MAT: THERE SHOULD NOT BE STIGMA AGAINST ZERO TAX COMPANY OR PERSON OTHER CONTRIBUTIONS SHOULD ALSO BE CONSIDERED.

[C.A. DEV KUMAR KOTHARI]

There is wrong feeling that  there are zero tax companies, who have earned lot of income and distributed dividend but have not paid income-tax.  There have been provisions  to impose minimum tax on such companies, for example through section 80VVA, 115J, 115JA and 115JB of the Income-tax Act, 1961.  It will be too  narrow an approach if  only income-tax paid by a company or any person  be viewed by the Government and tax authorities. Contribution, of any person in full filling  other purposes of incentives provided under law are also equally important. Full filling other social and public purposes like creating infrastructure, providing jobs, producing goods for consumption of society etc. should be viewed with proper emphasis. Even payment of indirect taxes is an important factor for consideration in this regard. We can notice that even large companies who have suffered losses in initial years or in years of recession and who could not pay dividend have paid indirect taxes. In case indirect taxes were nil or even lower, they could have made profit and paid tax on their income. Indirect taxes cannot always be passed over to consumer - this is reflected from the cases of payment of indirect tax on one hand and losses suffered on the other. There should not be hue and cry regarding some one not having paid income-tax by availing tax incentives; everyone is free to avail the benefits and concessions conferred by the law. Furthermore, the contributions of any person or company to society in other forms should also be considered.

Allowing tax concessions on one hand leading to no tax payable and then imposing tax on book profits is totally unjustified. MAT must be dropped.

Income-tax Act and incentives:

Direct tax in form of income-tax and wealth tax and indirect taxes in form of Central Excise, Customs Duty, Service Tax etc. are imposed by the central Government. The government provides various incentives or relief in area of direct and indirect tax both.

Through the Income-tax Act several type of incentives have been provided from time to time to serve many diversified socio-economic objectives, as required at relevant time. Some of major form of incentives can be listed below:

1. to impose tax on income at varying rates. Lower rate or exemption is prescribed to promote particular activity or investment.

2.  incentives for various public interests like:

(a) encourage investment  in industry, infrastructure, housing, public conveniences, science and technology etc.

(b)  encourage exports, discourage imports (sometimes encourage also) to create and maintain foreign exchange reserves, and provide competitive edge to Indian goods.

 (e) encourage energy conservation, and use of non-conventional energy,

(g) boost employment generation, social welfare, and area development,

(h) improvement in productivity, reduction of waste, and recycling of waste etc.

(i) encourage  savings and investment in industry, and household savings,

(j) to reduce pollution,

3. to remove disparities of wealth amongst rich and poor.

4. to curb unproductive undesired investments, and wasteful expenditure.

5. to circumvent creation and circulation of undisclosed money and assets (black money).

For achievement of these objectives various incentives and dis-incentives are incorporated in the Income-tax Act, 1961.  If an incentive is availed by a person and his income is reduced below taxable income, no one should have problem because some of objectives of the Act are fulfilled.  For example, in case of many industrial houses who have made investments in setting up new plants, they have availed benefit  allowed under tax laws and have provided infrastructure, jobs and sources of revenue generation for public and government. They might not have paid income-tax for  a number of years but they have paid indirect taxes. By this way  they have made contribution to the society by:

1. improving infrastructure,

2. increasing production, net exports,

3. creating job opportunities - direct and indirect, and employees paying taxes on their income and expenditure.

4. creating production base which helps in revenue generation for the public exchequer by way of indirect taxes on inputs used by them and finished goods manufactured and sold by them.

5. increased gross and net national product.

The above contributions of such persons to the society are very vital for the development of various segments of the society. In fact the value to society will be much more that the tax benefit availed.  By availing benefits allowed under the Income-tax Act, such persons may not be liable to pay any tax for number of years.  If they continue to make further investments, they may not be paying any income-tax for further several years.  In such cases non-payment of tax under Income-tax Act, should not cause a problem or ill feeling amongst persons who are paying tax. For example, an employee of a company may pay tax on his salary income but the company itself may not pay any tax, because it has availed benefits under the Act.  The employee has chosen risk free route of earning by way of taking a salaried job.  Whereas his employer has undertaken risk by setting up industrial unit or making further investment in old unit.  For the investment made by the employer, he may not be liable to pay income-tax, but on the basis of amount of income-tax paid by employer and employee one cannot say that the employer's contribution to society is less than of his employee.

Therefore, only income-tax paid by a person should not be viewed by Income-tax authorities as his contribution, the other objectives, in help of achievement of which the person has contributed should also be considered.  The thinking and approach of Income-tax authorities should not be self centered.  They must consider all the purposes of the Income-tax Act and not only tax collection.

However, taking narrow approach, many times it is said that there are zero tax companies, who have earned lot of income and distributed dividend but have not paid income-tax. Therefore, there have been attempts to impose minimum tax on such companies, for example through section 80VVA and 115J of the Income-tax Act, 1961, during some periods of time it was prescribed to impose minimum tax on profit making companies.  Now again, air is hot for prescribing minimum tax on such companies.

2. Is there any zero tax profits making company

If we think in a rational manner, and consider the objective of Income-tax Act in its totality, we will find that a company may not pay any income-tax by availing various benefits.  However, that does not mean that the company is a zero tax company.  An invisible tax is being borne by the person. When an industrial adventure is taken up, the entrepreneur is putting his money in the project, undertaking liability by raising loan capital and share capital, undertaking risks.  If the project is a failure, his capital may be lost, his liabilities will increase on account of interest and other fixed costs.  In case of failure the entrepreneur may become insolvent.  If the venture is successful, the entrepreneur will be contributing indirect taxes on inputs used and finished goods sold by him.  Though it is said that indirect taxes are borne by his customers, but it is not fully true, if indirect taxes on inputs and output is less, cost will be less and in that case chances of success of enterprise and profitability will be much higher.  If these indirect taxes are higher, and chances of success of and profitability in the operations will be less.  Therefore, by paying higher indirect taxes, the enterprise has earned less resulting into less payment of income tax.

It can be empirically established that companies have not earned profit, have not paid any dividend, have suffered huge losses in initial years of manufacturing projects yet they have paid huge amount of indirect taxes. If the indirect taxes are lower, then manufacturer can sell more goods at lower price and can earn profit. Therefore, it cannot be said that all indirect taxes are passed to consumers. In initial years, or even later on when there is loss,  it can be said that to the extent of loss, the indirect taxes have been borne by the manufacturer.

So long a person contributes towards achievement of various purposes of the Income-tax Act, there should not be stigma against him on account of lower income-tax paid by him.

3. Section 115J, 115JA and 115JB

These are special provision  relating to certain companies. At present S. 115JB is in force.

VARiosu amendments have been made in these sections from time to time and still the position is not clear on many aspects. These sections have caused lot of litigation.

The aspect common in these sections is that a minimum alternate tax is payable by a company assessee if it has book profit as per Profit and Loss account prepared as per provisions of the Companies Act,1956 -particularly part II of Scheule VI to that Act. 

  In this write up a crucial question is being examined about applicability of section 115J, 115JA and 115JB in a case when there is no total income as per computation under provisions of the Act i.e. cases when computation of total income results into loss or nil income. 

Steps and process of computation of total income and tax payable:

Computation of total income requires the following processes and steps:

A . Computation of current income from each source of income under different heads of income.

B.  Clubbing of income if applicable.

C. aggregation on income under different heads.

C.  Set off etc. of current loses against  income under different heads

D. Set off of past losses, if any, under different heads

E. Computation of gross total income

F. Allowing deductions under Chapter VI-A

G. Determination of chargeable profits or gains i.e. total income before depreciation

H. Allowing depreciation under section 32 against chargeable profits or gains to the extent of chargeable profits or gains and ascertaining balance amount of depreciation which will form part of current depreciation of subsequent year(s).

I. checking whether 'total income' is less than 30 per cent of the book profit ( when S. 115J and 115JA were in force) or whether tax payable on total income is  less than prescribed percentage of book profit at relevant time (when S.115JB is applicable.

J. If total income is less than 30 per cent of book profit, 30 per cent profit will be total income under section 115J and 115JA in relevant years when respective sections were applicable.  And

 If tax payable on normally computed total income is less than prescribed percentage of book profit then tax at prescribed rate on book profit will be tax payable as MAT.

Failure to apply process or step of computation:

If there is loss, loss is kept apart for set off and/ or carry forward.

If after set off, three is still loss it is carried forward and there is no income to be taken as GTI.

After set off of  current and / or past losses there may not be any  income to be taken in GTI.  

If there is no gross total income (GTI), there does not arise occasion for allowing deductions under Chapter VIA, to compute total income (before depreciation).

If ther is no chargeable income then there will be no occassion to allow depreciation. If there is lesser chargeable income than allowable deprecation, then deprecaion  shall be allowed  to the extent of chargeable profits or gains and balance will be carried forward.

Therefore, in cases when there is no GTI, the process of computation of total income, come to a halt. Similarly process of computing tax payable also comes to a halt.

S. 115J ,115JA and 115JB are self contained and integrated codes. They have to be applied strictly as a charging section as well as computational provisions. If the process of computation of total income come to a halt and it cannot be carried, then the computation provisions fails. If the computation provision fails , then the charging provision also fails.

 The term 'income', cannot by any stretch of imagination include 'loss' for the purpose of charging tax.

Applying the principles of strict interpretation section 115J, 115JA and 115JB are  to be strictly interpreted.  On strict interpretation, we find that in absence of total income or gross total income permitting some allowance of deductions under Chapter VIA, section 115J and 115JA cannot be applied. In case of S. 115JB one more condition is that there should be 'tax payable' on normally computed total income. Therefore, in case of S. 115JB if there is no GTI, TI and tax payable then computation provision and charging provision both fails.

Few examples:

                                                                                                                        Rs.

1. Income for the year                                                                                    50,000

Past losses Rs.1,00,000 set off to the extent of                                   50,000

Gross total Income                                                                                           Nil

Deduction available under Chapter VIA Rs.20,000 but cannot be allowed in view of lack of gross total income.

In the above case even past losses are not fully set off, there is no gross total income and there is no total income therefore section 115J  and 115JA cannot be applied because there is no 'total income'. Applicability of section 115J and 115JA  can only be considered after the earlier steps towards computation of total income have taken place fully and not otherwise.  In addition to absence of GTI and TI the requirement of 'tax payable' is also not satisfied to attract S. 115JB. Considering purposes of the income-tax Act,  When all  benefits available under the Act are not exhausted, due to lack or inadequacy of 'gross total income' a tax cannot be imposed by way of MAT.

 

                                                                                                                        Rs.

2. Gross total income for the year                                                                 50,000

Deductions available under Chapter VIA Rs.1,00,000

But allowed only to the extent of gross total income                                      50,000

Total income                                                                                                     Nil

In this case also gross total income is not sufficient to fully avail deductions under Chapter VIA, and there is no 'total income', tax payable on total income is also not computed, therefore, section 115J  115JA and 115JB cannot be applied, in absence of  GTI, TI and tax payable.

The expression 'total income', in the context of a charging provision like section 115J, 115JA and 115JB  does not and cannot include 'loss'.  'Income' means a positive income.  If negative income is also considered as 'income', for imposing a tax, then even, in cases of loss tax will have to be paid.  Person who has earned a profit of say Rs. one lakh, and another who suffered loss of Rs. one lakh, both will have to pay tax equally.  Or if we apply positive income X tax rate for tax payable then one can also argue that negative income X tax rate means minum tax payable that is  sum payable by government to person who suffered loss.  That cannot be case in charging section.

The term 'income' includes loss only for the purposes of determination of gross total income or total income of an assessee for the purpose of computation of chargeable  income and not for the purpose of levying tax.  For example, for clubbing of income under section 64 it is clearly provided that 'income' includes 'loss', this is to determine total income after set-off of loss.  This is not to impose tax on loss.  Before this specific provision the Supreme Court has held that minor's/wife/s loss will be set off against partner's/husband's income, if the case is one in which income of minor or wife would have been clubbed.

However no one can say that a tax can be imposed on loss because the term 'income' includes 'loss'.

In the Explanation to S. 64 it is clearly stated that the Explanation is only for that section and thus it is not for any other provisions of the Act.

4. Salaried persons and tax payable

In view of the multifarious purposes of the Income-tax Act, 1961, there should not be stigma against any person or company who by planning the financial and business affairs avails benefits and reduces tax liability.  It must be kept in mind that the person who saves tax by availing benefits is contributing to the society in other manner which is also promoted under law by extending tax benefits.  Let us compare two cases of salaried persons getting similar salary.

 

                                                                                    Mr. A                            Mr. B

                                                                                           Rs.                               Rs.

Salary income computed under IT Act                3,00,000                       3,00,000

Rental income from hiring equipments                          40,000                         nil

Deduction for depreciation                                                - 60,000                          nil

Gross total income                                                           2,80,000                       3,00,000

Deduction under section 80C and 80CCA                  1,20,000                           NIl

Deduction u/s 80G                                                         10,000                            Nil

Total income                                                               1,50,000                      3,00,000

 

Tax payable                                                                  Nil                               14,420

Tax free incomes on savings                                          10,000                          nil

In the above  MR and and Mr. B both are earning same amount of salary. Mr. A is in habit of savings and he has made investment in plant and machinery , saving instruments etc. and his tax payable in nil. Mr. B is not saving any thing and he has to pay tax of Rs.14420/- on his income.

 It does not mean that contribution of Mr. A to the Society is  lesser than that of Mr. B.    In fact contribution of Mr. A  may be greater than that of Mr. B  because Mr. A  is building capital, investing in plant and equipments and small savings, giving some contributions to charitable organizations all these also  contributes a lot towards welfare of the society in general, besides Mr. A is securing his future also by saving money.  Whereas Mr. B  may be spending larger amounts on expenditure and a larger part of it may be on consumption and some part of it may also be wasteful expenditure. Mr. B is not caring about future of himself and his family.

 Conclusion

Therefore, the lesson is that contribution of someone to the society should be considered by taking into account his contribution in all respects and not by taking narrower view about some aspects.  There should not be hue and cry regarding some one not having paid income-tax; every one is free to avail the benefits and concessions conferred by the law.