Proviso to Section 10(38) of the Act cannot be read in the reverse to mean that if the gains are not included as book profits under Section 115JB of the Act, the exemption u/s 10(38) can be denied – High Court
In a recent judgment, Hon’ble High Court has held that proviso to Section 10(38) of the Income Tax Act, 1961 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 Act.
ABCAUS Case Law Citation:
4360 (2024) (12) abcaus.in HC
In the instant case, the Revenue had challenged the order passed by the Income Tax Appellate Tribunal (ITAT) in dismissing the appeal of the Revenue holding that Assessing Officer had wrongly interpreted the relevant provision with the proviso to section 10(38) of the Income Tax Act, 1961 (the Act)
The respondent assessee was a company incorporated under the Companies Act, 1956 and was enaged in real estate business. Under a Scheme of Arrangement under Section 391 to 394 of the Companies Act, 1956, five other companies were merged with the assessee with effect from the appointed date i.e. 01.08.2014 which fell in the relevant financial year. The said scheme was subsequently approved by the High Court.
The said five companies held shares in another company. After the appointed date, but during the financial year three of the aforesaid companies sold the shares resulting in LTCG in the hands of the said amalgamating company. Since the said amalgamating companies were merged with the Assessee during the relevant financial year, the income earned from the said transaction of the sale of shares, were required to be assessed in the hands of the Assessee.
The sale of the said shares resulted in LTCG amounting to ₹ 2,80,62,54,440/-, which the assessee claimed was exempted by virtue of Section 10(38) of the Act. Out of the aforesaid sum, the assessee accounted for ₹33,09,80,449/- as profits, however, carried the balance amount of ₹2,47,52,73,951/- directly to the capital reserve as the same represented the difference in the book value of investment in said shares held on 31.07.2014 and the book value of those shares held after 01.08.2014, that is, post the amalgamation date.
The AO was of the view that the said amount of ₹ 2,47,52,73,951/- was required to be added to book profits for the purposes of Section 115JB of the Act. Additionally, the AO held that the exemption under Section 10(38) of the Act was not available in respect of the said amount.
Aggrieved by the assessment order, the assessee preferred an appeal before the CIT(A) who held that the entire amount of LTCG was not liable to be included as income chargeable to tax by virtue of Section 10(38) of the Act. Accordingly, the CIT(A) deleted the disallowance of ₹2,47,52,73,951/-. However, the CIT(A) did not interfere with the AO’s decision regarding the computation of book profits for the purpose of determination of MAT under Section 115JB of the Act.
The Revenue appealed the decision of the CIT(A) to exclude the capital gains from the income of the assessee, by virtue of Section 10(38) of the Act, before the ITAT which rejected the appeal by the impugned order.
Before the Hon’ble High Court it was contended on behalf of the Revenue that the assessee was not entitled to claim any exemption under Section 10(38) of the Act in respect of LTCG that were not taken into account for computing book profits and income tax (MAT) payable under Section 115 JB of the Act. It was contended that ITAT had failed to appreciate that the assessee had taken the sale value and book value of the shares for the purpose of computing LTCG, which were exempted under Section 10(38) of the Act, but had not included the said gains as book profits for the purpose of computing profits under Section 115JB of the Act.
The Revenue contended that the income earned by way of LTCG from the shares cannot be excluded from taxable income under Section 10(38) of the Act by virtue of proviso to sub-section. It was contended that the proviso expressly provides that the LTCG would be taken into account in computing book profits payable under Section 115 JB of the Act and the fact that the assessee had not included LTCG as book profits for the purpose of Section 115 JB of the Act, would disentitle it to any benefit under Section 10(38) of the Act.
The Hon’ble High Court observed that Revenue was conflating the question whether LTCG arising out of the sale of shares were required to be included as book profits for the purposes of Section 115JB of the Act, and whether the same were liable to be excluded from the income chargeable to tax by virtue of Section 10(38) of the Act, under the normal provisions of the Act.
The Hon’ble High Court observed that 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 of the Act.
The Hon’ble High Court observed that the legislative history of the said proviso would indicate that it was introduced by virtue of the Finance Act, 2006. The inclusion of the said 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) of the Act was also included as a part of the book profits but other incomes covered under Section 10 of the Act were excluded.
The Hon’ble High Court further observed that it is apparent from the notes on clauses to the Finance Bill, 2006 that the proviso to Section 10(38) of the Act was added by virtue of the Finance Act, 2006 to abundantly clarify that the income from capital gains on certain assets, which are excluded from the income under Section 10(38) of the Act, would nonetheless, be included in computing book profits for the purposes of Section 115JB of the Act.
The Hon’ble High Court held that Proviso to Section 10(38) of the Act cannot be read in the reverse to mean that if the gains are not included as book profits under Section 115JB of the Act, 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 Act.
Accordingly, the Hon’ble High Court opined that no substantial question of law arises in the present appeal and same was dismissed.
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