MAT levy under IND AS regime – An unintended blow to strategic debt restructuring? - Part 2
Ketan Dalal (Managing Partner, Katalyst Advisors LLP)
Continued from Part 1
(a) Accounting under IND AS 109
A financial liability is derecognised in the books of the issuer when it is extinguished i.e. ceases to be a liability as such. This can happen when obligation specified in the contract is discharged, cancelled, or expires or is reclassified from financial liability to equity. What is of relevance here is that the issuer must be legally released from primary responsibility for the liability (or part of it) either by process of law or by the creditor. While the law provides for partial derecognition of the liability, it does not explain the mechanics for the same in clear terms. For the purpose of this analysis, we will deal with full derecognition of liability (and further assume that similar principles will be applicable for partial derecognition).
In accounting terms, derecognition is recognised as under:
Carrying amount of financial liability, part or full, that is extinguished
Less : Consideration paid (cash and non-cash assets transferred / new liabilities assumed / FV of equity issued in case of reclassification into equity)
Amount to be recognised in P&L
Thus, the difference in the carrying amount and consideration amount that has been paid (accrual system therefore not applicable) is carried to the Profit and Loss Account (giving rise to the potential MAT impact which is discussed further in this article).
The above principle of derecognition of financial liability is also applicable in case of conversion/ classification of liability into equity or when there is an exchange of liabilities or substantial modification of terms thereof. What constitutes substantial modification is tested under a quantitative criterion and/or qualitative criteria (to be applied by the management as well as auditors). The key highlight for the purpose of our analysis is that the difference in the carrying amount of old liability and the fair value of the liability assumed is recognised in the Profit and Loss Account (hence giving rise to a possible MAT impact).
(b) MAT Impact under s. 115JB of the ITA, 1961
As mentioned above, the accounting for derecognition (full or part) of a financial liability is to be adjusted under the Profit and Loss Account of the respective financial year when the consideration is paid. Therefore, it gets picked up from Profit and Loss Account for MAT levy.
Having seen the possible impact areas for MAT as corresponding to accounting for financial liability under IND AS 109, we need to look at some fundamental issues arising therefrom:
1) For a component to be MAT leviable, should it actually be chargeable to income-tax in the first place?
2) Should MAT be really leviable on capital account items such as “other equity” component of hybrid/ compound financial instruments?
3) Should MAT be levied on the profit arising on fair valuation of liabilities taken on capital account?
The age old issue – capital vs. revenue in nature for the purpose of MAT!
The IND AS 109 does not distinguish between a financial liability of capital or revenue nature; therefore, any profit / loss arising either on initial recognition, subsequent measurement or derecognition of any financial liability could be inferred to be MAT leviable as pointed out in various scenarios above!
However, in case of Binani Industries Ltd., the ITAT after giving a very careful consideration to several judicial precedents, held that, capital receipts that are not chargeable to tax under any provision of the ITA would not be liable to tax under the provisions of s.115JB. One can also find support in the Supreme Court decision in the case of Padmaraje R. Kadambande, wherein the Apex Court held that the capital receipts are not income itself as per definition of s.2(24) of the ITA, and therefore are not chargeable at all under the ITA.
Further, in the case of JSW Steel Ltd., the Mumbai Tribunal held that the purpose and legislative intent behind introduction of provisions of s.115JB of the ITA was to take care of the phenomenon of prosperous zero tax companies which had continued but were paying no income tax even though they had profits and were declaring dividends. It was therefore, sought that minimum corporate tax should be paid by these prosperous companies and, accordingly, MAT was introduced. It was never the intention of the legislature that any receipts which is not taxable per se within the tax provision or not reckoned as part of net profit as per the Profit &Loss Account as per Companies Act can be brought to tax as a book profit.
Applying the above logic towards accounting of financial liability under the ITA, can it be contended that the adjustments in the Profit and Loss Account are in fact on capital account (to the extent they pertain to capital loans, equity etc)and are recorded in Profit and Loss Account only in compliance with IND AS 109.Hence, it should be excluded from the book profits of the company. Further, can one also find support in the objective of the IND AS 109 which states that “The objective of this Standard is to establish principles for the financial reporting of financial assets and financial liabilities that will present relevant and useful information to users of financial statements for their assessment of the amounts, timing and uncertainty of an entity’s future cash flows”. Therefore, could it also be contended that adjustments under the IND AS 109 was not intended to be a part of the operational profits or losses of an IND AS company?
On contrary to the above judicial precedents, there are certain judicial precedents which have upheld a different tax position. In the case of B&B Infotech, the ITAT held that once the accounts are prepared under the Companies Act, 1956, no further adjustments (based on disclosure in the Notes to Account) could be undertaken to compute book profit for MAT purposes. Further, in the case of HCL Comnet Systems And Services Ltd., the SC held that the AO did not have jurisdiction to go beyond the net profits shown in the Profit and Loss Account except as per the explanation to s.115JB. Further, since the OCI forms a part of the Profit and Loss Account under IND AS, can it be contended that the adjustments made to items hereunder too (although of capital nature) cannot be excluded for the purpose of computation of book profit under s.115JB of the ITA?
In light of the above, the issue whether a capital item (profit / loss) can be included or excluded for the purpose of MAT is not only subsisting, but has become more litigious with the adoption of IND AS 109!
Having taken a look at the possible landmines strewn across the path of a CDR/ SDR, it may be apt to consider a representation to the Government to request for a special tax package for the entire exercise. This would help achieve the primary objective of the SDR/ CDR exercise without further burdening the borrower companies or stakeholders with unintended tax liability.
- This article has been co-authered by Megha Dhanuka, with inputs received from Rituraj Jaipuriar.
 Binani Industries Ltd. (2017) 82 Taxmann.com 320 (Kolkata – Tribunal)
 Padmaraje R. Kadambande v. CIT (1992) 195 ITR 877 (SC)
 JSW Steel Ltd (2017) 82 Taxmann.com 210 (Mumbai Tribunal)
 B&B Infotech v. ITA (2015) 155 ITD 1040 (Bangalore – Tribunal)
 HCL Comnet Systems And Services Ltd v. CIT (2008) 305 ITR 409 (SC)