MEMORANDUM OFASSOCIATION

The preparation of Memorandum of Association is the first step in the formation of a company. It is the main document of the company which defines its objects and lays down the fundamental conditions upon which alone the company is allowed to be formed. It is the charter of the company. It governs the relationship of the company with the outside world and defines the scope of its activities. Its purpose is to enable shareholders, creditors and those who deal with the company to know what exactly is its permitted range of activities.

Printing and signing of Memorandum.

The memorandum of Association of a company shall be (a) printed, (b) dividedinto paragraphs numbered consecutively, and (c) signed by prescribed number ofsubscribers (7 or more in the case of public company, two or more in the case ofprivate company respectively).

Contents of Memorandum

1. Name Clause :Promoters of the company have to make an application to the registrar ofCompanies for the availability of name. The company can adopt any name if :

i.) There is no other company registered under the same or under an identical name;ii.) The name should not be considered undesirable and prohibited by the Central Government. A name which misrepresents the public is prohibited by the Government under the Emblems & Names (Prevention of Improper use)Act, 1950 for example, Indian National Flag, name pictorial representation of Mahatma Gandhi and the Prime Minister of India, name and emblems of the U.N.O., and W.H.O., the official seal and Emblems of the Central Government and State Governments.

iii) Once the name has been approved and the company has been registered, then

a) the name of the company with registered office shall be affixed on outside of the business premises;

b) if the liability of the members is limited the words “Limited” or “Private Limited” as the case may be, shall be added to the name; [Sec 13(1) (1)]:

Omission of the word ‘Limited’ makes the name incorrect. Where the word’Limited” forms part of a company’s name, omission of this word shall make the name incorrect. If the company makes a contract without the use of the word “Limited”, the officers of the company who make the contract would be deemed to be personally liable

c) the name and address of the registered office shall be mentioned in all letterheads, business letters, notices and Common Seal of the Company, etc.

2. Registered Office Clause

Memorandum of Association must state the name of the State in which the registered office of the company is to be situated. Further, every company must have a registered office either from the day it begins to carry on business or within 30 days of its incorporation, whichever is earlier, to which all communications and notices may be addressed. Registered Office of a company is the place of its residence for the purpose of delivering or addressing any communication, service of any notice or process of court of law and for determining. It is also the place for keeping statutory books of the company.

3. Object Clause:

This is the most important clause in the memorandum because it not only shows the object for which the company is formed but also determines the extent of the powers which the company can exercise in order to achieve the object or objects.Stating the objects of the company in the Memorandum of Association is not a mere legal technicality but it is a necessity of great practical importance. It is essential that the public who purchase its shares should know clearly what are the objects for which they are paying.

i) Main Objects : This sub-clause has to state the main objects to be pursued by the company on its incorporation and objects incidental or ancillary to the attainment of main objects.

ii) Other objects: This sub-clause shall state other objects which are not included in the above clause.

Further, in case of a non-trading company, whose objects are not confined to one state, the objects clause must mention specifically the States to whose territories the objects extend.

While drafting the objects clause of a company the following points should be kept in mind.

i) The objects of the company must not be illegal, e.g. to carry on lottery business.ii) The objects of the company must not be against the provisions of the CompaniesAct such as buying its own shares declaring dividend out of capital etc.iii) The objects must not be against public, e.g. to carry on trade with an enemy country.iv) The objects must be stated clearly and definitely. An ambiguous statement like“Company may take up any work which it deems profitable” is meaningless.v) The objects must be quite elaborate also. Note only the main objects but the subsidiary or incidental objects too should be stated.

4. Capital Clause :

In case of a company having a share capital unless the company is an unlimited company, Memorandum shall also state the amount of share capital with which the company is to be registered and division thereof into shares of a fixed amount

The capital with which the company is registered is called the authorized or nominal share capital. The nominal capital is divided into classes of shares and their values are mentioned in the clause. The amount of nominal or authorized capital of the company would be normally, that which shall be required for the attainment of the main objects of the company. In case of companies limited by guarantee, the amount promised by each member to be contributed by them in case of the winding up of the company is to be mentioned. No subscriber to the memorandum shall take less than one share. Each subscriber of the Memorandum shall write against his name the number of shares he takes.

5. Liability Clause:

In the case of company limited by shares or by guarantee, Memorandum of Association must have a clause to the effect that the liability of the members is limited. It implies that a shareholder cannot be called upon to pay any time amount more than the unpaid portion on the shares held by him. He will no more be liable if once he has paid the full nominal value of the share.

The Memorandum of Association of a company limited by guarantee must further state that each member undertakes to contribute to the assets of the company if wound up, while he is a member or within one year after he ceased to be so, towards the debts and liabilities of the company as well as the costs and expenses of winding up and for the adjustment of the rights of the contributories among themselves not exceeding a specified amount.Any alteration in the memorandum of association compelling a member to take up more shares, or which increases his liability, would be null and void.

In this clause, the subscribers declare that they desire to be formed into a company and agree to take shares stated against their names. No subscriber will take less than one share. The memorandum has to be subscribed to by at least seven persons in the case of a public company and by at least two persons in the case of a private company. The signature of each subscriber must be attested by at least one witness who cannot be any of the subscribers. Each subscriber and his witness shall add his address, description and occupation, if any. After registration, no subscriber to the memorandum can withdraw his subscription on any ground.

ALTERATION IN MOA

Alteration of Memorandum of association involves compliance with detailed formalities and prescribed procedure. Alternations to the extent necessary for simple and fair working of the company would be permitted. Alterations should not be prejudicial to the members or creditors of the company and should not have the effect of increasing the liability of the members and the creditors. Contents of the Memorandum of association can be altered as under:

Change in name ClauseA company may change its name by special resolution and with the approval of the Central Government signified in writing. However, no such approval shall be required where the only change in the name of the company is the addition there to or the deletion there from, of the word “Private”, consequent on the conversion of a public company into a private company or of a private company into a public company. The Registrar shall enter the new name in theRegister of Companies in place of the former name and shall issue a fresh certificate of incorporation with the necessary alterations. The change of name shall be complete and effective only on the issue of such certificate. The Registrar shall also make the necessary alteration in the company’s memorandum of association

Change in Address ClauseThis may involve:a) Change of registered office from one place to another place in the same city,Town or village. In this case, a notice is to be given to the Registrar who shall record the same.

b) Change of registered office from one town to another town in the same State. In this case, a special resolution is required to be passed at a general meeting of the shareholders and a copy of it is to be filed with the Registrar and along with this notice has to be given to the Registrar of the new location of the office.

C) Change of Registered Office from one State to another State to another State.As per company act 1956, a company may alter the provision of its memorandum so as to change the place of its registered office from one State to another state for certain purposes. Referred to in Sec 17(1) of the Act. In addition the following steps will be taken.

i. Special Resolutionii. Confirmation By Central Government

3. Change in Object ClauseThe alteration shall be effective only after it is approved by special resolution of the members in general meeting for alteration of the objects clause in Memorandum of Associations sanction of Central Government is dispensed with the limits imposed upon the power of alteration are substantive and procedural.

Substantive limits are provided by Section 17 which provides that a company may changeIts objects only in so far as the alteration is necessary for any of the following purposes:

i. To enable the company to carry on its business more economically or more Effectively;ii. To enable the company to attain its main purpose by new or improved means;

iii. To enlarge or change the local area of the company’s operation;iv. To carry on some business which under existing circumstances may conveniently. or advantageously be combined with the

business of the company;v. to restrict or abandon any of the objects specified in the memorandum

vi. to sell or dispose of the whole, or any part of the undertaking of the company;vii. to amalgamate with any other company or body of persons.

Alterations in the objects are to be confined within the above limits for otherwise alteration in excess of the above limitations shall be void.

4. Change in Capital Clause : The procedure for the alteration of share capital and the power to make such alteration are generally provided in the Articles of Association If the procedure and power are not given in the Articles of Associational, the company must change the articles of association by passing a special resolution. If the alteration is authorized by the Articles, the following changes in share capital may take place:1. Alteration of Authorised share capital 2. Reduction of Authorised capital 3. Reserve share capital or reserve liability 4. Variation of the rights of shareholders 5. Reorganization of capital structure

5. Change in Liability ClauseOrdinarily the liability clause cannot be altered so as to make the liability of members unlimited. It lays down that a member cannot by changing the memorandum or articles is made to take more shares or to pay more the shares already taken unless he agrees to do so in writing either before or after the change.

A company, if authorized by its Articles, may alter its memorandum to make the liability of its directors or manager unlimited by passing a special resolution. This rule applies to future appointees only. Such alteration will not affect the existing directors and manager unless they have accorded their consent in writing.

ARTICLES OF ASSOCIATION

Articles of Association are the rules, regulations and bye-laws for governing The internal affairs of the company. They may be described as the internal regulation of The company governing its management and embodying the powers of the directors and Officers of the company as well as the powers of the shareholders. They lay down the Mode and the manner in which the business of the company is to be conducted.In framing Articles of Association care must be taken to see that regulations framed do not go beyond the powers of the company itself as contemplated by the Memorandum of Association nor should they be such as would violate any of the requirements of the companies Act, itself. All clauses in the Articles ultra vires the Memorandum or the Act shall be null and void.

Articles generally contain provision relating to the following matters;

i. share capital different classes of shares of shareholders and variations of these rights ii. allotment of shares

iii. lien on shares iv. calls on sharesv. (v)forfeiture of shares

vi. issue of share certificatesvii. transfer of shares

viii. alteration of share capitalix. borrowing power of the company x. rules regarding meetings

xi. voting rights of membersxii. notice to members

xiii. dividends and reserves xiv. accounts and auditxv. directors, their appointment and remuneration;

xvi. the appointment and reappointment of the managing director, manager and secretary; xvii. fixing limits of the number of directors

xviii. winding up.

DISTINCTION BETWEEN ARTICLES OF ASSOCIATION AND MEMORANDUM OF ASSOCIATION

The difference between memorandum of association and articles of association is as under:

S.no Memorandum of Association Article of Association

1 It is character of company indicating nature of business & capital. It also defines the company’s

relationship with outside world

They are the regulation for the internal management of the company and of the company and are subsidiary to the memorandum.

2 It defines the scope of the activities of the company, or the area beyond which the actions of the company cannot go.

They are the rules for carrying out the objects of the company as set out in the Memorandum.

3 It, being the charter of the company, is the supreme document

They are subordinate to the Memorandum. If there is a conflict between the Articles and the Memorandum, the act of the company

4 Any act of the company which is ultra vires the Memorandum is wholly void and cannot be ratified even by the whole body of shareholders.

Any act of the company which is ultra the article can be confirmed by the share shareholders if it is not ultra vires to memorandum.

5 Every company must have its own Memorandum A company limited by shares need not have articles of its own. In such a case, Table A Applies.

6 There are strict restrictions

on its alteration. Some of the conditions of incorporation contained in it cannot be altered except with the sanction of the Central Government.

They can be altered by a special resolution, to any extent, provided they do not conflict with the Memorandum and the Central Government. Companies Act.

D T A A

Introduction of double taxation

In the current era of cross -border transactions across the world, due to unique growth in international trade and commerce and increasing interaction among the nations, residents of one country extend their sphere of business operations to other countries where income is earned. One of the most significant results of globalization is the noticeable impact of one country’s domestic tax policies on the economy of another country. This has led to the need for incessantly assessing the tax regimes of various countries and bringing about indispensable reforms. Therefore, the consequence of taxation is one of the important considerations for any trade and investment decision in any other countries.

Before considering the basic principles of international double taxation, you need to make sure we know

What a tax is?

“A compulsory levy made by public authority for which nothing is received directly in return”

This definition suggest that the nature of tax is that it is a payment made (a cost incurred) without the usual associated receipt,

Other transactions, of any consideration in return.

The interaction of two tax systems each belonging to different country, can result in double taxation. Double Taxation of the same income in the hands of same entity would give rise to harsh consequences and impair economic development. Concept of Double taxation

Meaning of double taxation

Double taxation means taxing the same income twice, once in the home country and again in host country. It is of relevance to mention here “No rules of international law prohibit international double taxation.” So it is for the countries in the international arena to solve double taxation problems. Where a taxpayer is resident in one country but has a source of income situated in another country, it gives rise to possible double taxation.

Double taxation of income is a great disincentive as it Hampers free flow of capital and

Becomes a prohibitive burden on taxpayers leading to decline in foreign investments.

If both rules apply simultaneously to a business entity and it were to suffer tax at both ends, the cost of operating in an international scale would become prohibitive and deter the process of globalization. It is from this point of view that Double taxation avoidance Agreements (DTAA) become very significant.

Double Taxation of the same income would cause severe consequences on the future of international trade. Countries of the world therefore aim at eliminating the prevalence of double taxation. Such agreements are known as "Double Tax Avoidance Agreements" (DTAA) also termed as "Tax Treaties”.

In India, the Central Government, acting under Section 90 of the Income Tax Act, has been authorized to enter into double tax avoidance agreements with other countries.

Rules due to which double taxation arises

Source Rule – Under which the income of a person is subjected to taxation in the country where the source of such income exists i.e. where the business establishment is situated or where the assets/property is located irrespective of whether the income earner is a resident in that country or not; and

  Residence Rule – Under which the income earner is, taxed on the basis of his/her residential status in that country. Hence, if a person is resident of a country, he/she may have to pay tax on any income earned outside that country as well.

HOW TO CALCULATE RELIEF UNDER SECTION 90, WHAT TREATY USE FOR THIS CALCULATION?

First include the income earned and taxed in the foreign country along with the income earned in India.

Then calculate tax on the Total income above.

Now calculate average rate of tax.

Then multiply such rate with the income earned from foreign country.

Deduct tax paid in the foreign country from the tax calculated in step. 4 above,

Such amount is relief u/ s 90.

Example

In case of Resident individual. Income earned in India = Rs500000 Income earned from foreign = 200000 (tax paid there = Rs. 50,000)

1) Total income is = 500000 + 200000 = 700000

2) Tax calculated on 7,00,000/- is Rs. 118450/-

3) average rate of tax is (118450 / 700000) = 16.92%

4) Calculate average tax on foreign income i.e. 200000 x 16.92% = Rs. 33840/-

5) Tax paid in foreign country is Rs. 50,000.

6) Hence relief u/s 90 is lower of 33840 and 50000, i.e 33.840/-

Therefore tax statement is,

Tax on total income = 118450

Less: relief u/s 90 = 33840

Tax payable 84610/-

Reliefs for double taxation

The relief against such double taxation in India has been provided under Section 90and Section 91 of the Income Tax Act. They contain two ways of double taxation relief

Unilateral relief

Bilateral Relief

Unilateral relief:

Under this system of taxation whether the income is subject to tax abroad or not is immaterial. In Unitary system, relief is given by way of tax credit for the taxes paid abroad. The countries, which follow this method of tax credit, are, U.S, Greece, India, and Japan to name a few.

For example, under section 91 of the Income tax Act, 1961, the method is “tax credit method”. A resident in India who has paid income tax in any country with which India does not have a treaty for the relief or avoidance of double taxation is entitled to credit against his Indian Income tax for an amount equal to the Indian coverage rate or the foreign rate whichever is lower applied to the double taxed income. This is done as follows.

Unilateral relief will be available for the tax-payer, if the following conditions are satisfied:-

The person or company (assesses) in question must have been resident in India in the previous year;

Same income must have accrued or arisen to him outside India during the previous year and it should also be received outside India. Such income must not be deemed to accrue or arise in India;

That income should be taxed both in India and in a foreign country and there should be no reciprocal arrangement for relief or avoidance from double taxation with the country where the income has accrued or arisen.

In respect of that income, the person or company (assessee) must have paid by deduction or otherwise, tax under the law in force in the foreign country in question in which the income outside India has arisen.

It is necessary that the foreign tax be levied in a country with which India has no agreement for relief against or avoidance of double taxation, but it is immaterial that tax paid in such a foreign country is in respect of income arising in another foreign country with which Indian has such an agreement

Bilateral Relief

Under Section 90, Indian government provides protection against double taxation by entering into a mutually agreed tax treaty (DTAA) with another country. Under bilateral relief, protection against double taxation is provided either by completely avoidance of overlapping tax or waiving a certain amount of the tax payable in India.

Bilateral relief is provided in section 90 and 90A of the Indian Income Tax Act.

Bilateral relief is provided through following methods:

Exemption Method

One method of avoiding double taxation is for the residence country to altogether exclude foreign income from its tax base. The country of source is then given exclusive right to tax such incomes. This is known as complete exemption method and is sometimes followed in respect of profits attributable to foreign permanent establishments or income from immovable property. Indian tax treaties with Denmark, Norway and Sweden embody with respect to certain incomes.

Credit Method

This method reflects the underline concept that the resident remains liable in the country of residence on its global income, however as far the quantum of tax liabilities is concerned credit for tax paid in the source country is given by the residence country against its domestic tax as if the foreign tax were paid to the country of residence itself.

Tax Sparing

One of the aims of the Indian Double Taxation Avoidance Agreements is to stimulate foreign investment flows in India from foreign developed countries. One way to achieve this aim is to let the investor to preserve to himself/itself benefits of tax incentives available in India for such investments. This is done through “Tax Sparing”. Here the tax credit is allowed by the country of its residence, not only in respect of taxes actually paid by it in India but also in respect of those taxes India forgoes due to its fiscal incentive provisions under the Indian Income Tax Act.

Objectives OF DTAA

Avoiding and alleviating the adverse burden of international double taxation, by –

1. Laying down rules for division of revenue between two countries;

2. Exempting certain incomes from tax in either country;

3. Reducing the applicable rates of tax on certain incomes taxable in either countries.

4. Tax treaties help a taxpayer of one country to know with greater certainty the potential limits of his tax liabilities in the other country.

5. Another benefit from the tax-payers point of view is that, to a substantial extent, a tax treaty provides against non-discrimination of foreign tax payers or the permanent establishments in the source countries vis-à-vis domestic tax payers.

DTAA Models:

There are two major types of DTAA Model

1. OECD MODEL: OECD Models are generally adopted by developed nations and their emphasis is on the residency based taxation.

2. UN MODEL: UN Model emphasis is on the source based taxation and generally adopted by the developing nations.

There is also US model Convention & Indian Model Convention too.

Components of Tax Treaty

An analysis of any tax treaty would have the following components:

1. Date: The date on which it come into effect.

2. Applicability –Applies to a person who is resident of one or both the countries. “Resident” is defined under domestic law of different counties differently. Article 4 expects that it should based upon domicile, physical residence, place of management or such other criteria but makes it clear that where a person is a resident in both the countries, it is the location of the permanent home or

where vital interests are located or where he is citizen, in that order, will decide the residential status. There may be cases, when it has been found that the assessee is resident in both the countries then tie-breaker rule has to apply to determine the residential status.

3. General Definitions –Article 3 of DTAA generally covers general definition of Person, Company, contracting state, Enterprise of a contracting state, Competent Authority, national etc, which all are applicable to the respective DTAA.

4. The Tax which it covers –What kind of tax the treaty covers should be known as there is different form of tax in different countries & the DTAA will provide the relief on the specified tax as mentioned in the DTAA?

5. Permanent Establishment and its parameters –

a. PE means a fixed place from where the business of the enterprise is carried on.

b. PE includes place of management, branch, office, factory, workshop, mine, quarry, and oil or gas well, a construction site for long duration, a service location for a long duration and a dependent agency with power to conclude contracts

6. Definitions: The definition of concepts like immovable property, dividend, business profits, royalty, technical fees, salaries etc.

7. Method of Relief: Stipulation as to the method of relief either by way of exempting income or where it is taxable, taxing it at stipulated rate, which may be lower than the domestic rate, or by unilaterally giving credit for tax paid in the other country.

8. Exchange of information with special reference to the concept of associated enterprises primarily to tackle diversion of income to avail treaty benefit or evasion of tax in one or the other country.

9. Provision for elimination of double taxation.

10. Other clauses to suit the requirement of the participating countries

Conclusion

Apart from relief to persons of a country where India has entered in Double Taxation Avoidance Agreement, there is relief given even in cases where the Government of India has not entered into DTA agreement with any foreign country. In such cases if any resident Indian produces evidences to show that, he has paid any tax in any country with which the Government of India has not entered into a DTA agreement, tax relief on that part of his income which suffered taxation in the foreign country, to the extent of tax so paid in such foreign country, or the tax leviable in India under the Income Tax Act on such income whichever is less shall be allowed as deduction u/s 91 while calculating his tax liabilities on such income.

MAT

Minimum Alternate Tax Section 115JB

OBJECTIVE:

To counter increase in number of Zero tax paying companies.

Company earning substantial income:

Paying handsome dividends.

Not paying tax on account of various incentives.

All profitable companies should pay minimum corporate tax.

APPLICABILITY

Companies Foreign Company Banking, Electricity, Insurance, NBFC Section 25 Companies

Procedure for Computation of MAT

STEP PROCEDURE

1 Compute Total Income under Income Tax Act, 19612 Compute Book Profit u/s 115JB.

3 Compute tax on Total Income at rates applicable for Companies under Income Tax Act.4 Compute Tax at 18.5% on Book Profit.

5 Tax payable = Higher of Step 3 or Step 4

Computation of Book Profit

Net Profit as per Statement of Profit and Loss:

For Companies governed by The Companies Act – Statement of Profit and Loss as per Revised Schedule VI.

For all other Companies – Statement of Profit and Loss prepared in accordance with the provisions of the Act governing such Company.

Computation of Book Profit

Add: If debited to Statement of Profit and Loss

1. Income Tax paid or payable or provision for tax

2. Amount transferred to reserves by whatever name called

3. Provision for unascertained liabilities

4. Provision for losses of subsidiary Companies.

5. Dividends paid / proposed

6. Expenditure related to exempt incomes u/s 10/11/12 [except 10(38)]

7. Amount of Depreciation

8. Deferred Tax including the provision created

9. Any amount set aside as provision for Diminution in Value of assets.

Amount standing in Revaluation Reserve relating to Revalued Asset on the retirement or disposal of such asset

Less: If Credited to Statement of Profit and Loss

1. Amount withdrawn from any reserves / provisions

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

3. Brought forward loss (other than depreciation) or unabsorbed depreciation, whichever is less, as per books of accounts

4. Profits derived from sick industrial undertakings.

5. Depreciation debited excluding depreciation on account of revaluation of asset

6. Withdrawal from revaluation reserve to the extent it does not exceed the amount of Depreciation on account of revaluation.

7. Profits of a Tonnage Tax Company

8. Amount of deferred Tax

Technical issues on MAT– Section 115JB

1. Can AO recompute MAT liability by making certain adjustments outside the P&L a/cBooks are prepared as per companies Act?AO has no power to disturb Book profits if accounts so prepared are accepted as presenting a true and fair view by Statutory Auditors.

Apollo Tyres Limited vs CIT (255 ITR 273) (SC)

2. Books not prepared as per Companies Act ?

AO can recalculate the Net Profit

3. No fraud or misrepresentation but only change of opinion?

AO cannot disturb the profit as shown by the assesse

4. Whether Profits on sale of assets, investment credited to profit and loss account be excluded for the purpose Of computing MAT ?

Capital gains taxable u/s 45 and credited to P&L a/c to be included in book profits

MAT CREDIT SECTION 115JAA

Available when Assessee pays tax on Book Profit

STEP 1.Tax on Book Profit

STEP 2.Tax on Total Income

STEP3. MAT Credit = Step 1 – Step 2

MAT Credit can be availed in 10 Subsequent Assessment Years.

Availing MAT Credit

Applicable when Assessee paid Tax on Total Income

STEP 1 Tax on Total Income

STEP 2Tax on Book Profit

STEP 3Difference of Tax = Step 1 – Step 2

STEP 4Availed MAT Credit = Aggregate available MAT Credit or Step 3, whichever is less.

STEP 5Net Tax Payable = Tax on Total Income (Step 1) – Step 4.

CASE 1/ YEAR 1

Total Income Rs. 3,00,000

Book ProfitRs.20,00,000

Applicable when assessee paid tax on Book Profit

Step 1 Tax on Book Profit = Rs.3,81,100

Step 2 Tax on Total Income = Rs.92,700

Step 3 MAT Credit = Step 1 – Step 2 = Rs.2,88,400

Year 2 – Availing MAT Credit

Total Income Rs. 7,00,000

Book Profit Rs.10,00,000

Step 1 Tax on Total Income = Rs.2,16,300

Step 2 Tax on Book Profit = Rs.1,90,550

Step 3 Difference of Tax = Step1 – Step2 = Rs.25,750

Step 4 Availed MAT Credit = Actual MAT Credit (2,88,400) or Step 3 whichever is less. = 25,750

Step 5 Net Tax Payable = Step1 – Step 4 = Rs.1,90,550

Step 6 Balance of MAT Credit = Rs.2,88,400 – Rs.25,750 = Rs.2,62,650

Year 3 – Availing MAT Credit

Total Income Rs. 10,00,000

Book Profit Rs. 8,00,000

Step 1 Tax on Total Income = Rs.3,09,000

Step 2 Tax on Book Profit = Rs.1,52,440

Step 3 Difference of Tax = Step1 – Step2 = Rs.1,56,560

Step 4 Availed MAT Credit = Actual MAT Credit (2,62,650) or Step 3 whichever is less = 1,56,560

Step 5 Net Tax Payable = Step1 – Step 4 = Rs. 1,52,440

Step 6 Balance of MAT Credit = 2,62,650 – 1,52,440 = 1,10,210

1. The taxable income of Essem Minerals Pvt. Ltd. computed as per the provisions of Income-tax Act is Rs. 8,40,000. Book profit of the company computed as per the provisions of section 115JB is Rs. 18,40,000. What will be the tax liability of Essem Minerals Pvt. Ltd. (ignore cess and surcharge)?

Ans. The tax liability of a company will be higher of: (i) Normal tax liability, or (ii) MAT. Normal tax rate applicable to an Indian company is 30% (plus cess and surcharge as applicable). Tax @ 30% on Rs. 8,40,000 will amount to Rs. 2,52,000 (plus cess). Book profit of the company is Rs. [As amended by Finance Act, 2015] 18,40,000. MAT liability (excluding cess and surcharge) @ 18.50% on Rs.18,40,000 will come to Rs. 3,40,400. Thus, the tax liability of Essem Minerals Pvt. Ltd. will be Rs. 3,40,400 (plus cess as applicable) being higher than the normal tax liability.

2. The tax liability of Essem Minerals Ltd. for the financial year 2015-16 under the normal provisions of the Income-tax Act is Rs. 8,40,000 and the liability as per the provisions of MAT is Rs. 10,00,000. Will the company be entitled to claim any MAT credit in the subsequent year(s) as per the provisions of section 115JAA?

Ans. A company paying MAT is entitled to claim the credit of MAT paid in excess of normal tax liability. In this case the liability of Essem Minerals Ltd. for the year 2015-16 under the normal provisions is Rs. 8,40,000 and as per the provisions of section 115JB it is Rs. 10,00,000 (which is higher than normal tax liability) and, hence, the company has to pay Rs. 10,00,000, i.e., liability as per MAT provisions. As per section 115JAA, if in any year a company pays its tax liability as per MAT, then it can claim MAT credit being the excess MAT paid over the normal tax liability. In this case, as the liability of MAT is higher, and, hence, the company will be entitled to claim MAT credit of Rs. 1,60,000 (being excess of MAT over normal tax liability of Rs. 8,40,000).

3. The tax liability of Essem Energy Ltd. for the financial year 2015-16 under the normal provisions of the Income-tax Act is Rs. 18,40,000 and the liability as per the provisions of MAT is Rs. 18,00,000. It has brought forward MAT credit of Rs. 2,00,000. Can the company adjust the MAT credit? If, yes then how much and what will be the tax liability of the company after adjustment of MAT credit

Ans. MAT credit can be adjusted in the year in which the liability of the company as per the normal provisions is more than the MAT liability. In this case the liability as per the normal provisions of the Income-tax Act is Rs. 18,40,000 and the liability as per the provisions of MAT is Rs. 18,00,000. Liability as per the normal provisions is more than liability as per the provisions of MAT and, hence, the company can adjust the MAT credit. The set off in respect of brought forward MAT credit shall be allowed in the subsequent year(s) to the extent of the difference between the tax on total income as per the normal provisions and liability as per the MAT provisions. Thus, after set off of MAT credit, the liability of the company cannot be less than liability as per the provisions of MAT. In this case, the liability as per MAT is Rs. 18,00,000, and, hence, after claiming set off of the MAT credit, the liability of

company cannot be less than Rs. 18,00,000. Hence, out of the credit of Rs. 2,00,000 the company can claim credit of Rs. 40,000 only and the balance credit of Rs. 1,60,000 can be carried forward to next year(s).