TaxTMI 
TaxTMI 
2011 (8) TMI 32
X X X X Extracts X X X X
X X X X Extracts X X X X
....reement, 135,267,264 equity shares of Cairn India Holdings Limited (CIHL) were transferred by the applicant to CIL and as a consideration, CIL issued 861,764,893 equity shares to the applicant. Accordingly, these equity shares of CIL were allotted to the applicant under a swap of share arrangement. Approval of the Foreign Investment Promotion Board of India was also obtained. On 12th October 2009, Petronas Corporation Intl. Limited (PCIL) acquired 2.29% equity shares in CIL from the applicant through an agreement dated 14th October 2009, pursuant to which the applicant transferred 4,36,00,000 equity shares to PCIL for a consideration of USD 241,426,379. The transaction took place in off-market-mode and not through the recognized stock exchange. 2. As per the application, the following question has been framed for a ruling from this Authority: 'Whether on the stated facts and in law, the tax payable on long term capital gains arisen to CUHL on sale of equity shares of CIL will be 10% of the amount of capital gains as per proviso to Section 112(1) of the Act?' 3. The applicant submits that in terms of section 195 read with section 9(1) of the Income Tax Act 1961 (Act), P....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ction 112, is not the correct position in law for the following reasons: a) The benefit of lower rate of tax at 10% under the proviso to section 112 has been extended to zero coupon bond („ZCB‟) by an amendment made in the proviso to section 112 by the Finance Act 2005. However, for computation of capital gains under section 48 in respect of ZCBs, the benefit of indexation under the 2nd proviso to section 48 is specifically excluded by the 3rd proviso to section 48. If it is accepted that the eligibility of benefit of indexation under the 2nd proviso to section 48 is a sine qua non for availing the benefit of lower tax rate of 10% under the proviso to section 112, then ZCBs would go out of the purview of section 112(1), whereas ZCBs have been specifically included by way of amendment in the proviso to section 112 so as to be eligible for the lower rate of tax at 10%. This interpretation would render the amendment infructuous. b) The proviso to section 112(1) granting lower rate of tax at 10% is also applicable to listed securities. Explanation to the said proviso provides that listed securities means securities as defined in clause (h) of section 2 of Secur....
X X X X Extracts X X X X
X X X X Extracts X X X X
....mken France SAS, AAR 739 of 2009, has expressed the view that it would be irrational and even incongruous to allocate the proviso only to the preceding clause, clause (d) to section112 of the Act. The same view has been taken by Learned ITAT in the case of BASF cited supra. Moreover, this is self-evident from the formatting of section 112(1) as it appears in the Act. 9. Without prejudice, the applicant submits that merely because a resident assessee can have one of the benefits i.e. indexation or lower rate of rate of 10%, non-resident cannot be denied the benefit on the ground that it is also entitled to the benefit of first proviso to the section 48. For example, section 115BBA, and section 115E of the Act extend additional benefits to non-resident assesses. In Timken France SAS cited supra, this authority has held that double benefit is not a taboo under the law. Similar was the view in the cases of Mandeep Eng. & Pkg. Ind. (P) Ltd. [2007] 292 ITR 1 (SC), G.V. Venugopal [2005] 273 ITR 207 (Mad) and Nagesh Devidas Kulkarni & Ors. [2007] 291 ITR 407 (Bom). 10. Learned advocate finally submits without prejudice that where two views are possible, the view in favour of the asse....
X X X X Extracts X X X X
X X X X Extracts X X X X
....onds would go out of the purview of proviso to section 112 (1), is not acceptable as the zero coupon bonds were taken out of the purview of 2nd proviso to section 48 w.e.f. 1-4-1998 and were included to confer benefit of lower rate of tax at 10% w.e.f. 1.4.2006. There is nothing inconsistent and rather it supports the contention of the Revenue. 13. Regarding the reference made by the applicant that due to the mention of the phrase „before giving effect to deduction under Chapter - VIA‟ in section 88 would render individual or HUF incapable of availing the rebate under section 88 because an individual or HUF will not be able to claim certain deductions under Chapter - VIA, the Revenue submits that it is not a correct analogy as in the case of an individual or HUF, it is very much possible to give effect to some of the provisions of Chapter-VI A, which does not exclude individual or HUF, whereas in the case of a non-resident, no part of the second proviso to section 48 is applicable and therefore no effect can be given. 14. The Revenue submits that the applicant is taking a hypothetical situation when it says that it cannot be barred from claiming double bene....
X X X X Extracts X X X X
X X X X Extracts X X X X
....asonable and liberal construction, care should be taken not to defeat the intention of the legislature." The purpose and legislative intention of the proviso to section 112(1) was considered at length by this Authority in the case of Timken France cited supra to arrive at the following conclusion: "13.3. We do not think that the CBDT circular or the Explanatory Memoranda are unequivocal and clear enough to throw light on the rationale of extending or not extending the benefit of reduced rate of tax in terms of the proviso to section 112(1) to the non-residents and foreign companies. They do not speak one way or the other on the point whether the intention was to exclude the non-residents/foreign companies [falling under clause (c) of section 112(1)] in the matter of availment of reduced rate of tax. 13.4. Neither the expression "all assessees" in the CBDT circular on which the applicant is relying nor the wording "level playing field" which is sought to be relied upon by the Revenue are clinching. No definite inference can be drawn from the terminology of the circular. It hardly needs any emphasis that the words employed in a Circular intended for administrative guidance cann....
X X X X Extracts X X X X
X X X X Extracts X X X X
....unt of income-tax payable on the total income as reduced by the amount of such long term capital gains, had the total income as so reduced been its total income; and (ii) the amount of income-tax calculated on such long-term capital gains at the rate of twenty per cent; (d) in any other case of a resident, - (i) the amount of income-tax payable on the total income as reduced by the amount of long term capital gains, had the total income as so reduced been its total income; and (ii) the amount of income-tax calculated on such long term capital gains at the rate of twenty per cent. Provided xx xx xx xx xx xx Explanation.- for the purposes of this section, - xx xx xx xx xx xx 18. From the reading of the section 112(1), it may be noticed that the sub-clause (a) ends with a proviso, sub-clause (b) had a proviso which was omitted w.e.f. 1-4-1996, sub-clause (c) does not have a proviso. At the end of each of the sub-clauses (a),(b) and (c), semi-colon i.e. (;) is placed to connect independent clauses (a),(b),(c) and (d) to indicate a closer relationship between them. But, at the end of the clause (d), a full-stop i.e. (.) is placed to mark the end of declarative sub-clauses (a),....
X X X X Extracts X X X X
X X X X Extracts X X X X
....tax treatment of zero coupon bonds has also been rationalized. It had specified that income on transfer of a zero coupon bond would be treated as capital gains, except the income arising from business of dealing in zero coupon bonds. In the notification, the CBDT has issued guidelines stipulating that the application should be made at least three months before the date of issue of such bonds and cannot be filed for bonds to be issued beyond two financial years from the year of application. The applicants have also to fulfill certain conditions relating to tenure of the bond, credit rating and listing on stock exchanges and more importantly that the life of the bond should not be less than 10 years and more than 20 years. The zero coupon bonds are also to be listed at a recognised stock exchange in India. The money raised is to be invested in a manner specified in the guidelines. The manner in which pro-rata amount of discount on a zero coupon bond is to be computed and allowed a deduction in the hands of the company or fund or public sector company that issues a zero coupon bond has been provided. Bonds and debentures are debt instruments with different types of exposure.....
X X X X Extracts X X X X
X X X X Extracts X X X X
....e effect as if for the words "cost of acquisition" and "cost of any improvement", the words "indexed cost of acquisition" and "indexed cost of any improvement" had respectively been substituted: Provided also that nothing contained in the second proviso shall apply to the long-term capital gain arising from the transfer of a long-term capital asset being bond or debenture other than capital indexed bonds issued by the Government. xx xx xx xx xx Explanation. - For the purposes of this section, - xx xx xx xx xx xx xx xx 21. The 3rd proviso to section 48 of the Act is a proviso to the 2nd proviso and restricts the application of the 2nd proviso where the capital asset is a bond or debenture but other than capital indexed bond issued by the Government. The 3rd proviso therefore restricts the benefit of indexation to such assets owned by a person. But the proviso does not apply to long-term capital assets owned by a person who is a non-resident coming under the 1st proviso to section 48. Thus the income chargeable under the head "capital gains" is to be computed keeping in mind the restriction imposed by the 3rd proviso on the 2nd proviso in the cases of assessees and assets coming w....
X X X X Extracts X X X X
X X X X Extracts X X X X
....he Finance Act 1997 w.e.f. 1.4.1998, whereby, benefit of indexation to the resident assessee on bond or debenture was denied. The non-resident assesses were taxed @ 10% on the long-term capital gains whereas the residents were paying tax on the long term capital gains @ 20%. As the benefit of lower rate of tax at 10% was already available to non-resident assessees, in order to bring level playing field with the resident assessees, proviso under section 112(1) was inserted by the Finance Act 1999 w.e.f 1.4.2000. Thereafter, the Finance Act 2005 inserted „zero coupon bond‟ as one of the assets along with „securities‟ and „unit‟ in the proviso to section 112(1). We have already noted that „zero coupon bond‟ and „bond‟ are different financial instruments. The 3rd proviso therefore does not include „zero coupon bond‟ and hence the „zero coupon bond‟ is eligible for indexation under the 2nd proviso to section 48 of the Act. 24. The importance of the word 'exceeds' occurring between the two phrases in the above proviso: "where the tax payable in respect of any income arising from the transfer of a long ....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... is the case that it applies to the 1st proviso meant for a non-resident assessee then the proviso would have made a mention of it. We are unable read anything more in the statue than what is stated therein. 26. It is averred that the mandate of the phrase in the proviso to section 112(1) is not to let the indexation formula enter into the computation process and is not a condition that unless an assessee is eligible to apply the indexation formula only then the reduced rate of 10% prescribed by the proviso to section 112 (1) can be applied. In this regard it may be stated that the indexation formula already enters into the computation in the first limb where it is mentioned that "tax payable in respect of any income arising from the transfer of long-term capital asset" is to be determined. In fact there is no issue on this part of proviso whether the 2nd proviso to section 48 enters into the said computation or not. The issue that arises lies in the second limb of the proviso starting with the phrase "ten percent of the amount of capital gains before giving effect to the provisions of the second proviso to section 48". This cannot be read to mean "deny the concessional rate of ....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... the transfer of securities (as long term capital assets) exceeds 10% of the amount of capital gains before giving effect to the provisions of the second proviso to section 48, then such excess has to be ignored. In other words, without taking away the right of computation under the second proviso to section 48, FIIs have been extended the benefit of limiting the tax rate to 10% on the capital gains arising from the transfer of long-term capital assets being securities. Under the scheme of section 115AD which applies to FIIs like the applicant (which does not apply to domestic companies and resident assessees), FIIs are taxed @ 10% of the gains computed under Section 48 without indexation, therefore, the proviso puts them on par. ....." This also throws light on this question. 29. We are of the view that as the section 48 must be read with section 112 and if the tax on long-term capital gains provision cannot be given effect to for any reason, then the provision has no application under the Act. Where a question had arisen about the interplay and relative scope of two provisions, the Hon‟ble Supreme Court in the case of B.C.Srinivas Setty, 128 ITR 294 has explained the ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ome-tax Act relating to computation and taxation of capital gains. Section 48 is the computing section. It provides the mode for computing capital gains. The first proviso looks at a non-resident, takes out a species of capital asset and provides for relief against inflation. The assets are specified as shares in or debentures of an Indian company. The second proviso deals with other capital assets of a non-resident and all capital assets of a resident and provides for the benefit of indexation; again to offset inflation. The third proviso introduced with effect from 1.4.1998 then steps in and excludes from the purview of the second proviso providing for indexation, bonds or debentures other than capital indexed bonds issued by the Government. Thus, both for a non-resident and a resident indexation regarding bonds and debentures is excluded. Section 112 fixes the tax payable on long term capital gains. It provides the proportion of tax to be paid at 20% of the Capital Gain, determined under Section 48, Clause ( c) covers a non-resident (not being a company) and a foreign company. The proviso introduced with effect from 1.4.2000, then extends a concession in the matter ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ermined without reference to indexation is less than the tax payable in respect of an income arising on the transfer of a long term capital asset of that nature, the assessee can take advantage of it. As regards a non-resident assessee, gain from sale of shares in or debentures of an Indian company continues to attract the first proviso to Section 48 and that assessee to the extent of those assets is kept out of the benefit of the second proviso. Now a set of securities of those to whom the second proviso to Sec. 48 applied, that had been kept out of the purview of the second proviso by the third proviso, have been brought in for relief. This does not justify an interpretation that what is covered by the first proviso to Section 48 of the Act is also brought in for a second dose of protection. In Timken (294 ITR 513), it was stated that the proviso in Section 112 of the Act was a special provision in relation to the transfer of certain long term capital assets and that there was no warrant to limit the reduced rate only to the three categories of resident assessees specified in Clause (a), (b) and (d). Be it so. It only means that the benefit of the proviso is also available to ....