MAT computation excludes capital receipts from surrendered gift shares; legitimate off-market sales between group companies allowed under section 115JB

The ITAT Delhi ruled in favor of the assessee on two key issues. First, regarding MAT computation under section 115JB, the tribunal held that receipt from surrender of gift shares, being a capital receipt not covered under Explanation 1 to section 115JB(2), cannot be added back to book profits. The AO lacked authority to adjust audited financial statements beyond specifically mentioned items. Second, concerning disallowance of long-term capital loss, the tribunal found the off-market sale transaction between group companies at averaged market price legitimate, rejecting revenue's claim of sham transaction and allowing the capital loss claim.

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Issues Involved:
1. Adjustment in Book Profit under Section 115JB of the Income-tax Act, 1961.
2. Disallowance of Long Term Capital Loss.

Summary:

Issue 1: Adjustment in Book Profit under Section 115JB of the Income-tax Act, 1961

The assessee contested the adjustment of Rs. 2,12,31,641/- in Book Profit for the purpose of Section 115JB of the Act, arguing that the CIT(A) failed to consider the facts and relevant Supreme Court decisions. The Tribunal noted that the assessee had credited the amount directly to the Reserve and Surplus account without routing it through the Profit & Loss account. The assessee argued that the accounts were prepared per the Companies Act and approved by shareholders, thus the AO could not alter them except for items in Explanation 1 to Section 115JB(2). The Tribunal upheld the assessee's position, referencing the Supreme Court's decision in Apollo Tyres Ltd., stating that the receipt was a capital receipt and correctly credited to Reserves and Surplus. The Tribunal concluded that the AO could not tax this amount under Section 115JB in AY 2015-16, as the revenue had missed the opportunity to adjust it in AY 2012-13. Thus, the ground raised by the assessee was allowed.

Issue 2: Disallowance of Long Term Capital Loss

The assessee challenged the disallowance of Rs. 11,04,54,306/- in Long Term Capital Loss. The AO had disallowed this loss, suspecting the transaction to be a sham as the shares were sold to a group company at a price lower than the market price. The Tribunal examined the facts, noting that the assessee sold shares in off-market transactions to avoid market disruption due to the large volume of shares. The sale price was based on the average market rate over the previous year. The Tribunal found no error in the assessee's method and held that the transactions were genuine. The Tribunal directed the AO to allow the long-term capital loss and permit it to be carried forward. Consequently, the ground raised by the assessee was allowed.

General Grounds:

Grounds 1 and 4 raised by the assessee were deemed general and did not require specific adjudication.

Conclusion:

The appeal of the assessee was allowed, with the Tribunal ruling in favor of the assessee on both issues. The order was pronounced in the open court on 05/03/2024.

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