Normally, a company is liable to pay tax on the income computed in accordance with the provisions of the income tax Act, but the profit and loss account of the company is prepared as per provisions of the Companies Act. There were large number of companies who had book profits as per their profit and loss account but were not paying any tax because income computed as per provisions of the income tax act was either nil or negative or insignificant. In such case, although the companies were showing book profits and declaring dividends to the shareholders, they were not paying any income tax. These companies are popularly known as Zero Tax companies. In order to bring such companies under the income tax act net, section 115JA was introduced w.e.f. assessment year 1997-98.
Under the existing provisions of section 115JB of the Income Tax Act, a company is required to pay a Minimum Alternate Tax (MAT) on its book profit, if the income-tax payable on the total income, as computed under the Act in respect of any previous year relevant to the assessment year commencing on or after the 1st day of April, 2010, is less than such minimum. The amount of tax paid under section 115JB is allowed to be carried forward and set off against tax payable upto the tenth assessment year immediately succeeding the assessment year in which tax credit becomes allowable under the provisions of section 115JAA.
It is proposed to amend sub-section (1) of section 115JB to increase the MAT rate to eighteen per cent from the existing fifteen per cent.
This amendment is proposed to take effect from 1st April, 2011 and will, accordingly, apply in relation to the assessment year 2011-12 and subsequent years.
Tax provisions allow the adjustment of brought forward business loss or depreciation, whichever is less as per the books of accounts for arriving at the book profits chargeable to MAT. The manner of computing the brought forward loss amount has been interpreted differently by various appellate authorities. The law does not specify a particular method for determining the brought forward amount, but there are some guidance provided in Circular No 495 dated September 22, 1987 issued by CBDT.
An issue being raised in recent times is whether the amount of loss or depreciation adjusted in the computation of book profits of one year can reduce the loss amount to be carried forward to the next year or whether the balance as appearing in the books of accounts as on the first day of the financial year is the only amount relevant for computation of MAT.
Authority for Advance Rulings, in the case of Rashtriya Ispat Nigam [2006] 285 ITR 1 (AAR), held that the adjustment made in one year by setting off lower of loss or depreciation is to be reckoned for the computation of MAT of the subsequent year, meaning thereby that for the subsequent year only the balance of the loss would be available for set-off irrespective of what appears in the financial statement. It should be noted that rulings of the AAR do not set a precedent but only have a persuasive value in case of similar other assessments.
In the case decided by Delhi ITAT in July 2008 viz: Sumi Motherson (I.T.A. 2323/Del/2006), the company underwent a capital reduction in the middle of a particular financial year, and, therefore, the book loss got wiped out as on the last day of the financial year. It was held that for the MAT purpose, the loss amount to be considered is the opening balance of the relevant financial year, and the write-off during a year would not affect the amount eligible for such set-off in that year.
Similar findings were made by ITAT Mumbai in the case of KFA Corporation vs JCIT (ITA No. 5147/Mum/2002) in May 2008. In this case, the available losses were set off in an earlier year against reversal of surplus provisions and reserves. As a result, the balance appearing in the books of account as on the first date of the financial year got reduced, and ITAT held that it is only the (lower) amount as appearing in the books of account is to be considered for computing book profits.
Further, as the books reflect only a consolidated brought forward amount, one can also contend that the tax payer is at the liberty to bifurcate the same into depreciation and loss based on a method that best suits his computation.
It appears that the position evolved from the cases of Sumi Motherson and KFA Corporation is more reasoned out, and it should be possible to distinguish the same from the context in which the AAR delivered the Rashtriya Ispat decision.
04 June 2010
Carry forward and set off of MAT credit u/s.115JAA and Allowability in the hands of amalgamated company Dec 5, 2009 Income Tax
Facts : As on 31-3-2009 X Ltd. is entitled to carry forward MAT credit u/s.115JAA of the Income-tax Act, 1961 amounting to Rs. one million. X Ltd. is amalgamated with Y Ltd. with effect from 1-4-2009.
Issue : In the light of the above facts the question for consideration is whether Y Ltd. is entitled to carry forward and set off MAT credit of X Ltd. ?
Analysis of S. 115JAA:
S. 115JAA of the Income-tax Act, 1961 allows credit in respect of tax paid u/s.115JA or u/s.115JB. Credit in respect of tax paid u/s.115JB is allowed only if such tax is paid for the A.Y. 2006-07 or any subsequent assessment year. The difference between the amount of tax paid u/s.115JA or u/s.115JB, as the case may be, and the amount of tax payable on total income, computed in accordance with the regular provisions of the Act, would be the amount of tax credit allowable u/s.115JAA. The credit in relation to tax paid u/s.115JA can be carried forward for a period of 5 assessment years succeeding the assessment year in which such tax credit becomes allowable. On the other hand, the credit in relation to tax paid u/s.115JB can be carried forward for a period of 10 assessment years succeeding the assessment year in which such tax credit becomes allowable. The Finance (No. 2) Act, 2009, by amending S. 115JAA(3A), has increased the period of carry forward of MAT credit from 7 assessment years to 10 assessment years.
The tax credit determined u/s.115JAA of the Income-tax Act, 1961 is allowed as a set off in a year in which tax is payable on the total income computed in accordance with the normal provisions of the Act. Set off of MAT credit brought forward is allowed to the extent of the difference between tax on total income and tax which would have been payable u/s.115JA or u/s.115JB as the case may be.
S. 115JAA does not expressly provide for set off of MAT credit of the transferor Company by the transferee Company. In other words, the said section does not specifically state that the MAT credit of the amalgamating Company can be carried forward and set off by the amalgamated Company. The said section also does not contain any express or specific prohibition with regard to carry forward and set off of the MAT credit of amalgamating or transferor Company by the amalgamated or transferee Company. In such a situation, the issue as to whether MAT credit of amalgamating or transferor Company can be carried forward and set off by the amalgamated or transferee company could be discussed under two alternatives.
Alternative 1 — Adverse view :
The proposition under this view is that the amalgamated or transferee company is not entitled to carry forward and set off the MAT credit of the amalgamating or transferor Company. The reasons for the same are as follows :
1. S. 115JAA does not specifically provide for the carry forward and set off of MAT credit of amalgamating company in the hands of the amalgamated company.
(a) The legislature has enacted specific provisions allowing the amalgamated company to continue to claim exemption/deduction to which the amalgamating company was entitled. For ex :
u/s.10A(7A), u/s.10B(7A) and u/s.10AA(5) where the eligible unit is transferred in a scheme of amalgamation, the amalgamated company is entitled to claim deduction for the unexpired period of tax holiday under the respective sections; as per 5th proviso to S. 32(1), the deduction in respect of depreciation allowance is apportioned between amalgamating and amalgamated company based on the number of days for which the assets were used by them; amalgamated company was entitled to claim the ‘investment allowance’/‘development rebate’/‘development allowance’ of the amalgamating company as per S. 32A(6), S. 33(3) and S. 33A(5) respectively; u/s.35AB(3), the amalgamated company is entitled to claim deduction in respect of expenditure on know how for the residual period; the amalgamated company is entitled to claim deduction u/s.35ABB(6) in respect of the expenditure incurred to obtain licence to operate telecommunication service for the unexpired period of the license; the deduction allowable u/s.35D in respect of amortisation of certain preliminary expenses over a period of 5 years can be claimed by an amalgamated company for the unexpired period; as per S. 35DDA(2) the amalgamated company is entitled to claim deduction in respect of the expenditure incurred under voluntary retirement scheme and eligible for amortisation for the remaining number of years; u/s.35E(7), the amalgamated company is eligible to claim deduction in respect of expenditure on prospecting for, or extraction or production of, any mineral for the unexpired period; S. 44DB allows amalgamating co-operative bank and amalgamated co-operative bank to claim proportionate deduction u/s.32, u/s.35D, u/s.35DD and u/s.35DDA based on the periods comprised in the financial year before and after the date of amalgamation. As per S. 72A, the amalgamated company is eligible to carry forward and set off brought forward business loss and unabsorbed depreciation allowance of amalgamating company on fulfillment of the conditions/requirements of the said section; U/s.72AA, the amalgamated banking company is eligible to carry forward and set off the accumulated loss and unabsorbed depreciation allowance of amalgamating banking company on fulfillment of the requirements/conditions of the said section. Regarding S. 72AA, the Memorandum explaining the provisions of Finance Bill 2005 [273 ITR (St.) 60] stated that the said section is being introduced with a view to provide for carry forward and set off of accumulated loss and unabsorbed depreciation allowance of a banking company against the profits of a banking institution under a scheme of amalgamation sanctioned by the Central Government. S. 72AB allows an amalgamated co-operative bank to carry forward and set off accumulated loss and unabsorbed depreciation allowance of amalgamating co-operative bank if the conditions/requirements of the said section are satisfied. S. 80IA(12) allows the amalgamated company to claim deduction under the said section for the unexpired period. However, as per Ss.12A of S. 80IA the amalgamated company would not be entitled to claim deduction under the said section for the unexpired period of tax holiday if amalgamation or demerger happens on or after 1-4-2007. By virtue of Ss.3 of S. 80IAB, Ss.7 of S. 80IC and Ss.6 of S. 80IE, the amalgamated company is entitled to claim deduction under the above sections for the unexpired period of tax holiday. As per S. 80IB(12) where an undertaking which is entitled to claim deduction under the said section is transferred before the expiry of the tax holiday period in a scheme of amalgamation, the amalgamated company is entitled to claim deduction under the said section for the unexpired period of tax holiday. As may be seen from the above, there are specific provisions in the Act allowing the amalgamated company to claim deduction or to carry forward and set off the accumulated loss and unabsorbed depreciation allowance of the amalgamating company.
As already noticed, there is a specific provision [80IA(12A)] denying the deduction under the said section to the amalgamated company. Further, S. 80ID allowing deduction in respect of profits and gains from business of hotels and convention centres in specified areas is silent as to whether amalgamated company could claim deduction under the said section for the unexpired period of tax holiday.
S. 115JAA does not contain specific provision as to whether the amalgamated company can carry forward and set off the MAT credit of amalgamating company. One may contend that if the legislature had thought of permitting carry forward and set off of MAT credit to the amalgamated company it would have inserted specific provision to that effect in S. 115JAA. In the absence of a specific provision allowing the amalgamated company to carry forward and set off MAT credit of amalgamating company, Y Ltd. may not be eligible to carry forward and claim MAT credit of X Ltd.
2. Ss.1A of S. 115JAA reads as under :
“(1A) Where any amount of tax is paid U/ss.(1) of S. 115JB by an assessee, being a company for the assessment year commencing on the 1st day of April, 2006 and any subsequent assessment year, then, credit in respect of tax so paid shall be allowed to him in accordance with the provisions of this section.”
On a literal reading of the above provision, one could argue that only the company which has paid tax u/s.115JB is entitled to carry forward and set off the MAT credit.
S. 115JAA was inserted by the Finance Act 1997. Para 99 of the Budget speech of the Finance Minister [224 ITR (St.) 9] for the year 1997 and the memorandum explaining the provisions of Finance Bill 1997 [224 ITR (St.) 26] do not specifically state that the amalgamated company can set off the MAT credit of the amalgamating company.
3. Where the language of a provision is clear and unambiguous, the plain and natural meaning of the words should be supplied to the language used and no word should be ignored while interpreting a provision of a statute. [Keshavji Ravji and Co. v. CIT, [1990] 183 ITR 1 (SC)]. As stated earlier, the language of S. 115JAA(1A) allows carry forward and set off of MAT credit only to the company which has paid tax u/s.115JB. As a result, MAT credit of X Ltd. may not be available for carry forward and set off in the hands of Y Ltd.
4. The Finance Act, 2006 extended the period of carry forward and set off of MAT credit from 5 years to 7 years. The memorandum explaining the provisions of Finance Bill 2006 [2006] 281 ITR (St.) 61 and Para 26.2 of the CBDT Circular No. 14/2006 dated 28-12-2006 [2007] 288 ITR (St.) 9 stated as follows :
“To provide relief to assessees, being companies, who are required to pay MAT u/s.115JB for any assessment year commencing on or after 1st April, 2006, the provisions of S. 115JAA have been amended to provide that the amount of tax credit determined shall be allowed to be carried forward and set off for seven assessment years immediately succeeding the assessment year in which the tax credit becomes allowable under the said section.”
As stated earlier, Finance (No. 2) Act, 2009 [314 ITR (St.) 57] has extended the period of carry forward and set off of MAT credit from 7 years to 10 years. In this connection, the memorandum explaining the provisions of Finance (No. 2) Bill 2009 [314 ITR (St.) 183] also states that the above amendment is proposed with a view to provide relief to the assessees being companies who pay MAT u/s.115JB for any assessment year beginning on or after the 1st day of April 2006.
From a plain reading of the above, it would be manifest that carry forward and set off of MAT credit is intended to provide relief to companies who have paid MAT. Thus, the benefit of MAT credit could be claimed only by a company which has paid MAT for AY 2006-07 or subsequent years and not by any other company. As a result, the amalgamated company may not be able to carry forward and set off MAT credit earlier belonging to amalgamating company.
5. In the year in which a company is liable to pay tax under regular provisions of the Act, MAT credit is allowed as a set off against the tax payable. The provisions of S. 140A, S. 234A, S. 234B and S. 234C allow reduction of MAT credit in the process of determining the tax/interest payable under the said sections. In other words, the amount of MAT credit is adjusted/reduced in the process of determining the tax payable u/s.140A and interest payable u/s.234A, u/s.234B, u/s.234C. Finance Act 2006 amended the provisions of S. 140A, S. 234A, S. 234B and S. 234C so as to allow the adjustment/reduction of MAT credit while determining the tax/interest payable under these sections.
The memorandum explaining the provisions of Finance Bill 2006 [281 ITR (St.) 61] and para 38.2 of CBDT Circular No. 14/2006 dated 28-12-2006 explaining the provisions of Finance Act, 2006 state that tax credit allowed u/s.115JAA is no different from the tax paid in advance and credit for having paid the MAT should be allowed against the tax liability determined on assessment.
Similar is the view taken in CIT v. Jindal Exports Ltd., [2009] 314 ITR 137 (Del.) wherein it was held as follows :
“Minimum alternate tax credit represents that portion of minimum alternate tax which was not actually payable by the company but has all the same been collected by the government. It represents the tax paid before it is due. Minimum alternate tax credit which is available for set off in a year falls within the meaning of “advance tax” because the context requires it be given such a purposive meaning.”
S. 219 of the Act deals with credit for advance tax. As per the said section, advance tax paid by an assessee shall be treated as a payment of tax in respect of the income of the assessment year relevant to the previous year in which advance tax was payable and credit therefor shall be given to the assessee in the regular assessment.
On a reading of the above section, one may argue that credit for advance tax payment is given to the person who has paid such tax.
When MAT credit and advance tax are treated equally or when MAT credit is considered as advance tax, the principle underlying S. 219 could be held applicable even to MAT credit. As credit for advance tax is allowed to the person who makes payment of such tax, similarly, set off of MAT credit should be allowed only to that company which pays MAT.
6. Rule 37BA read with S. 199 generally provides for allowing credit for tax deducted at source to the deductee. However, in certain cases, it also provides for allowing credit of TDS to a different person (other than the deductee) if the income on which tax is deducted at source is assessable in the hands of a person other than the deductee.
In the absence of guidelines or circumstances under which a company can set off MAT credit of other company u/s.115JAA or under any rule, the amalgamated company may not be eligible to carry forward and set off MAT credit of the amalgamating company.
7. As per the maxim ‘Expressio unius est exclusio alterius’ which is a rule of prohibition by necessary implication, mention of one or more things of a particular class may be regarded as silently excluding all other members of the class; ‘expressum facit cessare tacitum’. Further, where a statute uses two words or expressions, one of which generally includes the other, the more general term is taken in a sense excluding the less general one; otherwise there would have been little point in using the latter as well as the former.
As detailed above, various provisions of the Act allow the amalgamated company to continue to claim deduction or to carry forward and set off the accumulated loss and unabsorbed depreciation of the amalgamating company. S. 115JAA does not specifically provide for carry forward and set off of MAT credit of amalgamating company by amalgamated company.
Applying the above rule of interpretation one could argue that in the absence of a specific provision, the amalgamated company would not be entitled to carry forward and set off MAT credit of the amalgamating company.
Alternative II — Favourable view :
The proposition under this view is that the amalgamated company is entitled to carry forward and set off the MAT credit of the amalgamating Company. The reasons for the same are as follows :
1. Amalgamation is a process wherein one or more companies merge into another company or two or more companies merge together to form a new company. All the property of the amalgamating company before amalgamation becomes the property of the amalgamated company by virtue of the amalgamation. Similarly, all liabilities of the amalgamating company before amalgamation become the liabilities of the amalgamated company by virtue of the amalgamation. The definition of the term ‘amalgamation’ u/s.2(1B) of the Act also envisages the above requirement. It is a settled law that the term ‘property’ as employed in S. 2(1B) is a term of the widest import and, subject to any limitation which the context may require, signifies every possible interest which a person can clearly hold and enjoy. MAT credit which can be carried forward and set off has the potential of reducing the tax liability during subsequent years and therefore it possesses the characteristics of being considered as a ‘property’. Guidance note on accounting of MAT credit issued by ICAI also recognises that MAT credit has expected future economic benefits in the form of its adjustment against the discharge of the normal tax liability in future years and therefore is an ‘asset’. The said Guidance note also permits the accounting and recognition of MAT credit as an ‘asset’ in the financial statements. Thus, MAT credit of the amalgamating company, which would be considered as a property, becomes the property of the amalgamated company by virtue of the amalgamation.
AS-14 — Accounting for amalgamation in the books of amalgamated company issued by ICAI and notified by Central Government in the form of Companies (Accounting Standard) Rules 2006 envisages two types of amalgamation viz., amalgamation in the nature of merger (pooling of interest method) and amalgamation in the nature of purchase (purchase method).
If the amalgamation is that of type one i.e., amalgamation in the nature of merger, all the assets and liabilities of amalgamating company are recognised in the books of amalgamated company at their book value. Under this method, if MAT credit is recognised as an asset in the balance sheet of the amalgamating company, the amalgamated company is also required to recognise the same in its balance sheet.
Under type two amalgamation i.e., the purchase method, the amalgamated company accounts for the amalgamation either by incorporating the assets and liabilities at their existing carrying amounts or by allocating the consideration to individual identifiable assets and liabilities of the amalgamating company on the basis of their fair values at the date of amalgamation. The identifiable assets and liabilities may include assets and liabilities not recorded in the financial statements of the amalgamating company. [para 12 of AS-14]
Under this method, if MAT credit of amalgamating company (irrespective of whether such credit is recognised as an asset in the balance sheet of amalgamating company or not) is taken over by the amalgamated company or if the consideration in respect of amalgamation includes consideration for taking over MAT credit in the scheme of amalgamation, the latter company recognises the same in its balance sheet.
Thus, under both the types of amalgamation, the MAT credit of amalgamating company could be recognised as an asset in the balance sheet of the amalgamated company. MAT credit is thus an accounting derivative. It could be regarded as a ‘capital asset’ u/s.2(14). On transfer of such capital asset in a scheme of amalgamation, it could be said that the amalgamated company becomes the owner, enabling it to carry forward and set off MAT credit. The principle underlying some of the provisions wherein deduction is attached to the undertaking and not to the owner thereof could also be extended to MAT credit. Therefore, it could be said that on amalgamation the amalgamated company gets the right to carry forward and set off the MAT credit.
2. Various amendments were made to the Income-tax Act, 1961 by the Finance Act 1999 concerning tax implications of business reorganisations by way of amalgamation and demerger. The Finance Minister’s speech in Budget 1999 [236 ITR (St.) 1] stated that a comprehensive set of amendments is being proposed to make business re-organisations fully tax neutral. In the speech the following was stated “it is proposed that all fiscal concessions will survive for the unexpired period in the case of amalgamation and de-mergers.” It may be noted that MAT credit in respect of tax paid u/s.115JA was already on the statute books when the provisions of Finance Act 1999 were introduced. The intention of the legislature appears to be that the benefits/reliefs available to the amalgamating company should vest in the amalgamated company so that the latter company can claim such benefits/reliefs for the unexpired period, on a premise that the amalgamation had not been effected.
3. There is no prohibition or restriction in S. 115JAA with regard to carry forward and set off of MAT credit belonging to the amalgamating company by the amalgamated company. The memorandum explaining the provisions of Finance Bill, 2005 [273 ITR (St.) 60] and Circular no. 3 of 2006, dated 27-2-2006 [(2006) 281 ITR (St.) 222] explaining the provisions of Finance Act 2005 also do not state that carry forward and set off of MAT credit is allowable only to the company which has paid tax u/s.115JB. In an amalgamation, one company is subsumed into another. The amalgamated company becomes the ‘alter ego’ of the amalgamating company. Tax provisions desire that the benefits available to the amalgamating company survive and continue to be effective in the amalgamated company. The benefits are to remain unhindered despite the assumption of new legal garb. As a result, the amalgamated company may carry forward and set off MAT credit belonging to the amalgamating company.
4. In DCIT v. Beck India Ltd., (2008) 26 SOT 141 (Mum.) the High Court vide order dated 20-9-2001 approved the merger of a company with the respondent company with effect from the appointed date of amalgamation being 1-1-2001. The financial statements presented in the annual general meeting did not consider the unabsorbed losses of the amalgamating company since the said meeting was conducted before the date of the order of the High Court approving the merger. For the same reason, the original return filed by the respondent on 30-10-2001 did not consider the unabsorbed losses of amalgamating company in the process of computation of book profits u/s.115JB. After the approval of merger by the High Court, the respondent assessee revised its financial statements so as to consider the effect of amalgamation. The respondent assessee also filed a revised return wherein the unabsorbed losses of amalgamating company remaining after setting off the same with the surplus of the assessee company was reduced in the process of computation of book profits u/s.115JB. The Tribunal held that the assessee is eligible for set off based on the revised accounts.
Considering the above decision wherein losses of amalgamating company were allowed to be set off by the amalgamated company in computing book profits u/s.115JB, one could contend that MAT credit of amalgamating company could also be carry forward and set off by the amalgamated company u/s.115JAA.
5. In VST Tillers and Tractors Ltd. v. CIT, ITA No. 588/Bang./2008, a decision of the Bangalore ITAT, VST Precision Components Ltd. (‘VPCL or the amalgamating company’), a subsidiary of VST Tillers & Tractors Ltd. (‘the assessee’) amalgamated with the assessee under a scheme of amalgamation sanctioned by the Karnataka High Court. As per the sanctioned scheme, pursuant to the amalgamation, all assets and liabilities of VPCL would vest with the assessee. The sanctioned scheme inter alia provided that the unabsorbed losses and depreciation of VPCL shall be deemed to be losses and depreciation of the assessee as provided u/s.72 of the Act. The assessee in computing the MAT liability u/s.115JB reduced unabsorbed losses of VPCL (which was less than the unabsorbed depreciation of VPCL) from book profits. The CIT passed order u/s.263 holding that unabsorbed losses reduced were not as per books of account of the assessee but were as per books of accounts of VPCL and therefore the same cannot be reduced from the book profits of the assessee. On appeal, the Tribunal apart from relying on S. 72 also relied on S. 72A of the Act. It was observed that the sanctioned scheme also provided that the unabsorbed losses and depreciation of VPCL shall be deemed to be losses and depreciation of the assessee as provided u/s.72 of the Act. It was therefore held that the assessee has rightly reduced the unabsorbed losses of VPCL from its book profits in computing MAT liability u/s.115JB.
6. In ITO v. Mahyco Vegetable Seeds Ltd., (2009) 314 ITR (AT) 37 ITAT (Mum.) it was held that the resulting company is entitled to carry forward unabsorbed scientific research expenditure allocated to it in the process of demerger by the demerged company. The Tribunal held that the amount representing the unabsorbed capital expenditure on scientific research u/s.35(4) was not different from the unabsorbed depreciation for the purposes of S. 72A(7). The respondent company was therefore allowed to carry forward unabsorbed scientific research expenditure of the demerged company even though there is no specific provision in S. 72A allowing amalgamated or resulting company to carry forward and set off unabsorbed scientific research expenditure of amalgamating or demerged company.
7. In SKOL Breweries Ltd. v. ACIT, 28 ITAT India 998 (Mum.) ITA No. 313/Mum./07 A.Y. 2003-04 decision dated 15-5-2008 the Tribunal allowed set off of MAT credit of amalgamating company in the hands of the appellant assessee being the amalgamated company. The Tribunal observed :
“We have duly considered the rival contentions and gone through the record carefully. The Ld. CIT(A) while denying the benefit of taxes paid by M/s.. Charminar Breweries Ltd. (CBL) u/s.115JA has observed that M/s.. CBL was amalgamated with erstwhile SKOL and ceased to exist. Once the company ceases to exist then any benefit available to the company would not devolve upon the transferee company. For the above view CIT(A) has relied upon the decision of Hon’ble SC in the case of Sarawati Industries Syndicate 186 ITR 278. In our opinion Ld. first appellate authority has referred to this decision without context. The facts of that case are quite different. In that case, an assessee ‘A’ has paid certain amount to ‘B’ towards sales tax liability. ‘B’ who collected the sales tax from ‘A’ disputed the liability before the Sales tax Tribunal. During the pendency of the litigation ‘A’ ceased to exist and its business was taken over by ‘C’. The Sales tax Tribunal decided the issue in favour of ‘B’ and held that no sales tax is payable. Accordingly ‘B’ returned the money to ‘C’. This amount was sought to be taxed u/s.41(1) of the Act according to the provision as it existed in AY 1965 – 66. In the context the Hon’ble Supreme court has held that this amount is not taxable in the hands of ‘C’. The ingredients provided in the definition of amalgamation is altogether different from the condition provided in S. 41(1) in A.Y. 1965-66. The assets and liabilities on the date of amalgamation of the amalgamating company would become assets and liabilities of the amalgamated company. If M/s. Charminar Breweries has paid tax u/s.115JA of the Act in earlier assessment years and that benefit is permissible u/s.115JA of the Act then that cannot be denied to the assessee simply for the reason that M/s. Charminar Breweries is not in existence. The Ld. CIT(A) has erred in placing his implicit reliance upon the judgment of Hon’ble Supreme court. In principle we allow this ground of appeal of the assessee, set aside the issue to the file of A.O for verification of the taxes paid by M/s. Charminar Breweries and how that benefit would devolve upon the assessee. The AO shall verify the details and then grant the benefit to the assessee.”
8. The rationale for allowing credit in respect of taxes paid under MAT, as per the memorandum explaining the provisions of Finance Bill, 1997 [224 ITR (St.) 26] and as per Para 45.4 of CBDT Circular No. 763, dated 18-2-1998 [230 ITR (St.) 54] is that a company should always pay a minimum tax even while offsetting the MAT credit against regular tax. The objective of the said provision is to allow relief in respect of tax paid under MAT regime. It is a settled law that provisions granting exemptions and relief should be interpreted liberally so as to advance the objective and not to frustrate it. [Bajaj Tempo Ltd. v. CIT, [199] 196 ITR 188 (SC)]. Thus, MAT credit of X Ltd., on amalgamation with Y Ltd., should be available for carry forward and set off in the hands of the latter company.
9. It is also a settled law that when there is any genuine doubt about the interpretation of a fiscal statute or where two opinions are capable of being formed then, that rule of interpretation which is favourable to the assessee is to be preferred. [CIT v. Vegetable Products Ltd., [1973] 88 ITR 192 (SC)]
10. Going by the rationale of S. 115 JAA, one could contend that the MAT credit of amalgamating company can be set off by the amalgamated company. One could contend that in the process of amalgamation, one company loses its identity and would be merged with the other company. It could be contended that MAT credit, if utilised by the amalgamated company, would not result in any excessive relief.
11. Denial of carry forward and set off of MAT credit of an amalgamating company to an amalgamated company would be against the legislative intention and reasonable or purposive interpretation of S. 115JB and S. 115JAA. There would be no excessive relief or double deduction if amalgamated company is allowed to carry forward and set off MAT credit of amalgamating company. As explained earlier, MAT credit represents that portion of tax which was not actually payable by the company but has all the same been collected by the Government. [CIT v. Jindal Exports Ltd., [2009] 314 ITR 137 (Del.)] If amalgamated company is denied the benefit of carry forward and set off of MAT credit of amalgamating company, it could be termed unauthorised collection of taxes by the Government. Reliance may be placed on the decision in Escorts Ltd. v. DCIT, (2007) 15 SOT 368 (Del.) wherein it was observed that if no credit of TDS is to be given to the payee/deductee, the Government would have no authority to treat the same as tax and Article 265 does not empower the Government to make any levy or collection of tax not authorised by law.
It is settled law that where strict literal construction leads to injustice or a result not intended to be subserved by the object of the legislation, then an equitable construction should be preferred over the strict literal construction. Where the plain literal interpretation of a statutory provision produces a manifestly unjust result which could never have been intended by the legislature, the court might modify the language used by the legislature so as to achieve the intention of the legislature and produce a rational result.
The task of interpretation of a statutory provision is an attempt to discover the intention of the legislature from the language used. Language is an imperfect instrument for the expression of human intention. Statutes always have some purpose or object to accomplish and a sympathetic and imaginative discovery is the surest guide to their meaning. Though equity and taxation are often strangers, attempts should be made that these do not remain always so and if a construction results in equity rather than in injustice, then such construction should be preferred to the literal construction. [CIT v. Gotla, (J.H) [1985] 156 ITR 323 (SC); K. P. Varghese v. ITO, [1981] 131 ITR 597 (SC)]
12. In the process of interpretation of statutes, the maxim ‘Expressio unius est exclusio alterius’ is a valuable servant but a dangerous master. [Smith’s Judicial review of Administrative Action, Fourth edition page 187; Colquhoun v. Brooks, [1888] 21 QBD 52 (CA); Devidas v. UOI, (1993) 200 ITR 697 (Bom.); Kirloskar Pneumatic Co. Ltd. v. CIT(A), (1994) 210 ITR 0485 (Bom.); CWT v. Dungarmal Tainwala, (1991) 191 ITR 0445 (PAT); Nathuram Weljibhai Vyas v. Mrs. Laxmibai Lunkaranji Chandak, (1983) 139 ITR 0948 (Bom); ACCE v. National Tobacco Co. of India Ltd., AIR 1972 SC 2563.] The exclusion (in a legislature) is often the result of inadvertence or accident, and the maxim ought not to be applied, when its application, having regard to the subject-matter to which it is to be applied, leads to inconsistency or injustice. [Devidas v. UOI, (1993) 200 ITR 697 (Bom.)] In ACCE v. National Tobacco Co. of India Ltd., AIR 1972 SC 2563 [decision referred to in 139 ITR 0948 (supra)] it was observed that the rule of ‘Expressio unius est exclusio alterius’ is subservient to the basic principle that courts must endeavour to ascertain the legislative intent and purpose, and then adopt a rule of construction which effectuates rather than one that defeats these principles.
In view of the above, the maxim ‘Expressio unius est exclusio alterius’ should not be considered for denying the benefit of carry forward and set off of MAT credit of amalgamating company to amalgamated company.
Conclusion :
The reasons in support of and also against the issue under consideration have been set out above. The reasons in support of the argument that, amalgamated company can claim MAT credit of amalgamating company after merger, appears to be reasonable. Such conclusion would also be in accord with the purposive interpretation of the relevant provision. However, the tax authorities may be reluctant to allow MAT credit of the amalgamating company to amalgamated company. This may entail a tax demand and other consequences such as levy of interest and penalty on the amalgamated company. To avoid the levy of interest, one may take a pro-revenue stand while paying taxes, but adopt the liberal view while filing returns.
It may be noted that Para 13.10 of the discussion paper on Direct Taxes Code Bill, 2009 states that under the proposed code, MAT will be a final tax and therefore it will not be allowed to be carried forward for claiming tax credit in subsequent years.
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