Dividend Distribution Tax

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Background

• Under section 115-O of the Act, Dividend Distribution Tax (‘DDT’) is an additional tax payable at 20.36% (including applicablecess and surcharge) by a Domestic Company on its distributed profits

• If DDT is not paid within 14 days of declaration/ distribution/ payment of dividend (whichever is the earliest),

• Company would be deemed to be an ‘assessee in default’ as per Section 201 of the Act

• Levy of interest at 1% for every month or part of a month, for delay

• Possible imprisonment under section 276B of the Act

• DDT is payable separately, over and above the income tax liability of a Company

• No deduction or credit allowed to the company for the DDT paid

• No DDT is payable, if dividend is paid to any person for or on behalf of the New Pension System Trust

• Finance Act 2012 has removed cascading effect of DDT in multi tier corporate structure (previously relief was available onlyon a single tier corporate structure)

• Finance Act 2013 removes cascading effect of DDT on dividend received from foreign subsidiary company on fulfillment ofspecified conditions

• Section 115BBD provides for concessional rate of tax of 15% on dividend received by an Indian Company from its foreignsubsidiary

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Dividend(22) "dividend" includes—

(a) any distribution by a company of accumulated profits, whether capitalised or not, if such distribution entails therelease by the company to its shareholders of all or any part of the assets of the company ;

(b) any distribution to its shareholders by a company of debentures, debenture-stock, or deposit certificates in anyform, whether with or without interest, and any distribution to its preference shareholders of shares by way of bonus,to the extent to which the company possesses accumulated profits, whether capitalised or not ;

(c) any distribution made to the shareholders of a company on its liquidation, to the extent to which the distribution isattributable to the accumulated profits of the company immediately before its liquidation, whether capitalised or not ;

(d) any distribution to its shareholders by a company on the reduction of its capital, to the extent to which thecompany possesses accumulated profits which arose after the end of the previous year ending next before the 1st dayof April, 1933, whether such accumulated profits have been capitalised or not ;

(e) any payment by a company, not being a company in which the public are substantially interested, of any sum(whether as representing a part of the assets of the company or otherwise) made after the 31st day of May, 1987, byway of advance or loan to a shareholder, being a person who is the beneficial owner of shares (not being sharesentitled to a fixed rate of dividend whether with or without a right to participate in profits) holding not less than tenper cent of the voting power, or to any concern in which such shareholder is a member or a partner and in which he hasa substantial interest (hereafter in this clause referred to as the said concern) or any payment by any such company onbehalf, or for the individual benefit, of any such shareholder, to the extent to which the company in either casepossesses accumulated profits;

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Dividendbut "dividend" does not include—(i) a distribution made in accordance with sub-clause (c) or sub-clause (d) in respect of any share issued for full cash consideration,where the holder of the share is not entitled in the event of liquidation to participate in the surplus assets ;(ia) a distribution made in accordance with sub-clause (c) or sub-clause (d) in so far as such distribution is attributable to the capitalisedprofits of the company representing bonus shares allotted to its equity shareholders after the 31st day of March, 1964, and before the1st day of April, 1965;(ii) any advance or loan made to a shareholder or the said concern by a company in the ordinary course of its business, where thelending of money is a substantial part of the business of the company ;(iii) any dividend paid by a company which is set off by the company against the whole or any part of any sum previously paid by it andtreated as a dividend within the meaning of sub-clause (e), to the extent to which it is so set off;(iv) any payment made by a company on purchase of its own shares from a shareholder in accordance with the provisions of section77A of the Companies Act, 1956 (1 of 1956);(v) any distribution of shares pursuant to a demerger by the resulting company to the shareholders of the demerged company(whether or not there is a reduction of capital in the demerged company).

Explanation 2.—The expression "accumulated profits" in sub-clauses (a), (b), (d) and (e), shall include all profits of the company up tothe date of distribution or payment referred to in those sub-clauses, and in sub-clause (c) shall include all profits of the company up tothe date of liquidation, but shall not, where the liquidation is consequent on the compulsory acquisition of its undertaking by theGovernment or a corporation owned or controlled by the Government under any law for the time being in force, include any profits ofthe company prior to three successive previous years immediately preceding the previous year in which such acquisition took place.

Explanation 3.—For the purposes of this clause,—(a) "concern" means a Hindu undivided family, or a firm or an association of persons or a body of individuals or a company ;

(b) a person shall be deemed to have a substantial interest in a concern, other than a company, if he is, at any time during the previousyear, beneficially entitled to not less than twenty per cent of the income of such concern ;

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Key aspects► DDT shall not be leviable on distributed profits of a company that is a unit located in IFSC w.e.f tax year 2016-17

provided such company is deriving income solely in convertible foreign exchange. Further, such exemption is available

both to the payer as well as recipient of such dividend.

► Where a business trust holds 100% of the share capital of a domestic company, DDT shall not be chargeable in respect

of any amount declared, distributed or paid by the specified domestic company by way of dividends to the business

trust out of its current income on or after the date of acquisition of such holding by the business trust (w.e.f from 1-6-

2016).

► Where the total income of an individual, Hindu undivided family or a firm, resident in India includes any income in

aggregate exceeding INR 10 Lakh, by way of dividends declared, distributed or paid by a domestic company or

companies, the income-tax payable shall be the aggregate of –

(a) the amount of income-tax calculated on the income by way of such dividends in aggregate exceeding INR 10 Lakh,

at the rate of 10% and

(b) the amount of income-tax with which assessee would have been chargeable had the total income of the assessee

been reduced by the amount of income by way of dividends.

► Further, no deduction in respect of any expenditure or allowance or set off of loss shall be allowed to the assessee in

under the Act in computing the income by way of dividends.

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Quiz Time

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Question 1

ACo pays Rs 100 dividend to its parent, BCo (holds 100% of A Co) on which DDT is paid. BCo

in turn pays Rs 120 dividend to its parent CCo (holds 100% of B Co) on which appropriate

DDT is paid. CCo in turn pays Rs 140 dividend to its shareholders, namely the public. On

what amount would C Co pay DDT? Assume ACo, BCo and CCo are domestic companies.

(a) Rs 140

(b) Rs 40

(c) Rs 20

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Question 2

ACo, a foreign company pays Rs 80 dividend to B Co (holding 26% of ACo) . BCo in turn

pays Rs 100 dividend to its parent CCo (holds 25% of BCo). On what amount would BCo

pay DDT?

(a) Rs 100

(b) Rs 80

(c) Rs 20

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Question 3

FCo pays Rs 100 dividend to its parent, BCo (holds 100% of

F Co) on which tax is paid by BCo in foreign country at the

rate of 15 percent which is available as FTC. B Co pays Rs

120 dividend to its shareholders, namely the public. On

what amount would B Co pay DDT?

(a) Rs 100

(b) Rs 120

(c) Rs 20

F Co

B Co

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Question 4• ACo is a listed company

• BCo is a wholly owned subsidiary of ACo

• On 01.05.2016, BCo declared and paid interim dividend.BCo also paid DDT.

• On 01.08.2016, petition for amalgamation of BCo withACo filed with High Court post approval of shareholderswith appointed date of 1 April 2016.

• High Court order sanctioning amalgamation scheme isreceived in January 2017.

• Amalgamation is tax compliant.

• Pending HC approval, ACo declared and paid dividend toits shareholders.

• Could ACo consider set off of DDT paid by BCo in terms ofS.115 - O?

• Possibility of refund of DDT paid by BCo?

ACo

BCo

Payment ofDividend on1.5.2016

Merges w.e.f.1.4.2016

WOS

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Question 5

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• ACo declares dividend of Rs. 1,000 on 1 August 2013 atAGM for approving financial statements for F.Y. 2012-13.

• DDT of Rs. 170 paid on 10 August, 2013.

• ICo filed its ROI for A.Y. 2013-14 on 30 November 2013.

• In the meanwhile, on 30 October 2013, ACo receivesdividend of Rs. 300 from BCo (subsidiary) for yearended 31.03.2013 in respect of which BCo has paidDDT.

Issues:

• Whether post payment of DDT, ACo can claim set off ofdividend received against dividend paid?

• Can excess DDT be refunded by tax authority?

• Can excess DDT be adjusted against advance tax / selfassessment tax payment?

ACo

BCo

Shareholders

Dividend paid on1 Aug, 2013

Dividend paid on1 Aug, 2013 + DDTu/s. 115-O(1) (30 Oct,2013

Subsidiary

Buy Back Tax

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What is Buyback Tax?

§ The Finance Act, 2013 introduced a tax commonly referred to as the buy-back tax in the hands ofdomestic companies on buy-back of unlisted shares by way of introduction of section 115QA in theIncome-tax Act

§ Tax is payable at the rate of 20 percent on the distributed income on buy-back of such shares.Surcharge shall be levied at the rate of 12 percent.

§ Any gain arising to the shareholders on such buyback shall not be governed by the provisions ofsection 46A of the Act and is specifically exempt by virtue of section 10(34A)

§ Section 115QA defines buyback as “purchase by a company of its own shares in accordance with theprovisions of any law for the time being in force relating to companies”

§ Distributed income is defined as “the consideration paid by the company on buy-back of shares asreduced by the amount which was received by the company for issue of such shares”

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Case I – Impact of bonus issue on buy-back tax liability

Particulars Buyback option

Pre Bonus Post Bonus

Fair Value of the Company 1000 1000

No of shares(Issue price = 10)

10 50

Fair Value per share 100 20

Cash available 100 100

Shares to be bought back (onthe basis of fair value)

1 5 (shares to be bought back out ofthe original lot)

Consideration for buy back 1*100=100 5*20=100

Amount received on issue 1*10=10 5*10=50

Buyback tax at 20% 90*20% = 18 50*20% = 10

Effective tax rate onconsideration

18% 10%

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Case II – Buyback from secondary acquirer

Facts

§ A acquired 100 shares from a domestic company on the original issue at INR10 per share

§ B acquired these 100 shares on a secondary acquisition from A at a transferprice of INR 50 per share

§ All the shares held by B are later bought back by the company

Issue

§ What is the distributed income on which the company is liable to pay buy-back tax? IC

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Case III – Court approved buyback optionIssue

§ Does section 115QA apply to buyback pursuant to a Court approved scheme undersection 391-394 of the Companies Act, 1956?

§ Prior to the Finance Act, 2016 buy back was defined in section 115QA as ‘the purchase bythe Company of its own shares in accordance with the provisions of section 77A of theCompanies Act, 1976.’

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Case IV – Appointed dateIssue

§ The Court approved a scheme for buyback on 1 July 2016, however with an appointeddate of 1 April 2016. Will the buyback transaction be subject to buy-back tax?

§ The amendment by virtue of the Finance Act, 2016 which subjects to tax buy-backtransactions under the provisions of any law relating to companies is effective from 1 July2016.

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Case V – Buyback of shares issued under certaincircumstancesIssue

§ How do you determine the distributed income on the shares bought back, which wereoriginally allotted pursuant to conversion of option, Court approved scheme, bonusshares etc.?

§ Lack of clarity in calculating the distributed income since originally no amount wouldhave been received by the company on issue of such shares.

§ Amendment by Finance Act, 2016

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CBDT Circular No 3/2016§ The Central Board of Direct taxes has observed that the provisions of law regarding buy-

back of shares since introduction of DDT since 1 April 2003 till 31 May 2013 (till theintroduction of buy-back tax) are being interpreted in a conflicting manner by thetaxpayer and the tax authorities.

§ In this regard, it may be worth noting that section 2(22)(iv) specifically excludes buybackunder the provisions of section 77A of the Companies Act, 1956 from the meaning ofdividend.

§ The Board has clarified that buyback during the period 1 April 2003 and 31 May 2013will be taxed as capital gains under section 46A in the hands of shareholders and not asdividend under section 2(22).

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Minimum Alternate Tax

} Objective of MAT is to levy tax on zero tax companies– Companies showing book profits.

◦ Paying out dividends

◦ Not paying tax/marginal tax on account of various incentives

} Section 115JB was introduced by Finance Act 2000 i.e AY 2001-02 – Provides for levy of tax on book

profits at 18.5%

} Earlier governed by section 115J (upto AY 1996-97) and section 115JA (upto AY 2000-01)

} MAT is payable if tax as per regular provisions of the Act is less than 18.5% of “book profits”

} P&L account to be prepared in accordance with Schedule III of Companies Act, 2013

} Banking, insurance and power generation companies to prepare as per governing acts

} Accounting policies/ standards, depreciation rate/method adopted for statutory closing to be

followed

Background and objective

History of MAT

► First introduced vide the Finance Act, 1987 as section 115J.

► Vide Direct tax Amendment Act, 1989, was made inapplicable to a power generation/ distribution company

wef 1 April 1989.

► Vide Finance Act, 1990, the section was made inapplicable wef 1 April 1991.

► Reintroduced (as section 115JA) wef 1 April 1997 vide Finance (No 2) Act, 1996 and made inapplicable wef 1

April 2001 vide Finance Act, 2000.

► Now, MAT is levied as per the provisions of section 115JB which was inserted vide Finance Act, 2000

► Finance Act 2011 introduced Chapter XII-BA comprising sections 115JC to 115JF similar to sections 115JAA

and 115JB whereby MAT was made applicable to LLPs. Further amended by Finance Act 2012, to include all

persons other than corporate assesses.

• Report from CA in Form 29B to certify book profits are computed as per Sec.115JB, now required to be furnished

electronically as per rule 12(2)

• Possible to argue that report should be obtained in all cases irrespective of whether the company is liable to MAT,

since MAT liability can be ascertained only after comparing normal tax liability with book profits

• Section 115JB (4) uses the words “Every Company to which this section applies” implying report to be obtained

only where there is MAT liability

• No penalties are prescribed for not obtaining the report or for not filing the same along with the tax return.

However on a prudent basis the same should be filed.

• Section 139(9) does not consider tax return to be defective if Form 29B is not accompanied

Report in Form 29B

The following adjustments are made to book profits while computing book profit (Provided they have beencredited / debited to the P&L Account respectively)

Additions

Income -tax paid/payable and the provision thereof (*)

Amount transferred to reserves other than reserve for Shipping Business

Provisions for unascertained liabilities

Provisions for losses of subsidiaries

Dividends paid or proposed

Expenditure relating to income falling under section 10(except section 10(38)), section 11 and 12

Depreciation debited to Profit and Loss Account

Amount of deferred tax

Provisions for diminution in value of any asset

Revaluation reserve relating to revalued asset on the retirement or disposal of such asset

Expenditure relatable to income by way of royalty in respect of patent chargeable to tax under section 115BBF

Computation of Book Profit – Section 115JB

The following are certain adjustments which are made to book profits while computing book profit (Provided theyhave been credited / debited to the P&L Account respectively)

Reductions

Amount withdrawn from any reserves / provisions

Income exempt u/s 10/ 11/ 12 [except 10(38)]

Brought forward loss or unabsorbed depreciation, whichever is less, as per books of accounts

Profits derived from sick industrial undertakings.

Depreciation excluding depreciation on account of revaluation of asset

Revaluation reserve to the extent of depreciation on account of revaluation of assets

Amount of deferred Tax

Income by way of royalty in respect of patent chargeable to tax under section 115BBF

Computation of Book Profit – Section 115JB (contd..)

Normal Provisions vis-à-vis MAT

Particulars Amount Particulars AmountOperating expenses 6.00 Sales 10.00Book depreciation 2.00 Dividend Income 1.50

Net Profit 6.00 Profit on sale ofdepreciable assets 2.50

Total 14.00 Total 14.00

Particulars AmountNet Profit as per P/L account 6.00

Less: Dividend income (Exempt) (1.50)

Less: Profit on sale of depreciable assets (2.50)

Net profit after above adjustments 2.00Add: Book Depreciation 2.00

Less: Tax Depreciation (3.00)

Gross Taxable income 1.00Less: Brought forward loss (3.50)

Loss to be carried forward (2.50)

Profit and Loss A/Cof R Co

Computation of GrossTotal Income of R Co

R Co can distribute its Net profit (Rs6 cr) to its shareholders

However having brought forwardlosses it ended up paying no tax

Amount in Rs Cr

Amount in Rs Cr

Particulars Normal Provisions MAT Provisions

Net Profit as per P&L Account 6.00 6.00

Less: Dividend Income[Exempt undersection 10(34)

(1.50) (1.50)

Less: Profit on sale of depreciable assets (2.50) -

Net profit after above adjustments 2.00 4.50Add: Book Depreciation 2.00 2.00

Less: Tax Depreciation/Book Depreciation (3.00) (2.00)

Gross Taxable Income/ Book profit 1.00 4.50Less: Brought forward loss (3.50) -

Loss to be carried forward (2.50) 4.50Tax/MAT (18.5%) Nil 0.83

Normal Provisions vis-à-vis MAT (contd…)

MAT Credit – Section 115JAA► Credit with respect to tax paid under 115JB from AY 2006-07 onwards

► Credit of MAT paid in earlier years can be claimed for a period of 10 years immediately succeeding the year inwhich MAT credit becomes allowable.

► MAT credit becomes allowable in the year when tax becomes payable under normal provisions of Act.

► MAT credit allowable is restricted to difference between-

► tax computed as per normal provisions of Act and MAT payable with respect to book profits of thatfinancial year.

► The set off of tax credit is restricted to difference between

► tax payable as per normal provisions of Act and MAT payable with respect to book profits of thatfinancial year.

► Interest under 234A / 234B is to be charged after MAT credit available is set off against tax payable

► MAT credit provisions ensure that the company will always pay a minimum tax even while offsetting the MATcredit against regular tax.

► MAT credit should be inclusive of surcharge and education cess

MAT Credit - ExampleAY Tax as

per MATprovision

s

Tax as pernormal

provisions

MATCreditset off

Tax payable MATCredit c/f

2010-11 500 300 Nil 500 200

2011-12 1000 650 Nil 1000 550

2012-13 400 750 350 400 200

} AAR ruling in case of Castleton Investments Ltd (348 ITR 537) held that MAT is applicable to all companies,

including Foreign Companies since:

� Section 115JB does not make distinction between Indian Company and Foreign Company;

� Foreign Companies are also required to prepare their accounts as per the requirements of Companies

Act

} The Finance Act, 2015 (FA 2015) inserted a new clause to MAT provision, w.e.f. 1 April 2015, to exclude

certain income of foreign companies from the MAT regime.

} As a result due to uncertainty on applicability of MAT to FII/FPI for the period prior to 1 April 2015,

department levied MAT provisions on host of foreign companies and raised demands. Accordingly, a

committee headed by Justice (Retd.) A.P. Shah was formed by the Ministry of Finance (MoF) to give

recommendations on the subject of levy of MAT on FIIs for the period prior to 1 April 2015

} The Committee recommended that the provisions of MAT may not be made applicable to FIIs/FPIs for the

period prior to 1 April 2015.

} CBDT came out with instruction no 9/2015 dated 2 September 2015 wherein it was communicated that

the Government accepted recommendation of Committee

MAT Applicability – Recent Updates

} MoF, vide its Press Release dated 24 September 2015, has announced that the provisions of MAT will be

amended with retrospective effect from 1 April 2001 to provide that the MAT provisions will not be

applicable to foreign companies in the following circumstances:

� Where the foreign company is resident of a country with which India has entered into a DTAA and

such foreign company does not create a PE in India as per the relevant DTAA

� Where the foreign company is resident of a country with which India has not entered into a DTAA and

such foreign company is not obliged to seek registration under the relevant provision of the

Companies Act, 1956 or the Companies Act, 2013

} Accordingly, foreign companies which do not have a PE in India or which do not establish a place of

business in India in terms of the Companies Act, will now be out of the scope of MAT

} The SC has disposed Castleton's SLP against AAR ruling on MAT applicability after Attorney General has

submitted affidavit that Tax Department shall abide by CBDT circular

MAT Applicability – Recent Updates (contd..)

Introduction

} Chapter XII-BA introduced by Finance Act 2012 whereby AMT was made applicable to

◦ LLPs from AY 2012-2013.

◦ Persons other than corporate assessee from AY 2013-2014

Applicability

} Assesses claiming exemption under section 10AA and deductions under Chapter VIA- C – in relation to certainincomes (except section 80P).

} Relaxation to individual, HUF, AOP and BOI if the adjusted Total Income (‘ATI’) does not exceed Rs. 20 lakhComputation

ATI = Total Income + [Deductions claimed under section 10AA, Chapter VIA (except section 80P), Section 35AD].

Tax Rate

} ATI deemed to be the total income liable to income-tax at the rate of 18.5% (as increased by surcharge and cess asapplicable ) if tax payable under regular provisions lower than 18.5% of ATI

AMT Credit

AMT credit = Tax paid as per AMT less tax payable under other provisions of the Act

Section 115JC – Alternate Minimum Tax (‘AMT’)

Specific Issues

Issue 1: Can an assessing officer go beyond the audited financials?

► As per the provisions of section 115JB, the book profits will be the net profit as shown in the P&L

Account for the relevant period.

► Can AO make adjustments to net profit as per the audited financials of a Company?

Issue 2: Calculation of the loss to be set offConsolidated vs Year on Year approach

► Loss available for set off in fourth year = 500,000.

► Book profit as per 115JB = INR 100,000 (INR 600,000 – INR 500,000)

To determine the taxable profit in 4th year

Consolidated approachYear Profit (loss) excluding

depreciationDepreciation Net profit/loss

1 (300,000) (200,000) (500,000)

2 500,000 (200,000) 300,000

3 (700,000) (200,000) (900,000)

Aggregate (500,000) (600,000) (1,100,000)

4 1,000,000 (400,000) 600,000

Issue 2: Calculation of the loss to be set offConsolidated vs Year on Year approach (contd..)

Year on Year approach

Year Profit (loss)excluding

depreciation(A)

Depreciation

(B)

Netprofit/loss

Set-off Book Profit Lower of (A)and (B)

1 (300,000) (200,000) (500,000) - (500,000) (2,00,000)

2 500,000 (200,000) 300,000 (200,000) 100,000 -

3 (700,000) (200,000) (900,000) - (900,000) (2,00,000)

4 1,000,000 (400,000) 600,000 (200,000) 4,00,000 -

► Loss available for set off in fourth year = 2,00,000.

► Book profit as per 115JB = INR 400,000 (INR 600,000 – INR 200,000)

To determine the taxable profit in 4th year

Facts of the case

} Book profits computed under section115JB of the Act - Rs 10 crores

} Exempt income - Rs 2 crores

} Expenditure incurred for earning exempt income - Rs 1 crore

} Disallowance computed under section 14A(2)/(3) read with Rule 8D - Rs 5 crores

Issue for consideration

Whether computational provisions of section 14A(2)/(3) read with Rule 8D can be applied while computing

book profits under section 115JB?

Issue 3: Applicability of section 14A to Book profits

Issue 4: Applicability of MAT to Foreign CompaniesCase studies

1. X Co Gmbh, a resident of Germany, is engaged in the business of architectural design services. It has

provided certain designs and drawings for the construction of a building in India. The services taxable as

Royalty/ FTS under the Act as well as the relevant DTAA.

Will the provisions of MAT apply to such Company paying tax on a gross basis?

2. Let us assume in the above example that the Company has a Permanent Establishment in India and that

the services are effectively connected to the PE. Will your answer differ in such a scenario?

If MAT is applicable to Companies having a PE in India, should MAT be levied on the global profits or

should it be restricted to the profits attributable to the PE in India?

3. ABC Pte Ltd, a tax resident of Singapore, has a Liaison Office in India. Will the provisions of MAT be

applicable to ABC Pte Ltd by virtue of its liaison office in India?

4. XYZ Mauritius, a tax resident of Mauritius has sold shares in its Indian subsidiary to a third party individual.Considering that the capital gains are not taxable in India by virtue of the India – Mauritius DTAA, wouldXYZ be liable to MAT in India?

Would your answer differ if XYZ is a resident of USA and consequently capital gains are chargeable to tax inIndia?

5. ABC Pty Limited, an Australian Company, is engaged in a business which is eligible for being taxed undersection 44B of the Act. It is taxed at the rate of 10% (excluding surcharge and cess) of its revenues. Will theprovisions of section 115JB be applicable to it?

Key factors to determine applicability of MAT:

► Is the Company liable to tax in India?

► Is the amount of profit and (consequently tax) based on the books of account prepared?

► Is the Company liable to prepare and maintain books of account in India as per Companies Act 2013?

Issue 4: Applicability of MAT to Foreign CompaniesCase studies

} Capital receipt credited to P&L Account – Not taxable under normal computation provisions.

} Capital gains credited directly to reserve – Taxable as capital gains under normal computation provisions.

} Capital gains credited to P&L Account which are exempt under normal computation provisions (Eg. Sec10(38)) . If same gain credited directly to capital reserve?

} Capital gains credited directly to reserve which are exempt under normal computation provisions (Eg.Exemptions under sec 47)

} Gains from transfer of agricultural land which is not a taxable asset

Issue 5:Capital receipt credited to P&L / reserve

• Section clearly provides exhaustive list of items which need to be added back or deducted whilecomputing ‘book profit’

• No other adjustments other than those specified can be made

• Tax Authority has no power to go behind the net profit as per P&L which is approved by statutoryauditors as being compliant with requirement of Cos Act and accounting standards, approved byshareholders and no objection is raised by Registrar of Companies

Issue 7 – Whether TP adjustment /additions canbe made to determine book profits

Issue 8 – MAT credit on Amalgamation

} In case of amalgamation, the credit for prepaid taxeslike advance tax, withholding tax, etc. of theamalgamating company is available to theamalgamated company. However, the same neednot necessarily apply to MAT credit.

} MAT provisions in the Act seem to suggest that theMAT credit is to be availed by the same person whohas paid MAT. Further, the law has not made aspecific provision for transfer of MAT credit to theamalgamated company.

} Thus, there has been a long standing debate on theavailability of MAT credit of the amalgamatingcompany to the amalgamated company.

A Co B Co

Amalgamation

MATCredit1,000

MAT Creditof

A Co?

AmalgamationMAT

Credit1,000

MAT Creditof

A Co?

MAT credit available on Demerger

} In a qualifying demerger under section 2(19AA), all the property of the demerged undertaking gets

transferred to the resulting company.

} The above decision in the case of SKOL Breweries can be equally applied in the context of a demerger and

the term “property” can be considered to include taxes paid by the demerged undertaking and the same

can be transferred to the resulting company if it relates to the demerged undertaking.

} As per section 394(2) of the Companies Act 1956 where the High Court order sanctioning the demerger

has provided for the transfer of the “property” of the demerged company to the resulting company, such

“property” of the demerged company shall be transferred to and vest in the resulting company.

} MAT credit attributable to the demerged undertaking recorded in the books of accounts of the demerged

company as an “asset” should be transferred to the resulting company in a demerger if the same is

specifically provided for in the demerger scheme and the High Court has sanctioned such demerger.

Issue 9 – Provision for bad and doubtful debts andMAT

Year 1

Profit and loss A/C Dr. 100to Provision for bad and doubtful debts 100

Year 2

Provision for bad and doubtful debts Dr. 100to debtors 100

Issue 9 – Provision for bad and doubtful debts andMAT

Year 2

Provision for bad and doubtful debts Dr. 100to Profit & Loss A/C 100

Profit & Loss A/C Dr. 100to debtors 100

Thank You !The information in this pack is intended to provide only ageneral outline of the subjects covered. It should not beregarded as comprehensive or sufficient for making decisions,nor should it be used in place of professional advice.Accordingly, neither Ernst & Young nor any other member ofthe globalErnst & Young organization accepts any responsibility for lossarising from any action taken or not taken by anyone usingthis pack. The information in this pack will have beensupplemented by matters arising from any oral presentationby us, and should be considered in the light of this additionalinformation. If you require any further information orexplanations, or specific advice, please contact us and we willbe happy to discuss matters further.