9911796707
TMI BlogFramework for computation of book profit for the purposes of levy of MAT under section 115JB of the Income-tax Act, 1961 for Indian Accounting Standards (Ind AS) compliant companies.X X X X Extracts X X X X X X X X Extracts X X X X ..... which is now placed on www.incometaxindia.gov.in for inviting comments/suggestions from stakeholders. The stake holders and general public are requested to bring out issues/points which in their opinion would require further clarification/guidance. These issues/points may be submitted by 10th May, 2016 at the email addresses ([email protected]) or by post at the following address with Computation of book profit for Ind-AS compliant companies written on the envelope: Director (Tax Policy Legislation)-III Central Board of Direct Taxes, Room No.147-G, North Block, New Delhi-110001 (Meenakshi J Goswami) Commissioner of Income Tax (Media and Technical Policy) Official Spokesperson, CBDT. M P Lohia Ex IRS Convener MAT Ind AS Committee Mumbai, the 18th March, 2016 Shri Atulesh Jindal Chairman, Central Board of Direct Taxes, North Block, New Delhi-110001 Sir, Sub: Report 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 thereafter reg. Kindly refer to the Order of Central Board of Direct Taxes (CBDT) ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nies Act, 2013 contains provisions relating to declaration of dividend by a company. The section inter alia provides that the dividend shall be declared out of the profits of the company for the current year or out of the profits of the earlier year. It is further provided that in case of inadequacy of profits, the dividend can be declared out of the accumulated profits of the earlier year which has been transferred to the reserve. It is also specified that reserve for this purpose shall mean free reserves only. Section 2(43) of the Companies Act, 2013 provides that free reserve shall not include any amount representing unrealised gains, notional gains or revaluation of assets, or any change in 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. Thus. section 123 read with section 2(43) prohibits distribution of dividend out of reserves containing notional/unrealised gains. The Committee noted that fair value accounting is predominant in Ind AS and accordingly the net profit and net other comprehensive income of the current year may include a sizeable amount of n ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... esignated 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); viii. 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); ix. 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, and changes in the value of the foreign currency basis spread of a financial instrument when excluding it from the designation of that financial instrument as the hedging instrument (Chapter 6 of Ind AS 109). The MCA suggested that the above principle may be extended for reckoning book profits for the purposes of MAT provisions. 9. The Committee deliberated on the issue and recommends the following I. Based on the inputs from the MCA that current year profits (excluding net other comprehensive income) will be available for distribution as dividends, and consid ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mmittee recommends the following - I. Those adjustments recorded in reserves and which would subsequently be reclassified to the profit and loss account, should be included in book profits in the year in which these are reclassified to the profit and loss account; II. Those adjustments recorded in net other comprehensive income and which would never be subsequently reclassified to the profit and loss account (as discussed in para 9.III above), should be included in book profits as provided in para 9.III above; III. All other adjustments recorded in retained earnings and which would otherwise never subsequently be reclassified to the profit and loss account, should be included in book profits in the year of first time adoption of Ind AS; Section 115JB already provides for certain adjustments for computation of book profit. The above adjustments would be subject to the existing provisions of Section 115JB (e.g. the amount set aside as provision for diminution in the value of any asset is required to be added to book profits and accordingly would not be included in any of the adjustments mentioned above). 11. It may be noted that due to widening of the scope of the terms of reference ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... adjustments indicate that the provisions of section 115JB of the Act seek to compute the realised profit before tax which is available for appropriation/distribution. Hence, there appears to be an implicit relation between the distributable profits which is available for payment of dividend under the Companies Act and the tax base for levying MAT under section 115JB of the Act. 3. Section 123 of the Companies Act, 2013 contains provisions relating to declaration of dividend by a company. The section inter alia provides that the dividend shall be declared out of the profits of the company for the current year or out of the profits of the earlier year after providing for depreciation in accordance with the provisions of Schedule II of the Companies Act, 2013. It is further provided that in case of inadequacy of profit, the dividend can be declared out of the accumulated profits of the earlier year which has been transferred to the reserve. It is also provided that reserve for this purpose shall mean free reserves only. Section 2(43) of the Companies Act, 2013 provides that free reserve shall not include any amount representing unrealised gains, notional gains or revaluation of assets ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... derlying principles for providing different treatment to notional/unrealised gains for distribution of dividend so that the Committee can take an informed view in this matter. 6. Further, section 197 of the Companies Act, 2013 provides that the 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. In view of this requirement and treatment of notional/unrealised gains for the purposes of dividend discussed above, it appears that a company has to calculate the profits excluding the notional/unrealised gains for the purposes of determining the distributable surplus for dividend payment and for determining the base for managerial renumeration. This would require re-writing of accounts especially for an Ind AS compliant company. In view of this, it is requested that the M ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Act, 2013 (which is yet to be notified) is arrived at after considering/ taking into account notional/ unrealized gains which is termed as 'Net Other Comprehensive Income' of the year. 3. This aspect is also desired to be examined in the context of Section 123 of Companies Act, 2013 (dealing with Declaration of Dividend) and Section 198 of Companies Act, 2013 (dealing with calculating profits for the purpose of Managerial Remuneration) as the underlying principle of these provisions also appears to be similar as that of Section 115JB of the Income Tax Act, 1961. 4. The above issue has been examined, in consultation with ICAI and the following observations are made:- (i.) The Ind AS compliant Schedule Ill of the Companies Act, 2013 has been recommended by N ACAS and is under consideration of Ministry. The said Schedule Ill is enclosed for your reference. Items at serial number XIII, XIV and XV may be of relevance. (ii.) The total Comprehensive Income as per proposed Schedule III (Part II) i.e. proposed revised form of Profit loss Account for Ind AS compliant companies, is the aggregate of the Profit for the period and Other Comprehensive income (i.e. Aggregate of items XIII ..... X X X X Extracts X X X X X X X X Extracts X X X X
|
