Financial Accounting · Accounting for Taxes on Income (AS 22)

Special Cases in AS 22: MAT Credit and Amalgamation Effects

Updated 10 October 2026 · Fact-checked

MAT credit is tax paid under minimum alternate tax that can be set off against future normal tax. Under AS 22 as guided by ICAI, recognise it as an asset only when there is convincing evidence of future normal tax payable. Revaluation and amalgamation can create timing differences needing deferred tax.

Understand Special Cases: MAT Credit and Amalgamation Effects

AS 22 Accounting for Taxes on Income asks you to match tax expense with accounting profit. It does this through current tax and deferred tax. Deferred tax arises from timing differences, which originate in one period and reverse in later periods.

MAT credit is the special case. When a company pays tax under minimum alternate tax because its book profit-based tax exceeds its normal tax, the excess paid can be carried forward and set off against normal tax in later years, within the period the tax law allows. The credit is not a timing difference in the strict AS 22 sense. The ICAI Guidance Note on Accounting for Credit Available in respect of Minimum Alternate Tax treats it as an asset, shown as MAT credit entitlement, because it gives a future economic benefit.

The key test is evidence. Recognise the asset only if there is convincing evidence that the company will pay normal tax during the specified period, so the credit can actually be used. Review it at each balance sheet date. If the evidence weakens, write the carrying amount down. The credit is created by crediting the Profit and Loss Account (as a reduction of the tax expense line, shown separately) and debiting MAT Credit Entitlement. Check which tax law applies to your question and use the rates and period given in it.

Do not mix this with the virtual certainty test. Virtual certainty (supported by convincing evidence) applies to deferred tax assets on unabsorbed losses and unabsorbed depreciation. The convincing-evidence test applies to MAT credit entitlement. Learn which test goes with which item.

Revaluation: if a fixed asset is revalued, the tax base usually does not change, but the book value does. Depreciation on the revalued amount may not be allowed for tax. The treatment depends on the facts: whether tax allows the depreciation on the surplus, and whether the carrying amount will be recovered through use or through sale. If tax never allows the extra depreciation, treat it as a permanent difference and recognise no deferred tax on it. If tax allows it in some form, or a tax effect arises when the asset is sold, there may be a timing difference, so follow the facts in the question.

Amalgamation: under the pooling of interests method (AS 14), used for an amalgamation in the nature of merger, the transferee records assets, liabilities and reserves of the transferor at their existing book values. Under the purchase method, used for an amalgamation in the nature of purchase, assets and liabilities are recorded at fair value, or the consideration is allocated to them. Deferred tax is then recognised under AS 22 on the timing differences that exist, as for any other asset or liability. AS 22 has no separate merger rule for deferred tax. Any resulting difference goes to goodwill or capital reserve as AS 14 requires. Deferred tax assets on unabsorbed losses and depreciation of the transferor are recognised only if the virtual-certainty test is met in the transferee, and MAT credit only if the convincing-evidence test is met.

Key rules to remember

MAT credit entitlement: MAT credit = MAT paid − normal tax payable (for the year, where MAT exceeds normal tax); Recognise only with convincing evidence of future normal tax within the allowed carry-forward period.
Utilisation of MAT credit: Credit used = lower of (normal tax − MAT of that year) and available credit; Applies only in a year when normal tax exceeds MAT. Reduces current tax payable in the year of use; reduce the asset by the same amount.
Deferred tax: Deferred tax = Timing difference × Tax rate; Use rates enacted or substantively enacted at the balance sheet date.
Accounting entry for MAT credit: Dr MAT Credit Entitlement; Cr Profit and Loss (MAT credit entitlement); Shown as an asset and disclosed separately from deferred tax.
Revaluation depreciation: Extra depreciation = (Revalued amount − Original book value) ÷ Remaining life; Valid when the remaining life is unchanged by the revaluation. If not allowed for tax, treat as a permanent difference with no deferred tax; otherwise follow the facts.

How to solve Special Cases: MAT Credit and Amalgamation Effects questions

Use this order for any question on MAT credit, revaluation or amalgamation tax effects.

1Identify which issue is tested: MAT credit, revaluation, or amalgamation.
2For MAT, compute MAT payable and normal tax payable; the excess of MAT is the credit.
3Check the evidence condition in the question. If there is no convincing evidence of future normal tax, do not recognise the credit.
4For revaluation, find the extra depreciation and decide if tax allows it. If tax never allows it, treat it as a permanent difference; otherwise check for a timing difference.
5For amalgamation, state whether it is a merger (pooling of interests, book values) or purchase (fair value or consideration allocated), then list timing differences and apply the tax rate.
6Pass journal entries and show the effect on profit and loss and the balance sheet.
7Write the disclosure: MAT credit entitlement shown separately, with the basis of recognition.

Quickest way: Three-line check for tax effects

When to use it: Use in MCQs and short problems where the issue must be classified quickly.

MAT paid in excess of normal tax: asset only if future normal tax is convincingly expected.
Revaluation surplus depreciation: if tax never allows it, treat as a permanent difference; otherwise check for a timing difference.
Amalgamation: record at book values (merger) or fair value (purchase), then recognise deferred tax on timing differences under AS 22.

Common mistakes in Special Cases: MAT Credit and Amalgamation Effects

Recognising MAT credit without checking evidence.
Students treat any excess tax paid as automatically recoverable.
Fix: State the evidence test first. If the question says losses continue, do not recognise the credit.
Calling MAT credit a deferred tax asset in every answer.
Guidance and the common search phrase blur the two ideas.
Fix: Write that it is a separate MAT credit entitlement asset, shown apart from deferred tax.
Creating deferred tax on all revaluation depreciation.
Students see a book–tax gap and assume a timing difference.
Fix: Ask if tax will ever allow it. If never, it is permanent and no deferred tax arises.
Using an old tax rate for deferred tax.
Rates change between data points in the question.
Fix: Use the rate enacted at the balance sheet date unless the question says otherwise.
Ignoring the transferor's deferred tax in amalgamation.
Students focus only on purchase consideration.
Fix: Recognise deferred tax on timing differences of the transferor's assets and liabilities once recorded, and apply the virtual-certainty test to losses.

Worked examples

Example 1

ABC Ltd has tax under MAT of ₹12,00,000 for the year, while normal tax is ₹8,00,000. The company has convincing evidence that it will pay normal tax in the next three years. Show the treatment.

Show the solution

Tax payable for the year is the higher amount, ₹12,00,000.
MAT credit = ₹12,00,000 − ₹8,00,000 = ₹4,00,000.
Evidence of future normal tax exists, so recognise the asset.
Journal: Dr MAT Credit Entitlement ₹4,00,000; Cr Profit and Loss Account ₹4,00,000.
Profit and loss shows current tax ₹12,00,000 less MAT credit entitlement ₹4,00,000; net tax expense is ₹8,00,000.

Answer: MAT credit entitlement of ₹4,00,000 is recognised as an asset; net tax expense for the year is ₹8,00,000.

Example 2

XYZ Ltd revalues machinery with book value ₹10,00,000 to ₹14,00,000. Remaining life is 4 years and is unchanged by the revaluation. Tax does not allow depreciation on the revaluation surplus and never will. Tax rate is 30%. Compute the deferred tax on the extra depreciation.

Show the solution

Surplus = ₹14,00,000 − ₹10,00,000 = ₹4,00,000.
Extra depreciation each year = ₹4,00,000 ÷ 4 = ₹1,00,000.
Tax never allows this deduction, so it is a permanent difference.
Deferred tax = nil, because deferred tax is recognised only on timing differences.
For information, the tax effect would have been ₹1,00,000 × 30% = ₹30,000 per year if it were a timing difference, but it is not.

Answer: No deferred tax is recognised; extra depreciation of ₹1,00,000 a year is a permanent difference.

Exam tips

Write the evidence condition for MAT credit in every answer; examiners award marks for it.
Label the MAT asset as MAT credit entitlement and show it separately from deferred tax.
In revaluation questions, state whether the difference is timing or permanent before computing anything.
In amalgamation questions, name the type of amalgamation first; the treatment depends on it.
In MCQs, watch for words such as convincing evidence, virtual certainty and permanent difference.

Practice questions from Accounting for Taxes on Income (AS 22)

Special Cases: MAT Credit and Amalgamation Effects: frequently asked questions

Is MAT credit a deferred tax asset under AS 22?

Not strictly. The ICAI Guidance Note treats it as an asset called MAT credit entitlement, recognised when there is convincing evidence of future normal tax. Show it separately from deferred tax.

When should MAT credit be written down?

Review it at each balance sheet date. If you no longer have convincing evidence of future normal tax within the carry-forward period, reduce the carrying amount to the recoverable value.

Is deferred tax created on revaluation of fixed assets?

Only if there is a timing difference. If tax never allows depreciation on the revaluation surplus, it is a permanent difference and no deferred tax arises. Otherwise follow the facts given.

How does amalgamation affect deferred tax?

Under the pooling of interests method assets and liabilities are recorded at existing book values, and under the purchase method at fair value or by allocating the consideration. Deferred tax is then recognised on timing differences under AS 22.