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2. Computation Of Book Profit

STEP – 1 :

The Net Profit as shown  in the Profit and Loss account prepared as per Part II and III of Schedule VI for the relevant FY, shall be increased by the following , if debited to the Profit and Loss Accounts :

(A) the amount of Income Tax paid or payable, and the provision thereof. Even Corporate Dividend Tax shall be added back.

However,

    1. Income tax penalty or its interest –Whether tax including Wealth Tax penalty or its interest.

    2. Penalties under other laws, ( Although this is disallowed as deduction under the Income Tax  Act.

Are allowed as deduction and therefore shall not subjected to MAT.

(B) The amount carried on to any reserves, by whatever name called.

Also

    1. Reserve created even as per the direction of RBI shall be added back

    2. Reserve created u/s 80IA or Sec. 10A(IA) shall also be added back.

    3. Excess provisions are in the nature of reserve and therefore to be added back.

(C) The Amount or Amounts set aside to provisions made for meeting liabilities, other than ascertained liabilities, i.e. unascertained liabilities is not allowed as deduction e.g. Doubtful Debt etc. ,

    1. As per Supreme Court Judgment in BHARAT EARTH MOVERS provisions for encashment of leave made on scientific basis is an ascertained liability therefore allowed as deduction.

    2. Provision for Gratuity as per actuary is an ascertained liability therefore allowed as deduction.

(D) The amount by way of provision for losses of subsidiary companies is not allowed as deduction. Even actual losses of subsidiary company shall be not allowed as deduction. Is such provisions or losses are debited to P & L A/c then it shall be added back to Net Profit.

(E) The Amount or amounts of dividends paid or proposed is not allowed as deduction.

 STEP – 2 :

Following Profits are not subjected to MAT and therefore if they are credited to P & L  A/c is shall be subtracted.

(F) the amount of Profit relatable to income to which Sec. 10 [other than the provisions contained in section 10(23G)] , 10A, 11 or 12 apply are not subjected to MAT.

It means assessee shall not pay MAT on the income referred to and exempt u/s 10, 10A, 10B, 11 and 12.

However,

    • the amount of Profit relatable to any income to which section 10(23G) or 10BA applies are subjected to MAT and if they are credited to P & L A/c then no adjustment should be made.

    (G) the profit of sick industrial company for the assessment years

    • commencing from the assessment year relevant to previous year which the company has     become sick and

    • ending with assessment year during which the entire net worth of such company becomes equal to or exceeds   the accumulated losses shall be allowed as deductions

STEP – 3 :

The Profit as per Profit and Loss Account shall be reduced by the following :

(H) the amount withdrawn from any reserve or provision ( excluding a reserve creaed before the 1-4-1997 other wise than by way of a Debit to the Profit and Loss Account ) , if any such amount is Credited to the Profit and Loss Account.

Provided that where this section is applicable to an assessee in any previous year, the amount withdrawn from reserves created or provisions made in a previous year televant to the assessment year commencing on or after the 1-4-1997 shall not be reduce from the Book Profit unless the Book Profit of such year has been increased by those Reserves or Provisions ( out of which the said amount was withdrawn) under this Explanation or Explanation below the second proviso to section 115JA, as the case may be.

Meaning thereby

any Reserve created out of P & L A/c is  credited, is shall be reduced from Net Profit to compute Book Profit.

(I) The amount of brought forward business loss as per Books of Accounts (excluding depreciation) or unabsorbed depreciation as per Books of Accounts, whichever is Less is allowed as deduction.

Deduction u/s 80HHC, 80HHE, 80HHF is allowed as deduction. From assessment year 2005-2006 no deduction is allowed under  these sections.

 
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