Meaning of Prior Year Adjustments

• Prior year adjustments refer to income or expenses related to earlier periods.
  
• They are recorded in the current year’s Profit and Loss Account.
  
• These can arise due to errors, omissions, or revisions in estimates.
  
• Adjustments may relate to tax provisions, depreciation, or revenue recognition.
  
• Accounting standards require adequate disclosure of such entries.
  

Inclusion in Book Profit

• MAT is computed based on current year’s book profit as per financials.
  
• Any prior year adjustments reflected in the current P&L are included.
  
• These are not excluded unless specifically provided under Section 115JB.
  
• The treatment depends on whether the item qualifies as an allowable adjustment.
  
• All amounts forming part of net profit are prima facie included in MAT base.
  

Types of Add-Back Adjustments

• Provisions related to prior years that are unascertained are added back.
  
• Prior year tax or deferred tax entries are included as disallowable.
  
• If adjustments involve contingent liabilities, they are not allowed as deductions.
  
• Penalties or disallowed expenditures from past years are also added back.
  
• The nature and classification of adjustment determine MAT treatment.
  

Allowable Deductions from Book Profit

• Income related to prior years, if recorded now, is retained in book profit.
  
• Expenses allowed under normal tax provisions and fully quantified may be retained.
  
• Adjustments based on actual outflow and supported by documentation may not be added back.
  
• Companies must distinguish between actual liabilities and provisions.
  
• Only specific deductions permitted under Explanation 1 to Section 115JB are allowed.
  

Disclosure and Reporting Requirements

• Prior year items must be clearly disclosed in financial statements.
  
• Auditor must comment on treatment of such adjustments in Form 29B.
  
• Proper classification ensures correct MAT computation and avoids disputes.
  
• Companies must retain working papers supporting nature and justification.
  

Tax audit report must reconcile net profit with MAT-computed book profit.