MAT CREDIT TO BE TREATED AS ADVANCE TAX BY APEX COURT

[pawansingla]

By TIOL News Service

NEW DELHI, DEC 17, 2010: THE issue before the Larger Bench of the Apex Court is - Whether for the purpose of calculating interest under sections 234A,B&C, MAT credit available as per Sec 115JAA should first be set off against tax payable of the year. And the answer is YES.

Facts of the case

There are dozens of assessee-respondents in this case. Titan is one of them. It filed its returns for assessment year 2001-02. The total income declared in the return was Rs. 23,48,68,460/-. The assessee claimed a refund of Rs. 10,60,394/-. The A.O. initially processed the return under Section 143(1) and accepted it. Subsequently, the A.O. rectified the alleged mistake and charged interest under Section 234B of Rs. 1,10,67,561/-. The A.O. further charged interest under Section 234C of Rs. 40,18,170/- and the claim of refund got converted into a demand of Rs 1,50,58,707. This conversion from refund to demand took place because while computing interest under Sections 234B and C the A.O. computed the shortfall of the tax payable without taking into account the set off of MAT credit. Since Revenue lost the case before the HC it moved the Supreme Court.

Held that:

++ Section 115JA enacts a deeming fiction by deeming 30% of book profits to be the "total income" chargeable to tax. The amount of tax paid under Section 115JA is held to be a "tax" payable under the Act, as defined in Section 2(43). When tax is paid by the assessee under Section 115JA, then the assessee becomes entitled to claim credit of such tax in the manner prescribed. Such a right gets crystallized no sooner the tax is paid by the assessee. The said credit gets limited to the tax difference between tax payable on book profits and tax payable on income computed under the normal provisions of the Act in year one. Such credit is, however, allowable for a period of five succeeding assessment years, immediately succeeding the assessment year in which the credit becomes available. However, MAT credit is available for set off against the tax payable in succeeding years where the tax payable on income computed under the normal provisions of the Act exceeds the tax payable on book profits computed for that year.

++ at this stage, the statute envisages under Section 115JAA "credit in respect of tax so paid" because the entire tax is not an automatic credit but has to be calculated in accordance with sub-section (2) of Section 115JAA. Sub-section (4) to Section 115JAA allows "tax credit" in the year tax becomes payable. Thus, the amount of set off is limited to the tax payable on the income computed under the normal provisions of the Act less the tax payable on book profits for that year. The tax credit to be allowed is the function of the tax payable on book profits and the tax payable on income computed under the normal provisions of the Act, in year one. The difference of the two is the amount of tax credit to be allowed. The A.O. may vary the amount of tax credit to be allowed pursuant to completion of summary assessment under Section 143(1) or regular assessment under Section 143(3) for year one, in terms of Section 115JAA(6). As a consequence of such variation the tax credit to be allowed for year one is liable to change. Thus, the tax credit allowable can be set off by the assessee while computing advance tax/ self-assessment tax payable for years 2 to 6 limited to the difference between the tax payable on income computed under the normal provisions and tax payable on book profits in each of those years, as per assessee's own computation.

++ the entire scheme of Sections 115JA(1) and 115JAA shows that if an assessee is entitled to a tax credit as a consequence of the assessee making payment of tax in the year one, then, the set off of such tax credit follows as a matter of course once the conditions mentioned in Section 115JAA are fulfilled and the grant of such credit is not dependent upon determination by the A.O. save and except that the ultimate amount of tax credit to be allowed will be dependent upon the final determination of the total income for the first assessment year. There is no provision under Section 115JAA which postpones the right of the assessee to claim set off to the determination of the total income by the A.O. in the first assessment year. Entitlement/right to claim set off is different from the quantum/quantification of that right. Entitlement of MAT credit is not dependent upon any action taken by the Department. However, quantum of tax credit will depend upon the assessment framed by the A.O.

++ an assessee has a right to take into account the set off even while estimating its liability to pay advance tax on the "current income" in accordance with the provisions of Chapter XVII-C. Although Section 209(1)(d) does not make any specific provision either before or after the amendments carried out by the Finance Act, 2006 to the effect that an assessee is entitled to set off the tax credit that would be available in terms of Section 115JAA(1) while computing the quantum of advance tax that is to be paid it must follow that an assessee would be entitled to do so otherwise it results in absurdity, viz, that an assessee pays advance tax on the footing that it is not entitled to the credit and thereafter claims a refund of such advance tax paid as a consequence of the set off. Moreover, when an A.O. makes an intimation under Section 143(1) he accepts the return filed by the assessee to which the A.O. may make an adjustment and consequently makes a demand or refund. Section 143(1) makes it clear that whilst the A.O. determines the tax payable he has to give credit for all taxes paid either by way of deduction at source, advance tax, self assessment tax or tax paid otherwise which would include or which cannot exclude tax credit under Section 115JAA(1).

++ under section 234B, "assessed tax" means the tax on the total income determined under Section 143(1) or on regular assessment under Section 143(3) as reduced by the amount of tax deducted or collected at source in accordance with the provisions of Chapter XVII on any income which is subject to such deduction or collection and which is taken into account in computing such total income. The definition at the relevant time excluded MAT credit for arriving at assessed tax. This led to immense hardship. The position which emerged was that due to omission on one hand MAT credit was available for set off for five years under Section 115JAA but the same was not available for set off while calculating advance tax. This dichotomy was more spelt out because Section 115JAA did not provide for payment of interest on the MAT credit. To avoid this situation, Parliament amended Explanation 1 to Section 234B by Finance Act, 2006 w.e.f. 1.4.2007 to provide along with tax deducted or collected at source, MAT credit under Section 115JAA also to be excluded while calculating assessed tax.

++ any tax paid in advance/pre-assessed tax paid can be taken into account in computing the tax payable subject to one caveat, viz, that where the assessee on the basis of self computation unilaterally claims set off or MAT credit, the assessee does so at its risk as in case it is ultimately found that the amount of tax credit availed was not lawfully available, the assessee would be exposed to levy of interest under Section 234B on the shortfall in the payment of advance tax.

++the Department's viewpoint cannot be accepted because it would mean that even if the assessee does not have to pay advance tax in the current year, because of his brought forward MAT credit balance, he would nevertheless be required to pay advance tax, and if he fails, interest under Section 234B would be chargeable.

++ the consequence of adopting the case of the Department would mean that MAT credit would lapse after five succeeding assessment years under Section 115JAA(3); that no interest would be payable on such credit by the Government under the proviso to Section 115JAA(2) and that the assessee would be liable to pay interest under Sections 234B and C on the shortfall in the payment of advance tax despite existence of MAT credit standing to the account of the assessee. Thus, despite MAT credit standing to the account of the assessee, the liability of the assessee gets increased instead of it getting reduced.

++ it is immaterial that the relevant form prescribed under Income Tax Rules, at the relevant time (i.e. before 1.4.2007), provided for set off of MAT credit balance against the amount of tax plus interest i.e. after the computation of interest under Section 234B. This was directly contrary to a plain reading of Section 115JAA(4). Further, a form prescribed under the rules can never have any effect on the interpretation or operation of the parent statute.

(See 2010-TIOL-114-SC-IT-LB in 'Income Tax')