The Delhi High Court has upheld the decision of Income Tax Appellate Tribunal (ITAT) in deleting the addition worth Rs. 247 crores on account of disallowance of long term capital gains (LTCG) exemption.

The bench of Acting Chief Justice Vibhu Bakhru and Justice Swarana Kanta Sharma has observed that LTCG are excluded from the total income of an assessee under Section 10(38) of the  Income Tax Act, it is required to be taken into account in computing a book profit and income tax payable under Section 115JB of the Income Tax Act.

The respondent/Assessee is a company incorporated under the Companies Act, 1956. The Assessee had filed its return of income for the AY 2015-16 declaring the loss of Rs. 1,03,42,687. 

The Assessee filed its revised return of income subsequently on 28.03.2017, reflecting the capital loss of ₹25,84,43,953/-, and a book loss of ₹90,74,679/- for the purpose of calculating Minimum Alternate Tax (MAT) under Section 115JB of the Income Tax Act.

The department had preferred the appeal against the order dated 20.01.2020 passed by the Commissioner of Income Tax (Appeals) (CIT(A)) in respect of the assessment year (AY) 2015-16, by which the CIT(A) had held that the Assessee was entitled to exemption of an amount of Rs. 2,47,52,73,951 under Section 10 (38) of the Income Tax Act, which was denied by the Assessing Officer (AO).

According to the department, the decision is erroneous as the Long Term Capital Gains (hereafter LTCG), which the Assessee claimed were exempted under Section 10(38) of the Act, were not included in the Assessee’s profit and loss account for the relevant period. Therefore, the gains were excluded from the calculations of the book profits under Section 115JB. The CIT(A) found no merit in the contention. The ITAT had found no fault with the decision of the CIT(A) and rejected the department’s appeal.

The plain language of proviso to Section 10(38) of the Act does not support the Revenue’s contention. The import of proviso is that notwithstanding that LTCG are excluded from the total income of an assessee under Section 10(38) of the Act, the same are required to be taken into account in computing a book profit and income tax payable under Section 115JB.

The legislative history of the proviso would indicate that it was introduced by virtue of the Finance Act, 2006. The inclusion of the proviso was corresponding to the amendments to the Explanation 1 of Section 115JB of the Act. By virtue of the Finance Act, 2006, the Explanation to Section 115JB of the Act was amended and expenditure incurred in respect of the income exempt under Section 10 of the Act (with the exceptions of Section 10(38) of the Act) was excluded for the purposes of calculation of book profits and MAT under Section 115JB of the Act. 

In other words, the expenditure incurred for earning such income as was exempt from taxation (excluded from taxable income) by virtue of Section 10(38) of the Act, was required to be accounted for as expenditure for determining the book profits. 

Correspondingly, income under Section 10(38) was also included as a part of the book profits but other incomes covered under Section 10 of the Act were excluded.

The court held that Proviso to Section 10(38) of the Income Tax Act cannot be read in the reverse to mean that if the gains are not included as book profits under Section 115JB, the same are liable to be included as income for the purposes of assessment to tax under the normal provisions, notwithstanding that the gains are required to be excluded from income chargeable to tax under Section 10(38) of the Income Tax Act.

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Case Details

Case Title: The Pr Commissioner Of Income Tax-4 New Delhi Versus M/S Hespera Reality Pvt. Ltd

Case No.:  ITA 468/2024

Date: 24.12.2024

Counsel For Appellant: Shlok Chandra

Counsel For Respondent: Rohit Jain