A contentious issue of MAT credit after amalgamations and demergers

Throughout its existence, numerous provisions dealing with business reorganisation have been inserted in the Income-tax Act, 1961 (‘the IT Act’) by the Legislature to promote economic growth, industrialisation and infrastructure development.

Two of the most important provisions in this regard relate to amalgamations and demergers, which have been made exempt from tax under the IT Act subject to the fulfilment of certain conditions. However, while statutory provisions have been laid down to govern various aspects of these modes of business reorganisation, one significant aspect which is yet to be addressed through legislative intervention is whether Minimum Alternate Tax (‘MAT’) credit of the predecessor company can be transferred to the amalgamated or resulting company.

MAT is a tax levied on a company under section 115JB of the IT Act if the amount of income-tax payable under the Act’s general provisions is less than 15% of its ‘book profits’. If the amount of MAT paid by a company exceeds the normal tax liability during a particular year, section 115JAA of the IT Act allows for the carry forward of this excess amount for set-off in future years, normal tax exceeds MAT liability. This excess amount is known as the MAT credit.

Although the statute is silent regarding such transfer of MAT credit, various benches of the Income-tax Appellate Tribunal (‘ITAT’) have dealt with this issue in the case of both amalgamations and demergers. The ITATs have noted that much like TDS credit and other deferred tax benefits, MAT credit is one of the assets, which is transferred as a part of amalgamation and demerger. Thus, the ITATs have held that the amalgamated or resulting companies can avail their predecessor entities’ MAT credit . In doing so, the ITATs have also rejected the Income-tax Department’s arguments that in the absence of an enabling provision in either section 115JAA or section 115JB, such a transfer cannot take place, or that section 115JAA only allows for the set-off of MAT credit only by the company in whose case the MAT credit has arisen.

However, while there are several ITAT decisions on this issue favouring taxpayers, without any express provision in this regard or this issue having been dealt with by either any High Court or the Supreme Court, it must be noted that this issue has not attained finality.

An interesting parallel drawn with this issue concerns the carry forward of and set off of accumulated losses and unabsorbed depreciation by an amalgamated or resulting company. Prior to the insertion of section 72A of the IT Act as an express enabling provision, the Courts were of the view that the benefit of carried forward losses and unabsorbed depreciation cannot be taken by an amalgamated or resulting company since they were not the same legal entity as the one which had suffered such losses and depreciation in the course of its business. The Courts’ position was reversed only after the Legislature amended the law to provide such benefit and grant relief to amalgamated or resulting companies. Thus, the Income-tax Department may still have new arguments to make before the higher Courts against the ITAT decisions on this issue of MAT credit.

Considering how the COVID–19 pandemic has devastated different sectors and industries of the Indian economy, it is reasonable to expect that several businesses may have to resort to reorganization measures such as amalgamations and demergers to survive and sustain through these difficult times.

While the Government, through Budget 2021, has proposed amendments to the provisions dealing with the definition of ‘demerger’ and carry forward of accumulated losses and unabsorbed depreciation to aid disinvestment in public sector companies, it has failed to address the contentious issue regarding the benefit of carried forward MAT credit in the hands of amalgamated or resulting companies. Thus, businesses looking to reorganize to survive the COVID–19 pandemic have been deprived of some much-needed certainty in these uncertain times.

(S Vasudevan is Executive Partner and Tanmay Bhatnagar, Senior Associate at Lakshmikumaran & Sridharan Attorneys)

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