The provisions relating to tax on book profits, generally referred to as minimum alternate tax (Mat), were first introduced in the Income Tax Act, 1961 (the Act) by the Finance Act, 1987, wef assessment year 1988-89, vide section 115J.
Section 115J provides that where in the case of a company, the total income as computed under the Act is less than 30% of its book profit, the total income shall be deemed to be an amount equal to 30% of the book profit.
As book profit can be computed only after the end of the year, a contention was raised by the assessees that in case tax is paid u/s 115J, the provisions relating to computation and payment of advance-tax are not applicable, and as a consequence, they are also not liable to interest under section 234B and 234C for non-payment/default and deferment of advance-tax.
This contention was not accepted by Guwahati, Madras, Madhya Pradesh and Mumbai High Court which took a view that even in cases covered by section 115J, the assessees are liable to pay advance-tax. Punjab and Haryana High Court took similar view in case of section 115JA (Mat provision for assessment years 1997-98 to 2000-01).
The rationale for arriving at such conclusion was, firstly, the expression current income, on which advance tax is payable u/s 207, refers to computation of total income under provisions of the Act which includes section 115J as well. Secondly, sections 234B and 234C do not exclude the applicability where tax is payable section 115J. Thirdly, an estimate of book profit can be made on basis of business projections and profit embedded in transactions effectuated during the year. Lastly, even prior to insertion of section 115J assessees have been estimating current income, after providing deductions admissible under the Act, and if they can do so, they can also estimate book profit.
However, a division bench of the Karnataka High Court in the case of Kwality Biscuits Ltd v CIT (2000) 243 ITR 519, held that advance-tax related provisions would not apply to tax payable under section 115J since the entire exercise of computing income under section 115J can only be done at the end of the financial year, and the provisions relating to advance-tax cannot be made applicable until and unless the accounts are audited and the balance-sheet prepared. It also observed that section 115J is a deeming provision, and it should be carried to its logical conclusion but without creating further deeming fiction so as to include other provisions of the Act which are not specifically made applicable. Further, the words "for the purposes of this section" in the explanation to section 115J(1A) cannot be construed to extend beyond the computation of liability of tax.
The Revenue's civil appeal against the Karnataka High Court judgment has been dismissed by the apex court on April 26, 2006 (284 ITR 434).
A question now arises, in case the dismissal of civil appeal by the apex court is considered as law of the land under Article 141 of the Constitution, as to whether the reasoning as above in the context of section 115J shall also apply to section 115JB (Mat provision for assessment years 2001-02 onwards).
It may be pertinent to note that, unlike section 115J, section 115JB contains a specific provision namely, sub-section (5), providing that save as otherwise provided in this section, all other provisions of the Act shall apply to every assessee, being a company, mentioned in the said section.
Further, the Central Board of Direct Taxes (CBDT), in Circular No. 13 / 2001 dated November 9, 2001, have observed that section 115JB is a self-contained code, and referring to section 115JB(5), have observed that except for substitution of tax payable under the provision and the manner of computation of book profits, all the provisions of the tax including the provision relating to charge, definitions, recoveries, payment, assessment, etc, would apply in respect of the provisions of section 115JB.
One may also note that section 2 of the annual Finance Acts enacted after the insertion of section 115JB, proceed on the premise that advance-tax is payable even in cases covered by section 115JB.
Though there may be some force in the argument that section 115JB is triggered only after computing the book profit and the reasoning flowing from the division bench judgment of the Karnataka High Court in Kwality Biscuits' case (affirmed by the apex court) squarely applies, the legislative intent seems to be otherwise.
RAVI PRAKASH AND RICHA SAWHNEY
The authors are principal consultants, PricewaterhouseCoopers