How to Compute Book Profit in case of Companies

‘Book profit’ is arrived at after making specified adjustments to the profit as shown in the statement of profit and loss so prepared. These adjustments can be made as per the following steps:—

Step 1: Profits shall be Increased by the following Amounts

The profit as shown in the statement of profit and loss (prepared as per Schedule III) for the relevant previous year, shall be increased by the following amounts mentioned in clauses (a) to (i) below, where any of these is debited to the profits and loss account:

(a)        the amount of income-tax paid or payable, and the provision therefor; or

(b)        the amounts carried to any reserves by whatever name called; or

(c)        the amount or amounts set aside to provisions made for meeting liabilities, other than ascertained liabilities; or

(d)        the amount by way of provision for losses of subsidiary companies; or

(e)        the amount or amounts of dividends paid or proposed; or

(f)         the amount or amounts of expenditure relatable to any income to which section 10 (excluding the expenditure relating to income referred to in clause (38) relating to long-term capital gain on transfer of shares through a recognised stock exchange), 11 or 12 apply (i.e., incomes which are exempt from tax); or

(fa)       the amount or amounts of expenditure relatable to, income, being share of the assessee in the income of an association of persons or body of individuals, on which no income-tax is payable in accordance with the provisions of section 86;

(fb)       the amount or amounts of expenditure relatable to income accruing or arising to an assessee, being a foreign company, from,—

(A)       the capital gains arising on transactions in securities; or

(B)        the interest, dividend, royalty or fees for technical services chargeable to tax at the rate or rates (i.e., special rate(s)) specified in Chapter XII,

if the income-tax payable thereon in accordance with the provisions of this Act, other than the provisions of this Chapter, is at a rate less than the rate specified in section 115JB(1); or

(fc)       the amount representing notional loss on transfer of a capital asset, being share of a special purpose vehicle to a business trust in exchange of units allotted by that trust referred to in clause (xvii) of section 47 or the amount representing notional loss resulting from any change in carrying amount of said units or the amount of loss on transfer of units referred to in clause (xvii) of section 47; or

(fd)       the amount or amounts of expenditure relatable to income by way of royalty in respect of patent chargeable to tax under section 1 15BBF; or

(g)        the amount of depreciation; or

(h)        the amount of deferred tax and provisions therefor; or

(i)         the amount or amounts set aside as provision for diminution in the value of any asset (See note 16);

(j)         the amount standing in revaluation reserve relating to revalued assets on the retirement or disposal of such asset if such amount is not credited to the statement of profit and loss.

The above clause (j) was inserted because in certain cases, the amount standing in the revaluation reserve is taken directly to general reserve on disposal of a revalued asset. Thus, the gain attributable to revaluation of the asset was not subject to MAT liability.

(k)        the amount of gain on transfer of units referred to in clause (xvii) of section 47 computed by taking into account the cost of the shares exchanged with units referred to in the said clause or the carrying amount of the shares at the time of exchange where such shares are carried at a value other than the cost through statement profit or loss, as the case may be.

Step 2:  Profits shall be Reduced by the following:

The profit as per the Statement of Profit and Loss shall be reduced by the following:

(i)         the amount withdrawn from any reserves or provisions, if any, such amount is credited to the statement of profit and loss:

The amount withdrawn from the reserve or provision, created not out of profits before 1.4.1997, if credited to the statement of profit and loss, shall not be deducted while computing book profit. In other words, the amount withdrawn from any reserve, credited before 1.4.1997, shall not be reduced from the profit unless the same was debited to the statement of profit and loss at the time when such reserve was created.

Similarly, the amount withdrawn from the reserve created on or after 1.4.1997 and credited to the statement of profit and loss shall not be deducted while computing book profit unless the book profit in the year of creation of such reserve was increased by such reserve at that time.

(ii)        the amount of income to which any of the provisions of section 10, 11, 12 apply, if any such amount is credited to the statement of profit and loss; or

(iia)      the amount of depreciation debited to the statement of profit and loss (excluding the depreciation on account of revaluation of assets); or

(iib)      the amount withdrawn from revaluation reserve and credited to the statement of profit and loss, to the extent it does not exceed the amount of depreciation on account of revaluation of assets referred to in clause (iia) above; or

(iic)      the amount of income, being the share of the assessee in the income of an association of persons or body of individuals, on which no income-tax is payable in accordance with the provisions of section 86, if any such amount is credited to the statement of profit and loss; or

(iid)      the amount of income accruing or arising to an assessee, being a foreign company, from, —

(A)       the capital gains arising on transactions in securities; or

(B)        the interest, dividend, royalty or fees for technical services chargeable to tax at the rate or rates specified in Chapter XII,

if such income is credited to the statement of profit and loss and the income-tax payable thereon in accordance with the provisions of this Act, other than the provisions of this Chapter, is at a rate less than the rate specified in section 115JB(1); or

(iie)      the amount representing,—

(A)       notional gain on transfer of a capital asset, being share of a special purpose vehicle to a business trust in exchange of units allotted by that trust referred to in clause (xvii) of section 47; or

(B)        notional gain resulting from any change in carrying amount of said units; or

(C)        gain on transfer of units referred to in clause (xvii) of section 47,

if any, credited to the statement of profit and loss; or

(iif)       the amount of loss on transfer of units referred to in clause (xvii) of section 47 computed by taking into account the cost of the shares exchanged with units referred to in the said clause or the carrying amount of the shares at the time of exchange where such shares are carried at a value other than the cost through profit or loss account, as the case may be; or

(iig)      the amount of income by way of royalty in respect of patent chargeable to tax under section 115BBF;

(iih)      the aggregate amount of unabsorbed depreciation and loss brought forward in case of a—

(A)       company, and its subsidiary and the subsidiary of such subsidiary, where, the Tribunal, on an application moved by the Central Government under section 241 of the Companies Act, 2013 has suspended the Board of Directors of such company and has appointed new directors who are nominated by the Central Government under section 242 of the said Act;

(B)        company against whom an application for corporate insolvency resolution process has been admitted by the Adjudicating Authority under section 7 or section 9 or section 10 of the insolvency and Bankruptcy Code, 2016.

(iii)       the amount of loss brought forward or unabsorbed depreciation, whichever is less as per books of account in case of a company other than the company referred to in clause (iih) (see amendment below). The loss shall, however, not include depreciation. Further the provision of this clause shall not apply if the amount of brought forward loss or unabsorbed depreciation is Nil; or

Clauses (iv), (v) and (vi) were omitted by the Finance Act, 2011 w.r.e.f. 1.4.2011.

(iv)       the amount of profits of sick industrial company for the assessment year commencing from the assessment year relevant to the previous year in which the said company has become a sick industrial company under sub-section (1) of section 17 of the Sick Industrial Companies (Special Provisions) Act, 1985 and ending with the assessment year during which the entire net worth of such company becomes equal to or exceeds the accumulated losses.

 (v)       the amount of deferred tax, if any such amount is credited to the statement of profit and loss;

(vi)       the amount of profit derived from the activities of a tonnage tax company [Section 115VO].

The amount computed after increasing or decreasing the above in Step 1 and Step 2, respectively, is known as Book-profit.

(3)   [Section 115JB(2A)]: Book Profit Computed in accordance with Explanation 1 to section 115JB(2) to be Adjusted

For a company whose financial statements are drawn up in compliance with the Indian Accounting Standards specified in Annexure to the Companies (Indian Accounting Standards) Rules, 2015, the book profit as computed in accordance with Explanation 1 to sub-section (2) shall be further—

(a)        increased by all amounts credited to other comprehensive income in the statement of profit and loss under the head “Items that will not be re-classified to profit or loss”;

(b)        decreased by all amounts debited to other comprehensive income in the statement of profit and loss under the head “Items that will not be re-classified to profit or loss”;

(c)        increased by amounts or aggregate of the amounts debited to the statement of profit and loss on distribution of non-cash assets to shareholders in a demerger in accordance with Appendix A of the Indian Accounting Standards 10;

(d)        decreased by all amounts or aggregate of the amounts credited to the statement of profit and loss on distribution of non-cash assets to shareholders in a demerger in accordance with Appendix A of the Indian Accounting Standards 10:

Provided that nothing contained in clause (a) or clause (b) shall apply to the amount credited or debited to other comprehensive income under the head “Items that will not be re-classified to profit or loss” in respect of—

(i)         revaluation surplus for assets in accordance with the Indian Accounting Standards 16 and Indian Accounting Standards 38; or

(ii)        gains or losses from investments in equity instruments designated at fair value through other comprehensive income in accordance with the Indian Accounting Standards 109:

Provided further that the book profit of the previous year in which the asset or investment referred to in the first proviso is retired, disposed, realised or otherwise transferred shall be increased or decreased, as the case may be, by the amount or the aggregate of the amounts referred to in the first proviso for the previous year or any of the preceding previous years and relatable to such asset or investment.

(4)  [Section 115JB(2B)]: Changes in the Value of Assets and Liabilities to be ignored for purpose of Computation of Book Profit in case of a resulting company

In the case of a resulting  company, where the property and the liabilities of the undertaking or undertakings being received by it are recorded at values different from values appearing in the books of account of the demerged company immediately before the demerger, any change in such value shall he ignored for the purpose of computation of book profit of the resulting company under this section.

(5)   [Section 115JB(2C)]:  Book profit of Ind-AS compliant company to be further adjusted by one-fifth of transition amount

For a company referred to in section 1 I5JB(2A), the book profit of the year of convergence and each of the following four previous years, shall be further increased or decreased, as the case may be, by one-fifth of the transition amount:
Provided that the book profit of the previous year in which the asset or investment referred to in sub-clauses (B) to (E) of clause (iii) of the Explanation given below is retired, disposed, realised or otherwise transferred, shall be increased or decreased, as the case may be, by the amount or the aggregate of the amounts referred to in the said sub-clause relatable to such asset or investment:

Provided further that the book profit of the previous year in which the foreign operation referred to in sub-clause (F) of clause (iii) of the Explanation is disposed or otherwise transferred, shall be increased or decreased, as the case may be, by the amount or the aggregate of the amounts referred to in the said sub-clause relatable to such foreign operations.

(6)   [Section 115JB(2D)]: Adjustment on account of additional income of past year(s)

In the case of an assessee being a company, where there is an increase in book profit of the previous year—

—         due to income of past year or years included in the book profit on account of an advance pricing agreement entered into by the assessee under section 92CC or

—         on account of secondary adjustment required to be made under section 92CE,

the Assessing Officer shall, on an application made to him in this behalf by the assessee, recompute the book profit of the past year or years and tax payable, if any, by the assessee during the previous year under section 115JB(1), in such manner as may be prescribed (see rule 10RB below) and the provisions of section 154 shall, so far as may be, apply and the period of four years specified in section 154(7) shall be reckoned from the end of the financial year in which the said application is received by the Assessing Officer:

Provided that the provisions of this sub-section shall apply only if the assessee has not utilised the credit of tax paid under this section in any subsequent assessment year under section 115JAA:

Provided further that the provisions of this sub-section shall also apply to an assessment year beginning on or before the 1 st day of April, 2020 and notwithstanding anything contained in any other provisions of this Act, no interest shall be payable to such assessee on the refund arising on account of the provisions of this sub-section.

(7)  How much Brought Forward Loss/Unabsorbed Depreciation are Deductible from Book Profits

(1)        As per clause (iii) of Explanation 1 to section 115JB, the amount of loss brought forward or unabsorbed depreciation, whichever is less as per books of account in case of a company other than the company referred to in clause (iih) (see point (2) below) is to be deducted from the book profits. It has been however clarified that loss however shall not include depreciation. In this case brought forward loss and unabsorbed depreciation as per income-tax shall have no relevance.

It has been clarified that where the value of the amount of either loss brought forward or unabsorbed depreciation is ‘nil’, no amount on account of such loss brought forward or unabsorbed depreciation would be reduced from the book profit.

(2)        In case of a company whose application for corporate insolvency resolution process under the Insolvency and Bankruptcy Code, 2016 has been admitted by the Adjudicating Authority the aggregate amount of unabsorbed depreciation and loss brought forward (excluding unabsorbed depreciation) shall be allowed to be reduced from the book profit. [Clause (iih) of Explanation 1 to section 115JB].

Thus, a company whose application has been admitted would henceforth be entitled to reduce the loss brought forward (excluding unabsorbed depreciation) and unabsorbed depreciation for the purposes of computing book profit under section 115JB.