Query No. 6
Subject: Accounting for Minimum Alternative Tax (MAT) Credit.1 A. Facts of the Case
1. A company (hereinafter referred to as ‘the company’) is an infrastructure company enjoying benefits under section 80-IA of the Income-tax Act, 1961 (‘ITA’) and is eligible to claim tax holiday period of 10 consecutive years out of 15 years from the date of commencement of commercial operation, as per the existing ITA. 2.The main objective of the company is to develop, construct, operate and maintain an international airport. As part of the Concession Agreement, the company is given right to collect regulatory charges from the passengers and airlines to recoup the cost/return on investments. Apart from the regulatory charges, the company is given right to run non-aeronautical businesses to reduce regulatory charges on passengers and airlines. These non-aeronautical businesses include ancillary businesses like: (1) food & beverages, retail, car parking, duty free shops, etc. and (2) real estate businesses like SEZ, hotels, airport city, etc. As per the querist, the real estate business as mentioned in point no. 2 above may not be covered under section 80-IA and tax benefit may not be available. 3.The current scenario of the company is as follows:
4.The querist has stated that the above treatment of creating the MAT credit assets is done on the following grounds:
5. The querist has further stated that paragraph 11 of the Guidance Note on Accounting for Credit Available in respect of Minimum Alternative Tax under the Income-tax Act, 1961, issued by the Institute of Chartered Accountants of India, inter alia, states, “for the purpose of consideration of the probability of expected future economic benefits in respect of MAT credit, the fact that a company is paying MAT and not the normal income tax, provides a prima facie evidence that normal income tax liability may not arise within the specified period to avail MAT credit. In view of this, MAT credit should be recognised as an asset only when and to the extent there is convincing evidence that the company will pay normal income tax during the specified period”. (Emphasis supplied by the querist.)
6. Paragraph 12 of the Guidance Note on Accounting for Credit Available in respect of Minimum Alternative Tax under the Income-tax Act, 1961 states, “Where MAT credit is recognised as an asset in accordance with paragraph 11 above, the same should be reviewed at each balance sheet date. A company should write down the carrying amount of the MAT credit asset to the extent there is no longer a convincing evidence to the effect that the company will pay normal income tax during the specified period”. Convincing evidence is further defined in Explanation 1 to paragraph 17 of Accounting Standard (AS) 22, ‘Accounting for Taxes on Income’, notified under the Companies (Accounting Standards) Rules, 2006 as “To be convincing, the evidence should be available at the reporting date in a concrete form, for example, a profitable binding export order, cancellation of which will result in payment of heavy damages by the defaulting party. On the other hand, a projection of the future profits made by an enterprise based on the future capital expenditures or future restructuring etc., submitted even to an outside agency, e.g., to a credit agency for obtaining loans and accepted by that agency cannot, in isolation, be considered as convincing evidence”. 7. As per the querist, the company has recognised MAT credit asset to the extent there is convincing evidence that the company will pay normal income tax during the specified period. The company will review at each balance sheet date and write down the carrying amount of the MAT credit asset to the extent there is no longer convincing evidence to the effect that the company will pay normal income tax during the specified period.
B. Query
8.On the basis of the above, the querist has sought the opinion of the Expert Advisory Committee on the correctness of creation of MAT credit asset and its retention in the books until it is set-off. C. Points considered by the Committee
9.The Committee notes that the basic issue raised in the query relates to whether the projections about future profitability of the company based on certain assumptions in the facts and circumstances of the company can be considered as ‘convincing evidence’ for recognition of MAT credit as per the Guidance Note on Accounting for Credit Available in respect of Minimum Alternative Tax under the Income-tax Act, 1961. Accordingly, the Committee, while expressing its opinion, has considered only this issue and has not examined any other issue that may arise from the Facts of the Case, such as, computation of MAT liability and credit receivable in respect thereof, correctness of assumptions/probabilities, application of section 80-IA to real estate business of the company, duration of carry forward of MAT credit entitlement under existing provisions of ITA and the proposed/future provisions of DTC, etc. Further, the opinion of the Committee, expressed hereinafter, is only from the accounting point of view and not from the angle of interpreting legal provisions of any statute, such as, the Income-tax Act, 1961.
10.The Committee notes paragraph 11 of the Guidance Note on Accounting for Credit Available in respect of Minimum Alternative Tax under the Income-tax Act, 1961, which, inter alia, states as follows:
From the above, the Committee notes that as per the requirements of the Guidance Note, MAT credit should be recognised as an asset only when and to the extent there is convincing evidence that the company will be able to avail future economic benefits arising from the MAT credit during the specified period, which the company should determine keeping in view the facts and circumstances of the company. As far as ‘convincing evidence’ is concerned, the Committee notes Explanation 1 to paragraph 17 of Accounting Standard (AS) 22, ‘Accounting for Taxes on Income’, notified under the Companies (Accounting Standards) Rules, 2006 as reproduced in paragraph 6 above. The Committee notes, therefrom, that evidence is a matter of fact which, in order to be convincing, should be supported by something in concrete form at the balance sheet date, such as, existence of a deferred tax liability, which will get reversed in the future resulting in the normal tax liability for the company. Mere projections of future profitability cannot be considered as convincing evidence as per the said Explanation. The Committee notes that in the extant case, the company is making certain projections of future profitability based on its rights as concessionaire. The Committee is of the view that mere holding of such rights does not ensure profits of the business and cannot be considered as convincing evidence. Further, the Committee notes that the querist has also made certain assumptions about setting off of MAT credit against future profits from real estate business under the existing provisions of ITA/future provisions of DTC. The Committee is of the view that even if such assumptions materialise, there will only be an indication and not a ‘convincing evidence’ that the company may be liable to pay normal income taxes during the specified period against which MAT credit can be availed. Accordingly, the Committee is of the view that such projections, which are based on certain assumptions, cannot be considered as ‘convincing evidence’ and, therefore, on the basis of such projections only, the company should not create or retain MAT credit asset in the books of the company. The management in the extant case should consider evidences which can be considered as ‘convincing’, such as, some future binding profitable agreements or reversal of deferred tax liabilities, etc. resulting in normal income tax liability of the company, for recognising MAT credit asset in the books of the company as discussed above.
D. Opinion
11. On the basis of the above, the Committee is of the opinion that MAT credit entitlement should be recognised as an asset in the books of the company only when and to the extent there exists convincing evidence that the company would be able to avail the future economic benefits arising therefrom during the specified period, as discussed in paragraph 10 above. However, mere future projections based on certain assumptions cannot be considered as ‘convincing evidence’ and accordingly, on the basis of such projections only, the company should not create or retain MAT credit asset in the books of the company. _______________________________ |
