1. Introduction

Consider a situation where RST Limited was a loss making company. Ind ASs were adopted by this company from the year 2016-17. Since FY 2014-15 it has started to profits it was having accumulated MAT credit of Rs. xyz crores lying in the books of accounts as on 31.03.2019. Pursuant to new section 115BAA as in the Income Tax Act, 1961 the domestic companies have the option to pay tax @ 22% from the FY 2019-20 (AY 2020-21) onwards, if such company adhered to certain specified conditions including the condition inserted by Section 115JAA(8) whereby the company will have to write off MAT Credit if it has to switch over to new tax regime. Now the issue arises how to account for the impact of writing off of such accumulated MAT Credit in its Ind AS compliant financial statements. The present write up analyses this issue in detail and the author hopes that the following elaboration could be useful to the readers at large.

2. Legal and Accounting Aspects – analysis thereof:

(A). Income Tax Provisions for MAT Credit and Taxation Laws (Amendment) Act, 2019

Section 115JAA(1A) of the Income Tax Act, 1961 (‘the Act’) provides that 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.

Sub-section (2A) provides that 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.

Further, in terms of Section 115JAA(3A) the amount of tax credit determined under sub-section (2A) shall be carried forward and set off in accordance with the provisions of sub-sections (4) and (5) but such carry forward shall not be allowed beyond the fifteenth assessment year immediately succeeding the assessment year in which tax credit becomes allowable under sub-section (1A).

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 – Section 115JAA(4).

Sub-section (8) inserted in section 115JAA by the Taxation Laws (Amendment) Act, 2019, w.e.f. 1-4-2020 provides that:

The provisions of this section shall not apply to a person who has exercised the option under section 115BAA”

Section 115BAA(1)  as inserted by the Taxation Laws (Amendment) Act, 2019, w.e.f. 1-4-2020, provides that:

“Notwithstanding anything contained in this Act but subject to the provisions of this Chapter, other than those mentioned under section 115BA and section 115BAB, the income-tax payable in respect of the total income of a person, being a domestic company, for any previous year relevant to the assessment year beginning on or after the 1st day of April, 2020, shall, at the option of such person, be computed at the rate of twenty-two per cent, if the conditions contained in sub-section (2) are satisfied”

(B). Deferred Tax Asset under Ind AS 12

Ind AS 12 (‘the Standard’) defines ‘deferred tax assets’ as the amounts of income taxes recoverable in future periods in respect of:

(a) deductible temporary differences;

(b) the carry forward of unused tax losses; and

(c) the carry forward of unused tax credits.

In terms of Para 24 of the Standard, a deferred tax asset shall be recognised for all deductible temporary differences to the extent that it is probable that taxable profit will be available against which the deductible temporary difference can be utilised, unless the deferred tax asset arises from the initial recognition of an asset or liability in a transaction that:

(a) is not a business combination; and

(b) at the time of the transaction, affects neither accounting profit nor taxable profit (tax loss).

Further, Para 29(b) states that where there are insufficient taxable temporary differences relating to the same taxation authority and the same taxable entity, the deferred tax asset is recognised to the extent that tax planning opportunities are available to the entity that will create taxable profit in appropriate periods.

Tax planning opportunities are actions that the entity would take in order to create or increase taxable income in a particular period before the expiry of a tax loss or tax credit carry forward – Ind AS 12:30.

Para 34 of Ind AS 12 further stipulates that a deferred tax asset shall be recognised for the carry forward of unused tax losses and unused tax credits to the extent that it is probable that future taxable profit will be available against which the unused tax losses and unused tax credits can be utilised.

In terms of Para 36 of the Standard, an entity considers the following criteria in assessing the probability that taxable profit will be available against which the unused tax losses or unused tax credits can be utilised:

(a) whether the entity has sufficient taxable temporary differences relating to the same taxation authority and the same taxable entity, which will result in taxable amounts against which the unused tax losses or unused tax credits can be utilised before they expire;

(b) whether it is probable that the entity will have taxable profits before the unused tax losses or unused tax credits expire;

(c) whether the unused tax losses result from identifiable causes which are unlikely to recur; and

(d) whether tax planning opportunities are available to the entity that will create taxable profit in the period in which the unused tax losses or unused tax credits can be utilised.

To the extent that it is not probable that taxable profit will be available against which the unused tax losses or unused tax credits can be utilised, the deferred tax asset is not recognised.

Para 56 of Ind AS 12 further expounds that the carrying amount of a deferred tax asset shall be reviewed at the end of each reporting period. An entity shall reduce the carrying amount of a deferred tax asset to the extent that it is no longer probable that sufficient taxable profit will be available to allow the benefit of part or all of that deferred tax asset to be utilised. Any such reduction shall be reversed to the extent that it becomes probable that sufficient taxable profit will be available.

Accounting for the current and deferred tax effects of a transaction or other event is consistent with the accounting for the transaction or event itself – Para 57 of Ind AS 12.

Ind AS 12, further states the following with regard to where in the financial statements (i.e., in profit or loss, in other comprehensive income, or directly in equity) should the current and deferred tax be recognised:

“58. Current and deferred tax shall be recognised as income or an expense and included in profit or loss for the period, except to the extent that the tax arises from:

(a) a transaction or event which is recognised, in the same or a different period, outside profit or loss, either in other comprehensive income or directly in equity (see paragraphs 61A-65); or

(b) a business combination (other than the acquisition by an investment entity, as defined in Ind AS 110, Consolidated Financial Statements, of a subsidiary that is required to be measured at fair value through profit or loss) (see paragraphs 66-68).”

“60. The carrying amount of deferred tax assets and liabilities may change even though there is no change in the amount of the related temporary differences. This can result, for example, from:

(a) a change in tax rates or tax laws;

(b) a reassessment of the recoverability of deferred tax assets; or

(c) a change in the expected manner of recovery of an asset.

The resulting deferred tax is recognised in profit or loss, except to the extent that it relates to items previously recognised outside profit or loss.”

In terms of Para 61A, current tax and deferred tax shall be recognised outside profit or loss if the tax relates to items that are recognised, in the same or a different period, outside profit or loss. Therefore, current tax and deferred tax that relates to items that are recognised, in the same or a different period:

(a) in other comprehensive income, shall be recognised in other comprehensive income.

(b) directly in equity, shall be recognised directly in equity.

Para 63 provides that in exceptional circumstances it may be difficult to determine the amount of current and deferred tax that relates to items recognised outside profit or loss (either in other comprehensive income or directly in equity). This may be the case, for example, when:

(a)  there are graduated rates of income tax and it is impossible to determine the rate at which a specific component of taxable profit (tax loss) has been taxed;

(b) a change in the tax rate or other tax rules affects a deferred tax asset or liability relating (in whole or in part) to an item that was previously recognised outside profit or loss; or

(c) an entity determines that a deferred tax asset should be recognised, or should no longer be recognised in full, and the deferred tax asset relates (in whole or in part) to an item that was previously recognised outside profit or loss.

In such cases, the current and deferred tax related to items that are recognized outside profit or loss are based on a reasonable pro rata allocation of the current and deferred tax of the entity in the tax jurisdiction concerned, or other method that achieves a more appropriate allocation in the circumstances.

(C). Analysis

It is important to note that adjustments to equity in respect of deferred tax assets or deferred tax liabilities in the aforesaid circumstances do not necessarily mean that the items to which these deferred taxes relate were recognised “directly in equity” in the sense in which this term is used in paragraphs 58 and 61A of Ind AS 12 reproduced above. The ‘transaction or event’ in paragraphs 57 and 58(a), refers to the source which gave rise to the deferred tax implication. Consequently, the words ‘directly in equity’ in paragraphs 58(a) and 61A(b), relate to the base transaction/event. In other words, the deferred tax accounting follows the accounting of the source transactions/ events.

Thus, for Ind AS adjustments made on first-time adoption of Ind AS, it needs to be determined (using the entity’s current accounting policies) where the items on which the original deferred tax arose would have been recognised if Ind AS had been applied in the earlier periods.

Accordingly, depending on the nature of an item, the change in the amount of the related deferred tax asset or deferred tax liability resulting from the remeasurement of the same at lower tax rates introduced by the Ordinance should be recognised in profit or loss, other comprehensive income or directly in equity as required by paragraphs 58 and 61A of Ind AS 12.

The principles in above paragraphs enshrine the following essential elements for MAT Credit to be recognised as a deferred tax asset or to be reversed in an accounting period:

Clause No. Essential Elements Remarks – Analysis
1. MAT Credit – whether arising out of temporary differences No – see clause ‘3’ below
2. MAT Credit – whether arising out of carry forward of unused tax losses No – see clause ‘3’ below
3. MAT Credit – whether unused tax credit and hence a deferred tax asset Yes.

Though, the expression unused tax credit is not defined in Ind AS 12 but it is expressly and specifically considered as deferred tax asset under the Standard.

In terms of the following provisions of the Income Tax Act, 1961, MAT Credit is a statutory benefit (and hence in the nature of unused tax credit under Ind AS 12) available to the company assessee subject to prescribed conditions. As noted earlier:

s Section 115JAA(1A) provides that where any amount of tax is paid under sub-section (1) of section 115JB by an assessee, being a company for the assessment year……..then, credit in respect of tax so paid shall be allowed to him in accordance with the provisions of this section.

s Further, in terms of Section 115JAA(3A) the amount of tax credit determined under sub-section (2A) shall be carried forward and set off in accordance with the provisions of sub-sections (4) and (5) but such carry forward shall not be allowed beyond the fifteenth assessment year immediately succeeding the assessment year in which tax credit becomes allowable under sub-section (1A).

4. How the MAT Credit was created originally in the books of accounts When it was Indian GAAP:

MAT credit entitlement  Dr.

To Statement of Profit or Loss

(Being MAT Credit entitlement recognised for the year)

Hence, the following presentation was made in the AS complaint financial statements:

(A) In the year of creation

In the Statement of Profit and Loss:

Current tax (MAT)

Less:- MAT credit entitlement

Net current tax

In the balance sheet:

(Short term loans & advances, long term loans & advances)

MAT credit entitlement

(B) In the year of utilization

In the Statement of Profit and Loss:

Normal disclosures

In the balance sheet:

Provision for taxation

Less:- MAT credit utilization

(Short term loans & advances, long term loans & advances)

MAT credit entitlement (Balance left after utilization)

When Ind AS were first time adopted:

In the balance sheet:

Non-current Assets:

– Deferred Tax Asset (Net)

(including MAT credit entitlement now reclassified as Deferred Tax Asset)

5. Whether MAT Credit being the deferred tax asset is decided to be carried forward further from financial year 2019-20 and onwards on the consideration that it is probable that future taxable profit will be available against which unused tax credits can be utilised No.

The Company has opted for the provisions of Section 115BAA(1) of the Act and hence as a consequence in terms of Section 115JAA(8), the MAT Credit provisions of this section shall not apply to a person who has exercised the option under section 115BAA.

CBDT vide its Circular 29/2019 Dated 2-10-2019 also clarified that as regards allowability of brought forward MAT credit, it may be noted that as the provisions of section 115JB relating to MAT itself shall not be applicable to the domestic company which exercises option under section 115BAA and the tax credit of MAT paid by the domestic company exercising option under section 115BAA of the Act shall not be available consequent to exercising of such option.

Thus, it follows that due to the company opting of Section 115BAA, the MAT Credit available with the company shall lapse in perpetuity. This is also enshrined in second proviso to Section 115BAA(5) which provides that once the option has been exercised for any previous year, it cannot be subsequently withdrawn for the same or any other previous year.

So what follows is that the MAT Credit which is lapsing and hence which requires a consequent reversal to its carrying amount is not arising due to any temporary differences or on the consideration that now it is no longer probable that future taxable profit will be available against which unused tax credits can be utilised.

6. Whether MAT Credit being the deferred tax asset reviewed by the company as at 31st March, ‘2020 Yes (assumed)
7. On a review under clause ‘6’ whether the company is of the view that the carrying amount of such MAT Credit shall be reduced  to the extent that it is no longer probable that sufficient taxable profit will be available to allow the benefit of part or all of that deferred tax asset to be utilised. No. It is so because the answers to clause ‘1’ and clause ‘5’ are in negative as at 31st March, 2020 – that is such MAT Credit is neither on account of temporary differences nor it could be carried forward in subsequent years on the premise of probability of sufficient taxable profits in future. In other words, the carrying amount of MAT Credit is not getting impacted due to premise of probability of sufficient taxable profits in future rather it is lapsing on account of exercise of option given by Section 115BAA – see clause ‘5’ above.
8. Whether the transaction or other event that gave rise to MAT Credit as deferred tax asset was originally recognised in Ind AS compliant Statement of Profit or Loss No. The classification of MAT Credit as deferred tax asset was made directly in the Balance Sheet due to first time adoption of Ind AS. Due to this reclassification changes no impact was there on Statement of Profit or Loss. Further, the corresponding amount such MAT Credit which was already embedded in brought forward reserves and surplus was also not impacted due to such reclassification changes.

In other words, the MAT Credit (as asset) originally was merely a creation of an economic resource rather than the outcome of any timing differences being effecting the income approach of ‘accounting for taxes on income’ under AS 22. This can be deciphered from the following erstwhile Indian GAAP requirements:

Under AS 22, Expert Advisory Committee (EAC) of ICAI opined that:

  • Minimum Alternative Tax (MAT) is not a timing difference and hence deferred tax should not be created on the same – EAC opinion Query 11 Volume 26 – Opinion finalised on 27 March, 2006;
  • Recognition of payment of MAT cannot be treated as a timing difference for creation of deferred tax and accordingly, deferred tax should not be created on MAT – EAC opinion Query 24 Volume 25 – Opinion finalised on 20 October, 2005.

The Guidance Note on Accounting for Credit Available in respect of Minimum Alternative Tax under the Income-tax Act, 1961 as issued by ICAI (GN(A) 22 (Issued 2006)) further stipulated that:

  • MAT credit is an asset because it can be used in the future (within specified period) to set off MAT credit against the normal tax liability and hence it satisfies the definition of asset;
  • However, an asset can be recognized only if it satisfy the recognition criteria [i.e., An asset is recognised in the balance sheet when it is probable that the future economic benefits associated with it will flow to the enterprise and the asset has a cost or value that can be measured reliably];
  • Hence convincing evidence (that the company shall have a future normal tax liability that too within the specified period) must exist for MAT credit to be recognised;
  • According to paragraph 6 of Accounting Standards Interpretation (ASI) 6, ‘Accounting for Taxes on Income in the context of Section 115JB of the Income Tax Act, 1961’, issued by the Institute of Chartered Accountants of India, MAT is the current tax. Accordingly, the tax expense arising on account of payment of MAT should be charged at the gross amount, in the normal way, to the profit and loss account in the year of payment of MAT. In the year in which the MAT credit becomes eligible to be recognised as an asset in accordance with the recommendations contained in this Guidance Note, the said asset should be created by way of a credit to the profit and loss account and presented as a separate line item therein – Para 15 of the GN (A) 22.

It is worthwhile to note that:

  • The Ind AS were adopted in the year 2016-17 and the comparative year for this was 2015-16;
  • MAT Credit was being credited prior to implementation of Ind AS and accumulated balances are being carried on.

It should further be noted that:

1. The words recognised…………outside profit or loss, either in other comprehensive income or directly in equity” used in Para 58(a) of Ind AS 12 mean the recognition as per Ind AS and not as per AS

2. Such recognition was taken care of in revised manner on adoption of Ind AS in accordance with Ind AS 101 which in its Para 10 states that an entity shall, in its opening Ind AS Balance Sheet:

(a) recognise all assets and liabilities whose recognition is required by Ind ASs;

(b) not recognise items as assets or liabilities if Ind ASs do not permit such recognition;

(c) reclassify items that it recognised in accordance with previous GAAP as one type of asset, liability or component of equity, but are a different type of asset, liability or component of equity in accordance with Ind ASs; and

(d) apply Ind ASs in measuring all recognised assets and liabilities.

Hence, post Ind AS adoption, recognition, reclassification etc. shall get a new origin in light of Ind AS 101 and erstwhile version of AS will lose its authority to that extent. In this context, the MAT Credit as deferred tax asset got its new origin in the retained earnings itself and lost its attribute of origination from Statement of P & L.

9. Whether the transaction or other event that gave rise to MAT Credit as deferred tax asset was originally recognised in Other Comprehensive Income No – also see clause ‘8’.
10. Whether the transaction or other event that gave rise to MAT Credit as deferred tax asset was originally recognised in Equity No – also see clause ‘8’.
11. Though there is no change in the amount of the related temporary differences, whether the carrying amount of MAT Credit as deferred tax asset is getting changed due to a change in tax rates or tax laws Yes – also see clause ‘5’.
12. Whether accounting of lapsing the MAT Credit as deferred tax asset represents a consistent approach with the accounting for the transaction or event itself i.e. the source which gave rise to the deferred tax implication for such MAT Credit Yes. Since the lapsing of MAT credit is neither on account of temporary differences during the year nor on account of consideration that it is probable that future taxable profit will be available against which unused tax credits can be utilised, rather it is on account of exercise of option given by Section 115BAA (supra), the corresponding impact of such lapsing hence cannot be called as ‘arising out of transactions or events being asserted by the Statement of Profit or Loss.’

Further, the corresponding amount such MAT Credit as deferred tax asset has already being embedded in brought forward reserves and surplus and accordingly on the principle of ‘faithful representation’ as stipulated in Para 33 of ‘Framework for the Preparation and Presentation of Financial Statements’ under Indian Accounting Standards, that is, to be reliable, information must represent faithfully the transactions and other events it either purports to represent or could reasonably be expected to represent.

The lapsing of MAT Credit as deferred tax asset if it be routed through current year’s Statement of Profit or Loss, nowhere will be purporting to represent faithfully the transactions and other events that have taken place due to any measure of company’s financial performance. In other words, such lapsing is due to exercise of statutory option being given by the Act which can be exercised irrespective of the financial performance of the company assessee and thus it in substance it represents foregoing of an entitlement or a right which was created in earlier years and was embedded in the ‘reserves and surplus’.

3. Conclusion:

On the basis of analysis carried out in the preceding paragraphs it can be concluded that the accumulated MAT Credit as deferred tax asset should be reversed by lapsing it through Statement of Changes in Equity rather than the Statement of Profit or Loss. The following journal entry may be passed for this purpose:

Statement of Changes in Equity A/c   Dr.

To MAT – Deferred Tax Assets A/c

[Being MAT Credit-DTA lapsed on account of option exercised under Section 115BAA(1) read with Section 115JAA(8)]

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