The increase in the dividend distribution tax (DDT) rate in the Finance Act 2007 was viewed sceptically by the industry. The levy of minimum alternate tax (MAT) on the IT sector, which is enjoying tax deduction under section 10A/10B of the Income Tax Act on export profits, met with the same fate. It was overt that with these changes, the tax burden of the company will increase and the profits available for distribution to shareholders or alternatively to be ploughed back to the business would be comparatively less.
As regards computation of income under MAT, it has resulted into numerous disputes, one of them being allowability of DDT while computing MAT.
Section 115JB of the Act deals with levy of MAT. It provides that if the income tax payable on the total income is less than 10% of its book profits, then the tax liability shall be 10% (plus surcharge and education cess) of its book profits. Further, the book profit means the net profit as shown in the P&L account and to carry out certain adjustments mentioned in the section. One of the items of adjustment provides for addition of the income tax paid or the provision for income tax made during the year. The issue which arises is whether DDT can be considered as income tax and, accordingly, added back while computing the total income.
This issue was examined in a recent ruling by Chennai Tribunal in the case of DCIT v. Dhanalakshmi Paper Mills Ltd. In this case, the assessee company was liable to pay MAT for assessment years 1997-98 and 1998-99. While computing MAT, the assessee did not add back to the net profit the amount of DDT. The assessing officer (AO) did not agree with the assessees contention and added back DDT [as per explanation (a) to section 115JA (similar to section 115JB)] on the reasoning that DDT is nothing but an additional income tax.
The appellate commissioner decided the matter in favour of the assessee. But, the AO preferred an appeal to the tribunal. The department contended that the dividends received by the shareholders are exempt from taxation under section 10(33) of the Act. Therefore, the tax paid by the assessee on such profit or dividend which is distributed to the shareholders is nothing but an income tax. Therefore, it has to be added back to the book profit while computing MAT.
However, the assessee contended that the explanation (a) of section 115JA of the Act is not relevant, since it has not claimed any deduction out of the book profit. Further, the definition of book profit is exhaustive. The assessee also relied upon the provisions of fringe benefits tax (FBT) and argued that as per the provisions of section 115WA of the Act, FBT was also construed as an additional income tax.
However, FBT was not added back to the book profit while computing income tax under MAT provisions as per a CBDT circular. Further, the assessee also relied upon the decision of CIT v. Echjay Forgings Pvt Ltd, wherein it has been held that wealth tax cannot be added back in computing the book profits since section 115J of the Act provides for adding back only income tax.
The Tribunal upheld the contention of the tax department on the following reasonings: Under the Companies Act, a company can declare and distribute the profits to its shareholders. Upon distribution, the dividend income represents the profits (in form of dividend) of shareholders and such income is liable to income tax in the hands of shareholders. However, the tax legislature in their wisdom thought it fit to recover such tax on dividends from the company instead of shareholders. Hence, the nature of tax still remains as an income tax on dividends.
FBT is an expenditure incurred for purpose of the business, but not allowable as deduction in view of section 40(a)(ic) of the Act. Further, as per circular no. 8/ 2005, section 40(a)(ic) of the Act does not apply to computation of book profits under section 115JB of the Act and hence, FBT is allowable in computing the book profits. Whereas, DDT is not claimable as deduction out of the book profit. Hence, the circular relied upon by the assessee cannot be considered.
The decision of Mumbai High Court was in respect of wealth tax, which is not payable on income. Thus, the Tribunal held that DDT is an income tax and accordingly, it has to be added to the book profit while computing MAT liability.
It would be worth to note that this decision is in line with the decision rendered in the case of Jayshree Tea and Industries, wherein the High Court considered the finance minister speech at the time of introduction of DDT provisions and has observed that DDT is an additional tax on the company and not on the shareholder.
Thus, in view of these decisions, it can be said that DDT is an income tax and has to be added back while computing the book profit for the purpose of computing MAT liability.
KALPESH UNADKAT & SUDIN SABNIS
(The authors are with PricewaterhouseCoopers)