In the Bank of India case, the Authority for Advance Ruling pointed out that the section levying MAT should be considered a self-contained code. It should prevail over the other provisions of the I-T Act.
The Minimum Alternate Tax (MAT) has been in vogue intermittently for nearly 20 years. It has undergone several changes in structure. But the basic principle remains the same. The idea is that every company with ability to pay should contribute to the exchequer even though it may not show taxable income because of tax concessions and incentives utilised. It was as a measure of equity that the provision was introduced in the statute. But the law has in some instances led to queer results not quite compatible with the scheme of the Act.
Bank of India case
In this case, Bank of India (295 ITR 529 AAR), filed a return declaring nil income for the assessment year 1997-98. In accordance with Section 115JA of the Income-Tax Act, 1961, the bank computed a book profit of Rs 1,41,15,55,631 and paid applicable taxes on that amount. It had made a provision of Rs 4,57,57,000 towards taxes payable on income earned by the foreign branches abroad.
The I-T department added the Rs 4,57,57,000 to the book profit declared under Section 115JA. The provision was made by the foreign branches as per the I-T laws of the respective countries. It was an ascertainable liability as per those laws.
The bank resisted the attempt to include this provision in the book profits for levying MAT. The question revolved on the interpretation of the definition of book profits and the definition of tax payable. The Explanation to Section 115JA defines book profits to mean the net profit as shown in the profit and loss (P&L) account and as increased by the amount of income-tax paid or payable, and the provisions thereof.
There is a non obstante clause at the commencement of Section 115JA excluding the application of the other provisions of the Act to the computation of MAT. The dispute about the add-back of the foreign tax provision was referred to the Authority for Advance Ruling (AAR).
The AAR pointed out that the section levying MAT should be considered a self-contained code. It should prevail over the other provisions of the Act. It referred to several circulars of the Central Board of Direct Taxes (CDBT) explaining the rationale behind the introduction of MAT. The idea was that companies with ability to pay should suffer MAT.
It was argued for the bank that the provision made for foreign taxes reflected the exact amount which was payable in those countries. Since the entire amount in question would be paid to the foreign governments concerned, the ability of the bank to pay tax in India would be reduced to that extent. Section 2(43) of the Act defines tax to mean income-tax chargeable under the provisions of the Act. This is of course subject to the contextual meaning.
Indian vs foreign income
The AAR pointed out that the Board circulars never differentiated between income earned in India and income earned abroad. It does not say that ability to pay tax would be the post-tax ability. The section spoke of book profit as increased by income-tax paid or payable. The argument for the bank was that tax meant income-tax chargeable under the I-T Act of 1961. This argument was rejected by the AAR. It observed:
No distinction between Indian and foreign income-tax can be drawn by reference to Section 2(43), which defines tax. There is no justification to restrict the scope of the expression income tax to Indian income-tax only.
The AAR took note of the fact that the bank had included income earned by its foreign branches in computing the total income. But it claimed exclusion of the foreign income by virtue of the Double Taxation Avoidance Agreement (DTAA). Thus, the foreign income was neither offered nor taxed in the Indian income-tax assessment of the bank. In spite of these facts, the AAR decided that insofar as MAT is concerned, the foreign tax provision will have to be included in book profits.
This ruling creates an anomalous situation. As far as regular income is concerned, the income of the foreign branches is outside the ambit of Indian income tax. But the foreign tax provision is subject to MAT in India even though it is actually paid or payable abroad. This is how the DTAA appears to work. The AAR held that the provision of Rs 4,55,57,000 made by the foreign branches of the bank for payment of income-tax in those countries, is required to be added to book profits.
Harsh cases make bad law. It is time to have a re-look at MAT.
T. C. A. Ramanujam (The author is a former Chief Commissioner of Income-Tax.)