This key decision, which is a victory for the tax authorities, clarifies the applicability of interest payable for the shortfall in payment of advance tax.
In the case, the taxpayer, Rolta India filed a corporate tax return with nil income for the assessment year 1997-1998.
In response, the tax department levied MAT on book profits and charged interest under section 234B of the Income Tax Act.
When Rolta India appealed, the Bombay High Court applied the ruling of the Karnataka High Court in the case of Kwality Biscuits Ltd and held that interest cannot be charged for a shortfall in payment of advance tax in cases where the ultimate liability is under MAT provisions. The authorities appealed to the Supreme Court.
In issuing its decision, the Supreme Court stated that Kwality Biscuits Ltd was in the context of section 115J of the Act, which was in force from April 1 1988 to March 31 1991.
The court made it clear that a specific provision has been enacted providing that all other provisions should apply when the taxpayer is chargeable to tax under sections 115JA and 115JB of the Act. Such provisions would include interest payable for a shortfall in payment of advance tax.
“This decision is not a surprise but it did confirm the worst fears that a lot of taxpayers had been preparing for,” said Sriram Seshadri of BMR Advisors – Taxand, in Chennai. “Many had expected this decision and had set aside money for any interest payments but privately they were all hoping that the decision would have gone in Rolta’s favour.”
India’s MAT rate has been increasing in recent years starting out at 7% and increasing to its present rate of 19% As a result, the corresponding exposure for interest for a shortfall in payment of the tax has also been increasing.
“The court just formalised the principle that taxpayers had been adopting for a long time that interest is applicable,” said Sunil Shah, of Deloitte, “meaning that this decision will not have a major impact on the way companies pay MAT in India.”
While MAT is creditable against future taxes, subject to satisfaction of certain conditions, interest is not.
“It is important to properly estimate MAT liability,” said Seshadri.
This decision comes a month after the Supreme Court held that credit for MAT paid should be allowed before computing interest under section 234B and 234C of the Act.
“People should be pleased with this decision as it clarifies a number of points and there is no longer any uncertainty surrounding this matter,” said Sunil Kothare, Citigroup tax director for South Asia. “Also, the Chief Justice of India (who made the decision) used to be a tax judge and so was very familiar with this matter.”
