MAT & Carry and Set off of Brought forward Losses

This query is : Resolved

Prakash Joshi (Querist)
Follow

26 June 2023 Hi Friends,
A company has an accumulated losses of about 100 lacs carried forward since many years.
Last few year 2021-22 the company had a book profit on which it has paid Tax under MAT
in 2022-23 it has a net profit of Rs 90 lacs because of booking the income against an advance lying in the books. The Management thinks since it has already an accmulamated losses so it shouldn't be paying the tax for FY 2022-23 as they are not aware of MAT provisions.

I am seeking an expert view to answer of the following questions(as the actual working may vary when computed after tax audit).

1. Is the company eligible to set off b/f losses in this case in a scenario when its boo profit is higher than the profit computed as per Income tax act or visa versa (i.e when actual tax as per IT act is higher than Book Profit/MAT)
2. If the company is still liable to pay the MAT in this case what benefit it is getting having an accumulated losses brought forward.

Please provide your views.

Thanks
P C Joshi

Asha Kanta Sharma

Asha Kanta Sharma

(Expert)
Follow

09 July 2024 Certainly! Let's address your queries based on the scenario described:

### 1. Eligibility to Set Off Brought Forward Losses

In the case where a company has brought forward losses and is subject to Minimum Alternate Tax (MAT), the following considerations apply:

- **Book Profit vs. Taxable Income:** The company's taxable income under the regular provisions of the Income Tax Act (ITA) and its book profit may differ due to various adjustments required under tax laws (such as depreciation, income adjustments, etc.).

- **Set Off of Brought Forward Losses:** According to the Income Tax Act, brought forward losses (accumulated losses) can be set off against the current year's taxable income, including book profits computed under MAT. This set off reduces the taxable income liable for regular income tax or MAT.

- **MAT Computation:** MAT is applicable when the tax payable as per the normal provisions of the ITA is less than 18.5% (15% from FY 2022-23) of the book profit computed under MAT provisions. The company must pay the higher of the taxes computed under regular ITA provisions or MAT.

- **Scenario Example:**
- Suppose the company has a book profit of Rs. 90 lakhs as per MAT provisions for FY 2022-23.
- The company also has brought forward losses of Rs. 100 lakhs from previous years.

- **Taxable Income under Regular ITA:** If the taxable income under regular provisions (after adjusting for brought forward losses) is lower than 15% of the book profit (Rs. 90 lakhs), then MAT becomes applicable.

- **Set Off of Brought Forward Losses:** The company can set off the brought forward losses of Rs. 100 lakhs against the taxable income computed under regular ITA provisions. This reduces the tax liability under regular ITA.

### 2. Benefits of Accumulated Losses in Relation to MAT

- **Tax Benefit:** Accumulated losses can significantly reduce the taxable income under regular provisions of the ITA, thereby potentially reducing or eliminating the need to pay regular income tax in years where profits are made.

- **MAT Mitigation:** Even if MAT is applicable due to high book profits, the accumulated losses can still be set off against taxable income computed under regular ITA provisions, thereby reducing the effective tax liability.

- **Cash Flow Impact:** While MAT may be applicable in years of book profits, the ability to set off accumulated losses can provide a cash flow advantage by reducing the immediate tax outflow.

### Conclusion

In summary:
- The company can set off brought forward losses against the taxable income computed under both regular ITA provisions and MAT provisions.
- Accumulated losses help in reducing taxable income under regular provisions and mitigate the impact of MAT, though MAT may still be applicable if the book profit under MAT exceeds the taxable income computed under regular ITA.

It's advisable for the company to consult with a tax expert or chartered accountant to conduct a detailed tax audit and computation to ensure compliance with MAT provisions and to optimize the utilization of brought forward losses effectively.