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TMI BlogReport regarding framework for computation of book profit for the purposes of levy of Minimum Alternate Tax (MAT) under section 115JB of the Income-tax Act, 1961 for Indian Accounting Standards (Ind AS) compliant companies in the year of adoption and thereafterX X X X Extracts X X X X X X X X Extracts X X X X ..... nies in the year of adoption and thereafter. The Committee discussed in detail the provisions of section 115JB of the Act, Ind AS and relevant sections of the Companies Act, 2013 during its meetings held for suggesting framework for computation of books profit of Ind AS compliant companies. 2. The provisions of section 115JB of the Act provide for levy of MAT on the basis of "book profit" i.e. the net profit disclosed in the profit and loss account prepared in accordance with the provisions of the Companies Act. For determining the book profit, section 115JB of the Act provides for certain adjustments mainly for items relating to income-tax, appropriation of profit, adjustment for brought forward loss/unabsorbed depreciation, revaluation of assets, distribution of dividend, etc. The adjustment for brought forward loss/unabsorbed depreciation is provided on the basis of the provisions contained in section 205 of the Companies Act, 1956 which provides computation machinery for determining the amount available for distribution of dividend. The adjustments indicate that the provisions of section 115JB of the Act seek to compute the realised profit before tax which is available for app ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f notional/unrealised gains only and is silent about the treatment of notional/unrealised losses. 6. Section 197 of the Companies Act, 2013 provides that total managerial remuneration payable by a public company should not exceed 11% of the net profit for that year. Section 198 of the Companies Act which contains the mechanism for computation of profit for this purpose inter alia provides that profit for this purpose shall not include any changes in the carrying amount of an asset or of a liability recognized in equity, including surplus in profit and loss account on measurement of the asset or the liability at fair value. 7. In view of the above differing requirements in the Companies Act for treatment of unrealised/notional gains and losses, the Committee issued a letter dated 27th July, 2015 (enclosed as Annexure A) requesting the CBDT for seeking clarifications on these issues from Ministry of Corporate Affairs (MCA). 8. The MCA vide letter from File No. 17/134/2015 CL V dated 11th January, 2016 (enclosed as Annexure B) intimated that all notional/ unrealized gains included in Net other comprehensive income are required to be excluded for the purposes of arriving at distribu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ompliant companies, other than those already specified under section 115JB of the Act. II. As discussed, the net profits (excluding net other comprehensive income) under Ind AS may include a sizeable amount of notional/unrealised gains or losses. In the event that the MCA prescribes any further adjustments to the current year profits (excluding net other comprehensive income) for computation of distributable profits, the requirement for any additional adjustments to the book profit under section 115JB may be examined. III. As discussed in para 3 above, the net other comprehensive income includes certain items that will permanently be recorded in reserves and hence never be reclassified to the statement of profit and loss account/ included in the computation of book profits. The Committee recommends that these items should be included in book profits for MAT purposes at an appropriate point of time. An illustrative list of such items along with the recommended treatment for MAT is given below - SI. No. Items Recommended treatment 1 Changes in revaluation surplus (Ind AS 16 and Ind AS 38) To be included in book profits at the time of realisation/ disposal/ retirement 2 Re ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... a) Convener of MAT - Ind AS Committee Encl : as above ANNEXUR-A M.P. LOHIA Ex IRS Convenor MAT - Ind AS Committee Mumbai 274 July, 2015 Smt. Anita Kapur The Chairperson Central Board of Direct Taxes North Block, New Delhi-110001. Madam, Sub : Request for seeking clarification/guidance from MCA in respect of application of certain provisions of Companies Act, 2013 to Ind As compliant companies - reg. Kindly refer to the Order of Central Board of Direct Taxes (CBDT) from F. No. 133/23/2015- TPL dated 8th June, 2015 constituting this Committee to inter alia suggest the framework for computation of book profit for the purposes of levy of Minimum Alternate Tax (MAT) under section 115JB of the Income-tax Act, 1961 ('the Act') for Indian Accounting Standards (Ind AS) compliant companies in the year of adoption and thereafter. The Committee discussed in detail the provisions of section 115JB of the Act, Ind AS and relevant sections of the Companies Act, 2013 during its meetings held for suggesting framework for computation of books profit of Ind-As compliant companies. During the discussion, it was felt by the Committee that it is not possible to recomm ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ial statement in the annual general meeting For an Ind AS Compliant company, the financial statements shall include balance sheet, profit & loss account and statement of change in equity. An Ind AS compliant company shall be required to bifurcate its profit and loss account into following three parts :- A. Net profit or loss for the year; B. Net other comprehensive income to be reclassified to profit or loss in subsequent periods (the items included in this part shall be routed to the profit and loss account of the future period on happening of certain events); and C. Net other comprehensive income not to be reclassified to profit or loss in subsequent periods (the items included in this para shall never be routed to the profit and loss account of the future period). 5 Section 123 of the Companies Act, 2013, as discussed above, prohibits distribution of dividend out of reserves containing notional/unrealised gains. However, the dividend is allowed to be paid out of profits of the current year/earlier year without any restriction in respect of notional/unrealised gains. The fair value accounting is predominant in the Ind AS, therefore, the net profit/net other comprehensive i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... er, the definition of free reserve under section 2(43) of the Companies Act, 2013 provides for exclusion of notional/unrealised gains only and is silent about the treatment of notional/unrealised losses. Hence, the MCA may also be requested to provide clarity for treatment of notional/unrealised losses for the purposes of computation of free reserve. With introduction of Ind AS, the computation of the profits after excluding the unrealized / notional gains / losses would involve complex computations. It is therefore necessary also to ascertain from MCA that whether they are considering any change in the law for avoiding such complex computations for determining the profits for distribution of profits or managerial remuneration, etc. 8. As per the order dated 8th June, 2015 referred to above, the Committee was supposed to submit its interim report on the issue of MAT calculation of Ind AS compliant companies by 31" July, 2015. The Committee had deliberated this issue in detail in its three meetings, however, due to uncertainty on the issues relating to application of certain provisions of the Companies Act, 2013 mentioned above, the interim report could not be finalised. In view of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ncial statements of a foreign operation (Ind AS 21); (d) gains and losses from investments in equity instruments designated at fair value (Ind AS 109), (da) gains and losses on financial assets measured at fair value (Ind AS 109), (e) the effective portion of gains and losses on hedging instruments in a cash flow hedge and the gains and losses on hedging instruments that hedge investments in equity instruments measured at fair value through other comprehensive income in accordance with paragraph 5.7.5 of Ind AS 109 (Ind AS 109), (f) for particular liabilities designated as at fair value through profit or loss, the amount of the change in fair value that is attributable to changes in the liability's credit risk (Ind AS 109), (g) Changes in the value of the time value of options when separating the intrinsic value and time value of an option contract and designating as the hedging instrument only the changes in the intrinsic value (Chapter 6 of Ind AS 109), (h) Changes in the value of the forward elements of forward contracts when separating the forward element and spot element of a forward contract and designating as the hedging instrument only the changes in the spot element, a ..... 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