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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was withdrawn with effect from A.Y. 1991-92 - Refer Appendix II for the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."
9. Relevant rule and form
9.1 As envisaged under sub-section (4) of section 115JB, a report shall
be furnished in the prescribed form. For this purpose, the Board has
framed Rule 40B in the Income-tax Rules, 1962 and has prescribed Form
No.29B.
9.2 Prescribed Rule
"PART VIIB
40B. Special provision for payment of tax by certain companies
The report of an accountant which is required to be furnished by the
assessee along with the return of income, under sub-section (4) of section
115JB shall be in Form No.29B."
9.3 Prescribed Form
"FORM NO.29B
[See rule 40B]
Report under section 115JB of the Income-tax Act, 1961
for computing the book profit of the company
1. I/We* have examined the accounts and records of ................
(name and address of the assessee with PAN) engaged in the business of
.........(nature of business) in order to arrive at the book profits
during the year ended on the 31st March, ...
2.(a) *I/We certify that the book profit has been computed in accordance
with the provisions of this section. The tax payable under section 115JB
of the Income-tax Act in respect of the assessment year .... is Rs.....,
which has been determined on the basis of the details in Annexure A to
this Form.
3. In my/our* opinion and to the best of my/our* knowledge and according
to the explanations given to me/us* the particulars given in Annexure A
are true and correct.
|
Date ..... |
Signed Accountant |
Notes :
1. *Delete whichever is not applicable.
2. This report is to be given by-
(i) a Chartered Accountant within the meaning of the Chartered Accountants
Act, 1949 (38 of 1949); or
(ii) any person, who in relation to any State, is, by virtue of the
provisions in sub-section (2) of section 226 of the Companies Act, 1956 (1
of 1956), entitled to be appointed to act as an auditor of companies
registered in that State.
3. Where any of the matter stated in this report is answered in the
negative or with a qualification, the report shall state the reasons
therefor.
ANNEXURE A
[See paragraph 2]
Details relating to the computation of book profit
for the purposes of section 115JB of the Income-tax Act, 1961
|
1. |
Name of the assessee |
|
|
2. |
Particulars of address |
|
|
3. |
Permanent Account Number |
|
|
4. |
Assessment year |
|
|
5. |
Total income of the company under the Income-tax Act |
|
|
6. |
Income-tax payable on total income |
|
|
7. |
Whether Profit and Loss Account is prepared in accordance with the
provisions of Parts II and III of Schedule VI to the Companies Act,
1956 (1 of 1956) |
Yes/No |
|
8. |
Whether the Profit and Loss Account referred to in column 7 above has
followed the same accounting policies, accounting standards for
preparing the profit and loss account and the same method of rates for
calculating depreciation as have been adopted for preparing accounts
laid before the company at its annual general body meeting? If not,
the extent and nature of variation be specified |
Yes/No |
|
9. |
Net profit according to Profit and Loss Account referred to in (7)
above |
---- |
|
10. |
Amount of net profit as shown in Profit and Loss Account as increased
by the amounts referred to in clauses (a) to (f) of Explanation of
sub-section (2) of this section (file working separately, where
required) |
---- |
|
11. |
The amount as referred to in item 10 as reduced by the amounts
referred to in clauses (i) to (vii) of Explanation of sub-section (2)
of this section (file working separately, where required) |
---- |
|
12. |
Book profit as computed according to Explanation given in sub-section
(2) |
---- |
|
13. |
7.5% of "book profit" as computed in 12 above |
---- |
|
14. |
In case income-tax payable by the company referred to at Sl.No.6 is
less than seven and one-half per cent of its book profits shown in
column 12, the amount of income-tax payable by the company would be
7.5% of column 12, i.e. as per (13)". |
---- |
10. Scope of audit under section 115JB
10.1 According to sub-section (4) of section 115JB, every company to
which the section applies shall furnish a report in the prescribed form
along with the return of income. The report is to be given by an
accountant in Form No.29B as prescribed under Rule 40B. The accountant is
required to certify that the book profit has been computed in accordance
with the provisions of section 115JB. The scope of audit envisaged under
sub-section (4) of section 115JB is restricted to such examination of
accounts and records of the assessee as would enable the accountant to
certify whether the book profit has been computed in accordance with the
provisions of section 115JB and also to certify the income-tax payable
which is to be determined on the basis of the details in Annexure A to
Form No.29B. As mentioned above in the paragraph relating to "Accountant's
responsibility" it is not a full-fledged audit requiring his opinion on
the true and fair view of the financial statements of the company. This
guidance note should be read within the parameters of the scope of audit
explained as above.
10.2 The audit under section 115JB encompasses many controversial issues.
The accountant will have to examine the various claims or assertions made
by the assessee on different items which may include definition of book
profit, exempted income, additions to or deductions from the book profit,
adjustment of brought forward depreciation/business loss, whether any
claim is allowable or not, computation of tax payable thereon etc. The
accountant should examine these issues keeping in mind that the provisions
of section 115JB constitute a self contained code for computation of book
profit. The basic purpose of the audit here is the computation of book
profit and tax thereon as per section 115JB and not the computation of
assessable income of the company as per the general provisions of the
Income-tax Act. He should examine the stand of the company for each item
and the basis thereof by using his professional skill and expertise. In
case of any controversial issue, wherever the company places reliance on
any judicial precedents or any circulars, the same should be suitably
disclosed and where no circulars or judicial precedents are available, the
basis of view taken by the company should be suitably disclosed. If on any
issue or item there is a difference of opinion between the accountant and
the assessee and if the assessee does not agree with the computation made
by the accountant then the accountant should suitably qualify his report
while giving both the views.
10.3 The book profit computed and certified in the audit report under
section 115JB is on the basis of the examination conducted by the
accountant of the books and records and on the basis of the view taken
with reference to the various items considered in such computation. This
cannot be a static figure but can be subject to change by the Assessing
Officer while framing the assessment on the basis of the facts and
circumstances of the case and the applicable judicial decisions/circulars.
Similarly, it is open to the assessee to adopt and pursue a view different
from the one taken by the accountant in the computation of book profit and
the tax liability thereof.
11. Audit report under section 115JB
The audit report consists of three paragraphs. The first paragraph
contains the declaration about examination of the accounts and records of
the assessee in order to arrive at the book profit. The second paragraph
involves certification of computation of book profit in accordance with
section 115JB and the quantification of the tax payable under section
115JB on the basis of the details furnished in Annexure A to Form No.29B.
The last paragraph requires expression of the opinion that the particulars
given in the Annexure A are true and correct.
12. Examination of accounts and records
1. I/We* have examined the accounts and records of ..............
(name and address of the assessee with PAN) engaged in the business of
.........(nature of business) in order to arrive at the book profits
during the year ended on the 31st March, ...
[Paragraph 1]
12.1 The expression "accounts and records" appearing in the audit
report should normally refer to those accounts and records which are to be
examined for the purpose of arriving at the book profits for the relevant
previous year.
12.2 Since the audit report requires certification of the computation of
book profit in accordance with section 115JB, the accountant has to
examine the accounts and records of the assessee. The scope of audit shall
confine to matters necessary for verifying the components of book profit
and for determination of the extent of adjustments called for. In
conducting the examination and verification the accountant will have to
use his professional skill and expertise and apply such audit tests as the
circumstances of the case may require. He may apply such test checks as
may be deemed proper depending on the internal control procedures followed
by the assessee. The accountant will also have to keep in mind the concept
of materiality depending on the circumstances of each case. He would be
well advised to refer SAPs as well as the guidance notes issued by the
Institute. The "Guidance Note on Audit Reports and Certificates for
Special Purposes" deserves a special reference. The accountant would be
well advised to so design the audit programme as would reveal the extent
of examination and to ensure adequate documentation in support of the
information being certified.
12.3 As this audit is applicable to companies only, in majority of cases
the statutory audit under Companies Act, 1956 and/or the tax audit under
section 44AB of the Income-tax Act, 1961 would have been completed before
the accountant is asked to give his report under section 115JB. The
accountant may rely on these audit reports to such extent and in such
manner as provided in various SAPs issued by Institute from time to time.
The SAP on Basic Principle Governing an audit [SAP 1] issued by the
Institute mentions:
"Where the auditor delegates work to assistants or uses work performed
by other auditors and experts, he will continue to be responsible
for forming and expressing his opinion on the financial information.
However, he will be entitled to rely on the work performed by others,
provided he exercises adequate skill and care and is not aware of any
reason to believe that he should not have so relied" [emphasis added].
12.4 In a case when the accounts are not audited under the Companies Act,
1956 and accountant is called upon to give his report under section 115JB,
the accountant should proceed with caution. As per law there is no
requirement of prior audit under the Companies Act nor is it an extension
of the said audit. In such cases he will himself have to conduct all such
examination and verification which he considers necessary and sufficient
for issuing audit report as per Form No.29B.
12.5 It may be reminded here that mere filing the audit report under
section 115JB(4) will not fulfill the requirement of filing tax audit
report in appropriate cases. Returns in such cases, filed without tax
audit report will be defective returns as per section 139(9) of the
Income-tax Act and will be subject to consequences mentioned therein.
12.6 In regard to the nature of business, the principal line of business
should be stated. In the case of an assessee rendering services, the
nature of services should be broadly stated. The information to be given
about the nature of business in Form No.29B is similar to the information
called for in the return of income "Part IV, information relevant to the
business or profession" where an assessee is required to state the nature
of business or profession. The accountant may verify this information from
clause 8(a) of Form No.3CD being the form of particulars prescribed for
the purpose of tax audit under section 44AB of the Act.
13 Computation of book profit and income-tax payable
2.(a) *I/We certify that the book profit has been computed in
accordance with the provisions of this section. The tax payable under
section 115JB of the Income-tax Act in respect of the assessment year ....
is Rs....., which has been determined on the basis of the details in
Annexure A to this Form.
[Paragraph 2]
13.1 In paragraph 2 the accountant is required to certify that the book
profit and tax payable thereon have been computed in accordance with the
provisions of section 115JB. If the accountant is satisfied about the
correctness of the computation as contemplated under section 115JB, then
the certification may be done without any qualification. Otherwise the
report may be suitably qualified. However, where any of the matter stated
in the report is answered in the negative or with a qualification, the
report shall state the reasons therefor. The accountant should state the
qualification in the audit report making it comprehensive and self
explanatory. In this regard the accountant should follow the "Statement
on Qualifications in Auditors' Reports" issued by the Institute.
13.2 The basic purpose of enactment of section 115JB is to check the
practice of the zero tax companies and other companies showing substantial
book profits but paying nil or nominal tax to the exchequer. Therefore,
the section seeks to ensure that the accounting policies, accounting
standards and method and rates of depreciation followed in the accounts
from which book profit is computed, is the same as has been adopted in
presenting the accounts before the shareholders in the annual general
meeting. If there is any difference in the same then adjustments should be
made to make them compatible. Such readjusted accounts should form the
basis for computation of the book profit and tax payable there on as per
section 115JB.
13.3 Further, the accountant's own examination and/or the reports of other
auditors may reveal various deficiencies and qualifications in the
accounts being examined for computation of book profit. They may pertain
to various matters e.g. disclosures under the Companies Act, true and fair
view of the financial statements, matters relating to accounting policies
or accounting standards etc. The accountant should examine them
thoroughly. He should keep in mind that the purpose of the audit under
this section is ascertainment of book profit and not the computation of
income for regular assessment. As per the scheme of the Act the starting
point for this section is the net profit as per profit and loss account.
Therefore, the qualifications / deficiencies pertaining to balance sheet
may not have any relevance to the computation of book profit. Section
115JB is a self contained code in itself for computation of book profit
and tax payable thereon. Further, the reporting requirement as per
paragraph 7 of Annexure A of Form No.29B calls for a positive or negative
assertion about the preparation of profit and loss account in accordance
with the provisions of Parts II and III of Schedule VI to the Companies
Act, 1956 and does not require quantification thereof. The requirement of
the section is the preparation of the profit and loss account in
accordance with Parts II and III Schedule VI to the Companies Act.
However, the proviso stipulates that the accounting policies, accounting
standards and depreciation should be on the same basis as were adopted in
the accounts laid in the annual general meeting. So long as both the
accounts i.e. the accounts laid before the annual general meeting and the
accounts from which book profit is calculated are based on similar
accounting policies, accounting standards and depreciation method and
rates, the qualifications or deficiencies referred to above will not be of
relevance for this section. Such qualifications may affect the computation
of income under regular assessment and therefore should be suitably
considered for that purpose by the assessee and Assessing Officer.
However, no adjustment is required to be made for them while making the
report on computation of book profits. It would be advisable for the
accountant to suitably disclose these qualifications in his report.
13.4 The book profit and the tax payable under section 115JB are to be
determined on the basis of the details given in Annexure A to Form 29B.
The particulars required as per Annexure A should be obtained by the
accountant from the assessee based on which the computation of book profit
can be made. As has been stated earlier the onus of preparing and
authenticating such particulars clearly lies on the assessee. The quantum
of tax payable, determined and mentioned against item 14 of the Annexure,
should be incorporated in paragraph 2 of the audit report. If the
income-tax payable on the total income as furnished against item No.6 of
the Annexure is not less than 7.5 per cent of the book profit computed and
indicated against item No.13, "not applicable (N.A.)" requires to be
mentioned both against item No.14 of Annexure A as well as in para 2 of
the report.
14. Certification regarding particulars in Annexure A
3. In my/our* opinion and to the best of my/our* knowledge and
according to the explanations given to me/us* the particulars given in
Annexure A are true and correct.
[Paragraph 3]
This paragraph requires the accountant to report about the correctness
of the particulars mentioned in Annexure A to the audit report. As
mentioned above, the particulars should be obtained from the assessee duly
authenticated which should be verified. In case of any negative remark or
qualification about this matter, the same should be made in accordance
with the "Statement on Qualifications in Auditors' Report" and reasons
thereof should be given. If the accountant differs with the view of the
company, then both views may be given.
Annexure A to audit report
15. Columns 1 to 4
|
1. |
Name of the assessee |
|
2. |
Particulars of address |
|
3. |
Permanent Account Number |
|
4. |
Assessment year |
15.1 The name, particulars of address and permanent account number as
obtained from the assessee shall be mentioned against columns 1, 2 and 3
respectively in the Annexure A. The address to be mentioned should be the
same as has been communicated by the assessee to the Income-tax Department
for assessment purposes as on the date of the signing of the audit report.
If the assessee has not been allotted permanent account number as on the
date of signing of the report, that fact should be indicated and the
general index register number (GIR) if available can be given. The
assessment year relevant to the previous year for which the accounts are
being audited under section 115JB should be mentioned against column 4.
16. Column 5
Total income of the company under the Income-tax Act
16.1 The total income of the company under the Income-tax Act as
obtained from the assessee is required to be given against column 5 of the
Annexure. The amount mentioned as total income should be the same which is
determined for being furnished in the return of income for regular
assessment. As already explained the statement of total income is to be
prepared and authenticated by the assessee on which the accountant can
place reliance. Further, the accountant should state clearly in the report
as well as in Annexure A that the total income as given in the report and
the Annexure is as computed by the assessee.
17. Column 6
Income-tax payable on total income
17.1 The income-tax payable on the total income furnished against
column 5 shall be mentioned against column 6. A question may arise whether
the income-tax to be mentioned is inclusive of surcharge or exclusive of
the same. It may be noted that the section deals with only income tax
payable. The term only "tax" and not "income tax" is defined under clause
(43) of section 2 of the Act. As such, there is a difference between
income tax and tax (may also be termed as "total tax") payable. The
Finance Act provides that the "income-tax" shall be increased by
"surcharge" implying thereby that "income-tax" does not include surcharge.
Therefore, it may be said that what is required to be considered under
column 6 is the income tax before levy of surcharge. Besides, the
income-tax payable mentioned against column 6 is required to be compared
with 7.5 per cent of book profit as per column 14 of the Annexure. The
said 7.5 per cent does not encompass levy of surcharge and therefore the
income-tax on total income in column 6 should also not include surcharge
for comparison. It requires to be mentioned here that ultimately surcharge
as applicable shall be added to the income-tax payable by the company as
determined after the said comparison under column 14 of the Annexure. If a
contrary view is taken to the effect that income-tax includes surcharge,
then surcharge should be added both for column 6 as well as for column 14
before comparison.
|
18. |
Column 7
Whether Profit and Loss Account is prepared in accordance with the
provisions of Parts II and III of Schedule VI to the Companies Act,
1956 (1 of 1956) |
Yes/No |
18.1 The Companies Act requires that every company shall prepare its
profit and loss account in accordance with the provisions of Parts II and
III of Schedule VI to the said Act. The same requirement is reiterated in
section 115JB(2) of the Income-tax Act. The accountant is required to
verify the same and report. As mentioned earlier in this guidance note,
the accountant will have to examine this himself or if any other audit
report to this effect is available he may use the same in such manner and
to such extent as is laid down in SAPs.
It may be mentioned here that the column 7 of Annexure A to audit report
requires report from the accountant only in "Yes" and "No" form.
Therefore, in case of a negative answer no qualification is required.
However, in the case of negative observations, the accountant should give
his reasons. As discussed earlier, no adjustment for the same should be
made while reporting on the computation of book profits.
|
19. |
Column 8
Whether the Profit and Loss Account referred to in column 7 above has
followed the same accounting policies, accounting standards for
preparing the profit and loss account and the same method of rates for
calculating depreciation as have been adopted for preparing accounts
laid before the company at its annual general body meeting? If not,
the extent and nature of variation be specified |
Yes/No |
19.1. The first proviso to sub-section (2) of section 115JB stipulates
that while preparing the annual accounts including profit and loss
account, the accounting policies, the accounting standards and the method
and the rates of depreciation shall be the same as have been adopted for
the preparation of accounts laid before the annual general meeting in
accordance with section 210 of the Companies Act, 1956.
19.2 Similar requirement is envisaged by the second proviso to the said
sub-section where the financial year adopted under the Companies Act, 1956
is different from the previous year under the Income-tax Act. Accordingly,
where the company has adopted or adopts the financial year which is
different from the previous year under the Act, the accounting policies,
accounting standards and method and rate of depreciation followed in
determining book profit shall correspond to that followed for such
financial year or part of such financial year falling within the relevant
previous year.
19.3 The variation regarding the accounting policies, accounting standards
and method and rates of depreciation can arise in two cases. Firstly, when
the accounting year of the company is different from the previous year
under the Income-tax Act and secondly, when the company having the same
accounting year and previous year, prepares accounts for income-tax on
different bases. It may be noted that the reference to accounting
standards in this section are to the accounting standards as referred to
in section 211(3C) of the Companies Act and not the accounting standards
notified by the Central Government under section 145(2) of the Income-tax
Act.
19.4 As mentioned earlier, the accountant is required to verify the same
and report. He will have to examine this himself or if any other audit
report to this effect is available he may use the same in such manner and
to such extent as is laid down in SAPs. The accountant should verify the
accounts being submitted for income-tax purposes with the accounts laid
before the annual general meeting of the company. If the accounts have
been filed with the Registrar of Companies then the same may also be seen.
Where the annual general meeting of the company has not been held till the
completion of audit under section 115JB, the auditor should obtain
suitable management representation that the accounts examined by him will
only be placed before the annual general meeting of the company. He should
also suitably disclose the same in his report.
19.5 Column 8 of Annexure A to the audit report requires report from the
accountant in "Yes" or "No" form. In case the answer is in the negative
the accountant should mention the nature of the variation. The format
further requires the accountant to specify the extent of the variation.
Therefore the accountant should quantify the effect of any such variation.
|
20. |
Columns 9 to 11
9. Net profit according to Profit and Loss Account referred to in (7)
above |
---- |
|
|
10. Amount of net profit as shown in Profit and Loss Account as
increased by the amounts referred to in clauses (a) to (f) of
Explanation of sub-section (2) of this section (file working
separately, where required) |
---- |
|
|
11. The amount as referred to in item 10 as reduced by the amounts
referred to in clauses (i) to (vii) of Explanation of sub-section (2)
of this section (file working separately, where required) |
---- |
20.1 Net profit according to profit and loss account referred to in
column 7, is required to be mentioned against column 9. The amount against
column 9 should be verified with the profit and loss account of the
company as detailed above. Adjustments are required to be made to the net
profit by increasing the same by the amounts referred to in clauses (a) to
(f) of Explanation of sub-section (2) of section 115JB. If any adjustments
are to be made, a separate working sheet should be enclosed with the
Annexure. The net result of such working should be mentioned against
column 10 which should be verified by the accountant. To this figure,
adjustments must be made by reducing the amounts referred to in clauses (i)
to (vii) of Explanation of sub-section (2) of section 115JB and figures
mentioned against column 11 should be verified with that.
20.2 It may be noted that the computation of book profit under section
115JB is a self contained code. It permits only those adjustments which
are specifically provided in the section itself. No other adjustments are
permissible to be made.
20.3 The computation of book profit and the adjustments to be made
thereafter involves many controversial issues. The Board has issued
several circulars in this regard. Such circulars have been included in
Appendices VII to XII. Some of the controversial issues are given in
Appendix XIII to this guidance note. The objective of giving these
controversies is to inform the members about the existence of such
contentious issues. However the accountants are advised to examine the
contention of the company in respect of any controversial issue using
their professional skill and expertise and form their opinion. Where the
company has relied on any judicial decision or circular or any other basis
in support of its contention then the accountant may suitably disclose the
same in his report. A gist of relevant judicial decisions on the subject
is also given in Appendix XIV to this guidance note for the
consideration of the accountant. Where the accountant is in disagreement
with the contentions put forth by the company he may suitably qualify the
report giving reasons thereof. In such situations, the view point of the
company may also be disclosed.
|
21. |
Columns 12 to 13
12. Book profit as computed according to Explanation given in
sub-section (2) |
---- |
|
|
13. 7.5% of "book profit" as computed in 12 above |
---- |
21.1 The column No.12 provides that the book profit as computed
according to Explanation to sub-section (2) of section 115JB should be
mentioned therein. The effect of the addition and reduction to net profit
as per profit and loss account has already been given in column No.10 and
11 as discussed above. If the assessee has followed different accounting
policies, accounting standards or depreciation rates and methods in the
accounts prepared for income-tax and the accounts laid before the annual
general meeting of the company, then, as explained above, the requisite
adjustments are required to be made to the accounts presented to
income-tax authorities to bring it in uniformity with the accounts laid
before the annual general meeting. The same has been ascertained, verified
and quantified in column 8 of Annexure A to the audit report. Therefore
the amount mentioned in column No.11 should be further adjusted by the
amount quantified in column No.8 for arriving at the final figure of the
book profit which should be mentioned against column No.12. The accountant
should verify the same accordingly.
|
22. |
Column 14
In case income-tax payable by the company referred to at Sl.No.6 is
less than seven and one-half per cent of its book profits shown in
column 12, the amount of income-tax payable by the company would be
7.5% of column 12, i.e. as per (13)". |
---- |
22.1 Where the amount of income-tax payable on total income indicated
against column 6 is more than 7.5% furnished against column 13, "not
applicable (N.A.)" should be filled in against column 14. On the other
hand, if income-tax payable on total income indicated against column 6 is
less than 7.5% of book profit furnished against column 13, 7.5% of book
profit as appearing in column 12 should be mentioned against column 14. If
surcharge is applicable for the relevant assessment year, then the amount
mentioned against column 14 shall be increased by the surcharge. The
accountant should verify the same accordingly.
Appendix - I
(Refer to paragraph 2.1)
CHAPTER VI-B
RESTRICTION ON CERTAIN DEDUCTIONS IN THE CASE OF COMPANIES
S.80VVA. Restriction on certain deductions in the case of companies -
(1) Notwithstanding anything contained in any other provision of this Act,
where in the case of an assessee being a company, the amount or, as the
case may be, the aggregate amount which, but for the provisions of this
section, would have been admissible as deduction for any assessment year
under any one or more of the provisions of this Act specified in
sub-section (2) exceeds seventy per cent of the amount of total 9income as
computed had no deduction been allowed under any of the said provisions
(such total income being hereinafter referred to as the pre-incentive
total income), the amount or, as the case may be, the aggregate amount to
be allowed as deduction for that year in respect of any one or more of the
said provisions shall be restricted, in the manner specified in
sub-section (3), to seventy per cent of the pre-incentive total income
(2) The provisions referred to in sub-section (1) shall be the
following, namely
(i) clause (iii) of sub-section (1) of section 35;
(ii) clause (ia) of sub-section (2) of section 35;
(iii) sub-section (2A) of section 35, to the extent to which the
deduction under the said sub-section exceeds the sum paid by the
assessee;
(iv) sub-section (2B) of section 35, to the extent to which the
deduction under the said sub-section exceeds the expenditure incurred by
the assessee;
(v) section 35C;
(vi) section 35CC;
(vii) section 35CCA;
(viii) section 35CCB;
(ix) clause (ii) of sub-section (2) of section 33;
(x) clause (ii) of sub-section (2) of section 33A;
(xi) sub-section (1), or, as the case may be, sub-section (1), read with
clause (i) of sub-section (2), of section 33A;
(xii) clause (ii) of sub-section (3) of section 32A;
(xiii) sub-section (1), or, as the case may be sub-section (1), read
with clause (i) of sub-section (3), of section 32A;
(xiiia) section 32AB;
(xiiib) section 33AB;
(xiv) section 80G;
(xv) clause (b) of sub-section (2) of section 80GGA;
(xvi) clause (c) of sub-section (2) of section 80GGA;
(xvii) section 80HH;
(xviii) section 80HHA;
(xix) section 80HHB;
(xx) section 80HHC;
(xxi) section 80-I;
(xxii) section 80-J;
(xxiii)
(xxiv)
(xxv) section 80M;
(xxvi)
(xxvii) section 80O; and
(xxviii) section 80OQ.
(3) The deduction under the provisions specified in sub-section (2)
shall, for the purposes of restricting under sub-section (1), the amount
or, as the case may be, the aggregate amount of deduction, under those
provisions, be allowed in the order in which the said provisions have been
specified in sub-section (2), and accordingly-
(a) deduction shall first be allowed under the provision specified in
clause (i) of sub-section (2); and
(b) if no deduction is allowable under the provision specified in the said
clause (i) or the deduction allowable under that provision is less than
seventy per cent of the pre-incentive total income, deduction shall next
be allowed under the provision specified in clause (ii) of sub-section
(2); and
(c) if no deduction is allowable under the provision specified in the said
clause (ii), or the deduction under that provision together with the
deduction allowed under the provision referred to in the said clause (i),
is less than seventy per cent of the pre-incentive total income, deduction
shall next be allowed under the provision specified in clause (iii) of
sub-section (2) and so on until the aggregate deduction so allowed is
equal to seventy per cent of the pre-incentive total income.
(4) To the extent to which full deduction cannot be allowed in the
assessment year in respect of any provision specified in sub-section (2),
by virtue only of the restriction under sub-section (1) (and not by virtue
of anything contained in any other section), the amount remaining
unallowed shall be added to the amount, if any, to be allowed to the
assessee under the said provision for the next following assessment year
and be deemed to be part of the deduction admissible to the assessee under
the said provision for that year or, if no such deduction is admissible to
the assessee for that year, be deemed to be the deduction admissible to
the assessee for that year, and so on for succeeding assessment years.
Appendix - II
(Refer to paragraph 2.2)
*115J Special provisions relating to certain
companies
(1) Notwithstanding anything contained in any other provision of this
Act, where in the case of an assessee being a company (other than a
company engaged in the business of generation or distribution of
electricity), the total income, as computed under this Act in respect of
any previous year relevant to the assessment year commencing on or after
the 1st day of April, 1988 but before the 1st day of April, 1991
(hereafter in this section referred to as the relevant previous year); is
less than thirty per cent of its book profit, the total income of such
assessee chargeable to tax for the relevant previous year shall be deemed
to be an amount equal to thirty per cent of such book profit.
(1A) 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).
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 (1A), as increased by -
(a) the amount of income-tax paid or payable, and the provision
therefor; or
(b) the amounts carried to any reserves (other than the reserves
specified in section 80HHD or sub-section (1) 33AC), 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
*Inserted by the Finance Act, 1987 w.e.f. 1.4.1988. The section is
not operative for assessment year 1991-92 and onwards
(e) the amount or amounts of dividends paid or proposed; or
(f) the amount or amounts of expenditure relatable to any income to
which any of the provisions of Chapter III applies; or
(g) the amount withdrawn from the reserve account under section
80HHD, where it has been utilised for any purpose other than those
referred to in sub-section (4) of that section; or
(h) the amount credited to the reserve account under section 80HHD,
to the extent that amount has not been utilised within the period
specified in sub-section (4) of that section; or
(ha) the amount deemed to be the profits under sub-section (3) of
section 33AC;
if any amount referred to in clause (a) to (f) is debited or, as the
case may be, the amount referred to in clauses (g) and (h) is not
credited to the profit and loss account, and as reduced by,-
(i) the amount withdrawn from reserves (other than the reserves
specified in section 80HHD) 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, 1988, 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 this Explanation ; or
(ii) the amount of income to which any of the provisions of Chapter
III applies, if any such amount is credited to the profit and loss
account; or
(iii) the amounts [as arrived at after increasing the net profit by
the amounts referred to in clauses (a) to (f) and reducing the net
profit by the amounts referred to in clauses (i) and (ii)] attributable
to the business, the profits from which are eligible for deduction under
section 80HHC or section 80HHD; so, however, that such amounts are
computed in the manner specified in sub-section (3) or sub-section (3A)
of section 80HHC or sub-section (3) of section 80HHD, as the case may be
; or
(iv) the amount of the loss or the amount of depreciation which would
be required to be set off against the profit of the relevant previous
year as if the provisions of clause (b) of the first proviso to
sub-section (1) of section 205 of the Companies Act, 1956 (1 of 1956),
are applicable.
(2) Northing 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 or sub-section (3) of section 80J.
Appendix - III
(Refer to paragraph 2.2)
*115JA Deemed income relation to certain companies
(1) Notwithstanding anything contained in any other provisions of this
Act, where in the case of an assessee, being a company, the total income,
as computed under this Act in respect of any previous year relevant to the
assessment year commencing on or after the 1st day of April, 1997 (but
before the 1st day of April, 2001) (hereafter in this section referred to
as the relevant previous year) is less than thirty per cent of its book
profit, the total income of such assessee chargeable to tax for the
relevant previous year shall be deemed to be an amount equal to thirty 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 profit and loss account, the depreciation
shall be calculated on the same method and rates which have been adopted
for calculating the depreciation for the purpose of preparing the profit
and loss account 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 a company has adopted or adopts the financial
year under the Companies Act, 1956 (1 of 1956), which is different from
the previous year under the Act, the method and rates for calculation of
depreciation shall correspond to the method and rates which have been
adopted for calculating the depreciation for such financial year or part
of such financial year falling within the relevant previous year.
Explanation - For the purposes 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 -
*Inserted by the Finance (No.2) Act, 1996, w.e.f. 1.4.1997.
(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 dividend paid or proposed; or
(f) the amount or amounts of expenditure relatable to any income to
which any of the provisions of Chapter III applies;
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, 1997 but before the 1st day of April, 2001 shall not be reduced
from the book profits unless the book profit of such year has been
increased by those reserves or provisions (out of which the said amount
was withdrawn) under this Explanation; or
(ii) the amount of income to which any of the provisions of Chapter III
applies, 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; or *
Explanation - For the purposes of this clause, the loss shall not
include depreciation;
*The word 'or' should have been placed at the end of the Explanation to
clause (iii) and not here.
(iv) the amount of profits derived by an industrial undertaking from the
business of generation or generation and distribution of power; or
(v) the amount of profits derived by an industrial undertaking located
in an industrially backward State or district as referred to in
sub-section (4) and sub-section (5) of section 80-IB for the assessment
years such industrial undertaking is eligible to claim a deduction of
hundred per cent of the profits and gains under sub-section (4) and
sub-section (5) of section 80-IB; or
(vi) the amount of profits derived by an industrial undertaking from the
business of developing, maintaining and operating any infrastructure
facility as defined in the Explanation to sub-section (4) of section
80-IA and subject to fulfilling the conditions laid down in that
sub-section; or
(vii) the amount of profits of sick industrial company for the assesment
year commencing from the assesment 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; or
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); or
(viii) the amount of profits eligible for deduction under section 80HHC,
computed under clause (a), (b) or (c) of sub-section (3) or sub-section
(3A), as the case may be, of that section and subject to the conditions
specified in sub-sections (4) and (4A) of that section :
(ix) the amount of profits eligible for deduction under section 80HHE,
computed under sub-section (3) of that section.
(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) 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.
Appendix - IV
(Refer to paragraph 2.3)
115JAA Tax credit in respect of tax paid on deemed income relating
to certain companies
(1) Where any amount of tax is paid under sub-section (1) of section
115JA by an assessee being a company for any assessment year, then, credit
in respect of tax so paid shall be allowed to him in accordance with the
provisions of this section.
(2) The tax credit to be allowed under sub-section (1) shall be the
difference of the tax paid for any assessment year under sub-section (1)
of section 115JA and the amount of tax payable by the assessee on his
total income computed in accordance with the other provisions of this Act:
Provided that no interest shall be payable on the tax credit allowed under
sub-section (1).
(3) The amount of tax credit determined under sub-section (2) shall be
carried forward and set off in accordance with the provisions of
sub-section (4) and sub-section (5) but such carry forward shall not be
allowed beyond the fifth assessment year immediately succeeding the
assessment year in which tax credit becomes allowable under sub-section
(1).
(4) The tax credit shall be allowed set-off in a year when tax becomes
payable on the total income computed in accordance with the provisions of
this Act other than section 115JA, or section 115JB, as the case may be.
(5) Set off in respect of brought forward tax credit shall be allowed for
any assessment year to the extent of the difference between the tax on his
total income and the tax which would have been payable under the
provisions of sub-section (1) of section 115JA for that assessment year or
section 115JB, as the case may be for that assessment year.
(6) Where as a result of an order under sub-section (1) or sub-section (3)
of section 143, section 144, section 147, section 154, section 155,
sub-section (4) of section 245D, section 250, section 254, section 260,
section 262, section 263, section 264, the amount of tax payable under
this Act is reduced or increased, as the case may be, the amount of tax
credit allowed under this section shall also be increased or reduced
accordingly.
Appendix - V
Sections 115JA and 115JB - A comparative presentation
(Refer to paragraph 3.6)
For ease of comparison, the provisions of section 115JA are given on
the left hand side and the corresponding provisions of section 115JB have
been given on the right hand side.
115JA Deemed income relation to certain companies
(1) Notwithstanding anything contained in any other provisions of
this Act, where in the case of an assessee, being a company, the total
income, as computed under this Act in respect of any previous year
relevant to the assessment year commencing on or after the 1st day of
April, 1997 (but before the 1st day of April, 2001) (hereafter in this
section referred to as the relevant previous year) is less than thirty
per cent of its book profit, the total income of such assessee
chargeable to tax for the relevant previous year shall be deemed to be
an amount equal to thirty per cent of such book profit. |
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.
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(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 profit and loss account, the depreciation shall be
calculated on the same method and rates which have been adopted for
calculating the depreciation for the purpose of preparing the profit
and loss account 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 a company has adopted
or adopts the financial year under the Companies Act, 1956 (1 of
1956), which is different from the previous year under the Act, the
method and rates for calculation of depreciation shall correspond to
the method and rates which have been adopted for calculating the
depreciation for such financial year or part of such financial year
falling within the relevant previous year. |
(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. |
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Explanation - For the purposes 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
- |
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
- |
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(a) the amount of income-tax paid or payable, and the provision
therefor ; or |
(a) the amount of income-tax paid or payable, and the provision
therefor; or |
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(b) the amounts carried to any reserves by whatever name called; or |
(b) the amounts carried to any reserves, by whatever name called; or
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(c) the amount or amounts set aside to provisions made for meeting
liabilities other than ascertained liabilities; 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 |
(d) the amount by way of provision for losses of subsidiary companies;
or |
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(e) the amount or amounts of dividend paid or proposed; or |
(e) the amount or amounts of dividends paid or proposed; or |
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(f) the amount or amounts of expenditure relatable to any income to
which any of the provisions of Chapter III applies; if any amount
referred to in clauses (a) to (f) is debited to the profit and loss
account, |
(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, |
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and as reduced by,- |
and as reduced by- |
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(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, 1997 but
ending before the 1st day of April, 2001 shall not be reduced from the
book profits unless the book profit of such year has been increased by
those reserves or provisions (out of which the said amount was
withdrawn) under this Explanation; or |
(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 |
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(ii) the amount of income to which any of the provisions of Chapter
III applies, if any such amount is credited to the profit and loss
account; 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 |
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(iii) the amount of loss brought forward or unabsorbed depreciation,
whichever is less as per books of account; or Explanation - For the
purposes of this clause, the loss shall not include depreciation; |
(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
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(iv) the amount of profits derived by an industrial undertaking from
the business of generation or generation and distribution of power; or
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(v) the amount of profits derived by an industrial undertaking located
in an industrially backward State or district as referred to in
sub-section (4) and sub-section (5) of section 80-IB for the
assessment years such industrial undertaking is eligible to claim a
deduction of hundred per cent of the profits and gains under
sub-section (4) and sub-section (5) of section 80-IB; or |
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(vi) the amount of profits derived by an industrial undertaking from
the business of developing, maintaining and operating any
infrastructure facility as defined in the Explanation to sub-section
(4) of section 80-IA and subject to fulfilling the conditions laid
down in that sub-section; or |
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(vii) the amount of profits of sick industrial company for the
assesment year commencing from the assesment 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; or 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);
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). |
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(viii) the amount of profits eligible for deduction under section
80HHC, computed under clause (a), (b) or (c) of sub-section (3) or
sub-section (3A), as the case may be, of that section and subject to
the conditions specified in sub-sections (4) and (4A) of that section
: |
(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 |
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(ix) the amount of profits eligible for deduction under section 80HHE,
computed under sub-section (3) of that section. |
(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 |
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(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 |
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(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. |
(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. |
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(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. |
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(4) 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. |
(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." |
Appendix - VI
Circular NO. 495 dated 22nd September, 1987
(Refer to paragraph 2.2)
"New provisions to levy minimum tax on "book profit" of certain
companies:
36.1 It is an accepted cannon of taxation to levy tax on the basis of
ability to pay. However, as a result of various tax concessions and
incentives certain companies making huge profits and also declaring
substantial dividends, have been managing their affairs in such a way as
to avoid payment of income-tax.
36.2 Accordingly, as a measure of equity, section 115J has been
introduced by the Finance Act. By virtue of the new provisions, in the
case of a company whose total income as computed under the provisions of
the Income-tax Act is less then 30 per cent of the book profit computed
under the section, the total income chargeable to tax will be 30 per cent
of the book profit as computed. For the purposes of section 115J, book
profits will be the net profit as shown in the profit and loss account
prepared in accordance with the provisions of Schedule VI to the Companies
Act, 1956, after certain adjustments. The net profit as above will be
increased by income-tax paid or payable or the provisions thereof, amount
carried to any reserve, provision made for liabilities other than
ascertained liabilities, provision for losses of subsidiary companies,
etc., if the amounts are debited to the profit and loss account.
Liabilities relating to expenditure which has been incurred or which has
accrued in respect of expenses which are otherwise deductible in computing
income will not be added back. The amount so arrived at is to be reduced
by -
(i) amounts withdrawn from reserves, if any such amount is credited
to the profit and loss account;
(ii) the amount of income to which any of the provisions of Chapter III
applies, if any such amount is credited to the profit and loss account;
and
(iii) the amount of any brought forward losses or unabsorbed
depreciation whichever is less as computed under the provisions of
section 205(1)(b) of the Companies Act, 1956, for the purposes of
declaration of dividends. Section 205 of the Companies Act requires
every company desirous of declaring dividend to provide for depreciation
for the relevant accounting year. Further, the company is required under
section 205 to set off against the profit of the relevant accounting
year, the depreciation debited to the profit and loss account of any
earlier year(s) or loss whichever is less.
36.3 Section 115J, therefore, involves two processes. Firstly, an
assessing authority has to determine the income of the company under the
provisions of the Income-tax Act. Secondly, the book profit is to be
worked out in accordance with the Explanation to section 115J(1) would be
invoked if the income determined under the first process is less than 30
per cent of the book profit. The Explanation to sub-section (1) of section
115J gives the definition of the "book profit" by incorporating the
requirement of section 205 of the Companies Act in the computation of the
book profit. Brought forward losses or unabsorbed depreciation whichever
is less would be reduced in arriving at the book profits. Sub-section (2),
however, provides that the application of this provision would not affect
the carry forward of unabsorbed depreciation, unabsorbed investment
allowance, business losses to the extent not set off, and deduction under
section 80J, to the extent not set off as computed under the Income-tax
Act.
36.4. In the case of a tea company where income is derived from the
sale of tea grown and manufactured by the seller, only 40 per cent of such
income is liable to tax under rule 8 of the Income-tax Rules, 1962. 60 per
cent of the income, which is disregarded for the purposes of taxation is
considered to be agricultural income and is, therefore, exempt under the
provisions of Chapter III. The net profit determined in accordance with
Schedule VI to the Companies Act, 1956, has to be adjusted, inter alia,
in accordance with clause (f) and sub-clause (ii) of the Explanation to
section 115J(1). In the case of the tea companies, the book profit should
be computed by making all the adjustments referred to in the Explanation.
However, no adjustment in respect of clause (f) and sub-clause (ii) of the
Explanation is to be made for the agricultural income earned by tea
companies from tea business. 40 per cent of the adjusted amount arrived at
in this manner will be the book profit of the tea company in accordance
with rule 8 of the Income-tax Rules.
36.5 The following examples illustrate how the amended provisions
relating to the new section will be applied:-
| Book profits for the
purpose of the Companies Act, 1956 |
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Profit under the Income-tax Act
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(1) |
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(2) |
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