MAT-Ind AS Committee placed its report dated 17 June 2017 providing recommendations on proposed amendments to the provisions of the Section 115JB of the Act in respect of Ind AS Compliant Companies. The Committee observed that in order to  have parity between the transition adjustments and ongoing adjustments on account of items adjusted to “Other Equity”, an amendment is required to be made with effect from 1 April 2017 i.e. the effective date of the amendment made by the Finance Act 2017. As per the proposed amendment to Section 115JB of the Act, all amounts credited or debited during the previous year to any item of “Other Equity”, excluding the carve outs as mentioned therein, would need to be added / reduced in computing thebook profit of the Company for MAT purposes.

Issues

(i) One of the carve outs on which MAT would not be applicable is “capital reserve” in respect of Business combinations of entities under common control as per Appendix C of IndAS 103. However, capital reserve which could arise in respect of any other Business combinations under IndAS 103 would fall under the ambit of MAT. For example, any re-structuring involving merger of a target NPA entity (distressed acquisition or bargain purchase) with the acquirer (unrelated) may qualify as a Business Combination resulting in creation of capital reserve (being the difference in the fair value of fixed assets acquired less the value of shares issued by the acquirer). Such capital reserve would need to be added to book profits of the Company and hence, subject to MAT. It is recommended that Capital reserve arising in respect of any other Business combinations as per IndAS 103 should be excluded from the “Other Equity” for the Book Profit computation.

(ii) Another proposed carve out is “securities premium collected in cash and cash equivalents”. There is express definition of what constitutes “cash and cash equivalents” but in normal parlance it means Cash and cash equivalents comprise cash in hand, demand deposits with banks/corporations and short term highly liquid investments (original maturity less than 3 months) that are readily convertible into known amount of cash and are subject to an insignificant risk of change in value. However, in case where the securities premium reserve arises on account of a restructuring exercise e.g. on conversion of loans or compound instruments into shares or securities at fair market value, or on business combinations, such securities premium would be added to book profits and hence, subject to MAT. It is recommended that Securities premium reserve arising on issuance of shares or securities in compliance with the provisions of the Companies Act, 2013 should be excluded for computation of Book Profit.

(iii) In continuation of the example cited in (ii) above, there could be a scenario where an entity proposes to re-structure its financial statement by reducing its equity share capital either for re-alignment of shareholding (e.g. reduction of promoter’s equity on settlement with lenders under applicable RBI guidelines) or to adjust such share capital against a debit balance in the Retained Earnings. Such credit to “Other Equity” or “Retained Earnings” on Capital Reduction of share capital would be liable to be added to book profits of the Company and subject to MAT. It is recommended that Adjustment to any item of “Other Equity” on account of capital reduction of
share capital of a company should be excluded for computation of Book Profit.

Suggestion

Based on the proposed carve outs in the Committee Report dated 17 June 2017, the following adjustments to any item of “Other Equity” should also be excluded from addition / deletion from the book profit:

Capital reserve in respect of Business combinations in respect of any other Business combinations as per Ind AS 103.

Securities premium reserve arising on issuance of shares or securities in compliance with the provisions of the Companies Act, 2013. Adjustment to any item of “Other Equity” on account of capital reduction of share capital of a company

Source-  ICAI Pre-Budget Memorandum–2018 (Direct Taxes and International Tax)

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