The Tax PublishersSection C

CHAPTER V

COMPUTATION OF BOOK PROFIT

104. Computation of book profit

(1) Notwithstanding anything in this Code, where the normal income-tax payable for a financial year by a company is less than the tax on book profit, the book profit shall be deemed to be the total income of the company for such financial year and it shall be liable to income-tax on such total income at the rate specified in Paragraph A of the Second Schedule.

(2) Subject to the provisions of this Chapter, the book profit referred to in sub-section (1) shall be computed in accordance with the formula--

A+B-(C+D)

Where

A= the net profit, as shown in the profit and loss account for the financial year prepared in accordance with the provisions of section 105;

B = the aggregate of the following amounts, if debited to the profit and loss account:

(a) the amount of any tax paid or payable under this Code, and the provision therefor;

(b) the amount carried to any reserves, by whatever name called;

(c) the amount set aside as provision for meeting unascertained liabilities;

(d) the amount by way of provision for losses of subsidiary companies;

(e) the amount of dividends paid or proposed;

(f) the amount of depreciation;

(g) the amount of deferred tax and the provision therefor;

(h) the amount set aside as provision for diminution in the value of any asset;

(i) the amount of any expenditure referred to in clause (a) of sub-section (1) of section 18;

C = the aggregate of the following amounts:

(a) the amount of depreciation debited to the profit and loss account (excluding the depreciation on account of revaluation of assets);

(b) the amount withdrawn from the revaluation reserve and credited to the profit and loss account, to the extent it does not exceed the amount of depreciation on account of revaluation of assets referred to in clause (a);

(c) the amount withdrawn from any reserve or provision if any such amount is credited to the profit and loss account and such amount has been taken into account for computation of the book profit of any preceding financial year;

(d) the amount of profits of a sick industrial company for any financial year comprised in the period commencing from the financial year in which the said company has become a sick industrial company under sub-section (1) of section 17 of the Sick Industrial Companies (Special Provisions) Act, 1985 (1 of 1986) and ending with the financial year during which the entire net worth of such company becomes equal to or exceeds the accumulated losses;

(e) the amount of any income referred to in section 10 read with the Sixth Schedule, if credited to the profit and loss account;

(f) the amount of deferred tax, if any such amount is credited to the profit and loss account;

D = the amount of loss brought forward.

(3) In sub-section (2), the loss brought forward shall be--

(i) nil, if such loss brought forward (excluding depreciation) or unabsorbed depreciation as per books of account, as the case may be is nil; or

(ii) the amount of loss brought forward (excluding depreciation) or unabsorbed depreciation as per books of account, whichever is less, in any other case.

(4) In sub-section (2), the amount of tax shall include--

(a) any interest charged or chargeable under this Code;

(b) any tax on distributed profits under section 109 ;

(c) any tax on distributed income under section 110;

(d) any tax paid on branch profits under section 111; and

(e) any tax on wealth under section 112.

(5) Every company to which this section applies shall obtain a report in such form as may be prescribed from an accountant certifying that the book profit has been computed in accordance with the provisions of this section.

(6) In this Chapter--

(a) 'normal income-tax' means the income-tax payable for a financial year by a company on its total income in accordance with the provisions other than the provisions of this Chapter;

(b) 'tax on book profit' means the amount of tax computed on book profit at a rate specified in Paragraph A of the Second Schedule.

FROM NOTES ON CLAUSES

Clause 104 seeks to provide the method of computation of book profit in case of a company for the purposes of computation of the tax payable on such book profit.

The said clause provides that notwithstanding of anything in this Code, where the normal income-tax payable for a financial year by a company is less than the tax on book profit, then the book profit shall be deemed to be the total income of the company for such financial year and it shall be liable to income-tax on such total income at the rate specified in Paragraph A of the Second Schedule. This is essentially the concept of a Minimum Alternate Tax. The terms 'normal income-tax' and 'tax on book profit' used in this sub-clause have been defined in sub-clause (6) of the said clause. Paragraph A of the Second Schedule provides for a rate of tax of twenty per cent. on such deemed total income.

The clause further provides a formula for the calculation of the book profit. The formulas starting point is the net profit of the company computed in accordance with the provisions of Parts II and III of Schedule VI to the Companies Act, 1956. The sub-clause provides for various adjustments to be made to the net profit to determine the book profit. The adjustments have the effect of both increasing and decreasing the net profit. The book profit would be higher than the net profit if the adjustments have a net positive impact and vice versa.

The said clause also provides that every company, to which this clause applies, shall obtain a report in the prescribed form from an accountant certifying that the book profit has been computed in accordance with the provisions of this clause.

FROM MEMORANDUM REGARDING DELEGATED LEGISLATION

Clause 104 of the Bill provides that every company to which this clause in respect of computation of book profit applies, shall obtain a report in such form as may be prescribed from an accountant certifying that the book profit has been computed in accordance with the provisions of this clause.

Accordingly, it is proposed to empower the Central Government to make rules and issue forms in this regard for the purposes of this clause.

105. Preparation of profit and loss account for computing book profit

(1) Every company shall, for the purposes of section 104, prepare its profit and loss account for the relevant financial year in accordance with the provisions of Parts II and III of Schedule VI to the Companies Act, 1956 (1 of 1956).

(2) In this section, the accounting policies, the accounting standards adopted for preparing such accounts including profit and loss account and the method and rates adopted for calculating the depreciation shall, in the case of a company, be the same as have been adopted for the purpose of preparing such accounts including profit and loss account laid by the company at its annual general meeting in accordance with the provisions of section 210 of the Companies Act, 1956 (1 of 1956).

(3) Where the company has adopted or adopts the financial year under the Companies Act, 1956 (1 of 1956), which is different from the financial year under this Code--

(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 financial year.

FROM NOTES ON CLAUSES

Clause 105 relates to preparation of profit and loss account for computing book profit. The said clause seeks to provide the manner in which a company has to prepare its profit and loss account for the purposes of computation of its book profit under clause 104.

Accordingly, the clause provides that the profit and loss account of the company for a financial year shall be in accordance with the provisions of Parts II and III of Schedule VI to the Companies Act, 1956. For the purposes of this clause, the accounting policies, the accounting standards adopted for preparing such accounts (including profit and loss account) and the method and rates adopted for calculating the depreciation shall be the same as have been adopted by the company for the purpose of preparing and laying of such accounts at its annual general meeting in accordance with the provisions of section 210 of the Companies Act, 1956.

The said clause further provides that where the company has adopted or adopts a financial year under the Companies Act, 1956, which is different from the financial year under this Code, then the accounting policies, the accounting standards adopted for preparing such accounts (including profit and loss account) and 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 for such financial year or part of such financial year falling within the relevant financial year.

106. Tax credit for tax paid on book profit

(1) The credit for tax paid by a company under section 104 shall be allowed to it in accordance with the provisions of this section.

(2) The tax credit of a financial year to be allowed under sub-section (1) shall be the excess of tax on book profit over the normal income-tax.

(3) No interest shall be payable on tax credit allowed under sub-section (1).

(4) The amount of tax credit determined under sub-section (2) shall be carried forward and allowed in accordance with the provisions of sub-sections (5) and (6) but such carry forward shall not be allowed beyond the fifteenth financial year immediately succeeding the financial year for which tax credit becomes allowable under sub-section (1).

(5) The tax credit shall be allowed for a financial year in which the normal income-tax exceeds the tax on book profit and the credit shall be allowed to the extent of the excess of the normal income-tax over the tax on book profit, balance of the tax credit, if any, shall be carried forward.

(6) If the amount of normal income-tax or the tax on book profit is reduced or increased as a result of any order passed under this Code, the amount of tax credit allowed under this section shall also be varied accordingly.

(7) In the case of conversion of a private company or unlisted public company into a limited liability partnership under the Limited Liability Partnership Act, 2008 (6 of 2009), the provisions of this section shall not apply to the successor limited liability partnership.

(8) In this section, the expressions 'private company' and 'unlisted public company' shall have the meaning respectively assigned to them in the Limited Liability Partnership Act, 2008 (6 of 2009).

FROM NOTES ON CLAUSES

Clause 106 seeks to provide the manner in which tax credit for a financial year, arising due to payment of income-tax on book profit in such year, is to be calculated and carried forward and the manner in which such tax credit is to be allowed in succeeding years.

The said clause, inter alia, provides that the tax credit of a financial year to be allowed under this clause shall be the excess of tax on book profit over the normal income-tax. In other words, a tax credit would arise only in a year where the company pays income-tax on its book profit. Further, the amount of such tax credit shall be equal to the amount by which the income-tax on book profit exceeds the income-tax on income computed in accordance with the provisions of Part A of the Code (other than the provisions of this Chapter).

The clause also provides that no interest shall be payable on the tax credit allowed under this clause.

The clause further provides that the tax credit shall be allowed in a financial year in which the normal income-tax exceeds the tax on book profit and the credit shall be allowed to the extent of the excess of the normal income-tax over the tax on book profit. In other words, the credit shall be allowed only in respect of the amount of income-tax payable over and above the amount of income-tax that was payable on the book profit. For example, if the normal income-tax payable is one lakh rupees and the income-tax payable on book profit is sixty thousand rupees, then tax credit shall be allowed to the extent of forty thousand rupees only. The balance amount of sixty thousand rupees shall be carried forward for the remaining period.

The clause also provides that the tax credit determined under this clause shall be carried forward and allowed not beyond the fifteenth financial year immediately succeeding the financial year for which the tax credit becomes allowable.

107. Application of other provisions of this Code

Save as otherwise provided in this Chapter, all other provisions of this Code shall apply to a company referred to in this Chapter.

FROM NOTES ON CLAUSES

Clause 107 provides that apart from the specific exclusions provided in this Chapter from the application of certain provisions of the Code, all other provisions of the Code shall apply to a company referred to in this Chapter.

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