Query No. 24

Subject:

Creation of deferred tax asset in respect of MAT credit under sub-section

(1A) of section 115JAA of the Income- tax Act, 1961.¹

A. Facts of the Case

1. A company is engaged in a manufacturing business having annual turnover exceeding Rs.1000 crore. The querist has stated that the company has adopted Accounting Standard (AS) 22, ‘Accounting for Taxes on Income’, issued by the Institute of Chartered Accountants of India, as a part of its accounting policy with effect from April 2001. The company is expected to pay income tax under sub-section (1) of section 115JB [commonly referred to as Minimum Alternative Tax (MAT)] of the Income- tax Act, 1961 (hereinafter referred to as the ‘Act’) for the financial year 2005-06. Pursuant to insertion of sub-section (1A) of section 115JAA in the Act by the Finance Act, 2005, the company is entitled to a credit of such tax payment under MAT for the assessment year commencing from
1st April, 2006 and any subsequent assessment years against the tax payable under the normal provisions of the Act. Further, as per the provisions of the Act, the tax credit under this section shall not be allowed to be carried forward and set-off beyond the 5th assessment year succeeding the assessment year in which the tax credit becomes allowable.

2. According to the querist, based on approved business plan and future profitability of the company and other factors, it is virtually certain that the company will come under the purview of normal income tax within the next 2-3 years.

3. The querist has referred to paragraphs 3 to 5 of Accounting Standards Interpretation (ASI) 6 on ‘Accounting for Taxes on Income in the context of Section 115JB of the Income-tax Act, 1961’, which lays down, inter alia, the following:

“3. The payment of tax under section 115JB of the Act is a current tax for the period.

4. In a period in which a company pays tax under section 115JB of the Act, the deferred tax assets and liabilities in respect of timing differences arising during the period, tax effect of which is required to be recognised under AS 22, should be measured using the regular tax rates and not the tax rate under section 115JB of the Act.

5. In case an enterprise expects that the timing differences arising in the current period would reverse in a period in which it may pay tax under section 115JB of the Act, the deferred tax assets and liabilities in respect of timing differences arising during the current period, tax effect of which is required to be recognised under AS 22, should be measured using the regular tax rates and not the tax rate under section 115JB of the Act.”

4. The querist has further stated that credit of current tax paid under MAT is allowed to be set-off against normal tax liability up to the next 5 assessment years with effect from financial year 2005-06. As per the querist, provisions regarding deferred tax credit and related set-off against normal tax liability were not in force when AS 22 together with the aforesaid ASI became applicable to the company.

B. Query

5. The opinion of the Expert Advisory Committee is sought on the following issues:

(a) Considering the provisions of AS 22, read with ASI 6, and further amendment to the Income-tax Act, 1961, with effect from financial year 2005-06 allowing credit of tax paid under MAT against normal tax, whether it would be correct on the part of the company to recognise the payment of MAT as a timing difference between accounting income and taxable income resulting in a deferred tax asset when it is virtually certain that the said deferred tax asset (i.e., MAT credit) will be realised against future taxable income in the subsequent year(s).

(b) If answer to (a) above is in the affirmative, whether the timing difference, resulting in deferred tax asset (i.e., MAT credit) should be measured using MAT rate applicable in the year of origination (i.e., financial year 2005-06) instead of using regular tax rates as indicated in paragraph 5 of ASI 6.

(c) In case the MAT rates undergo change in future year(s), whether a revision in the valuation of the aforesaid deferred tax asset (i.e., MAT credit) using the tax rate that has been enacted or substantively enacted by the balance sheet date as set out in paragraph 21 of AS 22 is required to be made or the aforesaid deferred tax asset will continue to be carried at its old valuation as indicated in (b) above.

C. Points considered by the Committee

6. The Committee, while answering the query, has considered only the issues raised in paragraph 5 above and has not considered any other issue arising from the Facts of the Case.

7. The Committee notes the definitions of the terms ‘Timing differences’, ‘Accounting income (loss)’ and ‘Taxable income (tax loss)’ as contained in paragraph 4 of AS 22, as below:

“Timing differences are the differences between taxable income and accounting income for a period that originate in one period and are capable of reversal in one or more subsequent periods.”

“Accounting income (loss) is the net profit or loss for a period, as reported in the statement of profit and loss, before deducting income tax expense or adding income tax saving.”

“Taxable income (tax loss) is the amount of the income (loss) for a period, determined in accordance with the tax laws, based upon which income tax payable (recoverable) is determined.”

 

8. The Committee further notes paragraph 6 of ASI 6, which, inter alia, states as below:

“6. . . . Tax paid/payable under section 115JB is the current tax and does not, in itself, give rise to any deferred tax since this payment of tax is pursuant to the special provision of the Act. This section only prescribes the mode of computation of tax payable for the current year.”

9. The Committee notes from the above that the payment of MAT does not result in any timing differences since it does not give rise to any difference between accounting income and taxable income which are arrived at before adjusting the tax expense, viz., MAT in this case. Accordingly, it would not be correct on the part of the company to recognise any deferred tax asset in respect of MAT credit under AS 22.

D. Opinion

10. On the basis of the above, the Committee is of the following opinion on the issues raised in paragraph 5 above:

(a) No, it would not be correct on the part of the company to recognise the payment of MAT as a timing difference as discussed in paragraph 9 above.

(b) Answer to this question does not arise as answer to (a) above is not in the affirmative.

(c) Answer to this question does not arise, since no deferred tax asset is required to be created.

¹ Opinion finalised by the Committee on 20.10.2005