Landmark Cases on Presumptive and Book Profits (MAT)

No disallowance under section 14A can be made while computing book profits under section 115JB unless the expenditure is debited to the profit and loss account and satisfies clause (f) of Explanation 1 to section 115JB(2).

Disallowance computed under Section 14A, read with Rule 8D, cannot be added to book profits under Section 115JB for Minimum Alternate Tax (MAT) purposes. Additionally, for Section 14A disallowance, only investments that yielded exempt income during the year are considered for calculating their average value.

For the purpose of computing book profits under Section 115J, arrears of depreciation, including those arising from assets working extra shifts, are a necessary charge on profits if debited to the profit and loss account and are allowable as such.

Tax liability for an item of income or expenditure is determined solely by the provisions of the Income-tax Act. Entries in an assessee's books of account are not conclusive and do not govern the taxability or deductibility of an item, as the legal rights and obligations under the Act prevail.

A provision for doubtful debts cannot be added back while computing book profits under Section 115JB of the Income-tax Act for Minimum Alternate Tax (MAT) purposes.

The Supreme Court held that the 'project completion method' and the 'percentage of completion method' are recognized accounting methods for ascertaining profit for contracts. The case affirms these methods in the context of contract accounts.

Capital receipts, including interest subsidy received under schemes like TUF, are excluded when computing book profits under Section 115JB of the Income Tax Act. This principle also extends to the reduction of provisions written back from book profits for MAT purposes.

Disallowance under Section 14A for expenses relating to exempt income is required while computing book profit under Section 115JB. An Assessing Officer's order is erroneous for revision under Section 263 if the view taken was not plausible, legally unsustainable, and incorrect, requiring a recorded finding.

For computing book profits under Section 115JB, an Assessing Officer's power is limited to examining duly certified books and making adjustments only as per the Explanation. A provision for bad and doubtful debts, being a diminution in the value of an asset (receivable), does not constitute a 'provision for liability' under Clause (c) of the Explanation and therefore cannot be added back.

When tax is levied under Section 115JB on book profits, no penalty under Section 271(1)(c) for concealment or furnishing inaccurate particulars can be imposed based on additions or disallowances made in the regular computation of income. The regular computation is only for comparative purposes when the final tax liability is based on book profits.

Book profits under Section 115JB must include income by way of capital gains, similar to how total income is calculated under Section 45.

Section 115JB is a self-contained code for computing book profit, which relies on audited financial statements subject to adjustments under Explanation 1. Restrictions on export profit deductions under Section 80HHC(1B) for normal tax computation do not automatically apply when computing book profits under Section 115JB.

For computing presumptive income under Section 44BB, gross receipts do not include service tax reimbursements received from a client (like ONGC) if such amounts are not payments for services or plant/machinery directly used in the prospecting, extraction, or production of mineral oils.

Service tax paid to the Government of India is not 'on account of' the provision of services for mineral oil exploration and production, and thus does not form part of the aggregate taxable amount under Section 44BB(2)(a) and (b).

Capital receipts, such as interest and power subsidy, are not includible in book profit under Section 115JB as they do not fall within the definition of income under Section 2(24).

Wealth tax paid by an assessee cannot be added back to net profit for the purpose of computing book profit under section 115J or section 115JB, as wealth tax is not included in the definition of 'income-tax' under the Explanation to these sections.

For Minimum Alternate Tax (MAT) under Section 115JB, the book profit must reflect the true working results of the company. Capital receipts that are not income cannot be included in book profit, and adjustments based on notes on accounts can be made to arrive at the real profit.

The ITAT Special Bench in Rain Commodities Ltd. held that certain capital receipts, such as forfeited share warrants, if credited to the profit and loss account, are liable for book profits tax under Section 115JB (Minimum Alternate Tax).

When computing book profit under Section 115JA, amounts mentioned in the notes to accounts of financial statements must be considered, even if they are not directly debited to the profit and loss account.

Section 43B does not apply to electricity duty collected by an assessee under the Electricity Duty Act, as such amounts are not 'sums payable by the assessee by way of tax or duty'. The decision also clarifies the applicability and calculation of book profits under Section 115JB.

Disallowance under Section 14A cannot exceed the actual exempt income earned, and only investments that have yielded or are capable of yielding exempt income are considered for Rule 8D computation. The Assessing Officer must record objective satisfaction before rejecting the assessee's disallowance and applying Rule 8D, a principle also applicable to Section 115JB.

The assessment of profits for an insurance business is exclusively governed by the specific rules prescribed in the First Schedule to the Income Tax Act and Section 44, thereby precluding the Assessing Officer from applying general computation provisions, such as sections 28 to 43B, disallowances under Section 14A, or making adjustments outside these specific statutory rules.

Disallowance of expenditure incurred for earning exempt income under Section 14A read with Rule 8D must be added back to the book profit when computing Minimum Alternate Tax under Section 115JB. This addition is justified in terms of clause (f) to Explanation 1 of Section 115JB(2).

An amendment to a section is declaratory and clarifies the existing legal position, rather than introducing a new rule.

Provisions related to Section 14A, particularly its sub-sections (2) and (3), cannot be applied to clause (f) of the Explanation to Section 115JA for computing book profit. Amounts disallowed under Section 14A cannot be added to arrive at book profit under Section 115JB.

Book profit for Minimum Alternate Tax (MAT) under Section 115J/115JB is confined to business profit and does not include profit from the realization of assets, such as capital gains. Specifically, amounts exempted under sections like 54E or 54EC, being capital receipts, cannot be taxed under MAT.

A subsidy not in the nature of income, even if credited to the profit and loss account, cannot be regarded as income for the purpose of computing book profit under section 115JB of the Income-tax Act and must be excluded.

Provision for bad and doubtful debts, if it amounts to an actual write-off by reducing the sundry debtors balance from the asset side of the Balance Sheet, cannot be added back when computing book profits under Section 115JB read with Explanation (i) of the Income Tax Act.

Disallowance under Section 14A read with Rule 8D cannot be made if no exempt income is earned in the relevant assessment year. Consequently, such disallowance should not be added back while computing book profits under Section 115JB.

A provision made for Unclaimed Prior Revenue (UPR) is not an item to be added back to book profit under Explanation 1 to section 115JB(2) of the Income Tax Act, 1961.

For computing profits under the presumptive taxation scheme of section 44BB, gross revenue excludes service tax collected and deposited by the assessee but includes mobilization/demobilization fees for offshore services.

The lower of unabsorbed depreciation or business loss is deductible from book profits under Clause (iii) of Explanation 1 to Section 115JB. Capital receipts, such as forfeiture of share warrants, which do not have the character of income, are not liable for book profits tax under Section 115JB.

The amount transferred to Debenture Redemption Reserve is to be excluded when computing book profit under section 115JB for the purpose of Minimum Alternate Tax.

A Debenture Redemption Reserve (DRR) does not constitute a "reserve" because it represents an amount set apart to meet a known liability, specifically the obligation to repay debentures. Funds allocated for a present obligation cannot be classified as a reserve.

The computation provisions for long-term capital gains, including the benefit of indexation under sections 45, 48, and 112, are applicable when determining book profits under section 115JB(5) for Minimum Alternate Tax, unless explicitly overridden, ensuring the 'real income' is taxed.

Disallowance under section 14A is a notional disallowance and cannot be added back while computing Book Profits under section 115JB for Minimum Alternate Tax purposes.

Presumptive taxation provisions, such as those under Section 44AC, are intended to simplify income calculation, not to levy tax when there is no actual income. Such provisions may not be applicable in cases where an assessee incurs losses or where they lead to an unconscionable taxation on gross income.

Interest under sections 234B and 234C is leviable for failure to pay advance tax, even when the income tax is ultimately computed under Minimum Alternate Tax (MAT) provisions, specifically sections 115JA or 115JB. This ruling clarified the law, overturning previous interpretations.

Disallowance of expenditure under section 14A can be added to book profit computed under section 115JB, as per the ruling in DCIT v. Viraj Profiles Limited.

When income is accepted or estimated under presumptive taxation schemes like Section 44AD or Section 44AE, the assessee is not obligated to explain each and every cash deposit in their bank account. Consequently, additions made for unexplained peak credit in such cases are not sustainable.

For computing book profits under Section 115JB, the Assessing Officer cannot make disallowance under Section 14A, as the power to adjust net profit is limited to what is explicitly provided in the Explanation to Section 115J/115JB.

When bogus purchases are detected but the corresponding sales are not doubted, the addition to income should be restricted to the profit element embedded in such purchases, rather than the entire purchase amount, by estimating a fair rate of profit.

For banking companies, the machinery provisions of Section 115JB(2) of the Income Tax Act are unworkable due to a legal dichotomy created by the first proviso.

A reserve set apart to meet a known liability is not a reserve for the purposes of accounting, but rather a provision for a liability. This means it cannot be considered a reserve for tax purposes.

A form prescribed under the Income-tax Rules cannot override the parent statute; the set-off of MAT credit balance against tax is not dependent on the computation of interest under section 234B.

Disallowance under Section 14A is not to be considered while computing book profits under Section 115JB of the Act.

Capital gains arising on a depreciable asset, which are exempt under Section 50, are to be excluded from the calculation of deemed profits under Section 115JA, as the exemption is preserved by Section 115JA(4).

Dividend Distribution Tax (DDT) is a tax on the profits of the domestic company, not on the shareholder. The Supreme Court's decision in Tata Tea Co. Ltd. did not address the precise nature of DDT as a tax on the company versus the shareholder.

Exempt capital gains must be considered when computing book profits under Section 115JB. Book profits cannot be arbitrarily adjusted.

Adjustments to book profits under section 115JB of the Income Tax Act, 1961, are restricted to those explicitly provided in Explanation 1 to section 115JB(2). The Assessing Officer lacks the jurisdiction to make adjustments beyond those specified in the Explanation, even if related to depreciation or other disallowances.