THE FINANCE BILL, 2018 – proposal in MAT provision for some type of companies

[CA DEV KUMAR KOTHARI]

Proposal in nut shell:

As per proposal in case of company against whom an application for corporate insolvency resolution process has been admitted , will be entitled to reduce  the aggregate amount of unabsorbed depreciation and loss brought forward from its current  book profit of previous year.

Doubt must be clarified:

Though in view of context, and continuity of provisions, the expression ‘ the aggregate amount of unabsorbed depreciation and loss brought forward’  should be as per books of account of company.  However, this need to be clarified because one can also read it as aggregate amount of unabsorbed depreciation and loss brought forward, as per provisions of Income-tax Act,1961 also taking the view that before any tax becomes payable, all losses should be set off.

Beneficial or not?:

Whether, this provision will have any benefit to such companies is very doubtful because such company is likely to be seriously sick and there is hardly any chance of profits except in case of massive sales of its assets. In case of sale of assets also, in respect of land, the capital gains can be nominal after considering fair market value of land with benefit of cost inflation index. In case of depreciable assets, also chances of profit being earned will not be very good, because if the assets had appreciated, it would not be a case of insolvency law.

Other proposal for foreign companies : other proposed provision is about non applicability,   w.r.e.f.    assessment year 2001-02) to foreign companies who had offer and have been taxed under some special provisions of presumptive tax, specified in proposal, when company had no other income .

The proposed clause and its explanatory memorandum is reproduced below with highlights added:

From the Finance Bill,2018:

35. Amendment of section 115JB.

In section 115JB of the Income-tax Act,-

(a) in Explanation 1,-

(A) after clause (iig), the following clause shall be inserted, namely:––

‘(iih) the aggregate amount of unabsorbed depreciation and loss brought forward in case of a company against whom an application for corporate insolvency resolution process has been admitted by the Adjudicating Authority under section 7 or section 9 or section 10 of the Insolvency and Bankruptcy Code, 2016(31 of 2016).

Explanation.––For the purposes of this clause, the expression “Adjudicating Authority” shall have the meaning assigned to it in clause (1) of section 5 of the Insolvency and Bankruptcy Code, 2016 (31 of 2016) and the loss shall not include depreciation; or’;

(B) in clause (iii), after the words “books of account”, the words, brackets, figures and letter “in case of a company other than the company referred to in clause (iih)” shall be inserted;

(b) after Explanation 4, the following Explanation shall be inserted and shall be deemed to have been inserted with effect from the 1st day of April, 2001, namely:––

“Explanation 4A.-For the removal of doubts, it is hereby clarified that the provisions of this section shall not be applicable and shall be deemed never to have been applicable to an assessee, being a foreign company, where its total income comprises solely of profits and gains from business referred to in section 44B or section 44BB or section 44BBA or section 44BBB and such income has been offered to tax at the rates specified in those sections.”.

From the Memorandum Explaining proposal:

Clause 35 of the Bill seeks to amend section 115JB of the Income-tax Act relating to special provision for payment of tax by certain companies.

The said section provides for levy of tax on certain companies on the basis of book profit which is determined after making certain adjustments to the net profit disclosed in the profit and loss account prepared in accordance with the provisions of the Companies Act, 2013.

It is proposed to amend Explanation 1 to the said section so as to provide that in case of a company, against whom an application for corporate insolvency resolution process has been admitted by the Adjudicating Authority under section 7 or section 9 or section 10 of the Insolvency and Bankruptcy Code, 2016, the aggregate amount of unabsorbed depreciation and loss brought forward shall be allowed to be reduced from the book profit and the loss shall not include depreciation.

These amendments will take effect from 1st April, 2018 and will, accordingly, apply in relation to the assessment year 2018-2019 and subsequent years.

It is also proposed to insert a new Explanation 4A in the said section so as to clarify that the provisions of the said section shall not be applicable and shall be deemed never to have been applicable to an assessee, being a foreign company, where its total income comprises solely of profits and gains from business referred to in section 44B or section 44BB or section 44BBA or section 44BBB and such income has been offered to tax at the rates specified in the said sections.

This amendment, being clarificatory in nature, will take effect retrospectively from 1st April, 2001 and will, accordingly, apply in relation to the assessment year 2001-2002 and subsequent years.