2010 (12) TMI 23 - SC - Income Tax

Assessee can set off MAT credit on payment under Section 115JA(1); Section 115JAA(4) allows later quantification in assessment

Commissioner of Income Tax Versus Tulsyan NEC Ltd.

SC held that an assessee's entitlement to set off MAT credit arises upon payment under Section 115JA(1) and is not postponed until the A.O. determines ... Eligibility and Priority of MAT Credit Adjustment - Setoff of MAT Credit before interest liability - Section 115JAA and 234A, 234B, 234C - Held that:- There is no provision under Section 115JAA which postpones the right of the assessee to claim set off to the determination of the total income by the A.O. in the first assessment year. Entitlement/right to claim set off is different from the quantum/quantification of that right. Entitlement of MAT credit is not dependent upon any action taken by the Department. - However, quantum of tax credit will depend upon the assessment framed by the A.O. - The right to set off arises as a result of the payment of tax under Section 115JA(1) although quantification of that right depends upon the ultimate determination of total income for the first assessment year. It is immaterial that the relevant form prescribed under Income Tax Rules, at the relevant time (i.e. before 1.4.2007), provided for set off of MAT credit balance against the amount of tax plus interest i.e. after the computation of interest under Section 234B. This was directly contrary to a plain reading of Section 115JAA(4). Further, a form prescribed under the rules can never have any effect on the interpretation or operation of the parent statute. Mat credit allowed to be set off from advance tax before calculating interest Issues Involved:1. Whether MAT credit admissible under Section 115JAA should be set off against the tax payable before calculating interest under Sections 234A, 234B, and 234C of the Income Tax Act, 1961.Issue-Wise Detailed Analysis:1. Eligibility and Priority of MAT Credit Adjustment:The primary issue is whether MAT credit admissible under Section 115JAA should be set off against the tax payable before calculating interest under Sections 234A, 234B, and 234C. There is no dispute regarding the eligibility of the assessee for the set-off of tax paid under Section 115JA. The dispute is only in regard to the priority of adjustment for the MAT credit.2. Provisions of Sections 115JA and 115JAA:Section 115JA mandates that a company must pay tax on 30% of its book profits if the income computed under normal provisions is less than 30% of the book profits. Section 115JAA allows for the carry forward and set off of credit available in respect of tax paid under Section 115JA. The credit becomes crystallized once the tax is paid under Section 115JA, and it is limited to the difference between the tax payable on book profits and the tax payable on income computed under normal provisions.3. Computation of Tax Credit:The tax credit determined under Section 115JAA(2) is carried forward for five succeeding assessment years. The set-off is allowed when tax becomes payable on the total income computed under normal provisions, and it is limited to the difference between the tax on total income and the tax payable under Section 115JA or 115JB for that year.4. Calculation of Interest under Sections 234B and 234C:In the present cases, the Assessing Officer (A.O.) set off the MAT credit while calculating the tax payable but did not account for it while calculating interest under Sections 234B and 234C. This led to a significant tax demand due to the non-consideration of MAT credit in the computation of interest, converting a refund into a demand.5. Right to Set Off MAT Credit:The right to set off MAT credit arises as a result of the payment of tax under Section 115JA(1), although the quantification depends on the final determination of total income. The assessee is entitled to take into account the set off while estimating its liability to pay advance tax.6. Amendment to Explanation 1 to Section 234B:To address the hardship caused by the exclusion of MAT credit in the calculation of assessed tax, Parliament amended Explanation 1 to Section 234B by the Finance Act, 2006, effective from 1.4.2007, to include MAT credit under Section 115JAA while calculating assessed tax.7. Risk of Unilateral Claim of MAT Credit:The assessee claiming set off of MAT credit unilaterally does so at its risk, as any unlawful claim would expose the assessee to interest under Section 234B on the shortfall in advance tax payment.8. Impact of Forms Prescribed under Income Tax Rules:The form prescribed under the Income Tax Rules, which provided for the set off of MAT credit after the computation of interest under Section 234B, was contrary to the plain reading of Section 115JAA(4). A form prescribed under the rules cannot affect the interpretation or operation of the parent statute.Conclusion:The Supreme Court dismissed the civil appeals filed by the Department, holding that MAT credit should be set off against the tax payable before calculating interest under Sections 234A, 234B, and 234C. This ensures that the liability of the assessee is reduced appropriately by the MAT credit, preventing an increase in liability due to the non-consideration of such credit. The judgment emphasizes that the right to set off MAT credit is not dependent on the determination by the A.O. and should be accounted for while estimating advance tax liability.