Minimum Alternative Tax – An overview of issues associated

Legislative history and intent

Minimum Alternative Tax (‘MAT’), inspired by similar levies in the western countries, where the objective for introduction of MAT was to increase the revenue base, was first introduced in the Finance Act, 1987 by virtue of section 115J. Apparently, the levy discriminated between corporate vis-à-vis other entities – partnerships, sole proprietorships, etc and the same is held1 to be constitutional valid and not in violation of Article 14 and 19 under the Constitution of India. The MAT provisions subsequently traveled from section 115J to section 115JA and finally to the existing section 115JB.

Pragmatically, the intent for insertion of MAT in India was to levy tax on the “zero-tax” companies which made profits and distributed dividends but have little or negligible taxable income by virtue of various incentives/ deductions which have been claimed. The intent was reiterated in Memorandum to the Finance Bill, 1996, CBDT Circular No 762 dated February 18, 1998 and Finance Minster’s speech on Finance Act 2000. However, subsequently, contentions based on intent have not been accepted by the Department and it has been held that the provisions of MAT are applicable even in cases where the company has not declared dividend [DCIT vs Samsons Distilleries Pvt Ltd (2009-TIOL-217-ITAT-BANG) and DCW Ltd vs DCIT (ITA No. 4175/Mum/2005)].

Respite to some extent was provided to MAT paying companies by Finance Act, 2005. A tax credit mechanism under section 115JAA was introduced to allow tax credit in respect of MAT paid. MAT liability in excess of the normal tax liability was allowed to be taken as credit in subsequent years under section 115JAA. Currently, such credit can be carried forward and availed for 10 subsequent years.

Key issues and controversies involved

The calculation and methodology for computing MAT which seemed to be simplistic in nature, has been under scanner for legal interpretations. All unresolved controversies related to a number of issues on interpretation of sections 115J and 115JA should prevail for section 115JB as well, since section 115JB is pari material with the earlier provisions. Though numerous issues need to be addressed under MAT provisions, few significant areas of concern are enumerated below:

1. Is it mandatory to furnish Form 29B when the company is not liable to MAT?

MAT liability can be ascertained only after comparing normal tax liability with book profits. Accordingly, provisions of section 115JB(4) provides for obtaining a report from an accountant and Rule 40B and Form 29B provides a format for that. Therefore, it is possible to argue that the report in 29B should be obtained in all cases, irrespective of whether the company is liable to MAT.

Section 115JB (4), to the contrary, inter-alia uses the words “Every Company to which this section applies” – implying report to be obtained only where there is MAT liability. Further, the Act does not stipulate any penalty for not obtaining this report. Section 139(9) also does not consider the tax return to be defective if Form 29B is not obtained.

Hence, there is no explicit downside in cases where a company is not liable under MAT. However, given the legal issues involved in computing the Book Profits under MAT, on a prudent basis, a company should consider safeguarding its risk to the extent possible by getting the MAT computation vetted by a Chartered Accountant.

2. Profits/ gains not routed through Profit and Loss Account. Is it required to include such profits/ gains in Book Profits and offer the same for MAT?

Relying on the Apex Court judgement in the case of Apollo Tyres Limited (255 ITR 0273), judicial authorities have undisputedly held that the AO does not have the power to recast the book profits as arrived in the financial statements except as provided in section 115J if the following conditions are satisfied:

The accounts are prepared in accordance with Companies Act and the same has been audited by the statutory auditor, and his report indicates that the accounts are in accordance with the Companies Act.

The auditor’s report is adopted by the members in the General meeting.

The same is filed with and accepted by the Registrar of Companies.

Companies have therefore taken stand that amounts carried to capital reserves directly (which have not been credited to the profit and loss account) would not be capable of being added back to the book profits for MAT purposes – when the said accounts are duly audited by the statutory auditor, adopted by the members in the AGM and the same is filed with the Registrar. The position has also been blessed judicially in the following cases:

CIT vs Vijayshree Finance and Investment Co, Pvt Ltd2 (Madras High Court)
DCIT vs Indian Syntans Investments (P) Ltd3 (Chennai ITAT)
ACIT vs Vijay Furniture Manufacturing Co. Pvt. Ltd4 (Bombay ITAT)

In this regard, the most important aspect to be noted is the fact that none of the rulings mentioned above have objected to such a treatment in the books of accounts of the assessee, ie whether the tax payers have satisfied the provisions of Accounting Standard 10 and 13. In fact, the Bombay ITAT in the case of Vijay Furniture did not comment on the issue of treatment in books even though the same was the main point of contention of the Revenue authorities.

Pertinently, Bombay HC, in the case of CIT vs Veekaylal Investments Co (P) Ltd 166
CTR 965, have held that capital gains not routed through Profit and Loss account should form part of Book Profits for the purposes of MAT. The same was also re-iterated by Delhi ITAT in the case of Vishwanath Fin Cap (2007-TIOL-241-ITAT-DEL). The ITAT held that, “since the accounts were not prepared by the assessee in accordance with Part II and III of Schedule VI of Companies Act read with mandatory Accounting Standard 13, the AO was competent to re-cast the profit and loss account and re-compute the book profit for the purpose of Section 115JB of the Act.”

Therefore, whether the position adopted by companies would sail at Supreme Court level, even in cases where there is no qualification in the auditor’s report (given the fact that accounting standard interpretation is a matter of professional judgement), remains an unanswered question.

3. How should unabsorbed depreciation and brought forward losses be set off –
Clause (iii) of Explanation to Section 115JB?

The Authority of Advance Ruling (‘AAR’) in the case of Rashtriya Ispat Nigam Limited [2006] 285 ITR 1 has discussed the issues associated with clause (iii) of Explanation to Section 115JB in detail. However, the ruling has not been followed by a number of assessees, specifically in light of the Apex Court judgement in the case of Apollo Tyres, HCL Comnet Systems & Service Ltd (305 ITR 409) and the Tribunal decisions in the case of Sumi Motherson Innovative Engineering Ltd (ITA No 2323/Del/2006) and KFA Corporation Ltd vs JCIT (ITA No 5147/Mum/2002). The challenge is basically on account of the following issues which remain unanswered till date:

(a) Whether comparison of unabsorbed depreciation and depreciation should be made on a year-on-year basis or cumulative basis?

Illustration:

FY	Business Loss (A)	Unabsorbed depreciation (B)	Total	Lower of A or B
1999-2000	18	04	22	04
2000-2001	25	16	41	16
2001-2002	0	11	11	0
Total	43	{31}	74	{20}

As evident from above, if cumulative basis is followed, the amount of brought forward losses and unabsorbed depreciation will be same as the amount brought forward as per the “books of accounts”. Therefore, the same appears to be closer to the language of clause (iii).

(b) How to compute the amount the amount of losses and unabsorbed depreciation to be carried forward, ie whether the tax payer has an option to adjust the losses and unabsorbed depreciation on a pick and choose basis?

Illustration:

Continuing the above illustration, it is further assumed that the Book profits before adjustment under clause (iii) of Explanation to Sec 115JB is –

FY 2002–2003 – INR 6
FY 2003–2004 – INR 32

Though there can be many scenarios which merits consideration in this regard, two possible scenarios are discussed below:

Scenario I

Financial Year	Brought forward Book Loss (before depreciation) – (A)	Brought Forward depreciation (B)	Total	Benefit claimed
Break-up as on April 1, 2002	43	31	74	–
Set off during FY 2002-03	–	(06)	–	06
Amount to be carried forward	43	25	68	–
Set off during FY 2003-04	–	(25)	–	25
Amount to be carried forward	43	0	43	–
Potential benefit to be claimed in subsequent years	–	–	–	0
Total benefit claimed	–	–	–	31

Scenario II

Financial Year	Brought forward Book Loss (before depreciation) – (A)	Brought Forward depreciation (B)	Total	Benefit claimed
Break-up as on April 1, 2002	43	31	74	–
Set off during FY 2002-03	(06)	–	–	06
Amount to be carried forward	37	31	68	–
Set off during FY 2003-04	(32)	–	–	32
Amount to be carried forward	05	31	36	–
Potential benefit to be claimed in subsequent years	–	–	–	05
Total benefit claimed	–	–	–	43

Scenario I is in line with the advance ruling in the case of Rashtriya Ispat Nigam Limited. However, in the absence of specific suggestion/ prohibition under the Companies Act, or the Accounting Standards, or section 115JB, a tax payer may also be justified in adopting Scenario II.

(c) Whether losses cancelled in the process of corporate re-structuring exercise would still be available for set-off as brought forward losses?

Unabsorbed loss/ depreciation cancelled by book entry against reserves, share premium, etc would not answer the test of having been brought forward as per “books of accounts” in subsequent year. This has also been confirmed by Mumbai ITAT in the case of KFA Corporation Ltd. Therefore, it may be difficult to claim the losses cancelled in the process of corporate re-structuring exercise.

(d) Whether in case of amalgamation the amalgamated company can set-off unabsorbed losses of the amalgamating company?

A view can possibly be adopted that the losses which are brought forward in the books of accounts as on the first day of a accounting year should only be eligible for set-off and therefore, the amalgamated company may not be eligible for such set-offs (unless the amalgamation is effective from the first day of financial year).

However, Bangalore ITAT in the case of VST Tillers & Tractors Ltd vs CIT (2009-TIOL-26-ITAT-BANG) has held that the losses of amalgamating company are available for set-off to the amalgamated company, more so as the amalgamation scheme itself provided for such set-off.

Therefore, if the tax payer incorporates suitable provisions in the merger petition to the Court and pray that the losses of amalgamating company should for all tax assessment proceedings be deemed to have been incurred and recorded by the amalgamated company, the possibility of claiming the losses is greater.

4. Whether MAT credit can be carried forward and utilized by the successor company in case of amalgamation/ merger?

Unlike section 72A, section 115JB or section 115JAA does not contain any specific provision for amalgamations/ merger. Literal interpretation of the provisions of Section 115JAA(1) suggests that the tax credit would be allowed only to the company which had paid such taxes.

SRF Limited vs Garware Plastics and Polyesters Limited [1995] 2 Comp LJ 222 has held that benefits under section 43B would be available to the transferee upon merger. However, given that the Court has just made passing remarks and has not analyzed the allowability of benefits (under Section 43B) in detail, it may not be appropriate to rely on the same. Further, the Apex Court judgement in the case of CIT vs T Veerabhadra Rao [1985] 155 ITR 152, in connection with the right of the transferee company upon merger to recover debts, may also not be of much help.

Therefore, reliance to some extent can be placed on the Bangalore ITAT in the case of VST Tillers & Tractors Ltd and the merger petition can be appropriately drafted, however, in the absence of a specific provision in the Act, it may really be a challenge for the amalgamated company to avail such benefits.

Author: Courtesy

Contact: +91-22-24362234
amit@nehasinghi.com

Date: December 22, 2011