Introduction
In the case of Principal Commissioner of Income Tax (PCIT) v. Hespera Realty Pvt. Ltd.[i], the Delhi High Court has adjudicated upon a significant issue pertaining to the exemption of long term capital gains (‘LTCG’) under s. 10(38) of the Income-tax Act, 1961 (‘Act’), and its interplay with the computation of minimum alternate tax (‘MAT’) under s. 115JB of the Act. The captioned matter discusses whether LTCG is excluded from taxable income under s. 10(38) of the Act could still be exempt even if it is not reflected in the book profits for MAT purposes. Considering that the aforementioned case would have certain implications on the interpretation of exemptions and book profit calculations, it serves as an important precedent in tax jurisprudence.
Brief Facts
The Respondent, a company incorporated under the Companies Act, 1956, filed its return for the assessment year (‘AY’) 2015-16, declaring LTCG of approximately Rs. 280 crores arising from the sale of shares in India Bulls Housing Finance Ltd. The Respondent claimed that the gains were exempt under s. 10(38) of the Act as they were earned by companies that were merged into Respondent in August 2014 as part of a court-approved scheme. An addition of approximately Rs. 247 crores was made by the Assessing Officer (‘AO’) to the Respondent’s taxable income, arguing that the LTCG, which had not been included in the book profits for MAT computation under s. 115JB could not be exempt under s. 10(38).
The Commissioner of Income Tax (Appeals) [‘CIT(A)’] had ruled in favour of the Respondent and allowed such exemption. However, the CIT(A) upheld the inclusion of the LTCG in book profits for MAT purposes. Such a decision of the CIT(A) was reaffirmed by the Income Tax Appellate Tribunal. Aggrieved by such reaffirmation, Revenue filed an appeal before the High Court and raised the issue of whether LTCG, which was excluded from book profits, should still be exempt under s. 10(38).
Held
The High Court dismissed the Revenue’s appeal in the absence of having found any substantial question of law. It furthered to re-affirm the order passed by CIT(A) and the Tribunal while making the following observations.
The LTCG is exempt under s. 10(38) of the Act does not stand affected by its exclusion from book profits for MAT purposes under s. 115JB of the Act. It clarified that the proviso to s. 10(38) ensures LTCG is included in MAT calculations but does not override the exemption provided to it under normal tax provisions.
While elaborating on the legislative intent behind the proviso, the Court observed that it was not to alter the treatment of exempt LTCG under s. 10(38) but to ensure its appropriate inclusion in MAT computations.
Our Analysis
This judgment is significant in reinforcing the principle that exemptions under s. 10(38) are independent of MAT computations under s. 115JB. The court’s interpretation delineates the importance of respecting the plain language of statutory provisions and their legislative intent. By distinguishing the computation of taxable income under normal provisions from MAT calculations, the ruling ensures that taxpayers are not penalized for procedural inconsistencies unrelated to statutory exemptions.
Additionally, the court’s reliance on legislative history demonstrates a balanced judicial approach, ensuring that the introduction of the proviso to s. 10(38) of the Act aligns with the broader purpose of fair tax administration. This ruling not only protects taxpayers’ rights to claim legitimate exemptions but also imposes a responsibility on tax authorities to maintain procedural rigour and avoid conflating unrelated provisions. It sets a clear precedent for future cases, ensuring consistency and clarity in the application of tax laws. This judgment is a vital affirmation of judicial oversight in maintaining fairness and accountability in tax assessments.
End Note
[i] 2024 SCC OnLine Del 9176.
Authored by Pranav Dabas, Advocate at Metalegal Advocates. The views expressed are personal and do not constitute legal opinions.