Volume 5, Issue 23

28th September, 2012

Tax Alert
Availing MAT credit – Whether Surcharge and Cess paid earlier would be available as a credit?

Under the provisions of the Indian Income Tax Act (ITA), a company is required to pay tax on its book profit if the tax payable under the normal provisions of the ITA is less than the tax calculated at the prescribed percentage on the book profits. Such tax is known as ‘Minimum Alternate Tax’ (‘MAT’) and is levied as per section 115JB of the ITA.  This MAT paid is available as a tax credit against the future tax liability calculated under the normal provisions of the ITA.  The amount of MAT credit is allowed to be carried forward to the extent of excess MAT paid as compared to tax payable under normal provisions and can be set off against tax payable in the subsequent years subject to the provisions of the ITA.

One question that has always been a contentious issue is - whether ‘MAT credit’ that is allowed to be carried forward and set off is only in respect of basic income tax payable or includes ‘surcharge’ and ‘cess’? In other words, whether the MAT credit carried forward should be including surcharge and cess?

The Delhi Tribunal in a recent case of Richa Global Exports Pvt. Ltd. V. ACIT has considered the matter regarding calculation of the amount of MAT credit allowed to be carried forward and set off.  This case forms the subject matter of this Tax Alert.

Contentions of the Tax payer:

  • The definition of ‘Tax’ u/s. 2 (43) of the ITA should be read with Explanation 2 to section 115 JB which states that tax includes all the three components: Tax, surcharge and cess. The same meaning should apply to all the provision of MAT and hence, there should be full grant of MAT credit i.e. including surcharge and cess.
  • The tax payer also relied upon on the Supreme Court’s decision in the case of CIT v. Tulsyan NEC Ltd. (330 ITR 226).

Contentions of the Revenue:

  • The provisions dealing with MAT only refer to income tax and there is no mention of surcharge and cess
  • Further, Intimation u/s. 143(1) is computer generated from Central Processing Centre (CPC) and hence calculations are automatically done.

Question raised before the Delhi Tribunal:

  • Should surcharge and education cess be included for the purpose of calculating MAT credit? 

Tribunal’s judgment:

  • A plain reading of the provisions points out that it is only the Income Tax portion which shall be carried forward and set off and not surcharge and cess.  Wherever the Statute intended to include surcharge and cess it has specifically provided for the same.
  • The term ‘Tax’ as defined  under  MAT provisions (Sec 115JB) for calculating book profits cannot be extended to provisions for calculating carry forward and set off of MAT credit.
  • Point 14 of form 29B (CA certificate for certifying the MAT) states the amount of tax payable as per MAT is the income tax and does not include surcharge and cess.
  • Intimation u/s. 143(1) sent to the tax payer calculates MAT as only tax and does not include surcharge and cess on the same. Hence, entitlement of credit shall also be of income tax only excluding surcharge and cess.
  • Accordingly, the Tribunal ruled in favour of Revenue that the for the purpose of carry forward and set off in subsequent years, MAT shall not include surcharge and cess.

SKP’s comments:

The main plank of the Tribunal decision is that the MAT credit allowed to be carried forward and set off should be excluding surcharge and cess on the ground that MAT payable is excluding surcharge and cess and thus, if no surcharge or cess is payable under MAT there is no question of allowing credit for the same.
In our view, the MAT tax payable includes surcharge and cess since the surcharge and cess have been levied by Finance Act on the tax payable (whether under normal provisions or by way of MAT). Even in the intimations received from CPC Bangalore, surcharge and cess are levied on MAT.  Thus, in our view, since MAT is paid inclusive of surcharge and cess the credit should also be given for the inclusive amount.
Secondly, the term ‘Income-tax’, as discussed above, means the tax on total income of the previous year of every person and any additional Income-tax payable under the provisions of the Act. It is in this sense that the term ‘Income-tax’ has to be applied throughout the Act including provisions relating to MAT. The said view is also supported by Supreme Court in case of Commissioner of Income-tax v. K. Srinivasan (83 ITR 346) in which the Court has explained the rationale for levying the surcharge and the cess and held that the same would form part of the ‘tax’.

Attention is further drawn to the decision of the Mumbai Bench of the Income-tax Appellate Tribunal in the case of Classic Shares & Stock Broking Services Ltd 2010-TIOL-667-ITAT-Mum  wherein it has been held that when tax is paid under normal provisions, surcharge and education cess should be first added to the basic tax payable and thereafter tax paid such as advance tax, self assessment tax and the available MAT credit have to be deducted. Thus, indirectly an inference can be drawn that the MAT credit shall be calculated including surcharge and cess as if the tax payable is including surcharge and cess. The above referred decision of the Supreme Court by the tax payer in the case of Tulsyan NEC Ltd. is also to the same effect.

In our opinion, the view of the Mumbai Tribunal appears to be better since the same is in tune with the decision of the Supreme Court’s decision in the case of K. Srinivasan. It looks very likely that the matter would be litigated further by the tax payer and tax authorities.