2009 (7) TMI 909 - AT - Income Tax

Tax Tribunal: Compensation on non-pari passu shares not taxable as income; Indexation benefits denied

The Tribunal ruled that compensation received on non-pari passu shares is a capital receipt, not taxable as 'income from other sources,' reducing the cost ... Capital gains Issues Involved:1. Classification of compensation on non-pari passu shares as dividend income.2. Entitlement to the benefit of indexation for long-term capital gain/loss under section 48 of the Income-tax Act.Issue-Wise Detailed Analysis:1. Classification of Compensation on Non-Pari Passu Shares as Dividend Income:The assessee, a company incorporated in the USA and registered with SEBI as a Foreign Institutional Investor (FII), filed its return of income for the assessment year 1998-99. The Assessing Officer included compensation of Rs. 99,260 received on non-pari passu shares as dividend income. The CIT(A) upheld this classification, leading the assessee to appeal to the Tribunal.The Tribunal noted that the concept of compensation on non-pari passu shares arises when shares are entitled to a proportionate dividend due to their allotment date. In the secondary market, these shares are not quoted separately, and the buyer expects a full year's dividend. Compensation is paid to adjust the differential dividend as per SEBI guidelines.In a similar case (Emerging Markets Growth Fund v. Jt. DIT), the Tribunal held that compensation received on non-pari passu shares from brokers is a capital receipt, not taxable as 'income from other sources,' and should reduce the cost of new shares purchased. The Tribunal followed this precedent, ruling that the compensation of Rs. 99,260 is a capital receipt not chargeable to tax, thereby reducing the cost of acquisition of the shares. Consequently, ground No. 1.2 did not require consideration.2. Entitlement to the Benefit of Indexation for Long-Term Capital Gain/Loss:The assessee claimed the benefit of indexation on the cost of acquisition for computing capital loss, which was initially rejected by the CIT(A) based on section 115AD(3) of the Act. The assessee argued that section 115AD is meant to benefit FIIs and should not be more onerous than other provisions. They contended that section 115AD does not prohibit a FII from availing benefits under section 112(1)(c)(ii) of the Act, and where two options are available, the one with the least tax burden should be chosen.The Departmental Representative countered that section 115AD is a specific code for taxing capital gains of FIIs, overriding the general provisions of section 48. The Tribunal considered the submissions and the legislative intent behind sections 48 and 112, which provide for the computation of capital gains and prescribe the rate of tax on long-term capital gains, respectively.Section 115AD, introduced to provide tax incentives for FIIs, specifies that the first and second provisos to section 48 do not apply for computing capital gains from the transfer of securities by FIIs. The Tribunal referenced the AAR's decision in Universities Superannuation Scheme Ltd., which held that section 115AD is a self-contained code for FIIs, and they cannot opt out of it to claim benefits under sections 48 and 112.The Tribunal agreed with the AAR's reasoning, concluding that FIIs must be assessed under section 115AD for capital gains/losses and cannot claim indexation benefits under section 48. Thus, ground No. 2 of the assessee was dismissed.Conclusion:The appeal by the assessee was partly allowed. The Tribunal ruled that compensation on non-pari passu shares is a capital receipt, not chargeable to tax, and should reduce the cost of acquisition of shares. However, the assessee's claim for indexation benefits under section 48 was dismissed, affirming that FIIs must be assessed under section 115AD without the benefit of indexation.