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SEPARATE PROFIT AND LOSS ACCOUNT FOR THE PURPOSE OF MAT ARE REQUIRED. HOWEVER, THERE ARE VITAL DIFFERENCES IN THIS REGARD IN THREE SECTIONS. Therefore, recent judgment of Gujarat high Court on S. 115J are partly helpful for recent years. |
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SEPARATE PROFIT AND LOSS ACCOUNT FOR THE PURPOSE OF MAT ARE REQUIRED. HOWEVER, THERE ARE VITAL DIFFERENCES IN THIS REGARD IN THREE SECTIONS. Therefore, recent judgment of Gujarat high Court on S. 115J are partly helpful for recent years. |
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Relevant links: Section 115J, 115JA and 115JB of the Income Tax Act, 1961. DY. COMMISSIONER OF I.T. (ASST) Versus ARVIND MILLS LTD. - 2009 TMI - 33194 - GUJARAT HIGH COURT Apollo Tyres Ltd. Versus Commissioner of Income Tax - [2008 -TMI - 6081 - SUPREME Court] Sub-section (6) to the section 211 of the Companies Act, 1956. "(6) For the purposes of this section, except where the context otherwise requires, any reference to a balance sheet or profit and loss account shall include any notes thereon or documents annexed thereto, giving information required by this Act, and allowed by this Act to be given in the form of such notes or documents." Separate profit and loss account is a statutory requirement: As per Section 115J(1A), S. 115JA(2), and 115JB(2) every company is required to prepare a profit and loss account for the purpose of these sections as are applicable in relevant periods. These provisions are in mandatory terms. The relevant parts read as follows: Sub-section (1A) to section 115J: (1A) Every assessee, being a company, shall, for the purpose 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)". (2) Every assessee, being a company, shall, for the purpose 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 proviso 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 purpose 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 adopted 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 the 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. We find that similar language has been used in main sub-sections (1A) of S.115J and , sub-section (2) of section 115JA and sub-section (2) of section 115JB , However, in case of S. 115JA and 115JB additional requirement is that the accounts to be prepared in accordance with Part II and III of the Schedule VI. Except that in sub-section (2) of sections 115JA, there is a proviso for additional requirement relating to adoption of the same depreciation rates and method as followed by the company for preparing the annual accounts for laying before the annual general meeting and in sub section (2) of section 115JB there is a proviso for adoption of the same accounting policies, accounting standards and depreciation rates and method as has been adopted for accounts to be laid before the annual general meeting. Thus we find that in case of S.115J, there was no requirement of adopting same accounting policies and method and rate of depreciation. Therefore, to that extent the provisions of S.115JA and 115JB are substantially different that the provisions of S.115J. Therefore recent judgment of Gujarat high Court may not be fully applicable to recent years when S.115JA and 115JB are applicable. Section 115J (1A) compare with Section 115JA(2):
In the proviso to S.115JA (2) there is requirement to adopt the method and rate of depreciation similar to those adopted in case of profit and loss account prepared for the purpose of the companies Act for approval of AGM of company. There is, however, no requirement to adopt same or similar accounting policies for the two purposes. The proviso and extension to the proviso to S.115JA(2) makes it clear that for the purpose of MAT under section115JA separate profit and loss account need to be prepared even if the accounting period adopted for companies Act is also the previous year as per I.T. Act. In case of Section115J, there was no such proviso however as the word "shall" been used, it can be said that it is mandatory to prepare separate profit and loss account for the purpose of Section115J also. Section 115J (1A) compare with Section 115JB(2):
Comparison of Section 115JA (2) and 115JB (2):
In the proviso to S.115JB (2) there is requirement to adopt the method and rate of depreciation and also accounting policies and accounting standards similar to those adopted in case of profit and loss account prepared for the purpose of the companies Act for approval of AGM of company. The proviso and extension to the proviso to S.115JB(2) also makes it clear that for the purpose of MAT u/s 115JB also separate profit and loss account need to be prepared even if the accounting period adopted for companies Act is also the previous year as per I.T.Act. Why a separate profit and loss account is required in provisions relating to MAT: It is needless to say that every company is required to prepare profit and loss account and balance sheet in terms of requirement of the Companies Act. Therefore questions arises as to: a. why there is specific provision in provisions relating to MAT to prepare only profit and loss account as per the same provisions?. b. Why the account laid before the AGM cannot be used even when they relate to period which is the previous year for income-tax purpose? The reasons for this requirement appears to be due to reason that in the case of accounts for the purpose of the Companies Act notes to account and qualifications are to be read with the profit and loss account vide S. 211(6) of the Companies Act, 1956. Therefore, profit as shown in the profit and loss account need to be adjusted for the particular purpose for which one study and analyze the accounts of a company. For example, a person or banker who is granting short term loan to company is mainly concerned with cash profits, whereas a long-term lender is concerned with cash profits as well as profit after depreciation and amortizations because the amount of depreciation erodes the value of security taken for loan. Similarly for the purposes of income-tax, the general rule is that it is dependent in much greater manner on provisions of the I.T.Act and then to the accounting policies and method. Though the accounting policies regularly followed are relevant, however, there is still scope to discard them for tax purposes. In case of MAT also, the idea underlying the provision as to requirement to prepare separate profit and loss account appears to be to adopt uniformity (may be over a period of time) amongst various company assesses to the maximum extent possible. For example, a company may follow WDV basis for depreciation and another may follow SLM basis, in both cases over a period of time there will be same amount of depreciation provided in accounts. In case of WDV basis there will be accelerated provisioning whereas in case of SLM there will be constant provisioning. Over a period of time in both cases usually depreciation shall be provided to the extent of 95% of the cost, and then if the asset still continue in use, further depreciation may not be provided and adjustment of profit or loss on sale of assets shall only be made. It appears that to make the work of the A.O. it is mandated that a separate profit and loss account should be prepared for the purposes of MAT. This can be done in two ways: a. Prepare a profit and loss account and give effect of notes and qualifications to account, as laid before the AGM or b. Prepare a statement starting with profit as per profit and loss account and make adjustments for the sums referred to in notes and qualifications on account to exactly workout profit or loss as per requirement of Companies Act. In practice we find that the method (b) is more frequently used then method (a).. Therefore, it can be said that it is mandatory to prepare a separate profit and loss account for the purpose of MAT to ascertain book profit, and in case of loss to ascertain book loss eligible for carry forward and set off against book profit in future.. Recent judgments of the Gujarat High Court: Recently in the following judgments the Gujarat High Court considered matter relating to MAT u/s 115J: DCIT Vs. SURAT TEXTILE MILLS LTD. - [2009 -TMI - 33193 - GUJARAT HIGH COURT] in this case: Assessee debited depreciation allowance on the basis of WDV (Written down method) in profit and loss account u/s 115J (1A) and got the same audited by a Chartered Accountant. Whereas in the books of accounts as adopted by the AGM of the company for the 15 months depreciation was debited on the basis of SLM (straight line method). AO denied deprecation on WDV method and calculated depreciation on SLM method - the High Court held that action of AO is wrong and answers the question in favor of assessee. DCIT Vs. ARVIND MILLS LTD. - 2009 TMI - 33194 - GUJARAT HIGH COURT The company prepared a separate profit and loss account subsequently this was also in accordance with Parts II & III of Schedule VI, but was different from the profit and loss account approved at the Annual General Meeting. The question arose whether such an exercise was permissible? Court held that on application of the ratio laid down in Apollo Tyres Ltd. Vs. CIT [2008 -TMI - 6081 - SUPREME Court], only requirement of Sec.115J is that the accounts has to be prepared in accordance with Schedule VI of the Companies Act and certified by the Chartered Accountants and therefore revised accounts (separately prepared for S.115J) are acceptable. Earlier article: At the link http://www.taxmanagementindia.com/visitor/article expert.asp?ID=3 the readers can see articles by the same author in which the following article webhosted on 10.02.2009 is on the same subject: Current provisions: As noted above at present,(since Assessment year 2001-02) Section .115JB is in force. As per S. 115JB (2) the same accounting policies and standards and also the same rate and method of depreciation is to be adopted for the purpose of making profit and loss account for S. 115JB.Therefore the judgments of Gujrat High Court are not of much help for current period. However, brought forward book loss can still be worked out as per profit and loss account prepared for the purposes of S. 115J, for relevant periods in which different accounting policies and different method and rate of depreciation could be adopted. For the period relevant to S. 115JA assessee company can adopt different accounting policies and standards but so far deprecation is concerned the same rate and method is to be adopted as adopted in account laid before AGM., It is worth to mention that as S. 115JB is an independent section and provides for charge of tax and computation of income both. Therefore, it cannot be said that what has been provided subsequently in S. 115JA or in S. 115JB is clarificatory and applicable to S. 115J and 115JA also with retrospective effect. Therefore, for the earlier periods profit and loss account can be prepared accordingly. Since there was no MAT during AY 1991-92 to 1996-97 and there was no S. 115JA it can be said that for guidance purpose separate profit and loss accounts can be prepared as per S. 115J for ascertaining book loss eligible for set off against book profit. Conclusions: It is mandated that a separate profit and loss account should be prepared for the purpose of MAT not only to ascertain current book profit but also brought forward book loss or depreciation whichever is less and is eligible for set off. The purpose for such exercise appears to enable the A.O. to know what is profits of the company for the previous year from its operations. This obviously can be done by giving effect to the notes and qualifications on the profit and loss account laid or to be laid before the AGM. Request from readers: Readers are requested to place their suggestions, remarks and feedback on the website so that the purpose of article can be achieved in greater manner.
By: C.A. DEV KUMAR KOTHARI - May 11, 2009
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