Computation of Book Profit Under Explanation 1 to Section 115JB (1) & (2)

Section 115JB mandates that companies calculate Minimum Alternate Tax (MAT) based on book profits (derived from financial statements) rather than taxable income. Below is a step-by-step guide to computing book profit, including adjustments under Explanation 1 to Section 115JB(1) & (2).

1. Legal Basis

• Section 115JB(1): Defines MAT liabilityas 15% of book profit (plus surcharge & cess).
• Explanation 1 to Section 115JB(2): Specifies adjustmentsto net profit for computing book profit.

2. Step-by-Step Computation

Step 1: Start with Net Profit as per P&L (Schedule III, Companies Act, 2013)

• Use the net profit before taxfrom the Statement of Profit & Loss (prepared under Companies Act, 2013).

Step 2: Additions to Net Profit (Increase Book Profit)

The following items are added back to net profit:

1. Income Tax Paid/Provided(including MAT, surcharge, cess).
2. Dividends Paid/Proposed(including interim dividends).
3. Depreciation(including on revalued assets).
4. Provisions for Unascertained Liabilities(e.g., litigation, warranties).
5. Expenses Related to Exempt Income(e.g., Section 10 exemptions).
6. Deferred Tax Expense(if debited to P&L).
7. Amounts Transferred to Reserves(other than statutory reserves).

Step 3: Deductions from Net Profit (Decrease Book Profit)

The following items are deducted from net profit:

1. Exempt Incomes(e.g., agricultural income, LTCG under Section 10(38)).
2. Withdrawals from Reserves(if credited to P&L).
3. Lower of Brought-Forward Losses or Unabsorbed Depreciation(as per books).
4. Deferred Tax Credits(if credited to P&L).
5. Royalty Income under Section 115BBF.

Step 4: Arrive at Book Profit

Formula:

Book Profit = Net Profit (P&L)              

+ Additions (as per Explanation 1)              

– Deductions (as per Explanation 1) 

Step 5: Compute MAT Liability

• MAT = 15% of Book Profit(plus surcharge & cess).
• IFSC Units: 9%(if income is in convertible foreign exchange).

3. Practical Example

4. Compliance & Reporting

• Tax Audit (Section 44AB): Mandatory if book profits trigger MAT.
• Form 29B: Chartered Accountant must certify MAT computation.
• Disclosure in ITR: Book profit adjustments must be reported in Schedule MAT (ITR-6).

5. Recent Updates (2024–25)

• No changesto MAT rates or computation method.
• Insolvency & Banking Companies:
  • NCLT-approved resolution plansmay allow adjustments for unabsorbed losses.
  • Bankscan exclude provisions for NPAs if compliant with RBI no