Audit shows that there were shortcomings in the assessments of several companies with large profits that reduced tax liability by availing various deductions
The Comptroller and Auditor General (CAG) has noticed irregularities in the way the income tax department (ITD) carried out the assessment of Zero Tax Companies.
Several companies that were having large profit from business and distributing substantial portion of the income to their shareholders as dividend, were reducing their tax liability by availing various deductions and exemptions available in the Act. Such companies referred to as “Zero Tax Companies”, were attempted to be brought into tax net by introduction of section 115J by Finance Act 1987, said the
report no. 30 of 2017 (Performance Audit)
This provision was withdrawn by Finance Act 1990. It was re-introduced as section 115JA by Finance Act, 1996. Section 115JA was further revised from 1 April 2001 by introducing a new section 115JB whereby companies had to pay tax on their book profit/deemed income at a rate prescribed by the Government from time to time. Section 115JAA provided for allowance of credit of tax paid by the companies under section 115JA/115JB in subsequent years.
The CAG found that the ITD did not consider incomes in 22 assessment cases for tax under Minimum Alternate Tax (MAT) though the same were considered for tax under normal provision. Omission resulted in tax effect of Rs 74.10 crore.
In 16 assessment cases, ITD did not consider the extraordinary/exceptional items for computation of book profit. Omission resulted in underassessment of income aggregating Rs 126.57 crore involving tax effect of Rs 23.13 crore.
The CAG report said that the ITD allowed in eight assessment cases deduction in respect of Debenture Redemption Reserve/Loan Redemption Reserve charged to the ‘Appropriation Account’ as claimed by assessee in computation of book profit under MAT involving tax effect of Rs 331.14 crore.
ITD on one hand reduced excess depreciation pertaining to earlier years due to change in method of depreciation credited to the profit and loss account in computation of book profit in eight assessment cases. On the other hand in six assessment cases, ITD did not add shortfall in depreciation due to change in method of accounting. This involved tax effect of Rs 5.16 crore.
The report went on to say that ITD allowed bad debts actually written off as deduction in computation of income under normal provisions in six assessment cases. However, while computing book profit under section 115JB, bad debts actually written off was not reduced.
ITD made disallowances on account of bogus purchases/undisclosed income/unaccounted income under normal provisions in 18 assessment cases, and not under special provisions of MAT, there being no provision for addition of such items under special provisions.
The income tax department made transfer pricing adjustments with respect to items which had direct bearing on the profit as per profit and loss account in 36 assessment cases during computation of income under normal provisions but were not considered for computation of book profit under MAT. This involved tax effect of Rs 93.05 crore.
