Court clarifies MAT calculation: Unascertained liabilities from previous years must be added back

Get the full picture - access the original judgement of the court order here.

Case Name:

Covema Filment Ltd., Rep. by its Director Adarsh Deva Vs Commissioner of Income Tax (High Court of Kerala)

ITA.No.226 of 2014

Key Takeaways:

1. When calculating MAT, unabsorbed depreciation/business loss figures should be taken from the books of accounts.

2. If interest on a bank loan was disallowed as an unascertained liability in previous years, it should be added back when computing MAT under Section 115JB.

3. The court emphasized the importance of considering specific facts when dealing with tax matters.

Issue:

The main legal questions were:

1. How should unabsorbed depreciation/business loss be calculated for MAT purposes under Section 115JB?

2. Can interest provision on a bank loan from previous years be deducted under Explanation 1(i) to Section 115JB(2)?

Facts:

- The case concerns the assessment year 2006-07.

- Covema Filaments Ltd. had made provisions for interest on a bank loan from 2000-01 to 2005-06.

- The company was in communication with the bank for a One Time Settlement (OTS) during this period.

- In the 2006-07 assessment year, the matter was settled with the bank, resulting in a waiver of the entire interest and a portion of the principal.

- The interest previously debited to the profit and loss account was debited from the reserve and credited to the profit and loss account for 2006-07.

Arguments:

Assessee (Covema Filaments Ltd.):

- Claimed that the interest shown as provision in earlier years was disallowed under Section 43B.

- Argued that this amount was added back as an unascertained liability when computing MAT under Section 115JB in earlier years

- Contended that the interest should be deducted under Explanation (i) to Section 115JB(2) for the current year.

Revenue (Income Tax Department):

- Argued that it wasn't clear whether the amount was added back under Section 115JB in previous years.

Key Legal Precedents:

The judgment doesn't mention any specific legal precedents. However, it refers to several sections of the Income Tax Act, 1961:

- Section 115JB: Deals with Minimum Alternate Tax (MAT)

- Section 43B: Relates to certain deductions to be allowed only on actual payment

- Explanation 1(i) to Section 115JB(2): Concerns adjustments to book profit for MAT calculation

Judgement:

1. On unabsorbed depreciation/business loss: The court agreed with the Tribunal's decision to remand the matter to the Assessing Officer for consideration, stating that figures should be taken from the books of accounts.

2. On interest provision: The court held that if the interest was disallowed under Section 43B as an unascertained liability in earlier years, it should be considered an ascertained liability for the current year's MAT calculation.

3. The court partially allowed the appeal and remanded both issues for further consideration.

FAQs:

Q1: What is Minimum Alternate Tax (MAT)?

A1: MAT is a minimum tax that a company must pay, even if it's entitled to various deductions and exemptions that would otherwise reduce its tax liability.

Q2: What is an unascertained liability?

A2: An unascertained liability is a potential financial obligation whose exact amount is not yet known or confirmed.

Q3: Why did the court remand the issues back to the Assessing Officer?

A3: The court wanted the Assessing Officer to consider the specific facts of the case in light of the court's guidance, especially regarding the treatment of the interest provision.

Q4: What's the significance of Section 43B in this case?

A4: Section 43B is crucial because it determines whether certain expenses can be deducted only when actually paid. In this case, it affected how the interest provision was treated in previous years.

Q5: How does this judgment affect the calculation of MAT?

A5: This judgment clarifies that if an amount was disallowed as an unascertained liability in previous years under Section 43B, it should be added back when computing MAT under Section 115JB.

1. The appeal of the assessee is from the order of the Income Tax Appellate Tribunal [for brevity “the Tribunal”] for the assessment year 2006-07.

2. The first question is with respect to the unabsorbed depreciation/business loss; the lower of which was to be granted deduction while computing tax under Section 115JB of the Income Tax Act, 1961 [for brevity “the Act”]. Whether the figures are to be taken as per the books of accounts or as permissible under the Income Tax Rules; is the question raised. The Tribunal found that there is no restriction as provided under 115JB and that it has to be from the books of accounts. The issue was remanded to the Assessing Officer [for brevity “AO”] for consideration. The assessee has raised a question on this in the present appeal only because the remand report of the AO had specifically indicated the facts. In any event, the last fact finding authority, the Tribunal, having remanded the matter, holding the issue in favour of the assessee, and there is no appeal by the Revenue; we would not interfere such consideration by the AO in accordance with the order of the Tribunal. There is no question of law arising from the aforesaid issue.

3. The next issue is on the provision for interest in a Bank loan made for the earlier years; from 2000-01 to 2005-06, being permissible as a deduction under Explanation 1(i) to Section 115JB(2). On facts, it has to be noticed that the assessee's specific claim was that though the interest was shown as a provision in the earlier years, the same was disallowed under Section 43B. It is also contended that in computation of the MAT under Section 115JB, this amount was added back as an unascertained liability in the earlier years. The assessee had been communicating with the Bank as to a One Time Settlement [OTS] during the said period. Eventually in the previous year relevant to the subject year, 2006-07, the matter was settled with the Bank. The entire interest was waived by the Bank and also a portion of the principal. The interest so debited to the profit and loss account for the earlier years was, hence, debited from the reserve and credited to the profit and loss account for the subject year. The same had to be deducted under Explanation (i) to Section 115JB(2).

4. The Tribunal, however, found that the interest is an unascertained liability and ought not to have been disallowed in the earlier years. When the AO as per the remand report at Annexure-C specifically states that it is disallowed under Section 43B, it was not proper for the Tribunal to have taken such a view. The learned Standing Counsel, Government of India (Taxes) also argues that as of now it is not clear as to whether the same was added back under Section 115JB. In such circumstances, the earlier issue having been remanded, it is only proper that the AO considers this issue also looking at the facts. However, we make it clear that the question of law raised as to whether the same was unascertained liability or ascertained liability is answered in favour of the assessee; if the same has been disallowed under Section 43B as an unascertained liability in the earlier years.

The appeal is partly allowed and the issues remanded for consideration; one in accordance with the findings of the Tribunal and the other in accordance with what has been held by this Court. Parties are left to suffer their respective costs.

Sd/-

K.VINOD CHANDRAN

JUDGE

Sd/-

ASHOK MENON

JUDGE