Broadly speaking book profit in context of MAT means profit as shown in the profit and loss account adjusted by additions and deductions as provided in respective sections that is Section115J, Section115JA and Section 115JB. As the profit and loss account is subject to notes and qualifications thereon, the profit shown in the profit and loss account may have to be adjusted with the amount of incomes or expenses not accounted for in the profit and loss account for which disclosure is made in accompanying documents which form part of the profit and loss account as per Section 211 of the Companies Act,1956.
Certain sums not allowable in normal computation are allowable against book profit:
We find that in different situations all expenses debited in the profit and loss account may not be allowable as per provisions applicable in the case of assessee to a particular year and in particular circumstances. For example, certain sums debited in the profit and loss account on account of tax, duty, fees, LTA, PF, interest, ascertained or estimated liability for gratuity etc. may not be allowable under I.T. Act due to specific disallowance provision. However, to prepare accounts as per applicable accounting policies and accounting standards these sums have to be provided in accounts. Therefore such sums are deductible from the profit of the company for the relevant period. And if such sums are debited, they cannot be added back to book profit for the purpose of MAT.
On e can also say that even if such sums are not debited but disclosed by way of note, then also such sums are to be deducted from book profit to ascertain profit for the purpose of MAT. The requirement is that the liability should be ascertained or estimated on reasonable basis. It should not be unascertained or contingent liability.
Gratuity provision is required to be made. For proper estimation scientific methods are available for estimation of gratuity liability which will be payable in future. Actuarial valuation is one of recognized method of estimation of gratuity liability. As per provisions of relevant applicable law like Companies Act,1956 , accounting policies and accounting standard gratuity provision is to be made. If it is not provided a suitable disclosure and qualification may be given on accounts.
Gratuity provision is deductible from book profit- held by ITAT, Mumbai:
Dresser Valve India Pvt. Ltd. v. ACIT decided on April 24, 2009
The Tribunal in appeal no. ITA No. 6464/Mum/2007 considered the matter of provision for gratuity made in accounts but which was not funded in recognized gratuity fund so disallowed under section 40A(7) / under section 43B.
The Tribunal held that the liability was ascertained one and it was deductible from profits as debited in profit and loss account and the A.O. cannot add back the same in book profit for MAT under section 115JB although the same was disallowable in normal computation.
The analysis, observations and order of the Tribunal is summarized below:
Both the parties were heard, the orders, decisions and judgments and provisions of the Income-tax Act were considered.
It is noticed that the objection of the revenue is with regard to the assessee's failure to follow the AS-15 and the 'actuarial method' referred therein and not disputed the quantification of the 'provision of gratuity.
As per revenue the incorrect quantification of the provision makes the provisions as an unascertainable liability and therefore, such provisions should be dealt with as per the provisions of section 115JB read with Explanation1(c) and accordingly, the book provisions should be increased.
As per the assessee it is an ascertained liability duly evidenced from the books and method of quantification does not decide the issue of ascertainment or otherwise of the liability
The provision of section 115JB are code by itself and determination of the book profits has to be done only as per the provisions of section 115JB, which unambiguously provides for exclusion of provisions of ascertained liabilities for the purpose of 'book profits'.
The judgment of the Supreme Court in the case of Bharat Earth Movers [2008 -TMI - 5816 - SUPREME Court] is relevant and the relevant portions of the same reads as under:
"Business liability arising in the accounting year, the deduction should be allowed although the liability may have to be quantified and discharged at a future date. What should be certain is the incurring of the liability. It should also be capable of being estimated with the reasonable certainty without actual quantification. Till these requirements are satisfied the liability is not a contingent one. The liability is one present/' though it will be discharged at a future date. It does not make any difference if the date of liability has to be discharged it is not certain.
The provision are not allowable as deduction, certain provisions which are capable of estimation with reasonable certain without quantification are allowable as they are ascertainable. On finding that the actual quantification is not a legal necessary in matters of ascertainment of the gratuity', we are of the opinion that the provision of gratuity in the assessee's case is capable of being estimated with reasonable certainty and therefore, it is not a contingent or unascertained liability.
Being an ascertained liability the same falls outside scope of the provisions of clause (c) of the Explanation 1 to section 115JB warranting no addition to the 'book profits'.
The relevant ground is allowed in favor of assessee holding that gratuity liability estimated by assessee and debited in profit and loss account cannot be added back to book profit.
The applicability of the rule to some other expenses:
The rule that a liability estimated in a reasonable and scientific method and provided in accounts is allowable against book profit can be applied to some other estimated liabilities like leave encashment liability, pension liability, liability for commitment of warranties and guarantees, liability for after sales services, expected liability in case of insurance companies, liability against disputed dues etc. even though such sums may not be allowable while computing chargeable income as per other provisions relevant to computation of income under different heads.
Similarly certain deductions may not be allowed while computing income under the head income from house properties, income from other sources and capital gains. For example depreciation on let out properties is not allowed while computing income under the head income from house property, however, depreciation provided in profit and loss account cannot be added back.
Other articles on MAT:
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 and 11.05.2009 are on the same of MAT:
'MAT' AND NECESSARY ADJUSTMENT IN BOOK PROFIT IN VIEW OF NOTES, OBSERVATION, DISCLOSURES OR QUALIFICATION ON ACCOUNTS SECOND ARTICLE IN VIEW OF RECENT JUDGMENT OF DELHI HIGH COUTRT By: - C.A. DEV KUMAR KOTHARI Dated: - 10-02-2009
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. By: - C.A. DEV KUMAR KOTHARI Dated: - 11-05-2009