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profits was introduced originally under section 115J by the Finance Act, 1987 with effect from A.Y. 1988-89 and it was withdrawn with effect from A.Y. 1991-92 - Refer Appendix II for the text of section 115J and Appendix VI for circular No.495 explaining the scope of the provisions of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.

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

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

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.

18.1 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.

19.1. 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.

20.1 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.

21.1 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.

22.1 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.

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:-