JULY 15, 2009

Budget 2009 - amendment to MAT - harsh nullification of SC ruling

By Kapil Goel, CA

AMONG a host of amendments the Finance Bill 2009 has proposed, is the retrospective amendment to MAT. The Clause 43/44/45 of subject finance bill, has proposed an amendment seeking to overrule Supreme Court ruling in HCL Comnet case (2008-TIOL-182-SC-IT) which allowed provision for bad debt made in accordance with applicable accounting guidelines, as an allowable adjustment/deduction in taxable book profits under subject provision. The provision of MAT taxes the company assessee, under the Act, on alternate basis, on their book profits determined as per accounts, and not on their tax profits. In this regard, whatever book adjustments are made in accordance with applicable accounting guidelines have been treated all along as allowable under subject provision, including provision for bad debt which is prudent and correct accounting.

Now simply to affirm the inconsistent and defeated revenue stand, and to overrule a legitimate/correct Supreme Court ruling in HCL case (supra), an amendment has been proposed from retrospective effect (Assessment Year 1998-1999) to state that any provision for diminution in value of any asset will be disallowed to increase taxable book profits in hands of corporate assessee/tax payer. This needs to be debated for being dropped or to be made prospectively applicable.

Non-Monetary Gifts proposed to be taxed under section 56 of the Act: Double Taxation

In this connection, clause 26 of the subject Finance Bill, has proposed an amendment so as to tax non monetary property gifts. In other provision, that is, section 47 of the Act, the said gifts transactions are exempted from capital gains taxation as they are not treated as "transfer" under the Act. However, subsequently, when donee receiving the gift sells said gifted property, cost adopted in hands of donee by deeming fiction of section 49, is the cost to the previous owner/donor. There is no reciprocal amendment in section 49 of the Act so as to adopt the taxed gift value under section 56, as the cost on subsequent transfer, in hands of donee, which ultimately results in potential double taxation. This anomaly needs to be debated for being corrected.

Example:

A property cost to donor (X) Rs 10 taxed under section 56 at Rs 100 (being fair market value) in hands of donee (Y). When Y sells that property for Rs 100, capital gains taxation will be on Rs 100 - Rs 10 (cost to X) = Rs 90. Therefore, there is double taxation to the extent of Rs 90/=.