There are numerous cases where a company having huge unutilised MAT credit gets amalgamated with other companies due to various business and expansion reasons. In such cases, a doubt arises on the allowability of one of main asset of the amalgamating company i.e. the MAT credit to the amalgamated company. This issue has been a matter of litigation since many years and has been settled by various judicial authorities in difference cases. Let us understand the issue in detail below.
1. Section 115JAA:
Section 115JAA of the Act deals with MAT credit. The relevant provisions of section 115JAA reads as under:
1(A) Where any amount of tax is paid under sub section (1) of section 115JB by an assessee, being a company for the assessment year commencing on the 1st day of April, 2006 and any subsequent assessment year, then, credit in respect of tax so paid shall be allowed to him in accordance with the provisions of this section.
(2A) The tax credit to be allowed under sub-section (1A) shall be the difference of the tax paid for any assessment year under sub-section (1) of section 115JB and the amount of tax payable by the assessee on his total income computed in accordance with the other provisions of this Act:
Provided that no interest shall be payable on the tax credit allowed under sub-section(1A).
(4) The Tax credit shall be allowed set off in a year when tax becomes payable on the total income computed in accordance with the provisions of this Act other than section 115JA or section 115JB, as the case may be.
(5) Set off in respect of brought forward tax credit shall be allowed for any assessment year to the extent of the difference between the tax on his total income and the tax which would have been payable under the provisions of sub-section (1) of section 115JA or section 115JB, as the case may be for that assessment year.
(7) In case of conversion of a private company or unlisted public company into a limited liability partnership under the Limited Liability Partnership Act, 2008 (6 of 2009), the provisions of this section shall not apply to the successor limited liability partnership.
2. Observation:
a. As can be observed from above, section 115JAA of the Act allows credit in respect of tax paid under section 115JB of the Act. The Tax credit determined under section 115JAA of the act is allowed as a set off in a year in which tax is payable on the total income computed in accordance with the normal provisions of the Act.
b. Section 115JAA(7) of the Act specifically provides that in case of conversion of a private or unlisted public company into a limited liability partnership(‘LLP’) under the LLP Act, 2008, the provisions of section 115JAA shall not apply to the successor LLP i.e. the successor LLP would not be eligible to set-off the unutilized MAT credit of the erstwhile company.
c. However, there is no specific provision in relation to transfer of accumulated MAT credit in case of a merger. In other words, the said action does not contain any specific prohibition with regard to carry forward and set-off of the MAT credit of an amalgamating or transferor company by the amalgamated or transferee company.
Accordingly, a view may be taken that if the intention of the legislature was to restrict transfer of accumulated MAT credit in case of a merger also, specific prohibition to that effect could have been provided in the Act. Therefore, in absence of any specific prohibition (similar to conversion of company into LLP) transfer and set-off of unutilized MAT credit of amalgamating company should be available to amalgamated company
3. Other relevant points
a. As per the provisions of Section 2(1b) of the Income Tax Act,1961, “Amalgamation” means the merger of one or more companies with another company in such a manner that, inter alia, all the property of Amalgamating company immediately before the amalgamation becomes the property of the Amalgamated company by virtue of the Amalgamation. Now the question arises is the MAT Credit is property?
b. According to section 2(1B) of the Act, “Property” is a term of the widest import and, subject to any limitation which the context may require, signifies every possible interest which a person can clearly hold and enjoy.
c. “MAT credit which can be carried forward and set off has the potential of reducing the tax liability during subsequent years and therefore it possesses the characteristics of being considered as a property”
d. In terms of the guidance note on accounting of MAT credit issued by the Institute of Chartered Accountants of India (ICAI) and Accounting Standard 14 – Accounting for amalgamation in the books of amalgamated company, MAT credit of Amalgamating company could be recognized as an asset in the balance sheet of the amalgamated company.
Accordingly, it may be safe to conclude that MAT credit qualifies as ‘property’ for the purposes of the above section 2(1B) and hence the unutilized MAT credit of the amalgamating company should be available to the amalgamated company.
4. Judicial Pronouncements:
a. Adani Gas Limited v/s ACIT, ITA no. 2241 of 2011, the Ahmedabad Tribunal held that once the demerged gas distribution undertaking no more exists w.e.f. 01-01-2007 coming to be the appointed day, the assessee-resulting company is entitled for all the pro rata adjustments of TDS, advance tax and MAT credits as per law; to be utilized in former’s account.
b. Ambuja Cements Ltd. v/s DCIT (2019) 179 ITD 436 (Mumbai Tribunal),it was held that “on a reading of the provisions of section 115JAA, there is no any such restriction with regard to allowance of MAT credit of an amalgamating company at the hands of amalgamated company. Rather ,a plain reading of the aforesaid provision reveals that MAT credit is allowed to be carried forward for a specific period. Carried forward MAT credit of the amalgamating company can be claimed by the amalgamated company.”
c. Capgemini Technology Services India Limited Vs DCIT (ITAT Pune) ITA No. 1857/PUN/2017, Section 115JAA(7) of the Act contains a specific prohibition on the entitlement of MAT credit in case of conversion of a private company or unlisted public company into a limited liability partnership (LLP). This provision’s intent was to restrict the allowance of MAT credit to the successor only on conversion of a company into LLP and not any other case of succession, including the amalgamation. Thus, in the absence of any specific prohibition under the Act, there remains no doubt whatsoever that the MAT credit of the amalgamating company has to be allowed in the hands of the amalgamated company.
Also, the MAT credit represents that portion of tax which was not actually payable by the company but has all the same been collected by the Government. If amalgamated company is denied the benefit of carry forward and set off of MAT credit of amalgamating company, it could be termed unauthorized collection of taxed by the Government.
4. Conclusion:
In light of the above section interpretation, argument points and favourable judicial precedents on the matter, it would be safe for the amalgamated company to take the credit of unutilised MAT credit of the amalgamating company.
Authors:
Karan Vakharia, Partner at MASD & Co | Email: [email protected]
Palash Jain, Associate at MASD & Co | Email: [email protected]
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