The Bombay High Court on 5 May 2015 has granted stay to one of the Foreign Institutional Investors ('FIIs') who filed a writ petition against the demand notice issued by the Income-tax department for payment of Minimum Alternate Tax (MAT) on capital gains arising from transfer of Indian securities.
The court has stayed the tax authorities' move till the case is next heard. The next hearing would be sometime in June, 2015.
This issue arose after an amendment proposed in the Finance Bill, 2015 that MAT would not apply to FIIs in respect of capital gains arising from transactions in securities.
The amendment was restricted only to capital gains earned by FIIs which might have resulted in levy of MAT on other income.The matter was considered by the Finance Minister and, accordingly, in the Finance Bill, 2015 as passed by the Lok Sabha an amendment is proposed that the exemption from MAT shall also be available to income arising from interest, royalty or fee for technical services, provided tax payable on such income is less than 18.5%
Since the amendment was proposed to be given prospective effect, demand notices were issued by the income-tax department to recover MAT from FIIs in respect of earlier years.
Tax authorities are relying on the ruling in the case of Castleton Investment Ltd., In re  24 taxmann.com 150 (AAR – New Delhi), according to which MAT is applicable to foreign entities. Whereas contentions of the tax experts (representing FIIs) are that MAT is applicable to companies that maintain books of account under Indian law and foreign investors don't do so.
Against said move by the Dept., the writ filed by one of the FIIs has been admitted by the Bombay High Court, however,on the technical grounds that the tax officer had directly issued a final order instead of a draft order since there was a variation between the income disclosed in the return of income and income computed in assessment order.
More details on the issue are awaited.