We are pleased to
release an alert which summarizes a recent Andhra Pradesh High Court (HC)
ruling in the case of Nagarjuna Fertilizers & Chemicals Ltd. (Taxpayer)
in the context of Minimum Alternate Tax (MAT) provisions in a peculiar
fact pattern.
The Taxpayer had initially credited and reduced interest income from “Expenditure incurred during construction period pending allocation” (Capital Work-in-Progress) in the Balance Sheet for four tax years. The Tax Authority had taxed such interest income under normal provisions in the respective tax years. The Taxpayer changed its accounting policy in the fifth year (in which MAT was applicable) and credited the interest (including for the earlier four years) to Profit & Loss account (P&L) which was assessed to MAT. The HC was required to adjudicate whether such interest income for earlier years which had already suffered tax under normal provisions can be taxed again under MAT in the fifth year as it was credited to P&L in the fifth year. This was particularly so in the light of ratio of Supreme Court’s (SC) ruling in Apollo Tyres’ case which held that P&L approved by authorities under Companies Act is binding on the Tax Authority.
The HC ruled in Taxpayer’s favor and held that the impugned interest income for earlier years cannot be taxed under MAT in the fifth year because (a) MAT is restricted to “incomes of relevant tax year” and incomes undisputedly pertaining to earlier tax year/s cannot be roped in for MAT; and (b) it is a cardinal principle of taxation that same income cannot be subjected to tax more than once in different years in absence of specific provisions and MAT provisions are no exception to this principle. The HC also held that the above conclusion is not impacted by the ratio of Apollo Tyres’ ruling (supra).
The present HC ruling is significant to the extent it upholds that MAT provisions which levy tax on the basis of “book profit” do not override the cardinal principle of taxation that same income cannot be subjected to tax more than once across different tax years in absence of specific enabling provisions. If income has already suffered tax in earlier years under normal provisions, the same cannot be taxed under MAT in subsequent year merely because it is credited to P&L in subsequent year. This supports that MAT is merely an alternative form of taxation. The principle may be of relevance in many situations where there may be timing difference between taxation under normal provisions and credit to P&L.
The ratio of the present ruling may be distinguishable from a situation where prior period items are debited/credited to P&L in terms of the accounting standard where such items are not subjected to tax in earlier years.
The Taxpayer had initially credited and reduced interest income from “Expenditure incurred during construction period pending allocation” (Capital Work-in-Progress) in the Balance Sheet for four tax years. The Tax Authority had taxed such interest income under normal provisions in the respective tax years. The Taxpayer changed its accounting policy in the fifth year (in which MAT was applicable) and credited the interest (including for the earlier four years) to Profit & Loss account (P&L) which was assessed to MAT. The HC was required to adjudicate whether such interest income for earlier years which had already suffered tax under normal provisions can be taxed again under MAT in the fifth year as it was credited to P&L in the fifth year. This was particularly so in the light of ratio of Supreme Court’s (SC) ruling in Apollo Tyres’ case which held that P&L approved by authorities under Companies Act is binding on the Tax Authority.
The HC ruled in Taxpayer’s favor and held that the impugned interest income for earlier years cannot be taxed under MAT in the fifth year because (a) MAT is restricted to “incomes of relevant tax year” and incomes undisputedly pertaining to earlier tax year/s cannot be roped in for MAT; and (b) it is a cardinal principle of taxation that same income cannot be subjected to tax more than once in different years in absence of specific provisions and MAT provisions are no exception to this principle. The HC also held that the above conclusion is not impacted by the ratio of Apollo Tyres’ ruling (supra).
The present HC ruling is significant to the extent it upholds that MAT provisions which levy tax on the basis of “book profit” do not override the cardinal principle of taxation that same income cannot be subjected to tax more than once across different tax years in absence of specific enabling provisions. If income has already suffered tax in earlier years under normal provisions, the same cannot be taxed under MAT in subsequent year merely because it is credited to P&L in subsequent year. This supports that MAT is merely an alternative form of taxation. The principle may be of relevance in many situations where there may be timing difference between taxation under normal provisions and credit to P&L.
The ratio of the present ruling may be distinguishable from a situation where prior period items are debited/credited to P&L in terms of the accounting standard where such items are not subjected to tax in earlier years.
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