Section 115JB of the income tax act

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SECTION 115JB OF INCOME TAX ACT, 1961 SPECIAL PROVISION FOR PAYMENT OF TAX BY CERTAIN COMPANIES (AFTER BUDGET 2016)

This section is nothing but the Minimum Tax that a company is required to pay. This section provides that in case the tax payable by a company is less than 18.5 % of its books profit in any assessment year beginning from 01.04.2012, then such book profit will be assumed to be the income of the company and tax payable by the company during that financial year will be 18.5 % of such book profit. This is provided u/s 115JB(1). In subsection (1) to section 115JB , the word ‘Company’ is used which means that section 115JB is applicable in case of Company whether resident or a foreign company. But a New explanation 4 was inserted vide Budget 2016.

This Explanation takes the place of Exiting Explanation 4 and existing Explanation 4 was named as Explanation 5 under the Act. This newly inserted Explanation (4) provides that the provision of Sec 115JB is not applicable in case of foreign companies under following circumstances:-

1. The assessee is a resident of a country or a specified territory with which India has an agreement u/s 90(1) or Central Govt has signed an agreement u/s 90A(1) and that assessee does not have a permanent establishment in India or

2. The assessee is a resident of a country with which India does not have an agreement and the assessee is not required to seek registration under any law for the time being in force relating to the companies . This new explanation will have retrospective effect from 01.04.2001.

Moreover the Sec155JB is not applicable in case of LIC Business covered u/s 115B, Income of a shipping company which is subject to the provision u/s 115V to 115VZC and a Developer or an entrepreneur carrying on business or rendering any services in a unit in special economic Zone provided these business or services are rendered on or after 01.04.2005 but before 01.04.2012.It means the provisions of Sec 115JB are applicable in case of unit or in special Economic Zone on income is arising on or after 01.04.2012. Sub section (2) of Section 115JB provides that the company is required to maintain the books of accounts as per the Companies Act, 2013.

However insurance or banking company or any company engaged in the generation or supply of electricity], or to any other class of company for which a form of profit and loss account has been specified in or under the Act governing such class of companies, are not required to prepare the profit and loss account for the relevant previous year in accordance with the provisions of companies act, 2013. In Sub Section (1) to Sec 115JB , a word Book Profit is used for calculation of tax liability of the company.

This books profit meaning is provided in Explanation (1) of sub-section (2) of Section 115JB.This explanation provides that book profit is nothing but is calculated after making some adjustments in the net profit as per the profit and loss account of the company. The adjustment that are required to be made are provided under Clause (a) to (k) and Clause (i) to clause (VIII) to Explanation (1).Items mentioned in Clause (a) to clause (k) are required to be added to the net profit and items mentioned in clause (i) to clause (VIII) are required to be reduced from the Net profit, if credited to the Profit and Loss Account, to arrive at the book profit. We will discuss these clauses one by one in detail to have a better understanding of the same :-

1. INCOME TAX [Clause (a)]

This clause to Explanation (1) provides that the amount of income tax paid or payable or provision thereof, if any debited to the Profit and Loss Account, should be added back to the Net Profit. The meaning of Income tax under this clause was a matter of big debate which was clarified under Explanation (2) later on.

This explanation (2) provides that the Income Tax that is required to be added back to the Net Profit includes :- (i) Dividend Tax u/s 115O (ii) Dividend Distribution Tax u/s 115R (iii) Interest if any charged under this act(eg- Interest u/s 234A,234B234C etc) (iv) Surcharge on the income tax (v) Education Cess (vi) SHEC These are the items that are covered under the meaning of Income Tax under Clause (a) to Explanation(1). Thus it is very clear that the Wealth Tax , Indirect Taxes etc shall not be added back. Moreover late fee , penalty etc under Income Tax will also be not added back. However it is expressly provided that interest will be added back. There might be the cases where a company have foreign branches.

This company has made provision for the income tax payable by the Foreign Branches under the tax laws of those countries. Now the question arises whether this provision of the income tax will also be added back to the Net Profit?

The answer is very clear and it will be yes.Because the Clause provides that Income Tax falling within the Explanation (2) is to be added back. It is not required here that the income tax should be Income Tax payable in India

2. AMOUNT CARRIED TO RESERVES BY WHATEVER NAME CALLED[Clause(b)]

This clause provides that if any reserve is created by debiting the profit and loss account , then such amount shall be added back to the net profit.However the reserves created u/s 33AC (Shipping Business ) are not required to be added back even if created by debiting the Profit and Loss Account.

3. AMOUNT SET ASIDE FOR CREATING PROVISIONS FOR MEETING LIABILITIES OTHER THAN ASCERTAINED LIABILITIES[Clause (c)]

This Clause provides that any amount set aside for creating provisions for meeting unascertained liabilities shall be added back to the profit and loss account. It is to be noted that the provision made for ascertained liabilities will not be added back to the net profit. Only provision for unascertained liabilities are required to be added back.Moreover the provision for warranty is ascertained liability hence the amount debited to the profit and loss account for warranty will not be added back.

4. PROVISION FOR LOSS OF SUBSIDIARY COMPANIES[Clause(d)]

Any amount debited to the profit and loss account for creating provision for loss of subsidiary company will be added back.

5. DIVIDEND

Clause (e) to Explanation (1) provides that any amount debited to the profit and loss account for the dividend paid or proposed will be added back to the net profit for calculating book profit.

6. EXPENSES RELATED TO CERTAIN INCOMES

Clause (f) to clause (fb) provides that any expenses debited to the profit and loss account in respect of the below mentioned incomes will be added back to the net profit:-

(i) Income exempt u/s 11 and 12 (ii) Income exempt under of section 10 except Clause (38) (iii) Share of profit from an AOP on which no income tax is payable in accordance with the provision of sec 86 (iv) In case of foreign companies , interest , royalties or technical fees chargeable to tax u/s 115A to 115BBE or capital gain arising on transactions in securities if income tax payable in respect of these income under the normal provision is less than 18.5%. It has been provided in point no.

(ii) above that the expenses incurred in respect of income u./s 10 debited to the profit and loss account should be added. However it excludes income exempt u/s 10(38) i.e Long Term Capital Gain which means that the expenses incurred in respect of Long Term Capital Gain is not required to be added back to the Net Profit even if such long term capital gain is exempt under the income Tax Act.

A new clause i.e clause(fd) was inserted by Finance Act 2016 , which provides that in any expenditure is incurred in respect of any income of royalty on patent which is chargeable to tax u/s 115BBF shall also be added back to the Net profit.This clause will be effective from 01.04.2017 i.e from A.Y. 2017-18 7. Loss on account of Units mentioned u/s 47(xvii) Clause (fc) to the Explanation (1) inserted by Finance Act 2015, provides that any losses incurred and debited to the profit and loss account on account of units mentioned u/s 47(xvii) is also required to be added back.

These losses are:-

(i) Notional Loss on transfer of a capital asset or a special purpose vehicle to a business trust in exchange of the units allotted by that trust

(ii) Losses on transfer of such units

(iii) Loss resulting from any change in carrying amount of units of the trust. However in case there is gain on transfer on units referred u/s 47(xvii) computed by taking into account the cost of shares exchanged with the units referred to in the said clause or the carrying amount of shares at the time of exchange where such shares are carried at a value other than the cost through profit and loss account shall be added back to the net profit to arrive at the book profit.

8. Depreciation and Depreciation Reserve Account or Diminution in the value of asset

The clause (g) provides that the Depreciation debited to the profit and loss account should be added back to the Net profit. This depreciation includes the depreciation on account of revaluation of assets also. It means the total depreciation debited to the profit and loss account should be added back to the net profit. But if we go through the Clause (iia) , then it provides that the depreciation excluding the depreciation on revaluation of asset shall be reduced from the Net Profit.

The combined study of Clause (g) and Clause(iia) makes it very clear that the depreciation on account of revaluation of assets should not be reduced from the Net Profit for computing book profit. Moreover in case a revalued asset is disposed off or sold then the amount standing in the revaluation reserve account related to the revalued asset should be added back to the Net Profit as provided under clause(j) to Explanation (1) In case any amount is withdrawn from Revaluation Reserve Account by crediting the Profit and Loss Account , then the amount to the extent of depreciation on account of revaluation of asset would be reduced from the net profit while computing book profit as provided under Clause ((iib). Now there might be the cases when the value of asset are reduced and a provision is created on account of diminution of the value of any asset.This provision should be added back as provided under Clause (i).

9. DEFERRED TAX OR PROVISION THEREOF

The amount of deferred tax and the provisions debited to the Profit and Loss account shall be added back [Clause (h) to Explanation (1)] These are the items that required to be added back to the Net Profit for computing the book profit.Now we will discuss the items that are required to be reduced from the Net profit to arrive at Book Profit.

These are:-

1. AMOUNT WITHDRAWN FROM PROVISIONS OR RESERVES

In order to have a clear understanding of Clause (i) to Explanation 1, I want to present a Chart

2. CERTAIN INCOMES

Clause (ii), (iic),(iid) provides certain income which are required to be reduced from Net Profit if credited to the Profit and Loss Account.

These incomes are:- (i) Income exempt u/s 11 and 12 (ii) Income exempt under of section 10 except Clause (38) (iii) Share of profit from an AOP on which no income tax is payable in accordance with the provision of sec 86 (iv) In case of foreign companies , interest , royalties or technical fees chargeable to tax u/s 115A to 115BBE or capital gain arising on transactions in securities if income tax payable in respect of these income under the normal provision is less than 18.5%. It is to be noted that Long Term capital gain covered u/s 10(38) will not be reduced from Net Profit. A new clause i.e clause (iig) was inserted by Budget 2016, which provides that the income in the nature of royalty on patent chargeable to tax u/s 115BBF shall be reduced from the Net profit if credited to the Profit and Loss Account , to arrive at the book profit.

3. Brought Forward loss or unabsorbed Depreciation

Clause (iii) of Explanation 1 of Section 115JB provides that the brought forward losses or unabsorbed depreciation whichever is less as per books of accounts should be reduced from the net profit to arrive at the book profit. Now it is a point of big debate that the lower value out of brought forward losses and unabsorbed depreciation as per books of accounts should be taken on consolidated basis or on year to year basis. This lower value should be taken on year to year basis not on consolidated basis.

Let us have the clarification of the issue with an example:-

ASSESSMENT YEAR	DEPRECIATION AS PER BOOKS OF ACCOUNTS	LOSSES AS PER BOOKS	TOTAL LOSS
2012-13	525000.00	700000.00	1225000.00
2013-14	470000.00	720000.00	1190000.00
2014-15	460000.00	300000.00	160000.00
TOTAL	145500	1120000.00	2575000.00

As per clause (iii) , lower of brought forward loss or unabsorbed depreciation as per books of accounts should be reduced from net profit of A.Y. 2015-16 . A big confusion is directly Rs. 1455000.00 should be reduced from NP in A.Y. 2015-16 taking lower figure on consolidated basis or lower of the two be selected year wise and that amount should be reduced. In my view the amount of deduction should be:-

• A.Y 2012-13 – Rs. 525000.00 Ay 2013-14 – Rs. 470000.00
• A.Y. 2014-15 – Rs. 0.00 Total – Rs. 995000.00

The deduction from NP to arrive at book profit should be of Rs. 995000.00 in A.Y. 2015-16 instead of Rs. 1455000.00.It is to be noted that the brought forward loss should not include the amount of depreciation therein.

4. PROFIT OF SICK INDUSTRIAL UNIT

The profits of sick industrial units are not subject to the provisions of MAT. So if any such profits appears in the profit and loss account , such amount should be reduced from NP to calculate book profit. This adjustment is applicable in case of sick industrial companies. This adjustments is applicable in case of sick industrial companies for the AY i) Starting from the AY in which the company becomes the sick company ii) Ending with the AY during which the paid up capital and free reserves of such company is equal to or more than the accumulated losses.

5. DEFERRED TAXES

Clause (viii) provides that any deferred taxes credited to the Profit and Loss Account should be reduced from NP. 6. Loss on account of Units mentioned u/s 47(xvii) Clause (iie) and (iif) to the Explanation (1) inserted by Finance Act 2015, provides that any gain credited to the profit and loss account on account of units mentioned u/s 47(xvii) is also required to be added back .

These losses are:- (iv) Notional gain on transfer of a capital asset or a special purpose vehicle to a business trust in exchange of the units allotted by that trust (v) Gain on transfer of such units (vi) Gain resulting from any change in carrying amount of units of the trust. However in case there isl loss on transfer on units referred u/s 47(xvii) computed by taking into account the cost of shares exchanged with the units referred to in the said clause or the carrying amount of shares at the time of exchange where such shares are carried at a value other than the cost through profit and loss account shall be reduced from the net profit to arrive at the book profit. In this way the book profit is calculated under sec 115JB to determine MAT payable by the company.

There might be the cases when the company has losses in any assessment year but there is profit on calculation of Book Profit.

In this situation, the question arises in our mind is whether carry forward of losses will be allowed OR not in that assessment year. Sub Section(3) of Section 115JB makes it very clear that the provision of carry forward business losses, capital losses or unabsorbed depreciation is very well applicable even in the A.Y in which the provisions of 115JB are applicable under the act. But these companies on which 115JB are applicable are required to furnish a report in Form No. 29B from a CA along with the return of Income. This form is nothing but a confirmation given by the accountant that the book profit is calculated in accordance with the provisions of Sec 115JB.

This Sec 115JB creates tax liability in the hand of the company even if the books of accounts are showing losses. Now the question in our mind, is this tax paid will be available for credit to the company or will be a tax loss to the company. Sec 115JAA provides that in case the tax is paid @ 18.5% by the company in any assessment year then this excess tax paid by the company will be available as tax credit in the year in which the tax as per normal provision is higher than tax liability as per 115JB.

We will discuss the complete provisions of this tax credit available u/s 115JA later on separately.Thus it is very clear that tax paid under Sec 115JB is not a tax loss but will be available as tax credit in the succeeding assessment year ar per the provisions mentioned u/s 115JAA.