Monday, May 23, 2011

MAT: Some Legal Issues

One of the changes sought to be introduced through the Budget this year was the imposition of alternate minimum tax on Limited Liability Partnerships. This is sought to be achieved by the introduction of Section 115JC into the Income Tax Act, 1961. Section 115JC provides:

115JC. Special provisions for payment of tax by certain limited liability partnerships.—(1) Notwithstanding anything contained in this Act, where the regular income-tax payable for a previous year by a limited liability partnership is less than the alternate minimum tax payable for such previous year, the adjusted total income shall be deemed to be the total income of the limited liability partnership for such previous year and it shall be liable to pay income-tax on such total income at the rate of eighteen and one-half per cent.
(2) Adjusted total income referred to in sub-section (1) shall be the total income before giving effect to this Chapter as increased by—
(i) deductions claimed, if any, under any section included in Chapter VI-A under the heading “C.—Deductions in respect of certain incomes”; and
(ii) deduction claimed, if any, under section 10AA.

In the case of companies, u/s 115JB, the book profits are deemed to be the total income of the company and tax is payable on the book profits. The concept of book profits is defined under Explanation 1 to mean the net profit as shown in the P&L account, subject to certain additions and reductions. This in itself has led to several controversies. Some of these include the issue of whether any additions other than those mentioned in the Explanation can be claimed, and the issue of whether exempt income such as exempt capital gains are also taxed under the MAT net.

In the case of LLPs, the difficulties are sought to be avoided by clearly stating that the adjusted total income means the total income under the Act increased by Chapter VI-A deductions and by Section 10AA deductions. The issue of what additions and deductions are permissible and not permissible, is thus clarified to a great extent. However, as a policy issue, there have been several concerns  over the imposition of MAT on LLPs. Further, the Finance Act also seeks to introduce provisions imposing MAT on SEZ units by making amendments to Section 115JB(6). These provisions have been challenged in the Gujarat High Court, as reported here.

Turning back to some of the more controversial issues in MAT (u/s 115JB), one of the issues pertains to the use of somewhat creative, but permissible, accounting methods. For example, one common technique seen is that of crediting certain capital gains directly to the reserves without routing it through the profit and loss account. Whether or not such treatment is perfectly in accordance with the accounting standards is a debatable point. However, even when the statutory auditors have certified such treatment as being in accordance with the accounting standards, the Department in several instances has taken the view that these gains ought to have been reflected in the P&L account, and have sought to make additions to the net profit as shown by assessees. The Supreme Court in Apollo Tyres v. CIT, 265 ITR 273 had held (on the issue of whether tax authorities can go behind the audited accounts), “we find it difficult to accept the argument of the Revenue that it is still open to the Assessing Officer to re-scrutinize this account and satisfy himself that the accounts have been maintained in accordance with the provisions of the Companies Act…” However, in Bombay Diamond, ITA 7488/Mum/07, the Mumbai Bench of the Tribunal has held that it is open to the AO to consider whether the accounts have been kept in accordance with the provisions of the Companies Act and the accounting standards, even when statutory auditors have certified the same. The second issue is concerned with whether exemption under the regular provisions of the Act – such as exempt capital gains u/s 47(iv) – can also be used in the case of MAT. This issue was decided against the assessee by the Special bench of the Tribunal in Rain Commodities v. DCIT – a decision which may require some reconsideration, as argued here. In Rain Commodities, the contrary judgment in Sutlej Cotton Mills was held to be no longer good law.

Thus, the provisions of MAT continue to give rise to legal controversies, and no easy solutions are in sight. Assessees will have to wait for a detailed decision by a High Court in order for certainty on these issues. Insofar as LLPs are concerned, the provisions themselves appear to try to minimize these controversies. Only the Chapter VI-A and Section 10AA deductions need to be added back to compute the adjusted total income.

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