Guidance Note on Audit Under Section 115JB of The Income Tax Act, 1961
1. Terms, abbreviations used in this Guidance Note
In this Guidance Note the following terms and abbreviations occur often in the text. A brief explanation of such terms and abbreviations is given below. Further, reference to a section without reference to the relevant Act means that the section has reference to the Income-tax Act, 1961.
(a) Act
The Income-tax Act, 1961.
(b) Accountant
Accountant means a chartered accountant within the meaning of the Chartered Accountants Act, 1949, as referred to in section 288 of the Act.
(c) AS
Accounting Standards issued, prescribed and made mandatory by the Institute of Chartered Accountants of India
(d) AS(IT)
Accounting Standards notified by the Central Government under section 145(2) of the Act.
(e) Board
The Central Board of Direct Taxes constituted under the Central Boards of Revenue Act, 1963.
(f) Circular
A circular or instructions issued by the Board under section 119(1) of the Act.
(g) Institute
The Institute of Chartered Accountants of India.
(h) Rules
The Income-tax Rules, 1962.
(i) SAP
Statement on Standard Auditing Practices.
(j) SLM
Straight line method of depreciation.
(k) WDV
Written down value.
2. Introduction
2.1 The levy of a minimum tax on companies making large profits and declaring substantial dividends to the shareholders but not paying income-tax on such profits due to the various exemptions and incentives provided in the Income-tax Act, was first introduced through section 80VVA by the Finance Act, 1983 w.e.f. A.Y. 1984-85. The method adopted by this section was to place a ceiling on the aggregate quantum of incentives available under various provisions of the Act. However, the unabsorbed incentives were allowed to be carried forward and set off against taxable income in future years. Section 80VVA was dropped from the statute book by the Finance Act, 1987 w.e.f. A.Y. 1988-89. The text of section 80VVA is given in Appendix I.
2.2 The concept of tax on book profits was introduced originally under section 115J by the Finance Act, 1987 with effect from A.Y. 1988-89 and it was withdrawn with effect from A.Y. 1991-92 - Refer Appendix II for the text of section 115J and Appendix VI for circular No.495 explaining the scope of the provisions of section 115J. Subsequently the concept was reintroduced with a few changes, imposing Minimum Alternate Tax (MAT) under section 115JA with effect from A.Y. 1997-98. The Finance Act, 2000 has inserted a new section 115JB with effect from A.Y. 2001-2002. Consequential amendments have been made in section 115JA to restrict its applicability only upto A.Y. 2000-2001 - Refer Appendix III for the text of section 115JA.
2.3 The provision for allowing credit for MAT under section 115JAA, has now been discontinued except that the unavailed tax credit under that section can be claimed for the balance of unexpired period of 5 years against excess of normal tax liability over section115JB tax liability - Refer Appendix IV for the text of section 115JAA and also to Appendix XII for Circular No.763 explaining the provisions of section 115JAA.
3. Comparative analysis of section 115JB with section 115JA
3.1 Section 115JB makes a conceptual departure from the deemed total income to the deemed tax on book profits under the provisions of section 115JA where, if the total income of an assessee being a company, computed in accordance with the provisions of the Income-tax Act, is less than 30% of its book profit, the total income for the purpose of charge of tax for the relevant previous year shall be deemed to be an amount equal to 30% of such book profit. On the other hand, section 115JB provides that where the income-tax payable by a company on its total income as computed under the Act is less than 7.5% of its book profit, the tax payable for the relevant previous year shall be deemed to be 7.5% of such book profits. Once the tax liability is determined on this basis, it will be increased by the surcharge as provided by the Finance Act.
3.2 Section 115JA stipulated that the depreciation shall be calculated on the same method and rates while preparing the profit and loss account both for laying before the company at its annual general meeting under the Companies Act as well as for the purpose of section 115JA. Section 115JB requires the annual accounts including profit and loss account to adopt the same accounting policies, accounting standards and the method and rates of depreciation as have been adopted while preparing such accounts including profit and loss account laid before the company at its annual general meeting. These requirements apply even where the company adopts a financial year different from the previous year under the Income-tax Act.
3.3 While section 115JA sought to exclude income and expenditure falling within the ambit of Chapter III, section 115JB is specific in excluding the items of income and expenditure in respect to which the provisions of section 10, 10A, 10B, 11 and section 12 apply. There is no reference to section 10C which grants exemption in respect of certain industrial undertakings in North Eastern Zone.
3.4 The profits earned by certain industrial undertakings referred to in sub-section (4) and sub-section (5) of section 80-IB and also the profit derived by industrial undertakings from the business of developing, maintaining and operating any infrastructure facility covered by section 80-IA qualified for exclusion in computing the book profits for the purpose of section 115JA. These exclusions have been omitted under section 115JB. Section 115JAA excluded from its scope income exempted under sections 80HHC and 80HHE. The new section 115JB has also excluded the income exempt under sections 80HHC, 80HHE and 80HHF.
3.5 There was no stipulation under section 115JA to furnish an audit report certifying that the book profit has been computed in accordance with the provisions of law. However, section 115JB(4) requires audit report certifying that book profit has been computed in accordance with the provisions of section 115JB and such report is required to be filed along with the return of income.
3.6 A detailed comparative presentation showing the differences between sections 115JA and 115JB is given in Appendix V.
4. Applicability of section 115JB
4.1 General The title of the section 115JB reads "Special provision for payment of tax by certain companies". Sub-section (4) of section 115JB begins with the words "every company to which this section applies......" A conjoint reading of these indicates that the requirement of audit under section 115JB shall apply to companies which are liable to pay tax by virtue of section 115JB. However, it may not be possible to conclusively determine the liability of a company under section 115JB from the face of the profit and loss account without making complex adjustments envisaged under that section. In such cases it may be prudent for the company to obtain a report from an accountant for ascertaining its liability under section 115JB and also enclose it along with the return.
4.2 The objective behind the requirement of furnishing the audit report is to facilitate the determination of book profit and the tax liability thereon by the Assessing Officer. The provisions of sub-section (4) of section 115JB mandate the furnishing of the audit report along with the return of income filed under sub-section (1) of section 139 or along with the return furnished in response to a notice under clause (i) of sub-section (1) of section 142. However, in cases of return filed under section 139(4) also the report should be furnished along with the return.
4.3 Foreign companies
A doubt may arise about the applicability of the provisions of section 115JB to foreign companies with reference to the profits derived from operations in India. The Authority for Advance Rulings had occasion to examine this issue and held that the provisions of section 115JA are applicable to foreign companies. According to this decision, a foreign company shall calculate its Indian profits separately for the purpose of minimum alternate tax - P. No.14 of 1997 In re (1998) 234 ITR 335 (AAR). The same analogy shall apply to section 115JB.
4.4 Presumptive tax provisions vis-à-vis section 115JB
There are special provisions enacted under the head "profits and gains of business or profession" which provide for determination of income on a particular basis. They are sections 44AD, 44AE, 44AF, 44B, 44BB, 44BBA and 44BBB. The income derived from the sources covered by the respective provisions and computed in accordance with such provisions shall be deemed to be the profits and gains of such business chargeable to tax under the head “profits and gains of business or profession” which is one of the heads of income mentioned in section 14. Therefore, the income computed in accordance with the provisions of sections 44AD, 44AE and 44AF, 44B, 44BB, 44BBA, and 44BBB is nevertheless income computed in accordance with the provisions of the Act under the head “income from business or profession”. Tax payable on such presumptive income together with income under other heads shall be compared with the tax payable under section 115JB and then the tax liability shall have to be determined.
4.5. Business of extraction or production of mineral oil
The provisions of section 42 provide for computation of business income under Chapter IV-D in the case of an assessee engaged in the business of extraction or production of mineral oil in respect of which an agreement has been entered into with the Central Government. The provisions of the Income-tax Act shall stand modified in accordance with the terms of such agreement by virtue of section 42. It is to be noted that the provisions of section 42 apply only for the computation of total income under the provisions of the Act and not for the computation of book profit under section 115JB. Therefore, total income shall be computed under the provisions of the Act by taking into account section 42 and the tax payable thereof shall be determined. Such income-tax shall be compared with 7.5% of the book profit and whichever is more shall be the tax payable by the company subject to the levy of surcharge. The ruling given by the authority for Advance Ruling in Niko Resources Ltd. v CCIT (1998) 234 ITR 828 (AAR) supports this view.
5. Company’s responsibility
Ensuring compliance of the provisions of section 115JB is primarily the responsibility of the company. Therefore, the company should prepare statement of its liability under section 115JB duly authenticated, giving details and the basis of all the adjustments made and submit the same to the accountant for verification and certification after such examination as he may deem proper. The company should also make available to the accountant all the books of account, records and other documents as may be deemed necessary by the accountant for carrying out the audit.
6. Accountant’s responsibility
6.1 The audit report under section 115JB(4) is required to be given in Form No.29B as per Rule 40B of the Income-tax Act, 1961 which requires certification by the accountant that the book profit and tax payable thereon have been computed in accordance with provisions of section 115JB. He is also required to certify that the book profit and tax payable thereon have been computed as per details given in Annexure A to the report and that the particulars given in Annexure A are true and correct.
6.2 The said report does not require the accountant to certify the true and fair view of the financial statements of the company on the given date as is required under section 227 of the Companies Act, 1956. Therefore, he should restrict his examination to such details and matters which in his opinion are sufficient to certify the computation of the book profit and tax payable thereon as per section 115JB of the Income-tax Act, 1961 and also to certify the correctness of other particulars as mentioned in the said report.
6.3 The accountant should verify the statement of computation of tax liability submitted by the company from the books of account, records and such other documents of the company as he may deem proper. He may also obtain such other information as he may deem appropriate in the form of Management’s Representation as mentioned in SAP 11.
6.4 The accountant should note that the SAPs issued by the Institute would be applicable to the audit under section 115JB, to the extent relevant.
6.5 As in the case of other professional assignments, the accountant should comply with the “Code of Conduct” issued by the Institute in conducting audit under section 115JB. The accountant is advised to conduct the audit under section 115JB in accordance with this guidance note.
7. Objective of this Guidance Note
7.1 The object of this guidance note is to provide guidance to accountants for discharging their responsibilities under section 115JB of the Act. It intends to :
(i) assist in clarifying the respective responsibilities of the company and the accountant;
(ii) suggest inquiries the auditor is required to make from the company;
(iii) provide guidance on the verification procedure for certification of book profit and tax payable thereon as per section 115JB and other particulars in the report;
(iv) suggest the manner to deal with the controversial issues arising in the matter;
(v) suggest circumstances/manner in which a disclosure may be made or a qualified/adverse certificate may be issued.
8. Section 115JB
8.1 The Finance Act, 2000 inserted section 115JB in the Act w.e.f. A.Y. 2001-2002. The said section reads as follows :
"115JB. Special provision for payment of tax by certain companies
(1). Notwithstanding anything contained in any other provision of this Act, where in the case of an assessee, being a company, the income-tax, payable on the total income as computed under this Act in respect of any previous year relevant to the assessment year commencing on or after 1st day of April, 2001, is less than seven and one-half per cent of its book profit, the tax payable for the relevant previous year shall be deemed to be seven and one-half per cent of such book profit.
(2). Every assessee, being a company shall for the purposes of this section, prepare its profit and loss account for the relevant previous year in accordance with the provisions of Parts II and III of Schedule VI to the Companies Act, 1956 (1 of 1956):
Provided that while preparing the annual accounts including profit and loss account,-
(i) the accounting policies;
(ii) the accounting standards followed for preparing such accounts including profit and loss account;
(iii) the method and rates adopted for calculating the depreciation,
shall be the same as have been adopted for the purpose of preparing such accounts including profit and loss account and laid before the company at its annual general meeting in accordance with the provisions of section 210 of the Companies Act, 1956 (1 of 1956):
Provided further that where the company has adopted or adopts the financial year under the Companies Act, 1956 (1 of 1956), which is different from the previous year under this Act,-
(i) the accounting policies;
(ii) the accounting standards adopted for preparing such accounts including profit and loss account;
(iii) the method and rates adopted for calculating the depreciation,
shall correspond to the accounting policies, accounting standards and the method and rates for calculating the depreciation which have been adopted for preparing such accounts including profit and loss account for such financial year or part of such financial year falling within the relevant previous year.
Explanation. - For the purpose of this section, “book profit” means the net profit as shown in the profit and loss account for the relevant previous year prepared under sub-section (2), as increased by -
(a) the amount of income-tax paid or payable, and the provision therefor; or
(b) the amounts carried to any reserves, by whatever name called; or
(c) the amount or amounts set aside to provisions made for meeting liabilities, other than ascertained liabilities; or
(d) the amount by way of provision for losses of subsidiary companies; or
(e) the amount or amounts of dividends paid or proposed; or
(f) the amount or amounts of expenditure relatable to any income to which section 10 or section 10A or section 10B or section 11 or section 12 apply,
if any amount referred to in clauses (a) to (f) is debited to the profit and loss account, and as reduced by-
(i) the amount withdrawn from any reserves or provisions if any such amount is credited to the profit and loss account:
Provided that, where this section is applicable to an assessee in any previous year (including the relevant previous year), the amount withdrawn from reserves created or provisions made in a previous year relevant to the assessment year commencing on or after the 1st day of April, 2001 shall not be reduced from the book profit unless the book profit of such year has been increased by those reserves or provisions (out of which the said amount was withdrawn) under the Explanation; or
(ii) the amount of income to which any of the provisions of section 10 or section 10A or section 10B or section 11 or section 12 apply, if any such amount is credited to the profit and loss account; or
(iii) the amount of loss brought forward or unabsorbed depreciation, whichever is less as per books of account.
Explanation- For the purposes of this clause, the loss shall not include depreciation; or
(iv) the amount of profits eligible for deduction under section 80HHC, computed under clause (a) or clause (b) or clause (c) of sub-section (3) or sub-section (3A), as the case may be, of that section, and subject to the conditions specified in that section; or
(v) the amount of profits eligible for deduction under section 80HHE computed under sub-section (3) or sub-section (3A), as the case may be, of that section, and subject to the conditions specified in that section; or
(vi) the amount of profits eligible for deduction under section 80HHF computed under sub-section (3) of that section and subject to the conditions specified in that section; or
(vii) the amount of profits of sick industrial company for the assessment year commencing on and from the assessment year relevant to the previous year in which the said company has become a sick industrial company under sub-section (1) of section 17 of the Sick Industrial Companies (Special Provisions) Act, 1985 (1 of 1986) and ending with the assessment year during which the entire net worth of such company becomes equal to or exceeds the accumulated losses.
Explanation - For the purposes of this clause, “net worth” shall have the meaning assigned to it in clause (ga) of sub-section (1) of section 3 of the Sick Industrial Companies (Special Provisions) Act, 1985 (1 of 1986).
(3) Nothing contained in sub-section (1) shall affect the determination of the amounts in relation to the relevant previous year to be carried forward to the subsequent year or years under the provisions of sub-section (2) of section 32 or sub-section (3) of section 32A or clause (ii) of sub-section (1) of section 72 or section 73 or section 74 or sub-section (3) of section 74A.
(4) Every company to which this section applies, shall furnish a report in the prescribed form from an accountant as defined in the Explanation below sub-section (2) of section 288, certifying that the book profit has been computed in accordance with the provisions of this section along with the return of income filed under sub-section (1) of section 139 or along with the return of income furnished in response to a notice under clause (i) of sub-section (1) of section 142.
(5) Save as otherwise provided in this section, all other provisions of this Act shall apply to every assessee, being a company, mentioned in this section.”
8.2 The following is the relevant portion of the speech of the Finance Minister when he introduced the Finance Bill, 2000.
“156. The various exemptions currently available while calculating Minimum Alternate Tax (MAT) and the credit system has undermined the efficacy of the existing provision and has also led to legal complications. To address these issues, I propose that the Minimum Alternate Tax be now levied at the revised rate of 7.5% of the “book profits” as determined under the Companies Act instead of the existing effective rate of 10.5%. However, this will now be uniformly applied - barring one exception that I will mention later. There will also be no credit for Minimum Alternate Tax paid. This should bring all zero tax companies within the tax net, which is also the basic purpose of this tax. The new system has the virtue of a lowered rate of tax, a simple method of computation, and an equitable spread”.
8.3 The Memorandum explaining the provisions of the Finance Bill, 2000 explains the proposals for a new MAT as under:
MINIMUM ALTERNATE TAX ON COMPANIES
“As the number of zero tax companies and companies paying marginal tax had grown, Minimum Alternate Tax was levied from assessment year 1997-98. The efficacy of the existing provision has declined in view of the exclusion of various sectors from the operation of MAT and the credit system. It has also led to legal complications. It is, therefore, proposed to put a sunset clause in the existing provision, so that, it is not applicable after assessment year 2000-2001.
In its place, it is proposed to insert a new provision, which is simpler in application.
The new provisions provide that all companies having book profits under the Companies Act, prepared in accordance with Part II and Part III of Schedule VI to the Companies Act, shall be liable to pay a Minimum Alternate Tax at a lower rate of 7.5%, as against the existing effective rate of 10.5% of the book profits. These provisions will be applicable to all corporate entities without any exception. However, export profits under section 80HHC, 80HHE and 80HHF are kept out of the purview of this provision during the period of phasing out of deductions available under those provisions. In view of the changes made in the provisions of section 10A and 10B, those export-oriented units and the units in Free Trade Zones, which are set up before 1.4.2000, would be out of the purview of new provisions of MAT.
No credit of MAT paid under the new provision will be available. However, the credit for the brought forward MAT paid under the existing provisions will be allowed against the regular tax payable but not against the tax payable under the new provision.
The proposed amendment will take effect from 1st April, 2001, and will, accordingly, apply in relation to assessment year 2001-2002 and subsequent years.”
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