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Tax Publishers ITO v. Buniyad Developers (P) Ltd. [ITA No. 5290/Del/2016, dt. 21-9-2020] : 2020 TaxPub(DT) 3791 (Del.-Trib.) Exempted incomes under section 10 whether excluded from MAT computation? *Facts:* Assessee had sold some agricultural lands which was exempt under section 10(1) which was confirmed to be exempt by ITAT. This exempted income was not given effect to for MAT computation thus addition was sustained by assessing officer which was reversed by Commissioner (Appeals) who agreed with the assessee's contention that MAT provisions cannot overrun exempted incomes so they stand exempted even for MAT computation purposes. Aggrieved revenue went in appeal to ITAT. Held in favour of the assessee that exempted capital gains from sale of agricultural land cannot be brought to tax into MAT. *Applied:* ACIT v. Nilgiri Tea Estate Ltd. (2014) 47 taxmann.com 329 (Coch-Trib) *Editorial Note:* Reference be made to the following decisions as well. Decisions favouring assessee where exempted capital gains cannot be taxed under MAT-- M/s. Shivalik Venture Pvt. Ltd. v DCIT (Mumbai-ITAT) [ITA No. 2008/Mum/2012, Assessment Year 2009-10, decided on 19-8-2015] : 2015 TaxPub(DT) 3245 (Mum-Trib) Malayala Manorama v. CIT (2008) 300 ITR 251 (SC) : 2008 TaxPub(DT) 1900 (SC) Decisions Against: Rain Commodities Ltd. v Dy. CIT (2010) 131 TTJ 514 (Hyd.-ITAT) : 2010 TaxPub(DT) 2079 (Hyd-Trib) Veekay Lal Investment Co. (P) Ltd. (2001) 249 ITR 597 (Bom-HC) : 2001 TaxPub(DT) 1104 (Bom-HC) The below para cited in Shivalik Venture case supra makes an interesting read -- "We shall now examine the scheme of the provisions of section 115JB of the Act. It is pertinent to note that the provisions of section 10 lists out various types of income, which do not form part of Total income. All those items of receipts shall otherwise fall under the definition of the term "income" as defined in section 2(24) of the Act, but they are not included in total income in view of the provisions of section 10 of the Act. Since they are considered as "incomes not included in total income" for some policy reasons, the legislature, in its wisdom, has decided not to subject them to tax under section 115JB of the Act also, except otherwise specifically provided for. Clause (ii) of Explanation 1 to section 115JB specifically provides that the amount of income to which any of the provisions of section 10 (other than the provisions contained in clause (38) thereof) is to be reduced from the Net profit, if they are credited to the Profit and Loss account. The logic of these provisions, in our view, is that an item of receipt which falls under the definition of "income", are excluded for the purpose of computing "Book Profit", since the said receipts are exempted under section 10 of the Act while computing total income. Thus, it is seen that the legislature seeks to maintain parity between the computation of "total income" and "book profit", in respect of exempted category of income. If the said logic is extended further, an item of receipt which does not fall under the definition of "income" at all and hence falls outside the purview of the computation provisions of Income Tax Act, cannot also be included in "book profit" under section 115JB of the Act. Hence, we find merit in the submissions made by the assessee on this legal point". ANOTHER OPINION MAT Provisions Whether Exclude Tax Free/Exempt Capital Gains? 1. MAT provisions MAT provisions have a clause which exclude exempted incomes or incomes in section 10 from MAT applicability if such income is credited to the profit and loss account (Explanation 1, clause (ii) of section 115JB(1). The intent of this provision is what is not income cannot be taxed in MAT. Can the above provision be read to cover other exempted or income which are not considered as "income" for certain reasons of the Income Tax Act? 2. Rain Commodities Ltd. v. Dy. CIT (2010) 36 (II) ITCL 2 (Hyd-Trib) : (2010) 131 TTJ 514 (Hyd-Trib) : 2010 TaxPub(DT) 2079 (Hyd-Trib) This was a Special Bench decision of ITAT decision. The facts being as under :-- (a) Rain Commodities Ltd. had a 100% subsidiary called Rain Industries Ltd. By a scheme of reconstruction arrangement thru the court the holding company transferred all assets and liabilities to the subsidiary. (b) The assets were more than the liabilities in the transfer, thus, there was a capital gain on such transfer. (c) By virtue of section 47(iv) of the Income Tax Act transfer by a holding to its 100% subsidiary is not treated as a transfer, thus, exempt from capital gains tax. (d) While drawing the final accounts in the hands of the holding company Rain Commodities, the capital gain on the transfer of net assets was included in the profit and loss account. (e) The return was filed and assessed under section 143(3) after which the Commissioner of Income Tax invoked power to revise under section 263 whereby MAT provisions were called in by the Commissioner of Income Tax thereby adding back the capital gain of transfer to subsidiary (which was treated as an "extraordinary item" + due to section 47(vi) applicability) which assessee felt was outside the scope of MAT. (f) Assessee's contention was if the gain on the transfer to subsidiary was excluded in MAT calculation, there will be no book profits at all falling outside the scope of MAT. (g) Assessee's grounds were -- (i) MAT provisions were introduced to tax book profits to tackle issue of companies who had book profits more than taxable profits. (ii) Sutlej Cotton Mills Ltd. v. ACIT (1993) 199 ITR (AT) 164 (Kolkata-ITAT) : 1993 TaxPub(DT) 0798 (Cal-Trib) Special Bench decision was pressed in to explain purposive interpretation of section 115J introduction consequential to removal of section 80VVA. (iii) Only book profits can be taxed under MAT, thus, no inclusion of any profit on realization/sale of asset was required to be called for under MAT provisions. (iv) The reading of section 115JB is analogous to section 115J reading as it then existed in principle. (v) Similar reading of exclusion of profit on sale of assets under MAT was also in Asst. CIT v. Northern India Theatres (P) Ltd. (1996) 218 ITR (AT) 50 (Del) (TM) : 1996 TaxPub(DT) 0709 (Del-Trib). Such inclusion will not mean that the profits are computed according to Part II/III of Schedule VI of the Companies Act which is mandated by MAT provisions. (vi) Below were the decisions cited by the assessee with the respective grounds. (1) Cadell Weaving Mill Co. (P) Ltd. v. CIT (2001) 249 ITR 265 (Bom) : 2001 TaxPub(DT) 1093 (Mum-Trib) approved by the Supreme Court in CIT v. D.P. Sandhu Bros. Chembur (P) Ltd. (2005) 273 ITR 1 (SC) : 2005 TaxPub(DT) 1286 (SC) : Income under section 2(24)(vi) shall include only capital gains chargeable to tax under section 45 and not all capital gains, i.e., capital gains not chargeable to tax under section 45, fall outside the definition of income under section 2(24). (2) Asst. CIT v. Mukund Ltd. (I.T.A. No. 304/Mum/2004): Capital gains on sale to 100 per cent, subsidiary not chargeable to tax under section 47(iv) of the Act cannot be subjected to tax under the minimum alternate tax provisions. (3) ITO v. Suraj Jewellery India Ltd. (2008) 22 ITCL 288 (Mum-Trib) : (2008) 21 SOT 79 (Mum-Trib) : 2008 TaxPub(DT) 1126 (Mum-Trib) : Capital gains on sale to holding company not chargeable to tax under section 47(iv) of the Act cannot be subjected to tax under minimum alternate tax provisions. (4) ITO v. Frigsales (I) Ltd. (2005) 4 SOT 376 (Mum) : 2005 TaxPub(DT) 1838 (Mum-Trib) : Capital gains not chargeable to tax under section 50 of the Act cannot be subjected to tax under the minimum alternate tax provisions. (5) Oriental Containers Ltd. v. Joint CIT (2008) 20 ITCL 177 (Mum-Trib) : (2007) 19 SOT 30 (Mum) : 2008 TaxPub(DT) 1028 (Mum-Trib) : Surplus on revaluation of deferred sales-tax liability is not of income nature and accordingly, such item could not form part of book profit for minimum alternate tax provisions. (6) Pal Synthetics Ltd. v. Joint CIT (I. T. A. No. 1310/Mum/03) : Subsidiary receipt which is not a taxable income cannot be subject to book profit for minimum alternate tax provisions. (7) Sutlej Cotton Mills Ltd. v. Asst. CIT (1993) 199 ITR (AT) 164 (Kolkata-ITAT) : 1993 TaxPub(DT) 0798 (Cal-Trib) : Book profit was intended to be confined to business profits and was not intended to include profit on realization of any asset. The capital gains is deemed to be income only for the purpose of section 45 and cannot be deemed to be income for minimum profit on realization of any asset. The capital gains is deemed to be income only for the purpose of section 45 and cannot be deemed to be income for minimum alternate tax provisions. (8) Asst. CIT v. Northern India Theatres P. Ltd. (1996) 218 ITR (AT) 50 (Del) (TM) : 1996 TaxPub(DT) 0709 (Del-Trib) : Profits on sale of fixed assets yield only capital gains and they do not partake the character of business profits. Simply because these were shown as part of trading receipts in the profit and loss account and accounts were audited, nature of receipt cannot change. (9) Oswal Agro Mills Ltd. v. Deputy CIT (1994) 51 ITD 447 (Delhi-Trib) : 1994 TaxPub(DT) 1274 (Del-Trib) : Book profits should include only income from the business activities of the company and not any income which arose on account of capital gains. Accordingly, short-term capital gains as a result of sale of certain Government securities credited to the profit and loss account not to be included for computation of book profit under minimum alternate tax provisions. (10) GKW Ltd. v. Joint CIT (2000) 74 ITD 161 (Cal-Trib) : 2000 TaxPub(DT) 0730 (Cal-Trib) : The object of the Legislature is to consider the profits of the business while computing the book profits of the company and profit on transfer of assets should not be considered while computing the same. (11) Hitkari Fibres Ltd. v. Joint CIT (2004) 90 ITD 654 (Mum) : 2004 TaxPub(DT) 0665 (Mum-Trib) : Waiver of interest written back in the profit and loss account, provision of which was not allowed in earlier years, not to be included in the minimum alternate tax provisions. The minimum alternate tax to be levied on real book profits which has been earned by the companies and not on artificial income. (vii) The department pressed citing Apollo Tyres Ltd. v. CIT (2002) 255 ITR 273 (SC) : 2002 TaxPub(DT) 1371 (SC) citing that no adjustment needs to be carried out in the declared profit and loss account under the Companies Act. The department has to accept the authenticity of the same. (viii) The assessee factually included the gain in the profit and loss account. There was no mention by the statutory auditors as well on the capital gains which is to be noted. (viii) Department cited the below decisions/grounds -- (1) In the case of N. J. Jose and Co. P. Ltd. v. Asst. CIT (2008) 22 ITCL 525 (Ker) : (2010) 321 ITR 132 (Ker) : 2008 TaxPub(DT) 1682 (Ker-HC), the Kerala High Court held that there was no provision for exclusion of such income included in the profit and loss account and the fact that income was exempt under section 54E was not relevant for tax on book profits under section 115J of the Act. (2) In the case of Growth Avenue Securities P. Ltd. v. Deputy CIT (2010) 32 ITCL 81 (Del-Trib) : (2010) 1 ITR 807 (Del-Trib) : 2010 TaxPub(DT) 0523 (Del-Trib), the Income-tax Appellate Tribunal has, while holding that capital gain exempt under section 54EC were to be included in the book profits, also examined the decisions in Sutlej Cotton Mills Ltd. v. Asst. CIT (1993) 199 ITR (AT) 164 (Kolkata-ITAT) : 1993 TaxPub(DT) 0798 (Cal-Trib) and ITO v. Frigsales (India) Ltd. (2005) 4 SOT 376 (Mum) : 2005 TaxPub(DT) 1838 (Mum-Trib) and held them to be not in consonance with the decisions in Apollo Tyres Ltd. (2002) 255 ITR 273 (SC) : 2002 TaxPub(DT) 1371 (SC) and HCL Comnet Systems and Services Ltd. (2008) 23 ITCL 15 (SC) : (2008) 305 ITR 409 (SC) : 2008 TaxPub(DT) 2312 (SC). (ix) The ITAT after elaborately discussing the facts held the inclusion of capital gains under MAT provisions due to the following reasons/citations -- (1) Chapter XII-B is a code by itself having a non-obstante clause. Thus, the inclusion or exclusion unless explicit in MAT provisions cannot be read into the MAT provisions. (2) In Veekaylal Investment Co. P. Ltd. (2001) 249 ITR 597 (Bom) : 2001 TaxPub(DT) 1104 (Bom-HC) the Bombay High Court held that capital gains under section 45 has to be included. (3) In Malayalal Manorama v. CIT (2008) 22 ITCL 15 (SC) : (2008) 300 ITR 251 (SC) : 2008 TaxPub(DT) 1900 (SC) the Apex Court distinguished the inclusion of the capital gains inclusion in the profit and loss account for MAT computation as the assessee had directly taken the capital gains to capital reserve, thus, no adjustment could be done by the Income Tax Officer to the authenticated final accounts. (4) There is no provision to give a reading of exempting the tax exempted/or not taxed items in the MAT provisions. The law cannot be substituted for provisions which do not exist on the statute. (5) The provisions of section 47(iv)/47(v) or section 50 are not exempt provisions but deferment of tax provisions where if conditions are not met, then the same exempted gains can be subject to capital gains under section 47A. 3. Decision in M/s. Shivalik Venture Pvt. Ltd. v. DCIT (Mumbai-ITAT) -- ITA No. 2008/Mum/2012/AY 2009-10 decided on 19-8-2015 : 2015 TaxPub(DT) 3245 (Mum-Trib) (a) Assessee Shivalik Venture, was in the business of development/leasing of commercial complexes and rehabilitation of buildings in slum areas. (b) There was a 100% subsidiary SVI Realtors Pvt. Ltd. to whom development rights were transferred. Exemption under section 47(iv) was applicable on such transfer. (c) There was a note to the final accounts drawn under Companies Act on such transfer to the subsidiary as the gain on such transfer was disclosed in the profit and loss account. (d) Assessee in the course of assessment mentioned that such capital gains was outside the scope of MAT provisions which was not accepted by the Income Tax Officer. (e) Commissioner of Income Tax (Appeals) applied the above case of Rain Commodities v. DCIT (2010) 36 ITCL 2 (Hyd-Trib) : (2010) 131 TTJ 514 (Hyd.-ITAT) : 2010 TaxPub(DT) 2079 (Hyd-Trib) and upheld the ITO's order thus the appeal before the ITAT. (f) The ITAT distinguished the reading of Rain Commodities (supra) for the following reasons. 1. There was no Notes to Accounts in Rain Commodities case which has to be read as part of the authenticated financial statements under the Companies Act for MAT calculation. 2. Because such transfer is exempt under section 47(iv) is outside the scope of "transfer" taxing it in the guise of MAT is not the intent of the law. 3. Though MAT is an alternate tax and a separate code in itself, a purposive reading into the provisions will mean to tax cases which were otherwise exempt. What is exempt under the law cannot be taxed in the MAT provisions as then it would mean a whittling down of the exemption provisions which is already envisaged for incomes under section 10 also being exempt under MAT scope. 4. Once an income is not taxed/exempt, then the same cannot be taxed in some other guise. 5. Notes have to be read with the final accounts as held by the Delhi High Court/Pune Tribunal in -- (i) CIT v. Sain Processing & Wvg. Mills (P.) Ltd. (2009) 26 ITCL 173 (Del-HC) : (2010) 325 ITR 565 (Delhi) : 2010 TaxPub(DT) 0280 (Del-HC) (ii) K.K. Nag Ltd. v. Addl. CIT (2013) 49 ITCL 101 (Pune-Trib) : (2012) 52 SOT 381 (Pune-Trib) : 2013 TaxPub(DT) 0204 (Pune-Trib). 6. Even in Rain Commodities case, the sanctity of the final accounts of the Companies Act was permitted to be disturbed by the ITO if -- (i) P&L A/c was not drawn according to Part II/III of Schedule VI (of Companies Act) provisions. (ii) Accounting policies, standards, depreciation were not correctly applied. In this case, neither of the above exists as the Notes to Accounts is part of the financials and has to be cohesively read with the financials. 7. What is not envisaged as income under section 2(24) by the law by virtue of reading into section 45/47(iv), thus, cannot be taxed in the income-tax law itself. Such a reading was never read or brought in the Rain Commodities case. 8. Items falling under section 10 are exempt from MAT provisions as what is considered as income for normal accounts the legislature, in its wisdom for certain policy reasons, excluded the same from MAT computations. Thus, the legislature tried to maintain parity between tax provisions and book profits under the income-tax law itself through MAT exclusion clauses. In such a scenario, what is not income cannot be taxed into MAT either. (i) In the cases of Malayala Manorama/NJ Jose & Co./Veekaylal Investment Co. P. Ltd., the dealing on capital gains was not of "exempted" or capital gains which were not subject to tax or which did not form part of income as discussed herein. Thus, need to be distinguished here. "We shall now examine the scheme of the provisions of section 115JB of the Act. It is pertinent to note that the provisions of section 10 lists out various types of income, which do not form part of total income. All those items of receipts shall otherwise fall under the definition of the term "income" as defined in section 2(24) of the Act, but they are not included in total income in view of the provisions of section 10 of the Act. Since they are considered as "incomes not included in total income" for some policy reasons, the legislature, in its wisdom, has decided not to subject them to tax under section 115JB of the Act also, except otherwise specifically provided for. Clause (ii) of Explanation 1 to section 115JB specifically provides that the amount of income to which any of the provisions of section 10 (other than the provisions contained in clause (38) thereof) is to be reduced from the Net profit, if they are credited to the Profit and Loss account. The logic of these provisions, in our view, is that an item of receipt which falls under the definition of "income", are excluded for the purpose of computing "Book Profit", since the said receipts are exempted under section 10 of the Act while computing total income. Thus, it is seen that the legislature seeks to maintain parity between the computation of "total income" and "book profit", in respect of exempted category of income. If the said logic is extended further, an item of receipt which does not fall under the definition of "income" at all and hence, falls outside the purview of the computation provisions of Income Tax Act, cannot also be included in "book profit" under section 115JB of the Act. Hence, we find merit in the submissions made by the assessee on this legal point". 4. Final Note Shivalik decision, (supra) may not be the final word on the topic. However, it throws open the door to discussion where something is not "income" as the same was not a transfer can never be taxed in MAT. A subtle distinction also needs to be noted that in case of NJ Jose (2010) 321 ITR 132 (Ker) : 2008 TaxPub(DT) 1682 (Ker-HC) non-inclusion in MAT was due to re-investment benefit under section 54E and not a case of no "transfer". Mr. S. Rajaratnam, the "eminent tax jurist, has commented on this decision in his book Landmark Cases in Direct Tax Laws 5th Edition 2014, page 2241, succinctly as under :-- "In the case before the Kerala High Court in NJ Jose and Co. (P) Ltd. v ACIT, it appears that the assessee availed the benefit of section 54E by re-rolling the sale proceeds by reinvesting the proceeds in approved bonds, so as to be not liable for capital gains in computation of its statutory income. It appears that the assessee had included the same in the P&L account prepared under schedule VI of the Companies Act, 1956, but claimed exclusion of capital gain from its book profits, so that the assessee could not claim the benefit of the decision of Apollo Tyres case. The High Court found that there was no provision for exclusion of such income included in the profit and loss account and that the fact that it was exempt under section 54E would not be relevant for tax on book profits under section 115J. Should the assessee be pinned down to his account, irrespective of the correct treatment under company law or computation of income, according to accounting principles and accounting standards? One may have to await the adjudication of the Supreme Court for a final solution". If assessee had credited the capital gains to capital reserve and invited a qualification from the auditors it could have saved the skin both in NJ Jose's case as well as in Rain Commodities case. But, the fact is also that saving or deferring tax is only an icing on the cake called "business" whose prime intent is making profits.

Tax Publishers

ITO v. Buniyad Developers (P) Ltd. [ITA No. 5290/Del/2016, dt. 21-9-2020] : 2020 TaxPub(DT) 3791 (Del.-Trib.)

Exempted incomes under section 10 whether excluded from MAT computation?

Facts:

Assessee had sold some agricultural lands which was exempt under section 10(1) which was confirmed to be exempt by ITAT. This exempted income was not given effect to for MAT computation thus addition was sustained by assessing officer which was reversed by Commissioner (Appeals) who agreed with the assessee's contention that MAT provisions cannot overrun exempted incomes so they stand exempted even for MAT computation purposes. Aggrieved revenue went in appeal to ITAT.

Held in favour of the assessee that exempted capital gains from sale of agricultural land cannot be brought to tax into MAT.

Applied: ACIT v. Nilgiri Tea Estate Ltd. (2014) 47 taxmann.com 329 (Coch-Trib)

Editorial Note: Reference be made to the following decisions as well.

Decisions favouring assessee where exempted capital gains cannot be taxed under MAT--

M/s. Shivalik Venture Pvt. Ltd. v DCIT (Mumbai-ITAT) [ITA No. 2008/Mum/2012, Assessment Year 2009-10, decided on 19-8-2015] : 2015 TaxPub(DT) 3245 (Mum-Trib)

Malayala Manorama v. CIT (2008) 300 ITR 251 (SC) : 2008 TaxPub(DT) 1900 (SC)

Decisions Against:

Rain Commodities Ltd. v Dy. CIT (2010) 131 TTJ 514 (Hyd.-ITAT) : 2010 TaxPub(DT) 2079 (Hyd-Trib)

Veekay Lal Investment Co. (P) Ltd. (2001) 249 ITR 597 (Bom-HC) : 2001 TaxPub(DT) 1104 (Bom-HC)

The below para cited in Shivalik Venture case supra makes an interesting read --

"We shall now examine the scheme of the provisions of section 115JB of the Act. It is pertinent to note that the provisions of section 10 lists out various types of income, which do not form part of Total income. All those items of receipts shall otherwise fall under the definition of the term "income" as defined in section 2(24) of the Act, but they are not included in total income in view of the provisions of section 10 of the Act. Since they are considered as "incomes not included in total income" for some policy reasons, the legislature, in its wisdom, has decided not to subject them to tax under section 115JB of the Act also, except otherwise specifically provided for. Clause (ii) of Explanation 1 to section 115JB specifically provides that the amount of income to which any of the provisions of section 10 (other than the provisions contained in clause (38) thereof) is to be reduced from the Net profit, if they are credited to the Profit and Loss account. The logic of these provisions, in our view, is that an item of receipt which falls under the definition of "income", are excluded for the purpose of computing "Book Profit", since the said receipts are exempted under section 10 of the Act while computing total income. Thus, it is seen that the legislature seeks to maintain parity between the computation of "total income" and "book profit", in respect of exempted category of income. If the said logic is extended further, an item of receipt which does not fall under the definition of "income" at all and hence falls outside the purview of the computation provisions of Income Tax Act, cannot also be included in "book profit" under section 115JB of the Act. Hence, we find merit in the submissions made by the assessee on this legal point".

ANOTHER OPINION

MAT Provisions Whether Exclude Tax Free/Exempt Capital Gains?

1. MAT provisions

MAT provisions have a clause which exclude exempted incomes or incomes in section 10 from MAT applicability if such income is credited to the profit and loss account (Explanation 1, clause (ii) of section 115JB(1). The intent of this provision is what is not income cannot be taxed in MAT.

Can the above provision be read to cover other exempted or income which are not considered as "income" for certain reasons of the Income Tax Act?

2. Rain Commodities Ltd. v. Dy. CIT (2010) 36 (II) ITCL 2 (Hyd-Trib) : (2010) 131 TTJ 514 (Hyd-Trib) : 2010 TaxPub(DT) 2079 (Hyd-Trib)

This was a Special Bench decision of ITAT decision. The facts being as under :--

(a) Rain Commodities Ltd. had a 100% subsidiary called Rain Industries Ltd. By a scheme of reconstruction arrangement thru the court the holding company transferred all assets and liabilities to the subsidiary.

(b) The assets were more than the liabilities in the transfer, thus, there was a capital gain on such transfer.

(c) By virtue of section 47(iv) of the Income Tax Act transfer by a holding to its 100% subsidiary is not treated as a transfer, thus, exempt from capital gains tax.

(d) While drawing the final accounts in the hands of the holding company Rain Commodities, the capital gain on the transfer of net assets was included in the profit and loss account.

(e) The return was filed and assessed under section 143(3) after which the Commissioner of Income Tax invoked power to revise under section 263 whereby MAT provisions were called in by the Commissioner of Income Tax thereby adding back the capital gain of transfer to subsidiary (which was treated as an "extraordinary item" + due to section 47(vi) applicability) which assessee felt was outside the scope of MAT.

(f) Assessee's contention was if the gain on the transfer to subsidiary was excluded in MAT calculation, there will be no book profits at all falling outside the scope of MAT.

(g) Assessee's grounds were --

(i) MAT provisions were introduced to tax book profits to tackle issue of companies who had book profits more than taxable profits.

(ii) Sutlej Cotton Mills Ltd. v. ACIT (1993) 199 ITR (AT) 164 (Kolkata-ITAT) : 1993 TaxPub(DT) 0798 (Cal-Trib) Special Bench decision was pressed in to explain purposive interpretation of section 115J introduction consequential to removal of section 80VVA.

(iii) Only book profits can be taxed under MAT, thus, no inclusion of any profit on realization/sale of asset was required to be called for under MAT provisions.

(iv) The reading of section 115JB is analogous to section 115J reading as it then existed in principle.

(v) Similar reading of exclusion of profit on sale of assets under MAT was also in Asst. CIT v. Northern India Theatres (P) Ltd. (1996) 218 ITR (AT) 50 (Del) (TM) : 1996 TaxPub(DT) 0709 (Del-Trib). Such inclusion will not mean that the profits are computed according to Part II/III of Schedule VI of the Companies Act which is mandated by MAT provisions.

(vi) Below were the decisions cited by the assessee with the respective grounds.

(1) Cadell Weaving Mill Co. (P) Ltd. v. CIT (2001) 249 ITR 265 (Bom) : 2001 TaxPub(DT) 1093 (Mum-Trib) approved by the Supreme Court in CIT v. D.P. Sandhu Bros. Chembur (P) Ltd. (2005) 273 ITR 1 (SC) : 2005 TaxPub(DT) 1286 (SC) : Income under section 2(24)(vi) shall include only capital gains chargeable to tax under section 45 and not all capital gains, i.e., capital gains not chargeable to tax under section 45, fall outside the definition of income under section 2(24).

(2) Asst. CIT v. Mukund Ltd. (I.T.A. No. 304/Mum/2004): Capital gains on sale to 100 per cent, subsidiary not chargeable to tax under section 47(iv) of the Act cannot be subjected to tax under the minimum alternate tax provisions.

(3) ITO v. Suraj Jewellery India Ltd. (2008) 22 ITCL 288 (Mum-Trib) : (2008) 21 SOT 79 (Mum-Trib) : 2008 TaxPub(DT) 1126 (Mum-Trib) : Capital gains on sale to holding company not chargeable to tax under section 47(iv) of the Act cannot be subjected to tax under minimum alternate tax provisions.

(4) ITO v. Frigsales (I) Ltd. (2005) 4 SOT 376 (Mum) : 2005 TaxPub(DT) 1838 (Mum-Trib) : Capital gains not chargeable to tax under section 50 of the Act cannot be subjected to tax under the minimum alternate tax provisions.

(5) Oriental Containers Ltd. v. Joint CIT (2008) 20 ITCL 177 (Mum-Trib) : (2007) 19 SOT 30 (Mum) : 2008 TaxPub(DT) 1028 (Mum-Trib) : Surplus on revaluation of deferred sales-tax liability is not of income nature and accordingly, such item could not form part of book profit for minimum alternate tax provisions.

(6) Pal Synthetics Ltd. v. Joint CIT (I. T. A. No. 1310/Mum/03) : Subsidiary receipt which is not a taxable income cannot be subject to book profit for minimum alternate tax provisions.

(7) Sutlej Cotton Mills Ltd. v. Asst. CIT (1993) 199 ITR (AT) 164 (Kolkata-ITAT) : 1993 TaxPub(DT) 0798 (Cal-Trib) : Book profit was intended to be confined to business profits and was not intended to include profit on realization of any asset. The capital gains is deemed to be income only for the purpose of section 45 and cannot be deemed to be income for minimum profit on realization of any asset. The capital gains is deemed to be income only for the purpose of section 45 and cannot be deemed to be income for minimum alternate tax provisions.

(8) Asst. CIT v. Northern India Theatres P. Ltd. (1996) 218 ITR (AT) 50 (Del) (TM) : 1996 TaxPub(DT) 0709 (Del-Trib) : Profits on sale of fixed assets yield only capital gains and they do not partake the character of business profits. Simply because these were shown as part of trading receipts in the profit and loss account and accounts were audited, nature of receipt cannot change.

(9) Oswal Agro Mills Ltd. v. Deputy CIT (1994) 51 ITD 447 (Delhi-Trib) : 1994 TaxPub(DT) 1274 (Del-Trib) : Book profits should include only income from the business activities of the company and not any income which arose on account of capital gains. Accordingly, short-term capital gains as a result of sale of certain Government securities credited to the profit and loss account not to be included for computation of book profit under minimum alternate tax provisions.

(10) GKW Ltd. v. Joint CIT (2000) 74 ITD 161 (Cal-Trib) : 2000 TaxPub(DT) 0730 (Cal-Trib) : The object of the Legislature is to consider the profits of the business while computing the book profits of the company and profit on transfer of assets should not be considered while computing the same.

(11) Hitkari Fibres Ltd. v. Joint CIT (2004) 90 ITD 654 (Mum) : 2004 TaxPub(DT) 0665 (Mum-Trib) : Waiver of interest written back in the profit and loss account, provision of which was not allowed in earlier years, not to be included in the minimum alternate tax provisions. The minimum alternate tax to be levied on real book profits which has been earned by the companies and not on artificial income.

(vii) The department pressed citing Apollo Tyres Ltd. v. CIT (2002) 255 ITR 273 (SC) : 2002 TaxPub(DT) 1371 (SC) citing that no adjustment needs to be carried out in the declared profit and loss account under the Companies Act. The department has to accept the authenticity of the same.

(viii) The assessee factually included the gain in the profit and loss account. There was no mention by the statutory auditors as well on the capital gains which is to be noted.

(viii) Department cited the below decisions/grounds --

(1) In the case of N. J. Jose and Co. P. Ltd. v. Asst. CIT (2008) 22 ITCL 525 (Ker) : (2010) 321 ITR 132 (Ker) : 2008 TaxPub(DT) 1682 (Ker-HC), the Kerala High Court held that there was no provision for exclusion of such income included in the profit and loss account and the fact that income was exempt under section 54E was not relevant for tax on book profits under section 115J of the Act.

(2) In the case of Growth Avenue Securities P. Ltd. v. Deputy CIT (2010) 32 ITCL 81 (Del-Trib) : (2010) 1 ITR 807 (Del-Trib) : 2010 TaxPub(DT) 0523 (Del-Trib), the Income-tax Appellate Tribunal has, while holding that capital gain exempt under section 54EC were to be included in the book profits, also examined the decisions in Sutlej Cotton Mills Ltd. v. Asst. CIT (1993) 199 ITR (AT) 164 (Kolkata-ITAT) : 1993 TaxPub(DT) 0798 (Cal-Trib) and ITO v. Frigsales (India) Ltd. (2005) 4 SOT 376 (Mum) : 2005 TaxPub(DT) 1838 (Mum-Trib) and held them to be not in consonance with the decisions in Apollo Tyres Ltd. (2002) 255 ITR 273 (SC) : 2002 TaxPub(DT) 1371 (SC) and HCL Comnet Systems and Services Ltd. (2008) 23 ITCL 15 (SC) : (2008) 305 ITR 409 (SC) : 2008 TaxPub(DT) 2312 (SC).

(ix) The ITAT after elaborately discussing the facts held the inclusion of capital gains under MAT provisions due to the following reasons/citations --

(1) Chapter XII-B is a code by itself having a non-obstante clause. Thus, the inclusion or exclusion unless explicit in MAT provisions cannot be read into the MAT provisions.

(2) In Veekaylal Investment Co. P. Ltd. (2001) 249 ITR 597 (Bom) : 2001 TaxPub(DT) 1104 (Bom-HC) the Bombay High Court held that capital gains under section 45 has to be included.

(3) In Malayalal Manorama v. CIT (2008) 22 ITCL 15 (SC) : (2008) 300 ITR 251 (SC) : 2008 TaxPub(DT) 1900 (SC) the Apex Court distinguished the inclusion of the capital gains inclusion in the profit and loss account for MAT computation as the assessee had directly taken the capital gains to capital reserve, thus, no adjustment could be done by the Income Tax Officer to the authenticated final accounts.

(4) There is no provision to give a reading of exempting the tax exempted/or not taxed items in the MAT provisions. The law cannot be substituted for provisions which do not exist on the statute.

(5) The provisions of section 47(iv)/47(v) or section 50 are not exempt provisions but deferment of tax provisions where if conditions are not met, then the same exempted gains can be subject to capital gains under section 47A.

3. Decision in M/s. Shivalik Venture Pvt. Ltd. v. DCIT (Mumbai-ITAT) -- ITA No. 2008/Mum/2012/AY 2009-10 decided on 19-8-2015 : 2015 TaxPub(DT) 3245 (Mum-Trib)

(a) Assessee Shivalik Venture, was in the business of development/leasing of commercial complexes and rehabilitation of buildings in slum areas.

(b) There was a 100% subsidiary SVI Realtors Pvt. Ltd. to whom development rights were transferred. Exemption under section 47(iv) was applicable on such transfer.

(c) There was a note to the final accounts drawn under Companies Act on such transfer to the subsidiary as the gain on such transfer was disclosed in the profit and loss account.

(d) Assessee in the course of assessment mentioned that such capital gains was outside the scope of MAT provisions which was not accepted by the Income Tax Officer.

(e) Commissioner of Income Tax (Appeals) applied the above case of Rain Commodities v. DCIT (2010) 36 ITCL 2 (Hyd-Trib) : (2010) 131 TTJ 514 (Hyd.-ITAT) : 2010 TaxPub(DT) 2079 (Hyd-Trib) and upheld the ITO's order thus the appeal before the ITAT.

(f) The ITAT distinguished the reading of Rain Commodities (supra) for the following reasons.

1. There was no Notes to Accounts in Rain Commodities case which has to be read as part of the authenticated financial statements under the Companies Act for MAT calculation.

2. Because such transfer is exempt under section 47(iv) is outside the scope of "transfer" taxing it in the guise of MAT is not the intent of the law.

3. Though MAT is an alternate tax and a separate code in itself, a purposive reading into the provisions will mean to tax cases which were otherwise exempt. What is exempt under the law cannot be taxed in the MAT provisions as then it would mean a whittling down of the exemption provisions which is already envisaged for incomes under section 10 also being exempt under MAT scope.

4. Once an income is not taxed/exempt, then the same cannot be taxed in some other guise.

5. Notes have to be read with the final accounts as held by the Delhi High Court/Pune Tribunal in --

(i) CIT v. Sain Processing & Wvg. Mills (P.) Ltd. (2009) 26 ITCL 173 (Del-HC) : (2010) 325 ITR 565 (Delhi) : 2010 TaxPub(DT) 0280 (Del-HC)

(ii) K.K. Nag Ltd. v. Addl. CIT (2013) 49 ITCL 101 (Pune-Trib) : (2012) 52 SOT 381 (Pune-Trib) : 2013 TaxPub(DT) 0204 (Pune-Trib).

6. Even in Rain Commodities case, the sanctity of the final accounts of the Companies Act was permitted to be disturbed by the ITO if --

(i) P&L A/c was not drawn according to Part II/III of Schedule VI (of Companies Act) provisions.

(ii) Accounting policies, standards, depreciation were not correctly applied.

In this case, neither of the above exists as the Notes to Accounts is part of the financials and has to be cohesively read with the financials.

7. What is not envisaged as income under section 2(24) by the law by virtue of reading into section 45/47(iv), thus, cannot be taxed in the income-tax law itself. Such a reading was never read or brought in the Rain Commodities case.

8. Items falling under section 10 are exempt from MAT provisions as what is considered as income for normal accounts the legislature, in its wisdom for certain policy reasons, excluded the same from MAT computations. Thus, the legislature tried to maintain parity between tax provisions and book profits under the income-tax law itself through MAT exclusion clauses. In such a scenario, what is not income cannot be taxed into MAT either.

(i) In the cases of Malayala Manorama/NJ Jose & Co./Veekaylal Investment Co. P. Ltd., the dealing on capital gains was not of "exempted" or capital gains which were not subject to tax or which did not form part of income as discussed herein. Thus, need to be distinguished here.

"We shall now examine the scheme of the provisions of section 115JB of the Act. It is pertinent to note that the provisions of section 10 lists out various types of income, which do not form part of total income. All those items of receipts shall otherwise fall under the definition of the term "income" as defined in section 2(24) of the Act, but they are not included in total income in view of the provisions of section 10 of the Act. Since they are considered as "incomes not included in total income" for some policy reasons, the legislature, in its wisdom, has decided not to subject them to tax under section 115JB of the Act also, except otherwise specifically provided for. Clause (ii) of Explanation 1 to section 115JB specifically provides that the amount of income to which any of the provisions of section 10 (other than the provisions contained in clause (38) thereof) is to be reduced from the Net profit, if they are credited to the Profit and Loss account. The logic of these provisions, in our view, is that an item of receipt which falls under the definition of "income", are excluded for the purpose of computing "Book Profit", since the said receipts are exempted under section 10 of the Act while computing total income. Thus, it is seen that the legislature seeks to maintain parity between the computation of "total income" and "book profit", in respect of exempted category of income. If the said logic is extended further, an item of receipt which does not fall under the definition of "income" at all and hence, falls outside the purview of the computation provisions of Income Tax Act, cannot also be included in "book profit" under section 115JB of the Act. Hence, we find merit in the submissions made by the assessee on this legal point".

4. Final Note

Shivalik decision, (supra) may not be the final word on the topic. However, it throws open the door to discussion where something is not "income" as the same was not a transfer can never be taxed in MAT. A subtle distinction also needs to be noted that in case of NJ Jose (2010) 321 ITR 132 (Ker) : 2008 TaxPub(DT) 1682 (Ker-HC) non-inclusion in MAT was due to re-investment benefit under section 54E and not a case of no "transfer". Mr. S. Rajaratnam, the "eminent tax jurist, has commented on this decision in his book Landmark Cases in Direct Tax Laws 5th Edition 2014, page 2241, succinctly as under :--

"In the case before the Kerala High Court in NJ Jose and Co. (P) Ltd. v ACIT, it appears that the assessee availed the benefit of section 54E by re-rolling the sale proceeds by reinvesting the proceeds in approved bonds, so as to be not liable for capital gains in computation of its statutory income. It appears that the assessee had included the same in the P&L account prepared under schedule VI of the Companies Act, 1956, but claimed exclusion of capital gain from its book profits, so that the assessee could not claim the benefit of the decision of Apollo Tyres case. The High Court found that there was no provision for exclusion of such income included in the profit and loss account and that the fact that it was exempt under section 54E would not be relevant for tax on book profits under section 115J. Should the assessee be pinned down to his account, irrespective of the correct treatment under company law or computation of income, according to accounting principles and accounting standards? One may have to await the adjudication of the Supreme Court for a final solution".

If assessee had credited the capital gains to capital reserve and invited a qualification from the auditors it could have saved the skin both in NJ Jose's case as well as in Rain Commodities case. But, the fact is also that saving or deferring tax is only an icing on the cake called "business" whose prime intent is making profits.