The Delhi High Court recently held that gains accrued from capital assets entitled to statutory exemption that have not been included to ‘book profits’ under Section 115JB of the Income Tax Act, 1961 are to be included to taxable income.
An Income Tax Appeal was filed by the Principal Commissioner Of Income Tax-4 New Delhi impugning the order passed by the Commissioner of Income Taxes (Appeals) entitling the Respondent M/s Hespera Reality Pvt. Ltd. to avail exemption of an amount of ₹2,47,52,73,951/- under Section 10 (38) of the Income Tax Act, 1961, for the Assessment Year (A.Y.) 2015-16, which was previously denied by the Assessing Officer (AO).
The Revenue contested the exemption permission claiming that Long Term Capital Gains (LTCG) had not been duly included in the Assessee’s profit and loss account (P&L) and that the gains were excluded from the calculations of the book profits under Section 115JB – the contentions were rejected by both, the CIT(A) and Income Tax Appellate Tribunal (ITAT) against which the present appeal has been preferred by the Revenue.
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The primary question of law sought to be addressed by the Delhi High Court was whether the ITAT was justified in deleting the addition of Rs.247,52,73,951/- made by the AO citing disallowance of exemption of LTCG claimed under Section 10(38) of the Act without appreciating the findings of the AO.
The Division Bench of Acting Chief Justice Vibhu Bakhru and Justice Swarana Kanta Sharma observed that the Revenue had abstained from contesting the Assessee’s treatment of ₹2,47,52,73,951/- as capital reserves in the book profits in the appeal before the ITAT. Hence, the present appeal may also be confined to the question whether the AO had erred in including the said amount to the income of Assessee under the normal provisions of the Income Tax Act.
The Bench observed that the proviso to Section 10(38) of the Act introduced by the Finance Act, 2006 to clarify that income from capital gains on certain assets that are excluded from income under Section 10(38) are to be included while computing book profits for the purposes of Section 115JB of the Act.
Noting that Section 10(38) 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.
Consequently, the Delhi High Court rejected the appeal of the Revenue, finding no fault with the decisions of the CIT(A) and ITAT.
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