MINIMUM ALTERNATE TAX REGIME

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1 VOL. 19 NO. 12 / JUNE 2016 C.V.O. CA S NEWS & VIEWS MINIMUM ALTERNATE TAX REGIME Contributed by : CA Tejas Gangar a member of the association he can be reached at tejasgangar@gmail.com BACKGROUND Minimum Alternate Tax (MAT) was effectively introduced in India by the Finance Act of 1987, vide Section 115J of the Income Tax Act, 1961 (Act), to facilitate the taxation of zero tax companies. It had been observed that many companies, despite showing high profits in their books of accounts and paying substantial dividends, were paying marginal or no tax, by taking advantage of various tax concessions and other incentives, in a manner so as to avoid paying tax 1. MAT was thus envisaged as levying a minimum tax on such companies by deeming a certain percentage of their book profits, computed under the Companies Act, as taxable income. Section 115J was, however, made inoperative from Assessment Year The MAT provisions were subsequently reintroduced in 1996 by the Finance Act (No. 2) of 1996, through section 115JA; and then by the Finance Act of 2000, which replaced section 115JA with Section 115JB. BASIC PROVISION Section 115JB provides that in case the tax payable on the total income of a company in respect of any previous year, computed under the Act, is less than 18.5% of its book profit, such book profit shall be deemed to be the total income of such company. The tax payable for the relevant year for such company shall then be 18.5% of its book profit.book profit represents net profit as per profit and loss account subject to certain additions and deletions specified therein. If in any year the company pays liability as per MAT, then it is entitled to claim credit of MAT paid over and above the normal tax liability in the subsequent year(s).the provisions relating to carry forward and adjustment of MAT credit are given in section 115JAA. ISSUES AND ANALYSIS There are many issues related to section 115JB, which have been the matter of contention between the assessees and the Department. While some of the issues have been settled by way of amendment in the Act, the other few issues still remain to be addressed. 1 Circular No. 495, dated 22 September, 1987: [1987] 168 ITR (St.) Circular No. 572 dated 3 August, 1990: [1990] 186 ITR (St.) 89 The key challenges while dealing with MAT along with certain important aspects of MAT are discussed as follows: Q Is withdrawal from provision created in a MAT year allowed as reduction only if such provision actually suffered MAT in that year? A The significance of the phrase Where this section is applicable is merely to indicate the general applicability of MAT provisions in the year of withdrawal and it does not mean that MAT should actually become payable. In Circular No. 8 of 2002 dated 27 August 2002 which has explained the purpose of the said proviso in s.115jb is reproduced below:- It also provides that any amount withdrawn from a reserve or a provision created on or after 1st day of April, 1997, and which is credited to the profit and loss account shall not be reduced from the book profit, unless the book profits in the year of creation of such reserves or provisions were increased by the amount transferred to such reserves or provisions at that time. The above extract makes it clear that there is no pre-condition of MAT liability being triggered in the year of creation of reserve/provision. In any case, applicability of section 115JB does not necessarily mean incurrence of MAT liability. It only means that the company is required to compare normal tax and tax on book profit. Q. Whether deduction of extra depreciation as arrears of past years while computing book profit is allowable? A. Although, the assessee has an option under the Companies Act of adopting a straight line method or written down value method for claiming depreciation; however, deduction of extra depreciation as arrears of past years while computing book profit is not allowable, as has been held by the Madhya Pradesh High Court in the case of Gilt Pack Ltd. vs. Union of India [2007] (163 Taxman 331). While arriving this conclusion, the High Court followed the judgement of the Hon ble Supreme Court in the case of Karnataka Small Scale Industries Development Corporation vs. CIT [2002] (AIR SCW 4926). 6 Success means doing the best we can with what we have. Success is the doing, not the getting; in the trying, not the triumph.

2 C.V.O. CA S NEWS & VIEWS VOL. 19 NO. 12 / JUNE 2016 Q. A taxpayer is liable to pay INR 100mn taxes under MAT provisions. Against this, INR 80mn can be availed of by the taxpayer as MAT credit under section 115JAA in future against its taxes under the provisions of the Act other than MAT and is therefore, recognised as an asset in its financial statements and disclosed in the profit and loss account as a separate line item. Therefore, a question arises as to what is the amount that needs to be adjusted for determining book profits for the purpose of MAT (INR 100mn or INR 20mn). A. As the taxpayer is liable to pay tax under MAT, in effect the income-tax provision (other than MAT) for the current year is INR 20mn. Explanation 1 to section 115JB(2) provides for a formula to arrive at book profits. Clause (a) to this explanation provides that net profit as shown in Profit and Loss account.as increased by (a) the amount of income-tax paid or payable, and the provision therefore. Explanation 2 provides that for purpose of clause (a) of Explanation 1, the amount of income-tax shall include certain specified items, such as tax on distributed profits, interest, surcharge and cess. This provision does not specify that MAT credit (under section 115JAA), that can be availed of in future, should be factored in while computing book profit. Also, according to Accounting Standards Interpretation (ASI) 6, MAT is current tax. Hence, it would appear that the adjustment contemplated would have to be gross amount of INR 100mn under clause (a). However, this would lead to an absurd result of requiring to add back INR 100mn, whereas the net impact to the profit and loss account on account of taxes is only INR 20mn. Also, this would result in effectively having to pay MAT on MAT credit (of INR 80mn). It may be noted that clauses (h) and (viii) have been inserted in the Explanation to section 115JB(2) by the Finance Act, 2008 to provide for an adjustment on account of deferred tax. The memorandum explaining the introduction of the explanation provides as follows: As per the Explanation after sub-section (2), the expression book profit means net profit as shown in the profit and loss account prepared in accordance with the provisions of Part II and III of Schedule VI to the Companies Act, 1956 as increased or reduced by certain adjustments, as specified in that section. Clause (a) of the aforesaid Explanation, inter-alia, provides for increasing the book profits by income-tax paid or payable and the provisions therefore; if debited to profit and loss account. The intention behind these add backs is that the items which mainly appear below the line in the profit and loss account should be added back to arrive at the book profit if they appear above the line in the profit and loss account. Section 115JB has not specifically provided for add back of some such below the line items like deferred tax, dividend distribution tax, etc. as they were thought to be included in the term income-tax. However, there has been some ambiguity regarding add back of these items, if debited to profit and loss account. With a view to clarifying the intention, it is proposed to insert a new clause after clause (g) of the Explanation 1 as so numbered so as to provide that the book profit shall be increased by the amount of deferred tax and the provision therefor, if debited to profit and loss account. Therefore, it may be possible to adopt a position that MAT credit is also contemplated to be adjusted as a deferred tax under Explanation (1)(viii) to section 115JB(2) of the Act, if credited to the Profit and Loss Account, such that the objective of items which appear below the line are adjusted to arrive at the book profit. Also, MAT credit may be considered as a negative current tax requiring adjustment to arrive at the net figure of INR 20mn under clause (a). Thus, in the example provided above, where the current year provision is on account of MAT liability (INR 100mn as MAT, against which a MAT credit for INR 80mn would be available in future) the amount debited to the Profit and loss account on account of income tax would be INR 20mn, in which the case, the adjustment for current year tax under Explanation (1)(a) to section 115JB(2) could be INR 20mn, because effectively the Profit and loss account is debited by that amount. Q. Whether comparison of unabsorbed losses and depreciation should be on year to year basis? A. There are two views on this as explained below: View 1: Year to year basis Action is the foundational key to all success. 7

3 VOL. 19 NO. 12 / JUNE 2016 C.V.O. CA S NEWS & VIEWS Reference is drawn to the Central Board of Direct Taxes (CBDT) Circular 495 dated 22 Sept 1987 (168 ITR St. 110) to illustrate the position as may emerge if the quantification is done on a year to year basis: Year Profit Lower of Loss or (excluding Net Book of depreciation depreciation) Depreciation profit/loss Set off Profit carried forward 1984 (300,000) (100,000) (400,000) (400,000) (100,000) ,000 (200,000) 300,000 (100,000) 200, (1,000,000) (200,000) (1,200,000) - (1,200,000) (200,000) ,000,000 (200,000) 800,000 (200,000) 600,000 The methodology approved by the Circular can be explained as follows: The process of comparison of depreciation or business loss is to be carried out every year. In case of loss year, or the successive loss years, the loss component or the depreciation component, whichever is lower of the respective year is to be carried forward. In case of profit year, the lower of the brought forward component will be set of to the extent profit and losses remaining unabsorbed will be carried forward. The methodology suggested in the Circular has been largely accepted by the Authority of Advance Ruling (AAR), New Delhi in the case of RashtriyaIspat Nigam Ltd. In re. [2006](285 ITR 1). View 2: Consolidated approach The consolidated figure brought forward business loss at the beginning of the year is traced to two components: the aggregate unadjusted amount of business loss and the aggregate unadjusted amount of depreciation comprised in the consolidated loss. The lower of the two is accepted as permissible set off amount. Year Profit /(loss) (excluding depreciation) Depreciation Profit/loss after depreciation 1984 (300,000) (100,000) (400,000) ,000 (200,000) (300,000) 1986 (1,000,000) (200,000) (1,200,000) Aggregate (800,000) (500,000) (1,300,000) ,000,000 (200,000) 800,000 As per this approach, for the year 1987, the brought forward loss as per books of account is INR 1,300,000 which comprises of brought forward losses of INR 800,000 and unabsorbed depreciation of INR 500,000. The lower of the two, being unabsorbed depreciation of INR 500,000is allowed to be set-off. The Mumbai Tribunal in the case Amline Textiles Ltd vs. ITO [2009](27 SOT 152) upheld the above view. The method suggested as per CBDT Circular of 1987 may not be the preferred method as it requires reckoning of carry forward of losses from inception of the Company. It appears that in absence of mandate in section 115JB, the consolidated review approach appears closer to language of clause (iii) of Explanation 1 of section 115JB in as much as: Pursuant to this method, the amount of losses and unabsorbed depreciation will not be different from the amount brought forward as per books of accounts The method did not contemplate, the preparation of parallel set of records of year to year working which is different from the accounts prepared and presented under the Companies Act. 8 I cannot give you the formula for success, but I can give you the formula for failure which is: Try to please everybody.

4 C.V.O. CA S NEWS & VIEWS VOL. 19 NO. 12 / JUNE 2016 Q. Whether comparison between tax payable as per the regular provisions of the Act and the tax payable as per section 115JB of the Act is required to be made before or after taking credit for the foreign taxes? A. The issue can be examined as follows: Particulars Tax Computation As per regular provision (INR) Foreign sourced income on which tax in foreign country is paid at 20% - Eligible for section 10A deduction.(i) not eligible for section 10A deduction Domestic income - Eligible for section 10A deduction.(ii) Not eligible for section 10A deduction Total Income before section 10A deduction Deduction under section 10A of the Act (I+II) 700 NIL* Chargeable Total Income (III) Tax liability at 30%/18.5% respectively of III above** (IV) Doubly taxed income included in IV above (V) FTC available at 20% /18.5% respectively on doubly taxed income as per III above (VI) Net Taxable Income after FTC (IV minus VI) (VII) *No deduction under section 10A of the Act is admissible in computation of MAT profit ** Rates presumed As per MAT (INR) View 1 Comparison of tax liability should be made at level IV i.e. before claiming credit for foreign taxes paid. This view proceeds on the basis that foreign tax payment is a mode of discharging tax liability. This requires comparison to be made between normal tax liability of INR 90 and MAT liability of INR 185. From INR 185, foreign taxes of INR 130would be deducted and the balance amount of INR 65 would be payable by the taxpayer. The contents to support this view are: Section 115JB of the Act requires comparison between income-tax payable as computed under the regular provisions of the Act and on book profits. The term tax payable would mean the gross liability of tax i.e tax liability before deducting advance tax, tax deduction at source (TDS) and rebates and relief which may be available. Section 91 of the Act, which provides for unilateral relief (in absence of DTAA), provides for deduction from income-tax payable. Section 91 of the Act requires that the relief for FTC be computed on the basis of the comparison of the Indian rate of tax with the rate of tax of foreign country. For the purpose of this section, the Indian rate of tax is determined by dividing the amount of Indian income-tax (before deduction of any relief) by the total income. The provisions of section 234B/234C of the Act also seem to equate FTC as an alternative mode of discharging a tax liability as an alternative to tax deducted at source. The Income-tax Return form clearly indicates that double taxation relief is to be provided after application of provisions of section 115JB of the Act and not in the process of determination of liability under this section. You ve got to get up every morning with determination if you re going to go to bed with satisfaction 9

5 VOL. 19 NO. 12 / JUNE 2016 View 2 The comparison is made at Level VII. As per this view, if FTC obliterates the Indian tax liability, the tax liability as per regular provisions of INR 70 is payable as it is higher than the MAT liability of INR 65. As per section 4 of the Act, the charge of income tax is subject to the provisions of the Act and hence, the charge of income-tax is subject to relief from tax provided under sections 90 and 91 of the Act and MAT payable, after considering the credit for foreign taxes paid in each of the computations. On the basis of the foregoing discussion, View 1 appears to be a better view. Q. Does the draft rules provide for any guidance for grant of FTC where MAT is payable A. The CBDT vide notification dated 18 April 2016 released draft rules on FTC. One of the aspects considered is in respect of grant of FTC where tax is payable under the provisions of section 115JB of the Act. The draft rule provides that the credit of foreign tax shall be allowed against MAT in the same manner as is allowable against tax payable under the normal provisions of the Act. However, the said provision has come with a rider that where the amount of FTC available against the tax payable under the provisions of section 115JB exceeds the amount of tax credit available against the normal provisions, then while computing the amount of credit under section 115JAA in respect of the taxes paid under section 115JB, as the case may be, such excess shall be ignored. The said provision is clarificatory and will obviate taking claim of excess FTC twice, first, directly upon payment of taxes when being paid under MAT and second, indirectly by means of MAT credit against future tax liabilities. Q. Whether the taxpayer has choice of selecting the period for availing MAT credit u/s 115JAA in view of non-claim of credit in an intervening period. A. MAT credit will need to be claimed for the consecutive assessment years starting from the year in which the credit becomes allowable. It is not the option of the taxpayer to pick and choose the year in which the credit may be claimed within the overall limitation period of ten years. This can be supported by following reasons: In terms of section 115JAA(1A) / (2A), the MAT credit is quantified by taking into C.V.O. CA S NEWS & VIEWS account the difference between MAT liability and normal tax liability. This necessarily requires comparison between the tax liabilities for the given assessment years under the alternative computation mechanism. By implication, the quantification is related to the respective assessment year and is not impacted by the actual date of payment of tax. Proviso to section 115JAA(2A) provides that there is no interest payable in respect of tax credit which is allowed under section 115JAA. section 234A to section 234C make it clear that in determining the quantum of interest liability, credit allowed to be set off in accordance with the provisions of section 115JAA needs to be considered. The CBDT Circular No 3 of 2006 dated 27 Feb 2006 while explaining the reintroduction of section 115JAA w.e.f. A.Y does also make it clear that the provisions need to be implemented on year on year basis with clear FIFO application when a given year has MAT credit available from more than one year. Q. Whether the provisions of advance tax are applicable on companies paying MAT? A. It has been clarified by Circular No.13/2001 dated 9 September 2001 that provisions of advance tax are also applicable on the companies paying MAT and interest under section 234B/C is levied in case of default by these companies. This view has been affirmed by the Honb le Supreme Court in the case of JCIT vs. Rolta India Ltd. [2011](196 Taxman 594). Q. Whether MAT credit is preferred to credit for advance tax/ TDS payment while working out interest liability u/s 234B or while granting interest u/s 244A to the taxpayer on refund of advance tax paid? A. It is true that in few cases as also SC ruling in the case of Tulsyan NEC Ltd [2010](330 ITR 226), Courts have considered MAT credit in preference to advance tax/ TDS payment while working out interest liability u/s 234B or while granting interest u/s 244A to the taxpayer on refund of advance tax paid. However, in all these cases Tax Authority had tried to create double whammy or absurd situation for the taxpayers wherein inspite of eligible MAT credit being available for set off, Tax Authority levied 10 Success is going from failure to failure without losing enthusiasm

6 C.V.O. CA S NEWS & VIEWS VOL. 19 NO. 12 / JUNE 2016 interest under section 234B or denied grant of interest under section 244A in such situations i.e. despite MAT credit standing to the account of the taxpayer, it s liability gets increased instead of getting reduced. In the case of CIT vs Bharat Aluminium Co. Ltd. [2007](160 Taxman 388), thedelhi High Court held that MAT credit is available for adjustment on the first date of the previous year even before the instalment of advance tax is due on the current income. Further, in case of Sami Labs [2011](ITA No. 231 of 2009), the Karnataka High Court held that MAT credit is as much as a tax paid in earlier year and is available by way of credit to be adjusted in future years. In light of above and given the fact that there is no specific provision to set out priority under the Act, the taxpayer has an option to appropriate his entitlement i.e. TDS, advance tax, MAT credit against the liability which it owes in favour of the tax department. Q. Whether penalty under section 271(1)(c) is levied for situations where the income determined under the general provisions is less than the income declared for the purpose of MAT under section 115JB of the Act? A. In this regard, the CBDT Circular No.25 of 2015 dated 31 December 2015 states the following: The Delhi High Court in the case of Nalwa Sons Investment Ltd. [2010] (194 taxman 387) held that when the tax payable on income computed under normal procedure is less than the tax payable under the deeming provisions of section 115JB of the Act, then penalty under section 271(1)(c) of the Act could not be imposed with reference to additions /disallowances made under normal provisions. Subsequently, Explanation 4 to section 271(1) of the Act have been substituted by Finance Act, 2015 with effect from 1 April 2016, provides the methodologyfor calculating the amount of tax sought to be evaded for situations even where the income determined under the general provisions is less than the income declared for the purpose of MAT under section 115JB of the Act. Q. Whether MAT is applicable to foreign companies? A. Vide Finance Act 2016, Explanation 4 to section 115JB(2) has been introduced (effective from assessment year to provide for nonapplicability of MAT to a foreign company if- It is a resident of a country with which India has a Double Taxation Avoidance Agreement (DTAA) and does not have a permanent establishment in India; or It is a resident of a country with which India does not have a DTAA and the foreign company is not required to register under any law applicable to companies. Q. Whether MAT credit can be transferred to a buyer by means of slump sale as compared to a merger A. Transition of MAT credit to the purchaser by way of slump sale, inter alia, may not be allowed on account of following reasons: transaction of a slump sale involves transfer between two private parties which is distinguishable from merger where there is direction flowing from the Court order which may guide one to a different conclusion. MAT credit being in the nature of advance tax is an asset of the taxpayer and not of the undertaking. As credit for advance tax is allowed to the person who makes payment of the taxes, one may argue that only the company which has paid tax u/s 115JB is entitled to carry forward and set off of MAT credit. MAT credit binds the taxpayer and the Tax Department, a third party cannot participate in the same. Our Association s mouthpiece News & Views has readership circulation of more than 1250 chartered accountant and student members. We have now started accepting advertisement for any vacancy for staff. In case you have any vacancy at your office or at any of your client for qualified chartered accountants or students or any administrative job, we will publish your requirement in the Journal. This will be at very nominal cost of Rs. 1,500 for quarter page advertisement per issue. We will be taking advertisement on first cum first serve basis. Kindly contact CVO CA Office on and speak to Vaibhavi for more details. If you want to make an easy job seem mighty hard, just keep putting off doing it. 11