Facts of the Case

The respondent-assessee sold a parcel of land along with constructed houses during Assessment Year 2006-07 and claimed that the gains were exempt from taxation on the ground that the property constituted rural agricultural land, which does not qualify as a “capital asset” under Section 2(14) of the Income-tax Act, 1961. It was undisputed that the land fell outside the scope of Section 2(14)(iii) and was rural in nature.

The Assessing Officer did not invoke Section 115JB (Minimum Alternate Tax). During appellate proceedings, the Revenue sought to raise the applicability of MAT on the ground that profits reflected in the profit and loss account could still form part of “book profits.” The Income Tax Appellate Tribunal declined to entertain this ground, noting that it had neither been raised before the Assessing Officer nor in the original appeal. 

Issues Involved

  1. Whether profits arising from the sale of rural agricultural land—though exempt under normal provisions—can be considered while computing book profits under Section 115JB.
  2. Whether the ITAT was justified in refusing to admit an additional legal ground raised by the Revenue regarding MAT applicability.
  3. Whether income from transfer of rural agricultural land constitutes “agricultural income” for the purposes of MAT computation.

 Petitioner’s (Revenue’s) Arguments

  • Section 115JB provides a special mechanism for taxation based on book profits, independent of the regular computation of income.
  • Even if income is exempt under Section 10, adjustments under Explanation 1 to Section 115JB may require inclusion or exclusion depending on statutory provisions.
  • Amendments to Section 2(1A) clarified that income arising from transfer of agricultural land may not always qualify as agricultural income.
  • Judicial precedents, including decisions interpreting agricultural income and capital gains, support the proposition that gains from land transfer may not necessarily be exempt for MAT purposes.
  • The issue raised was purely legal and could be considered at any stage. 

Respondent’s (Assessee’s) Arguments

  • The MAT issue had not been raised during assessment or in the original grounds of appeal; therefore, the Tribunal correctly refused to entertain it.
  • Gains from sale of rural agricultural land do not fall within the definition of “capital asset” and hence remain outside the tax net.
  • Judicial authorities establish that only urban agricultural land falls within capital gains taxation; rural agricultural land remains exempt.
  • Consequently, such exempt income cannot be added back while computing book profits under Section 115JB.

Court Order / Findings

The Delhi High Court held that the Tribunal had erred in refusing to entertain the legal ground while simultaneously commenting on its merits. Since the issue involved a pure question of law, the Tribunal ought to have allowed arguments from both sides and adjudicated the matter.

  • The High Court set aside the ITAT’s order.
  • The matter was remitted to the Tribunal for fresh consideration.
  • All rights and contentions of both parties on merits were kept open. 

Important Clarification

  • A pure legal issue, even if raised later, deserves adjudication.
  • Procedural objections cannot override substantive legal examination where no new facts are required.
  • The Tribunal must consider the MAT applicability afresh on merits.

Final Outcome

The Revenue’s appeal was allowed to the extent that the Tribunal’s order was set aside. The case was remanded to the ITAT for fresh adjudication on the applicability of Section 115JB, with all issues left open for determinatio

Link to download the order -  https://www.mytaxexpert.co.in/uploads/1772176486_PRINCIPALCOMMISSIONEROFINCOMETAX4VsGOMANTAKEXIMISLTD..pdf 

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