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Minimum Alternate Tax Now Applies to Profits from Transfer of Capital Assets
The Special Bench of the Income Tax Appellate Tribunal constituted at Hyderabad has delivered a landmark ruling in the case of Rain Commodities Limited holding that profits arising from transfer of capital assets between a Holding Company and its Subsidiary cannot be excluded from the computation of book profits for levy of Minimum Alternate Tax ("MAT"), even though such profits are not liable to capital gains tax under the normal provisions of the Income-tax Act, 1961 ("Act"). Taxand India examines this significant ruling.
The taxpayer Company transferred certain capital assets to its 100 percent Subsidiary. The profit from the transfer was classified as an extraordinary item and was not included in the computation of book profit as such profits were not chargeable to tax under the normal provisions due to a specific exemption for such transfers. The Revenue rejected this claim and included these profits in the computation of book profits for the levy of MAT.
Since, contrary rulings were available from different benches of the Tribunal, a Special Bench was constituted to decide on whether the profits arising from transfer of capital assets by a holding company to its 100 percent subsidiary, which was not chargeable to tax under the normal provisions of the Act could be included in the computation of book profits for levy of MAT.
The Special Bench observed that when the taxpayer had included the capital gains in the Profit and Loss account prepared as per the Companies Act, 1956, it cannot be reduced from book profits. The provisions exempting the transfer was relevant only for the purpose of computation of income under the normal provisions of the Act and it was not relevant for the preparation of Profit and Loss account. Further, the exemption granted for the transfers as in the case of the taxpayer was not a total exemption but could be later brought to tax, if certain conditions were not complied with. The Special Bench held that nothing could be excluded from the net profit as per Profit and Loss account unless it was specifically provided for. The legislature has made specific provisions wherever it wanted to exclude an item of income from the purview of book profits. Since no such specific provision has been made for reducing the profits arising from transfer of capital assets, the Tribunal ruled that such profits were to be included for the purpose of levy of MAT.
This ruling is an important one and it reaffirms the principle upheld by the Supreme Court in the case of Apollo Tyres Ltd that the Profit and Loss account prepared in accordance with the Companies Act, 1956 cannot be adjusted except to the extent allowed under the Act. This decision would also be relevant in other corporate reorganisations involving transfer of capital assets between a Holding Company and its Subsidiary Companies.
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