Friday, 21 August 2015

Mumbai Tribunal rules exempt capital gains not liable to MAT despite credit to profit and loss account

We are pleased to release a Tax Alert summarizes a recent ruling of the Mumbai Income Tax Appellate Tribunal (Mumbai Tribunal) in the case of M/s. Shivalik Venture Pvt. Ltd. (Taxpayer) , on the issue of exclusion of exempt capital gains, credited to the Profit & Loss account (P&L), from ”book profit” while computing Minimum Alternate Tax (MAT) under the provisions of the Indian Tax Laws (ITL).

The Special Bench (SB) of the Hyderabad Tribunal had earlier ruled in the case of Rain Commodities v. DCIT  that exempt capital gains credited to the P&L are liable to MAT in the absence of any specific downward adjustment in the MAT provision.

Distinguishing the SB ruling on facts, the Mumbai Tribunal held that, in the instant case, the Taxpayer had expressly stated in the Notes to Accounts (Notes) that the exempt capital gains arising on transfer of capital assets to its wholly-owned subsidiary company (WOS) are not includible in the ”book profit”. The Notes  form an integral part of the P&L and, hence, even though the P&L reflects credit of capital gains, when read along with the Notes, the exempt capital gains stand excluded therefrom. Consequently, the net profit to be adopted for MAT purposes is the net profit without inclusion of exempt capital gains.

The Mumbai Tribunal also upheld the additional legal argument of the Taxpayer that transfer of capital assets to its WOS is not treated as “transfer” giving rise to taxable capital gains under the Income-tax Act and, consequently, the capital gains do not represent “income” of the Taxpayer. The scheme of MAT reveals that there is parity between normal and MAT computation, insofar that exempt incomes are excluded from both the computations. This logic can be extended to exempt capital gains and a receipt which is not liable to tax under the normal provisions cannot be included in “book profit” for MAT purposes.

Prior to the Rain Commodities ruling, there were conflicting rulings of various Tribunals on the issue of whether exempt capital gains credited to the P&L can be excluded from “book profit” in MAT computation. The SB, in the case of Rain Commodities, decided the issue in favor of the Tax Authority.  It is a well-settled convention to consider the SB’s decision as binding on the division benches of the Tribunal.

In the present case, the Mumbai Tribunal, after considering the SB’s ruling, still ruled in the Taxpayer’s favor by distinguishing the SB ruling on the factual ground that the Taxpayer, in the present case, had included a note in the Notes claiming exclusion of exempt capital gains from “book profit” and on the basis of the legal argument that non-chargeable capital receipt is not liable to MAT which, according to the Mumbai Tribunal, the SB had no occasion to consider.

While the issue is not wholly free from doubt, the present ruling would help other taxpayers whose facts are identical to the present case.

No comments: