CAG spots irregularities in ‘Zero Tax Companies’ -Governance Now

CAG spots irregularities in ‘Zero Tax Companies’

Audit shows that there were shortcomings in the assessments of several companies with large profits that reduced tax liability by availing various deductions

GN Bureau | August 21, 2017

#CAG #zero tax companies

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This provision was withdrawn by Finance Act 1990.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.

Comments

Other News

The women India doesn`t count enough

She runs a tailoring shop from a single room in her house. Every morning she stitches school uniforms, answers queries on WhatsApp, collects payments through UPI and orders fabric online. Officially, she still belongs to India`s informal economy. Yet her enterprise is no longer disconnected from the formal

“Cancer is just a mind game”

Dr. Ananda Shankar Jayant, a Padma Shri awardee, inspired audiences for decades through her mastery of Bharatanatyam and Kuchipudi. But it was her journey through cancer that taught some of life`s most powerful lessons in courage and resilience.

Why Swami Vivekananda is the pathfinder for our times

Swami Vivekananda for Our Times Edited and compiled by Rajiv Sikri, with Introduction by S. Gurumurthy Rupa Publications, 552 pages, Rs 695

Five ways to realise the potential of India’s handicraft and handloom sector

India`s economic ambitions are increasingly defined by the industries of the future. Semiconductors, electronics, artificial intelligence and advanced manufacturing dominate policy conversations. Yet one of India`s largest employment-intensive sectors continues to occupy a surprisingly marginal place in ec

Beyond toilets: Why open defecation persists in rural India

Despite the awareness campaigns on sanitation across India, open defecation (OD) is practised openly and widely in both rural and urban areas. Research shows that rural respondents are well aware of the negative impacts of OD, yet this awareness does not lead to toilet construction or use. In rural North I

What unpaid nation builders want from policymakers

The Supreme Court recently described homemakers as “nation builders” and fixed a notional monthly income of Rs 30,000 for them in motor accident compensation cases. The judgment was not about wages. It was about compensation. Yet it inadvertently raised a larger economic question: If a homemake