Owing to various exemptions, deductions and other incentives provided by the Income-tax Act, 1961, a number of large Indian companies were not paying income tax, though they had substantial book profits. To bring such “zero tax” companies into the tax net, a special provision was introduced in the Act, with such companies required to pay a minimum alternate tax (MAT) at a specified percentage (now 10%), in the event that income tax payable by the company was lower than a specified percentage of its book profits.
However, to grant some relief to such companies, the difference between the regular tax payable under normal provisions of the Act and MAT is allowed as credit (commonly known as MAT credit) to be carried forward to set off against the regular tax liability of future years. Currently, MAT credit can be carried forward for seven years.
The Act requires a company to estimate its taxable income and tax liability thereon (under normal provisions of the Act or MAT provisions) for the relevant year and pay income tax or MAT, as the case may be, in prescribed advance instalments. Any default/delay/deferment in the payment of advance tax attracts interest liability for the company under sections 234B/234C.
Typically, if the company estimates that its tax liability for the relevant year would be a regular tax liability under normal provisions of the Act, the company, for the purposes of determining its advance tax liability, would ordinarily reduce its brought-forward MAT credit, although there were no express provisions in the Act for this as there are in the case of credit for taxes deducted at source (TDS).
However, revenue authorities were disregarding the stand of the assessee companies for adjusting the brought-forward MAT credit for computation of advance tax liability. Accordingly, these companies were regarded as having defaulted on payment of advance tax. Consequently, such companies were saddled with interest liability. The available MAT credit was set off against the tax liability arrived at after considering the interest payable under section 234B/C.
The Finance Act, 2006, has, with effect from 1 April 2007, cleared the matter by amending the provisions of the Act and allowing the reduction of MAT credit before computing the advance tax and consequent interest liability under section 234B/234C for default, if any. Although the issue has been put to rest for the post-amendment period (that is, assessment year, or AY, 2007-08 onwards), the issue is still open for the pre-amendment period.
Recently, the Madras high court had an opportunity to deal with the issue pertaining to the pre-amendment period in the case of CIT v. M/s Chemplast Sanmar Ltd. In this decision, the court has held that the MAT credit available to Chemplast Sanmar was to be adjusted first before computing interest liability for default, if any, in payment of advance tax.
Further, while affirming the aforesaid position, the court also held that if there is a conflict between a rule and provisions of the Income-tax Act, the rule must make way for the provisions of the Act.
While processing Chemplast Sanmar’s return of income for AY 2002-03 under section 143(1) of the Act, the assessing officer (AO) had not adjusted the brought-forward MAT credit available to Chemplast. Chemplast was thus charged with interest under sections 234B and 234C. Chemplast appealed to the commissioner of income-tax (appeals), who upheld the AO’s view.
Chemplast then appealed to the income-tax appellate tribunal, which ruled in Chemplast’s favour. The revenue authorities appealed to the Madras high court, challenging the tribunal’s decision.
The contentions of the revenue authorities were that, as per the provisions of the Act, interest is to be calculated on assessed tax/returned tax as reduced by the amount of taxes deducted at source only. Further, as per Schedule G of the erstwhile return of income (Form No. 1) prescribed under the rules, the manner of computation of total income and the order in which TDS, advance tax and MAT credit should be adjusted is provided.
The company contended that MAT credit is in the nature of advance tax with the department and, hence, has to be set off only against the tax payable. As per the provisions of section 234B, any tax paid by the assessee under section 140A, or otherwise, should be taken into consideration. The words “or otherwise” include the tax credit available with the department, that is, whatever manner the tax is paid shall be taken note of while calculating the interest. Interest leviable under sections 234B/234C is only compensatory and not penal in nature.
Since MAT credit was available at the beginning of the year and had to be set off against the tax payable, there has been no revenue loss and, therefore, there is no question of charging any interest thereon by way of compensation. The expression under MAT provisions is “set off” and not “deduction”. Therefore, the tax credit has to be set off against tax payable
The amendment in sections 234B/234C brought about by the Finance Act 2006 is clarificatory in nature and, therefore, should be considered as having retrospective effect.
The Madras high court has held that MAT credit should be given effect to before charging interest under sections 234A, 234B and 234C.
While deciding in favour of Chemplast, the court has relied on the decision of the Delhi high court in the case of CIT v. Jindal Exports Ltd which had also held that MAT credit is nothing but tax paid in advance and the interest under sections 234B and 234C should be charged only after MAT credit is set off against tax payable on total income.
The Madras high court further held that the intention of the legislature is to allow set off of MAT credit before levying interest as the provisions of allowing MAT credit use the word “tax” and not “tax and interest as stated under sections 234B and 234C of the Act”. Had it been the intention of the legislature, it would have been specifically stated in the section itself.
The order of priority of adjustment of TDS, advance tax and MAT credit specified in Schedule G of Form No.1 is totally against the intention of the legislature. The rules and Form No. 1 can’t lay down an order of priority of adjustment of TDS, advance tax and MAT credit that is contrary to the provisions of the Act. The rules can’t override the provisions of the Act.
This is a welcome decision for companies whose cases on similar issues are pending in various appellate forums. This could provide some reprieve in times of a slowdown, when there is a severe cash crunch. Further, cases where tax demand relating to interest under sections 234B/C of the Act has been paid and assessment is completed, companies could seek alternative remedies under the provisions of the Act for a refund of the taxes. Very importantly, the judgement underlines the concept that even if there is an amendment from a particular date, it could quite conceivably be clarificatory of the earlier position in law.
Ketan Dalal is executive director and Manish Desai is associate director, PricewaterhouseCoopers. Your comments and feedback are welcome at firstname.lastname@example.org