Exempt long term capital gains to be included for MAT computation: Delhi ITAT

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

• The amounts not chargeable to tax, under the normal provisions of the ITL, should not be considered while computing MAT liability. If such exemptions are disregarded while computing MAT then the provisions of the ITL, providing for such exemptions, would become redundant.
• All other provisions under the ITL would also apply and, hence, the exempt LTCG should not be considered while computing MAT liability.
• For computing book profits, the amount of net profit shown as per the P&L, can be varied even if the adjustments are not specifically provided in the MAT provision.

Contentions of the Tax Authority

• Computation of book profits should be made in accordance with the MAT provision which lays down the entire mechanism for the calculation of book profits and MAT liability thereon. The other provisions of the ITL are not relevant for computing book profits and MAT liability.
• Reliance was placed on the Supreme Court’s (SC) decision in the case of Apollo Tyres Ltd. v CIT[¹].

Ruling of the ITAT

• The MAT provision is a deeming provision which has an overriding effect on other provisions of the ITL. It is a self-contained code and the adjustments required to be made to the net profit as per the P&L, to arrive at the book profits, are specifically illustrated in the MAT provision. No other deductions, rebates or allowances are permissible.
• By placing reliance on the SC decisions[²], it was held that:

a)The Tax Authority does not have the power to go beyond the net profit shown in the P&L, except to the extent provided in the MAT provision, as long as the accounts are maintained in consonance with the ICL.

b) The Tax Authority’s power is restricted only to the extent of checking whether the accounts have been prepared as per the ICL and have been duly certified.

c) The Tax Authority is permitted to make adjustments as specified in the MAT provision only.

• Relying on the Delhi High Court’s[³] decision, it was held that the net profit as per the P&L may be adjusted, taking into account the items which are separately disclosed in the ‘Notes to Accounts’ prepared as per the ICL, since the Notes to Accounts form part of the P&L.Since there is no mention in the MAT provision of LTCG adjustment which are not chargeable to tax otherwise, the Taxpayer is not entitled to such an adjustment while computing book profits for the purpose of MAT.

Comment

This ruling reiterates the principles laid down by the SC that for MAT computation, any adjustments, other than those specified in the MAT provision, are not permissible as long as the accounts are prepared by a taxpayer as per the ICL.

[1]  225 ITR 273

[2]  Apollo Tyres Ltd. v CIT (supra), CIT v HCL Comnet Systems &Services Ltd. [13 DTR 105]

^[3] CIT v Sain Processing and Weaving Mills (P) Ltd. [17 DTR 215)

NF