MAT: ITAT holding MAT not applicable to Banking Company which is not required to prepare profit and loss account as per Schedule VI to the Companies Act. With respect the author has reasons to differ.

[C.A. DEV KUMAR KOTHARI]

Recent decision of ITAT:

Krung Thai Bank PCL Versus Joint Director of Income Tax - InternationalTaxation ,Circle 3(1), Mumbai. [2010 -TMI - 77816 - ITAT, MUMBAI]

Date of Judgment: 30th day of September, 2010

The facts of the case are analyzed below:

1. The assessee is a foreign bank operating in India through its branch office.

2. The original assessment under section 143(3) was completed on 19th September 2006, accepting the income as per return.

3. The Assessing Officer issued notice under section 148 on 29th May 2007. The reasons for so reopening the assessment were as follows :

On perusal of the computation of income, the assessee has shown a profit of Rs 78,32,594 as per profit and loss account. After making necessary adjustments as per normal provisions of the Act, the assessee has shown a total income of Rs 94,74,105. After set off of brought forward loss of AY 2003-04, the assessee has declared nil income. However, the assessee has not computed book profit whereby income chargeable to tax has escaped assessment.

4. Re assessment was completed u/s 143(3) read with S. 147 and the AO computed book profit and imposed tax u/s 115JB- popularly known as MAT on book profit.

5. On first appeal by the assessee the action of the AO was confirmed by the CIT(A), hence the assessee preferred appeal before ITAT.

6. The assessee challenged validity of reassessment proceedings as well as application of S.115JB and assessment of book profits by way of MAT u/s 115JB.

Tribunals observations and order:

On perusal of records and after hearing contentions of parties the Tribunal observed and held on the following lines (Analysis):

A. About contentions raised by assessee/ appellant:

a. The very foundation of impugned reopening the assessment is the assumption that the provisions of Minimum Alternate Tax (MAT) under section 115JB would apply to the assessee.

b. Imposition of MAT u/s 115JB is the only addition made by the Assessing Officer in the reassessment proceedings.

c. On behalf of the assessee it was contended that the provisions of MAT do not apply to the assessee because the provisions of MAT can come into play only when the assessee prepares its profit and loss account in accordance with Schedule VI to the Companies Act. It is pointed out that, in terms of the provisions of Section 115JB(2), every assessee is required to prepare its profit and loss account in terms of the provisions of Part II and III of Schedule VI to the Companies Act . Unless the profit and loss is so prepared, the provisions of Section 115 JB cannot come into play at al l. However, the assessee is a banking company and under proviso to Section 211 (2) of the Act , the assessee is exempted from preparing its books of accounts in terms of requirements of Schedule VI to the Companies Act , and the assessee is to prepare its books of accounts in terms of the provisions of Banking Regulation Act .

d. It is thus contended that the provisions of Section 115 JB do not apply in the case of banking companies which are not required to prepare the profit and loss account as per the requirements of Part II and III of Schedule VI to the Companies Act .

e. Since the provisions of Section 115 JB do not apply to the assessee company, the reasons recorded for reopening the assessment are clearly wrong and insufficient.

f. for this reason, very foundation of impugned reassessment proceedings is devoid of legally sustainable merits.

g. The assessee has urged to quash the reassessment proceedings on this short ground.

B. On behalf of Revenue/ Respondent:

a. Learned Departmental Representative relied upon the orders of the authorities below.

b. There is no specific exclusion clause for the banking companies, and in the absence of such a clause, it is not open to infer the same.

c. The contentions of assessee are clearly contrary to the legislative intent and plain wordings of the statute.

C. Tribunal's findings and order:

(i) The provisions of Section 115 JB can only come into play when the assessee is required to prepare its profit and loss account in accordance with the provisions of Part II and III of Schedule VI to the Companies Act.

(ii) The starting point of computation of minimum alternate tax under section 115 JB is the result shown by such a profit and loss account.

(iii) In the case of banking companies, however, the provisions of Schedule VI are not applicable in view of exemption set out under proviso to Section 211 (2) of the Companies Act .

(iv) The final accounts of the banking companies are required to be prepared in accordance with the provisions of the Banking Regulation Act .

(v) The provisions of Section 115 JB cannot thus be applied to the case of a banking company.

(vi) The plea of the assessee is thus indeed well taken, and it meets our approval.

(vii) In Maharshtra State Electricity Board vs JCIT (82 ITD 422), it was held that provisions of MAT cannot be applied to electricity companies.

(viii) for mutually similar reason The Tribunal uphold the plea of the assessee and held that the provisions of Section 115 JB do not apply to the assessee, and as such, the Assessing Officer was in error in concluding that income had escaped assessment in the hands of the assessee.

(ix) The very initiation of reassessment proceedings was bad in law, and the Tribunal quashed the same and allowed appeal of assessee on Ground No. 1.

(x) Tribunal found no need to address other grievances raised by the assesse as they became academic when very initiation of reassessment proceedings has been quashed.

(xi) This decision will also govern the question whether on merits the addition on account of MAT under section 115JB could have been made; that is the only quantum addition made in the reassessment proceedings.

(xii) Other facets of validity of reopening, as pointed out on behalf of assessee were not required to be considered as tribunal have come to the conclusions as above, sp Tribunal did not deal with those arguments.

(xiii) In the result, appeal was allowed in the terms indicated above.

Authors view:

About reassessment:

So far initiation and completion of reassessment proceedings are concerned, it can be said that they were not done properly and with jurisdiction as there is only a change of opinion and that too without any tangible material and based on that reassessment cannot be undertaken. The assessee has submitted audited accounts before completion of regular assessment u/s 143(3) and at that time the A.O. has considered that S. 115JB is not applicable. As the assessment was made u/s 143(3), the AO could have asked the assessee to prepare a profit and loss account for the purpose of S. 115JB in accordance with sub-section (2) of the section 115JB. When that was not done, it is clear that the A.O. has considered that S. 115JB was not applicable in the case of assessee. Therefore, issuance of notice to reassess the income was based on mere change of opinion.

About non-applicability of S. 115JB

About non applicability of S. 115JB to any banking company or electricity company or insurance company etc., with due respect, the author has different views. In Companies Act it is found that such companies can prepare their annual accounts as per respective separate laws applicable in their case. In some circumstances even other companies can also get central governments permission to prepare their annual accounts in some other form (other than the one prescribed in Schedule VI).

Under the Companies Act the requirement is for the Balance Sheet and Profit and Loss Account and the Profit and Loss Account is annexed to the Balance Sheet. As noted above in some circumstances, companies may not prepare the annual account and more particularly the profit and loss account as per the Schedule VI to the said Act.

On reading of section 115J ,115JA and 115JB (MAT sections)we find that, only to address this aspect it is specifically provided in these sections that that every assessee being a company shall for the purpose of these sections prepare the profit and loss account as per part II and III of the Schedule VI to the companies Act 1956. Under MAT sections the tax is to be imposed with reference to book profit, therefore the requirement is only to prepare the P & L account and not the balance sheet.

As per sub-section (2) of S. 115JB ( similarly in case of S. 115J and 115JA), for the purpose of that section, it is mandatory for any company to prepare its profit and loss account as per Parts II and III of Schedule VI to the Companies Act, 1956. The said sub-section reads as follows:

(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 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 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.

 Author's views:

In view of the above provision, author feels that even a banking company, insurance company, power/ electricity company or any company exempted and allowed to prepare annual account in some other form is required to prepare a separate Profit and Loss account for the purpose of S. 115JB (also in case of section 115J and 115JA we find similar mandate).

In the Income Tax Return Form for companies also we find a question as to whether the profit and loss account is prepared as per part II and III of the Schedule VI to the Companies Act. In case the profit and loss account is not so prepared, then it is obligatory for such company to prepare a profit and loss account as per these provisions, specifically for the purpose of MAT provisions.

Case of Maharastra State Electricity Board (MSEB) 82 ITD 422 [2010 -TMI - 77817 - ITAT MUMBAI] was not applicable:

The Tribunal has followed this decision of co-ordinate bench. With respect the author feel that the decision in this case cannot be applied to any company which is a company under the Companies Act. Every electricity company, insurance company or banking company is mandatorily required to prepare profit and loss account as per part II and III of of Schedule VI to the Companies act.

The case of MSEB (or any other SEB on their facts) is different. They are not companies incorporated under the Companies Act. They are Electricity Board established to serve some vital public purposes and not as a government company intended to earn profit for the government.

On reading of the decision in case of MSEB we find that the Tribunal has another reasons to hold that S. 115JA was not applicable in that case. The following reasons are important for the purpose of our present study:

MSEB was not and constituted as company and cannot be deemed a company within the meaning of section 3 of the Companies Act.

MSEB cannot be deemed a company within the meaning of S. 616 (c) of the Companies Act.

In case of MSEB there is no question of holding of an AGM as in case of any company.

MSEB is not a company, in the context of MAT provisions and is not required to distribute dividend, therefore S. 115JA is not applicable.

The Tribunal also noted the difference between other electricity company and MSEB. It observed that Tata Electric Company Ltd, being a company engaged in generation and distribution of power is a company incorporated under the Companies Act and is also accompany within meaning of S. 616(c) of the Companies Act, but MSEB is not such a company, though engaged in generation and distribution of power.

Thus, in that case it was held that MSEB is not a company, is not required to prepare profit and loss account as per part II and III of Schedule VI to the Companies Act, is not required to distribute dividend, and is not a company for the purpose of S. 115JA.

Thus, case of an electricity board and an electricity company as well as banking company or insurance company are different. A company is mandatorily required to prepare profit and loss account for the purpose of MAT provisions in accordance with the part II and III of the Schedule VI to the Companies Act even if it can prepare its profit and loss account in some other form as per the provisions of the Companies Act.

Therefore, in this regard, the author has different views.

Weaknesses on behalf of revenue:

With due regards to the officers and counsels of the revenue author feels that the case was not properly pursued and represented by the revenue for the following reasons:

In the original assessment itself the AO could have required assessee to prepare and submit a profit and loss account as per part II and III of the Schedule VI to the Companies Act. Having failed to do so, it can be said that the AO has formed an opinion that MAT provision was not applicable to the branch of a foreign banking company.

The reasons given for initiation of reassessment proceedings were not sufficient, proper and complete.

Difference between MSEB and a company or deemed company was not properly borne out by the counsels of the revenue. The reasoning in case of MSEB were not applicable in case of banking company was not pressed.

Other possible contentions on behalf of assessee:

In this case the assessee could have argued that S. 115JB was not applicable for the following reasons:

a. There was no gross total income- after set off of past loss, assessee still had further losses to be carried forward so it is not a profit making company,

b. In absence of GTI, deductions under chapter VIA could not be claimed.

c. Total income could not be computed- the process of computing total income came to a halt once gross total income was reduced to nil after set off of the past losses.

d. Tax payable could not be computed,

e. When a computation of 'total income' and 'tax payable' could not be completed, the computation provisions could not be applied and therefore, the charging section also could not be applied. This is because S. 115JB is a self contained code consisting of charging provision and computation provision, and when a computation fails, charge also fails.

Conclusion:

In view of author, in case of a banking company, insurance company or power generation company or any other company who is not required to or is exempted from requirement to prepare its profit and loss account as per Part II and III of the Schedule VI to the Companies Act, it is mandatory that if the profit and loss account is not so prepare, then to prepare the profit and loss account in such manner for the purpose of MAT provisions. For that reason alone it cannot be said that MAT provisions shall not apply to such companies, though there can be some other reasons for non applicability of MAT in different circumstances.