Question ID : 38128

Mat in case of reduction of share capital

X Private Limited is a subsidiary of a foreign company. The Share capital of X Limited is Rs.7 crores and there are losses in the Company and the reserves and Surplus as on 31st March 2018 is as follows: Profit and (Loss) Balance – (63.7 crores), Security Premium – Rs.60 Crore, Net loss under reserves- Rs.3.7 Crores As per Mat the losses carried forward is Rs.2.36 Crores. The company wants to reconstruct the company through reduction of share capital by reducing the losses. The shareholder are willing to forego Rs.2.5 Crores amount in share capital, however there are many questions which are to be answered: 1. Whether Mat loss is to be completely reversed and we need to pay tax on remaining Rs.0.14 Crores or we may constitute that the reduction is out of those losses which are not allowed as loss under Mat (i.e. Mat considers lower of unabsorbed depreciation and book loss, so book shows more loss) and hence no reversal of loss shall be done? For Eg: If losses for three years are as follows: Year 1 Loss other than unabsorbed depreciation - 25 Crores Unabsorbed Depreciation - 0.15 Crores Mat Loss carried Forward - 0.15 Crores Year 2 Loss other than unabsorbed depreciation - 2.5 Crores Unabsorbed Depreciation - 0.75 Crores Mat Loss carried Forward - 0.75 Crores Year 3 Loss other than unabsorbed depreciation - 4.5 Crores Unabsorbed Depreciation - 1.25 Crores Mat Loss carried Forward - 1.25 Crores After Reduction the entries passed shall be as follows: Share Capital A/c Dr 2 Crores To Loss of 1st year A/c 2 Crores Since the amount is directly reversed in reserves and surplus no addition is to be done in MAT calculation. Losses remaining post the reduction: Year 1 Loss other than unabsorbed depreciation - 23 Crores (25 – 2 crores reduction) Unabsorbed Depreciation - 0.15 Crores Mat Loss carried Forward - 0.15 Crores Year 2 Loss other than unabsorbed depreciation - 2.5 Crores Unabsorbed Depreciation - 0.75 Crores Mat Loss carried Forward - 0.75 Cro

THERE WILL NOT BE ANY IMPACT ON THE MAT LIABILITY AS THERE IS ONLY ADJUSTMENT OF ACCUMULATED LOSSES AGAINST CAPITAL AND THERE IS NO SET OFF OF LOSSES AGAINST TAXAXBLE INCOME.