Summary:-In a recent ruling Delhi Income Tax Appellate Tribunal (ITAT) in the case of Growth Avenue Securities Pvt. Ltd. (Taxpayer) Vs DCIT [ITA No. 3912/Del/2005] on the issue of inclusion of capital gains in book profits while computing Minimum Alternate Tax (MAT) under the provisions of the Indian Tax Law (ITL), where such capital gains are not chargeable to tax under the normal provisions of the ITL. The ITAT held that any adjustments outside the scope of the MAT computation mechanism, under the ITL, is not permissible and since the exclusion of capital gains is not specifically provided therein, a taxpayer is not entitled to such an adjustment while computing book profits for the purpose of MAT.
Background and facts of the case
- The provision for levy and computation of MAT under the ITL (MAT provision) lays down a fixed rate of tax on book profits in case the total income, under the normal provisions of the ITL, is lower than such book profits. The computation mechanism specifically lays down certain adjustments which are required to be made to the net profit/loss, as shown in the Profit & Loss account (P&L) prepared in consonance with the Indian Company Law (ICL), to arrive at book profits.
- The Taxpayer was liable to pay MAT on book profits, as per the provisions of the ITL. The Taxpayer’s P&L and Balance Sheet were prepared in consonance with the ICL.
- The Taxpayer had earned long-term capital gains (LTCG) during the year, which were included in the net profit in the P&L. The proceeds were invested in the specified securities and, hence, the LTCG were not chargeable to tax under the normal provisions of the ITL. Accordingly, the Taxpayer claimed that such exempt LTCG may not be included in book profits while computing MAT liability.
- The Tax Authority and the first appellate authority rejected the Taxpayer’s claim and held that book profits for MAT computation should be determined as per the MAT provision, which do not provide for exclusion of exempt LTCG from book profits. Hence, the exempt LTCG should be included in book profits while computing MAT liability.
- Aggrieved by the order of the first appellate authority, the Taxpayer preferred an appeal before the ITAT.
Issue for consideration
Whether the LTCG, not chargeable to tax under the normal provisions of the ITL, should be included in book profits while computing MAT liability?
Contentions of the Taxpayer
