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Reserves created in approved amalgamation schemes not liable for MAT

Reserves created in approved amalgamation schemes not liable for MAT
23 May 2012

The Mumbai Bench of the Income Tax Appellate Tribunal (ITAT), has ruled that reserves created on revaluation of assets, as part of an amalgamation scheme, will not be subject to Minimum Alternate Tax (MAT). Taxand India summarises the case and explores the potential impact of this new ruling.

Summary of case:

United Estate Private Limited (Taxpayer), amalgamated two group companies in a court approved merger. The 'work in progress' of both companies was valued at market value, and the difference between market value and the existing book value amounted to Rs 397,989,292. This balance was set up in a 'general reserve'.

Revenue Authorities (RA) claimed before the Commissioner (Appeals) (CIT(A)) that the Taxpayer's 'work in progress' reserve had been taken from their profit and loss account, and as such, should be returned to the 'book profits' for MAT assessment.

The Taxpayer's response to this included a statement that general reserve recording of 'work in progress' was in accordance with the High Court approved amalgamation scheme, and compliant with Accounting Standards of Institute of Chartered Accountants of India.

The Commissioner of Appeals ruled in favour of the Taxpayer with the argument that profit cannot be made from revaluation of assets, and the RA referred the case to the ITAT.

ITAT upheld the order passed by CIT(A) and ruled in favour of the Taxpayer, citing that there must be a debit of the amount to the profit and loss account and the amount so debited must be carried to the reserve to be eligible for MAT. In the Taxpayer's case, the sum of the market value of 'work in progress' was input into the reserve and was not debited from the profit and loss account.

Taxand India looks at the case in more detail here


Taxand's Take

The decision of the ITAT is significant, as it provides clarity on treatment of reserves that are formed in an amalgamation schemes. Whilst the ITA holds that reserves created on revaluation of 'work in progress' in such schemes, it has not dealt with the implications in future years. This revalued 'work in progress' would result in higher debit to the profit and loss account in subsequent years, thereby lowering book profits for MAT.

Importantly, though, the recent Finance Act 2012 cites that the balance of revalued assets in a reserve would have to be added to the book profits in the year of disposal or retirement of the asset. Applicability of this amendment in a 'work in progress' context would have to be examined, but this could balance amalgamated companies' assets eligible for MAT.

Your Taxand contact for further queries is:
Mukesh Butani
T. +91 124 339 5010

Taxand's Take Author