Mutual Benefit Society.
5. Company owned by the co-operative society- A company in
which shares carrying not less than 50 percent of the voting
power having been allotted unconditionally to or acquired
unconditionally by, and the relevant previous year held by one or
more co-operative societies.
6. Listed companies-A company which is not a private company and
its equity shares are, as on the last day of previous year listed in
a recognized stock exchange in India.
7. Public limited company owned by Government and/or a widely-
held company- A company which is not a private company and its
shares carrying not less than 50 % of voting power (40 % in the
case of industrial companies) have been allotted unconditionally
to, or acquired unconditionally by, and were throughout the
relevant previous year beneficially held by—
I. The Government ;or
II. A statutory corporation; or
III. A company in which the public are substantially interested
or any wholly-owned subsidiary company.
A. Closely-held Company- Company in which the public are not
substantially interested is known as a closely-held company.
B. Industrial company [sec.2(8)(c) of the Finance
Act,1985] – Industrial company means a company which is mainly
engaged in the business of generation or distribution of electricity or
any other form of power or in the construction of ships or in the
manufacture or processing of goods or in mining. By virtue of the
Explanation to section 2(8)(C) of the Finance Act,1985,a company is
deemed to be mainly engaged in the business of generation or
distribution of electricity or any other form of power or in
construction of ships or in the manufacture or processing of goods
or in mining, ifthe income attributable to any one or more of the
aforesaid activities, included in its total income of the previous year
(before allowing deduction under section 80C to 80U) is not less
than 51 percent of such income. However, the Board, in its
Circulation No.103,dated February 17, 1973, while clarifying the
exact meaning of a similar Explanation to section 2(7)(d) of the
Finance Act, 1996, defines industrial company as:
a) A company which is mainly engaged in the business of
generation or distribution of electricity or any other form of power
or in construction of ships or in the manufacture or processing of
goods or in mining, even if its total income from such activities is
less than 51 percent of its total income; and
b) A company which, even thought not mainly so engaged, derives
in any year 51 percent or more of its income from such activities.
MAT
MAT or “Minimum Alternate Tax” has been a topic of intense discussion amongst tax payers as
well as tax authorities all over the world. While a majority of the countries world over have
refrained from levying such a tax, there are instances of countries like the United States, India,
Mexico and Colombia among others who have introduced varying forms of MAT at one point or
the other.
Why a “ Minimum Tax”?
When looked at from a layman’s point of view, and on preliminary thoughts, the principle of
application of such a tax seems to be a very reasonable, social and fair principle. This is
because the basic theme or logic of having such a tax seems very appealing to people who
often wonder why they have to pay a large proportion of their hard earned money towards taxes
while many large companies who earn millions do not pay any income tax at all. The earnings of
companies would be even more than the gross revenues of some of the states, but the total
direct tax paid by them amounted to zero. This prompted the Government to take note of the
matter, the concept of a minimum tax was introduced under the Income Tax Act 1961. These
amendments were meant to streamline and fine tune the MAT provisions based on prevailing
circumstances.
Minimum Alternate Tax – Basic concept
MAT, as the name implies, is the minimum amount of tax which a company has to pay, even if it
is not liable to pay any tax on its regular assessment. Assessees have to calculate their taxes
as per the regular method as well as per the procedure laid down for MAT computation, and pay
the tax which is higher of the two. Under the regular computation, the person is entitled to all the
deductions, exemptions and incentives available under the provisions of the tax code, such as
accelerated depreciation, investment allowance, rebate for setting up industries in a backward
area etc. The resultant computed income, therefore, normally would be much lower than the
book
profits. However, for the computation of income for the purposes of MAT, there are very few
adjustments, if any, to be made to the book profits. Most importantly, the method of depreciation
followed for the purpose of accounts is different from that considered for taxation purposes. As a
result, MAT ensures that every profitable company would have to pay some tax every year.
History of MAT in India
With a view to compel highly profitable companies, paying little or no tax due to availment of tax
incentives, the concept of MAT was introduced in 1983 by way of insertion of section 80 VVA of
the Income Tax Act 1961 (the Act). This section laid down certain restrictions on the aggregate
amount of deductions allowable under the provisions of the Act. However, the unabsorbed
deductions were allowed to be carried forward and set off against taxable income in future
years. Section 80 VVA remained in operation for the assessment years 1984-85 to 1987-88.
From 1st April 1988, Section 115 J was introduced to replace Section 80 VVA. By virtue of this
section, in case of a company whose total income was less than 30 % of the book profits, the
total income to be charged to income tax was deemed to be 30 % of the book profits. Section
115 J was in operation for the assessment years 1988-89 to 1990-91.
In the year 1991-92, in view of rationalization of tax structure including discontinuance of certain
investment incentives, it was felt that there should be no necessity of retention of the concept of
a Minimum Alternate Tax, and therefore this section was withdrawn from assessment year
1991-92
After a gap of about six years, the Minimum Alternate Tax was re-introduced under section 115
JA with effect from assessment year 1997-98. In the next year, Section 115 JAA was introduced
to give effect to a tax credit scheme by which the tax paid under MAT was allowed to be carried
forward for set off against regular tax payable during the subsequent five year period.
In 2000, the Government had yet another rethink on the concept of MAT, and section 115 JB
was introduced. The introduction of Section 115JB was a conceptual departure from“ deemed
total income” to “deemed tax“ on book profits. In other words, while the earlier section
concentrated on computation of a minimum deemed income, the new section laid emphasis on
computation of a minimum deemed tax. Moreover, the provision for allowing credit for MAT
under section 115JAA was discontinued. In the current year, credit for MAT paid has again been
allowed.
Taxable income and tax liability - how to computed
It determined as follows –

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

2. Income of other persons may be included in the income of the company
under section 60 and section 61.
3. current and brought forward losses should be adjusted according to the
provision to the provisions of section 70 to 80.provision of section 79
regarding set-off and carry forward of losses of closing held companies are
given in para 335.
4. The total of income so 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.
6. The resulting sum is Net income.

Text liability-Tax liability of a company is calculated as follows—

Computation 1-Under normal Computation 2-Under minimum

provisions alternates tax

Step 1 -Find out taxable income under Step 8-Find out book profit
normal provisions

Step 2 -Find out income-tax at the rate Step 9-Find out 10 per cent of book
of 30 percent 40 percent in the case of profit
a foreign company of income
computed under (1) supra.

There is no exemption limit.

Steps 3 - Add surcharge at the rate of Step 10-Add surcharge at the rate of
10percent of (2) [2.5 percent in the 10 percent[2.5 percent in the case of
case of a foreign company}, if net foreign company]if the book profit
income exceeds Rs 1 crore. exceed Rs 1 crore.

Steps 4 - Find out(2) + (3) Step 11-Find out(9)+(10)

Steps 5 -Add education cess at the rate Step 12-Add education cess at the rate
of 2 percent of (4) and secondary and of 2 percent of (11 )and secondary and
higher education cess at the rate of 1 higher education cess at the rate of 1
percent of (4). percent of(11).

Steps 6 -Deduct tax rebate or tax Steps 13find out(11)+(12)

credit under section 86,90,90A and 91£
Steps 7 -Find out(4)+(5)-(6)[it cannot
be less then zero]

Tax liability of a company is steps 7 or steps 13.which every is more.

1. If tax computed at step 7 is more than (or equal to) tax computed at step 13,
the provision of minimum alternate tax are not applicable.

2. If tax computed at step 7 is less than tax computed at step 13,the provision
of minimum alternate tax are applicable.

3. The extra tax which the company has to pay because of minimum alternate
tax [i.e. step13 minus step7] will be available for “Tax credit” under section
115AA.Tax credit can be set off against future tax liability of the company
subject to few conditions. However, the tax credit is available only in that
year in which tax computed at step 7 is more than tax computed at step 13.

NOTE:-

* IN the case of long-term capital gain’ it is 20 percent .In the case of winning from
lotteries, it is 30 percent. There are a few more cases where a special rate of tax applicable
[see annex 1]

£ There is no merit in contention that before adding surcharge, tax payable is to

reduced by credit for double taxation.

However, the provision of section 115JB will not be applicable in respect to income
accrued or arising after march 31,2005 from any business carried on, or service
rendered by an entrepreneur or a developer ,in a unit or special economic zone, as
the case maybe .moreover. tonnage income of a shipping company is subject to
minimum alternate tax

What is “Book profit”?

– Net profit as per profit and loss a/c (after 13 adjustments) is book profit.

How to determined Book profit?

Net profit as show in profit and loss account shall be adjusted to convert into book
profit. 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.

• Positive adjustments –Net profit as shown in profit and loss account

(prepared in accordance with the provisions of Parts II and III of the Sixth Schedule
to the Companies Act) is to be increase by the following amounts if debited to the
profit and loss account:

1.Income-tax paid or payable and the
provisions therefore
Income-tax, interest under the Income-tax
Act, dividend tax under section 115R
including surcharge, education cess and
secondary and higher education cess if
debited to Profit and loss account 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, commodities 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, No adjustment is required in respect of

by whatever name called reserve created under section 35AC with
effect from the assessment year 2003-04.

3.Amount or amounts set aside to
provisions made for meeting
liabilities, other than ascertained
liabilities
The Delhi High Cout in CIT v.E.I.Dupont India
Ltd.[2008] 169 Taxman 184,held that the
provision for doubtful debts and damage
stock are not added back has both of them
related to the asset and not to any liability
so that any unascertained liability. Likewise ,
provision for loss of fixed asset and loss on
foreign exchange fluctuations can not be
added back to net profit.

4.Amount by of provision for losses of

subsidiary companies
5.Amount or amount of dividends
paid or proposed

6. Amount of expenditure relatable to Expenses pertaining to income given under

any exempt income (if such income is (10) below if debited to profit and loss
not subject to minimum alternate account shall be added back.
tax)

7. Amount of deprecation See para 336.2-2d

8.Amount of deferred tax the Inserted with retrospective effect from the
provision therefore assessment 2001-02

•Negative adjustments-Net profit as shown in the profit and loss account is to be

reduced by the follows amount:

Amount to be deducted from net Comments

profit

9.Amount withdrawn from reserves or See para 336.2-2a

provision, if any such amount is credited
to the profit and loss account

10.Income exempt from tax The following income, if credited to profit

and loss account, shall be deducted-

a. Long-term capital gain

exempt under
section10(38)for the
assessment year 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
section 10A and 10B up to
assessment year 2007-
08;
e. Income exempt under
section 11 and 12.
The above incomes are not subject to
minimum alternate Tax. Moreover, is no
minimum alternate tax(a) in respect of
 income of arising after March 31,2005
From special economic zone to a
developer or entrepreneur, and (b)in
respect of income of shipping companies
subject to the provision of “tonnage
income”.

11. Depreciation (other than because of See para 336.2-2d

revaluation of asset)debited to profit and
loss account.

12.Amount withdrawn from revaluation See para 336.2-2d

reserve credited to profit and loss
account to the extent it does not exceed
the amount of deprecation on account
revaluation of assets.

13. Amount of loss brought forward or See para 336.2-2b

unabsorbed deprecation, whichever is
less, as per book of account

14.Amount of profit eligible for deduction This adjustment does not have any
under section 80HHC,80HHE and 80HHF practical utilty now a days.

15. profit of sick industrial unit See para 336.2-2c

16. The amount of deferred tax, if any Inserted with effect from the assessment
such amount is credited to the profit and year 2002-02.
loss account.

336.2-2a RESERVE CREDITED TO PROFIT AND LOSS ACCOUNT :- The amount

withdrawn from reserves and credited to profit and loss account 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 profit and loss account, 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 profit and loss account , 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).

336.2-2b BROUGHT FORWARD DEPRECIATION OR LOSS: - Section 115JB provides

that in computing book profit, the amount of (a) “loss” brought – forward (before
depreciation), or (b) unabsorbed depreciation, whichever is less (as per books of
account), shall be reduced from net profit.

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.

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 –

Brought forward loss Brought forward Brought forward Amount to be

before depreciation depreciation as loss after deducted from
as per books of per books of depreciation as net profit to
account account per books of convert it into
account book profit

Case 1 -40 -10 -50 10

Case 2 -30 -40 -70 30

Case 3 -25 0 -25 0

Case4 0 -10 -10 0

Case 5 +5 -70 -65 0

336.2-2c 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 profit and loss account, 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 assessement year relevent 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
reserve) 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 re-evaluation
of assets, write back of depreciation provisions and amalgamation.

336.2-2d DEPRECIATION – Depreciation debited to profit and loss account shall be

added back However, depreciation (not being depreciation which arises because of
revaluation of assets) shall be deducted as given in (11) (supra).

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 profit and loss account

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

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 Withdrawal from
6 6 6 6 6 10 10 10 10 10
(normal) reserve (1)
4 4 4 4 0 . . . . .
Depreciation
. . . . . Withdrawal from 9 9 9 9 9
(because of
5 5 5 5 5 reserve (2) . . . . .
revaluation)
57 61 58 68 72 0 4 1 11 11
Other expenses Withdrawal from
Net profit 10 11 11 12 12 revaluation reserve 10 11 11 12 12
9 3 0 0 0 9 3 0 0 0

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

Computation of book profit –

Adjustme A B C D E
nt No.

Net profit as per P&L account 57 61 58 68 72

Add: Depreciation debited to P&L account (total depreciation (7) 10 10 10 10 6

i.e., normal as well as extra because of revaluation) (Rs. 6
lakh + Rs. 4 lakh)

Less : Withdrawl from reserve which was initially created by (9) 10 10 10 10 10

debiting P&L account

Less : Depreciation debited to P&L A/c (Which is not partaining (11) 6 6 6 6 6

to revaluation of assets)

Less :Whithdrawl from revaluation reserve to the extent it (12) 0 4 1 4 0

does not exceed revaluation depreciation

Book profit 51 51 51 58 62

carry forward and set-off of tax credit-The amount of tax credit (i.e, excess of
steps 13 over step 7,para 334.1)under section 115JAA shall be credited forward and
set off subject to the following propositions-

1. No interest is payable of tax credit.

2. Tax credit shall be allowed set off in a future year in which tax becomes
payable on the total income computed in accordance with the provision other
than section 115JB.In other words ,it can be set off in that year when tax
computed under normal provision(i.e .,steps 7, para 334.1)is more than
minimum alternate tax(i.e., steps 13,para 334.1).
3. set off in respect of brought forward tax credit will be allowed for any
company assessment year to the extent of-
a. tax computed on total income under normal provision (i.e. steps
7);minus
b. 10 percent (plus surcharge + education cess) of book profit(i.e,step
13)
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.

1. Carry forward shall not be allowed beyond the period given below.
Section Minimum Time-limit for Last assessment
alternate tax paid carry forward of year for
in the following MAT credit adjustment of
assessment year MAT credit

115JA 1997-98 5 years 2002-03

115JA 1998-99 5 years 2003-04

115JA 1999-00 5 years 2004-05

115JA 2000-01 5 years 2005-06

115JB 2001-02 to 2005- NIL No carry forward

 06

115JB 2006-07 7years 2013-14

115JB 2007-08 7years 2014-15

115JB 2008-09 7years 2015-16

115JB 2009-10 7years 2016-17

2. 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 if the tax was paid. Moreover, there is no provision that the
Assessing Officer should determine the tax credit which shall be carried
forward.

Assessing officer can rewrite the profit and loss a/c-

 if profit and loss account is not prepared according to the company

act-if it is discovered that the profit and loss account is not drawn up in
accordance with provision of part II and part III of of the sixth schedule to
the company act ,the Assessing Officer can recalculate the net profit. In a
case where 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 profit and loss account 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 rates or
method of depreciation are different-According to the first proviso to
section 115JB(2)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 profit and loss account for the
purpose of computing book profit under section 115JB.

Some companies follow an accounting year under the company 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 shareholder 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 sae accounting policies, accounting standards and
depreciation method and rates which have been adopted for reporting profit to
shareholders.

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 provision
section 115 JB. The report should be submitted along with the return of income.