Minimum Alternate Tax (“MAT“) is a tax levied on a company under Section 115JB of the Income-tax Act, 1961 (“IT Act“) if the amount of income-tax payable under the general provisions of the IT Act is less than 15%[1] of its ‘book profits’ (i.e. the profit as shown in the statement of profit and loss prepared in accordance with Schedule III to the Companies Act, 2013 or in accordance with the legislation governing such companies, as the case may be, and in each case, subject to adjustments prescribed under Section 115JB of the IT Act). In such a case, the ‘book profits’ so computed are deemed to be the total income of the company and income-tax is levied thereon at the rate of 15% (as increased by applicable surcharge and cess). However, the excess of MAT paid over normal tax liability for the year is permitted to be carried forward under the provision of Section 115JAA of the IT Act for set-off in future years in which the normal tax liability exceeds MAT liability (“MAT Credit“).

As per Section 115JAA(3A) of the IT Act, a company is allowed to carry forward MAT Credit for a period of 15 years from the financial year to which it relates to. The Government has, however, clarified that the benefit of carry forward and set off of MAT Credit is not available to companies, which opt for paying taxes at a reduced corporate tax rate under section 115BAA of the IT Act.[2]

In this context, it is not uncommon to see companies undertaking corporate reorganizations, including schemes of arrangement involving amalgamations and demergers, which contain provisions pertaining to transfer of MAT Credit from the amalgamating/demerged company to the amalgamated/resulting company. It is relevant to note that while the IT Act does not contain any express provision dealing with transfer of MAT Credit in case of amalgamations or demergers,  Courts have, from time to time, dealt with this issue and, in certain cases, have permitted transfer of MAT Credit to the amalgamated/resulting company.

Transfer of MAT Credit in amalgamations

A plain reading of Section 115JAA of the IT Act seems to suggest that only the company that has paid tax under Section 115JB is entitled to carry-forward and set off the MAT Credit. There is no express provision in Section 115JAA which allows an amalgamated company to carry forward and claim the MAT Credit which was available to the amalgamating company. It is relevant to note that the IT Act contains specific provision in certain other sections  to entitle  the amalgamated company to  claim the deductions to which the amalgamating company was entitled to, as an example,  Sections 35AB(3), 35D(5), 35DDA(2), 72A(1), 80-IAB(3)/80-IAC(4)/80-IC(7)/80-ID(5)/80-IE(6) read with Section 80-IA(12), 10AA(5) etc. Thus, one view could be that in the absence of a specific provision in Section 115JAA of the IT Act, an amalgamated company is not entitled to avail the MAT Credit of the amalgamating company.

However, the other view, which, in author’s view, may be a better view, could be that since pursuant to an ‘amalgamation’, all assets and liabilities of the amalgamating company become the assets and liabilities of the amalgamated company, the amalgamating company ceases to exist and the amalgamated company becomes successor of the amalgamating company, the amalgamated company should be entitled to carry forward and set-off the unutilized MAT Credit of the amalgamating company. This proposition is supported by the fact that the IT Act itself mandates, vide Section 2(1B), that in an amalgamation “all assets and liabilities” of the amalgamating company should become the “assets and liabilities of the amalgamated company”. In this context, it is relevant to note that the “Guidance Note for accounting of credit available in respect of Minimum Alternative Tax under Income-tax Act, 1961” issued by the Institute of Chartered Accountants of India recognizes MAT Credit as an “asset” and lays down the conditions and manner in which it has to be recognized in the financial statements of the amalgamated company. Further, typically, MAT Credit is included in the definition of “assets” under a scheme of amalgamation. Therefore, since the unutilized MAT Credit is an asset of the amalgamating company, it should also move to the amalgamated company upon amalgamation.

Further, as discussed above, while MAT Credit clearly seems to qualify as an ‘asset’, the absence of any specific provision in Section 115JAA, in author’s view, is not comparable with sections 35AB(3), 35D(5), 35DDA(2), 72A(1), 80-IAB(3)/80-IAC(4)/80-IC(7)/80-ID(5)/80-IE(6) read with Section 80-IA(12), 10AA(5) etc which contain specific provision entitling the amalgamated company to claim the benefit of certain deductions to which the amalgamating company was entitled to; these sections deal only with a ‘right’ to claim deduction and  not an ‘asset’ per se which is recognizable as an asset in the financial statements (as opposed to the above-referred deductions with reference to which what is recognized  as an asset is only a deferred tax asset, that is, the tax saving in future which will result from such right to claim deductions etc.).

This position has also been upheld by the Income-tax Appellate Tribunal (“ITAT“) in multiple cases like M/s. Caplin Point Laboratories Ltd. v. Assistant Commissioner of Income-tax[3] and Ambuja Cements Ltd. v. Deputy Commission of Income-tax[4] etc. Interestingly, another aspect noted by courts in allowing transfer of MAT Credit to the amalgamated company is that since the amalgamating company ceases to exist, allowing carry forward of MAT Credit in case of amalgamations would not result in any dual benefit since there is no possibility of claim of such credit by the amalgamating company, which stands liquidated without winding up.

Transfer of MAT Credit in demergers

The demergers, on the other hand, stand in a slightly different footing and the reasoning discussed above in the case of amalgamations may not fully apply. While undoubtedly the MAT Credit should be considered as an ‘asset’, the foremost question which arises for consideration is as to whether the MAT, or for that matter, the income-tax per se, is an entity level tax? Given the scheme of the IT Act, since the obligation to pay income-tax is at an entity level and not division wise, one may not disagree that income-tax or MAT is an entity level tax (though, no doubt, one may apportion the income-tax or MAT across various divisions on some rational basis).

Thus, the next question, in this regard, which arises for consideration in the case of a demerger, wherein the demerged company (i.e. the entity which has unutilized MAT Credit) survives, is whether any part of MAT Credit can be said to be as asset relating to the demerged undertaking and can be transferred to resulting company(ies) in the absence of any specific provision in the IT Act? It is relevant to note that while Section 2(19AA) provides for a mechanism for transfer of general or multipurpose borrowings of the demerged company to the resulting company, as regard “assets”, there is no such provision and the only mandate in Section 2(19AA) is that all properties of the demerged undertaking should be transferred to the resulting company/ies.

It is relevant to note that in the case of demerger also, there are specific provisions in the IT Act which entitle the resulting company/ies to claim certain deductions to which the demerged company was entitled to, as an example, Sections 35AB(3), 35D(5A), 35DDA(3), 72A(4), 80-IAB(3)/80-IAC(4)/80-IC(7)/80-ID(5)/80-IE(6) read with Section 80-IA(12), 10AA(5) etc.

Further, it may not be out of context to note that as regards tax holiday provisions, CBDT had issued a Circular bearing Letter F. No. 15/5/63-IT(AI), dated December 13, 1963 (in the context of Section 80J and 84 of the IT Act), which provided that the benefit of tax holidays attaches to the undertaking and not to the owner thereof. Accordingly, the successor would be entitled to the benefit for the unexpired period of the tax holiday, provided the undertaking is taken over as a running concern. However, as far as the existing provisions relating to tax holidays under the IT Act are concerned, the legislature has now enacted specific provisions regarding transfer of tax holiday benefits. Does this reflect the legislative intent of allowing, even in the matter of deductions and tax holidays etc., only those deductions and tax holidays to the resulting company that are specifically provided for in the IT Act?

In the above background, whether one can say that notwithstanding that MAT Credit is an asset, no part of it can move to the resulting company(ies) in the absence of any specific provision in the IT Act, more specifically, absence of something on the lines of Section 72A(4) which not only provides for transfer of loss under the head ‘Profit and Gains of business or profession’ and unabsorbed depreciation in the case of a demerger but also provides for the manner in which the losses etc. would be determined.

However, the position may be different regarding transfer of advance tax and TDS credits sought to be transferred by the demerged company to the resulting company for the period between the Appointed Date and the Effective  Date (where the Appointed Date is anterior to the Effective Date) since the demerged company is deemed to be carrying on the business of the demerged undertaking, for and on behalf of the resulting company.

Incidentally, there have been a few judicial precedents, as an example, ITAT order in the case of Adani Gas Ltd[5], in which the transfer of MAT Credit was allowed to the resulting company. In the case of Adani Gas Ltd, in particular, the ITAT, relying upon Supreme Court decision in Marshall Sons & Company India Ltd[6], observed as under:

“11.      We draw support from the above extracted judicial precedent to hold that once the demerged undertaking no more exists post facto the appointed date thereof coming to 01-01-2007 and the assessee being the resulting company, the former’s MAT, TDS and advance tax credit are very much entitled to be considered in case of the latter assessee’s entity since the former the demerged undertaking is deemed to have carried out its business, if any only on behalf of the assessee. The only rider that would flow our above stated discussion is that this entitlement of all these benefits would be confined to pro rata basis only i.e. qua those relating to the demerged undertaking.“

In this case, while coming to its conclusion, the ITAT also analyzed another decision from the Gujarat High Court in Torrent (P) Ltd[7]. This case was also in the context of an amalgamation, where pursuant to an amalgamation of the petitioner company with its holding company, the dividend distribution tax paid by the petitioner company to the amalgamated holding company was sought to be refunded. The High Court, again relying upon the decision of Supreme Court in Marshall Sons & Company, ruled that since the amalgamation was effective from the Appointed Date, the declaration and payment of dividend by the petitioner company to its amalgamated holding company stood nullified in law, hence, allowing the claim of refund of dividend. The ITAT, after analyzing the Gujarat High Court decision, observed as under:

“13.      The Revenue fails to point out any distinction on facts or law. We conclude accordingly 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. The net result of our above discussion is that assessee’s arguments in principle are accepted in view of clauses of the above stated demerger scheme, sections 391 to 394 of the Companies Act, Section 2(19AA) of the Income Tax Act and the case law discussed hereinabove. We direct the Assessing Officer to compute pro rata quantification of the demerged undertaking MAT, TDS and advance tax credits as per law after affording adequate opportunity of hearing …..“

Importantly, the ITAT, in the case of Adani Gas Ltd, relied upon the decisions of the Supreme Court and Gujarat High Court which were in the context of amalgamation and where the amalgamating entities ceased to exist pursuant to the amalgamation, as against the  case of a demerger wherein while the demerged undertaking stands transferred to the resulting company, the demerged company continues to exist. Additionally, as pointed out by the ITAT itself, Revenue had failed to point out any distinction in fact or in law in the decisions relied upon by the ITAT. Further, as it appears from the judgment, no arguments were advanced before the ITAT about the nature of MAT Credit being an entity level tax etc.

On a separate note, in practice, it is not uncommon to see schemes of demerger, which expressly provide for an allocation of MAT Credit of the demerged company to the resulting company. An argument which is generally taken is that once such a scheme is sanctioned by the court (National Company Law Tribunal now), it would have an overriding effect. In this context, one may refer to the case of Deputy Commissioner of Income-tax v. TCS E-serve International Limited.[8] The facts in this case were slightly different in as much as the scheme of demerger neither contained any definition of the term “asset” (which included MAT Credit), nor included MAT Credit as a part of the demerged undertaking. However, the scheme did contain a clause pertaining to treatment of taxes, which read as under::

“25.      Taxes

All taxes including income-tax, central sales tax, customs duty, service tax, VAT and the like paid or payable by TEIL (demerged company) in respect of the operation and/ or the profit of the TEIL SEZ Undertaking (demerged undertaking) before the Appointed Date, shall be to the account of TEIL and, insofar as tax payment (including, without limitation, income tax, sales tax, customs duty, service tax, VAT etc.) whether by way of deduction at source, advance tax or otherwise howsoever, by TEIL with respect to the TEIL SEZ Undertaking after the Appointed Date, the same shall be to the account of TCS (resulting company) and be deemed to be the corresponding item paid by TCS and shall, in all proceeding, de dealt accordingly.“

In light of the above provision of the scheme, the ITAT held as under:

“8. …… Further, the Hon’ble Bombay High Court in its order approving, the scheme of demerger has categorically held that all the taxes, including income tax paid or payable by respondent shall be on account of TCS e-serve International Ltd, before the appointed date i.e 01/04/2013 and after, the date of appointment, it will be to the account of TCS Ltd. It is a settled position of law that any order passed by the High Court, including scheme of arrangement approved by the Hon’ble High Court acquired statutory recognition, in case there is no specific provision is provided in the Act, in respect of carry forward and set off of MAT credit. In case of demerger, the law laid down by the Hon’ble High Court, in the scheme of demerger would apply as operation of law. Therefore, we are of the considered view that even though, there is no specific provision is provided in the Act, in respect of carry forward and set off of MAT credit, in respect of demerger, but in view of specific directions of the Hon’ble Bombay High Court that till the appointed date i.e up to 01/04/2013, all the tax, including income tax paid or payable shall be on account of TCS e-serve International Ltd, we are of the considered view that whatever, MAT credit available to the assessee prior to that date even though, the same is arised on account of SEZ units, the credit for such MAT credit needs to be allowed to the assessee, but not to the demerged SEZ units. We further noted that TCS Ltd has not claimed credit for MAT credit in their return of income, which is evident from the fact that the AO of TCS Ltd in their assessment has categorically stated that MAT credit of TCS e-serve International Ltd will be available to the TCS e-serve International Ltd. Only. We, further stated that MAT credit should go into entity, but not with resulting company. Therefore, we are of the considered view that the Ld.CIT(A) has rightly considered the issue in light of provision of Act and also, the scheme of demerger approved by the Hon’ble Bombay High Court, while directing the AO to allow carry forward and set off of MAT credit.”

[Emphasis supplied]

In other words, the ITAT proceeded on the basis that a scheme of demerger, which has been sanctioned by the Court acquired statutory recognition, and accordingly, in view of Bombay High Court’s sanction to the instant scheme, held that the MAT Credit for period prior to the Appointed Date shall be available to the demerged company. In any case, these days, generally, the National Company Law Tribunal’s orders include an express observation that the sanction of the Scheme would not prejudice the rights of the revenue authorities to recover due taxes in accordance with law.

In the light of the above discussion, it appears that though there are certain judicial precedents allowing allocation of MAT Credit to the resulting company in a demerger, there are judgments like that of TCS E-serve wherein a different view is taken based on the prescription in the scheme of demerger.

As certainty is one of the essential pillars of an efficient tax system, one hopes that the Government will issue appropriate clarifications, in order to put the matter at rest and ensure uniformity and certainty,  to the effect that the unutilized MAT Credit shall be available in both amalgamations and demergers, and providing the basis for allocation of MAT Credit in the case of a demerger.

Author:
Abhinav Ashwin, Partner

Footnotes:

[1] As prescribed by Taxation Laws (Amendment) Ordinance, 2019.
[2] CBDT Circular No. 29/ 2019 dated October 2, 2019.
[3] Order dated January 31, 2014 in ITA No.667/Mds/2013 (ITAT Chennai).
[4] Order dated September 5, 2019 in ITA no.3643/Mum./2018 (ITAT Mumbai).
[5] 2016 (1) TMI 940 – ITAT Ahmedabad.
[6] [1996] 89 Taxman 619 (SC).
[7] [2013] 35 taxmann.com 300 (Gujarat).
[8] TS-516-ITAT-2019 (Mum).