AI Drafter 
TaxTMI 
TaxTMI 
2007 (10) TMI 235
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....to as 'NRB'). Both the original and bonus shares have been held by the applicant for more than 12 months. The shares of NRB are listed on the Bombay Stock Exchange and the National Stock Exchange. While so, on 14th November, 2005 the applicant sold its entire share-holding consisting of original and bonus shares to the Indian promoters of NRB for a consideration Rs.57.96 crores. The applicant seeks advance ruling of this Authority as regards the manner of computation of capital gains and the rate of tax to be applied. The following are the questions of law that are framed by the applicant: Questions 1. Whether on the stated facts and in law the tax payable on the long-term capital gains arising on sale of originally purchased shares of NRB Bearing Ltd will be 10% of the amount of capital gains as per proviso to section 112(1) of the Act? 2. Whether on the stated facts and in law the tax payable on long-term capital gains arising on sale of bonus shares of NRB Bearing Ltd will be 10% of the amount of capital gains as per proviso to section 112(1) of the Act? 3.* Whether on the stated facts and in law long-term capital gains arising on the sale of ....
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....hom benefit of indexation is not available (in view of explicit benefit through appreciation of foreign exchange) can also compute their income at the rate of 10%. 4. The first and foremost question is whether in terms of the proviso to section 112(1) of the Act, the income from capital gains arising from the transfer of shares answering the description of "listed securities" held for more than 12 months, is liable to be taxed at 10 per cent only. Section 112 sets out the rates at which tax is payable on long-term capital gains. The relevant portion of section 112 is extracted hereunder: Section 112(1) "(1) Where the total income of an assessee includes any income, arising from the transfer of a long-term capital asset, which is chargeable under the head 'Capital gains' the tax payable by the assessee on the total income shall be the aggregate of - (a) in the case of an individual or a Hindu undivided family, being a resident - (i) the amount 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 his total income; and (ii) the amount of income-tax calculated on such long te....
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....mpany or other body corporate and it also includes Government securities. The other requirement is that it should be listed in recognized stock exchanges in India. Specific contentions 5. It is the contention of the applicant that the lesser rate of 10 per cent is applicable to long-term capital gains derived by non-resident foreign companies as well and the benefit of reduced rate is not to be confined to residents only. The learned Senior Counsel for the applicant submits that the proviso to section 112(1) applies to all the clauses of sub-section (1) and argues that a non-resident foreign company is not disentitled to invoke the proviso to section 112(1) on the ground that it is not eligible to get the benefit of the 2nd proviso to section 48. In other words, the contention on behalf of the applicant is that the applicability of the 2nd proviso to section 48 is not a condition precedent for availing the benefit of lesser rate of tax of 10 per cent under the proviso to section 112(1). The learned counsel for the applicant submits that the proviso to Section 112(1) is a special provision in respect of shares and a non-resident foreign company can avai....
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....e consideration received or accruing as a result of the transfer of the capital asset the following amounts, namely :- (i) expenditure incurred wholly and exclusively in connection with such transfer; (ii) the cost of acquisition of the asset and the cost of any improvement thereto : Provided that in the case of an assessee, who is a non- resident, capital gains arising from the transfer of a capital asset being shares in, or debentures of, an Indian company shall be computed by converting the cost of acquisition, expenditure incurred wholly and exclusively in connection with such transfer and the full value of the consideration received or accruing as a result of the transfer of the capital asset into the same foreign currency as was initially utilised in the purchase of the shares or debentures, and the capital gains so computed in such foreign currency shall be reconverted into Indian currency, so, however, that the aforesaid manner of computation of capital gains shall be applicable in respect of capital gains accruing or arising from every reinvestment thereafter in, and sale, of shares in, or debentures of, an Indian company : Provided further that where long-term....
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....s or debentures purchased by them by reason of fall in the value of the Indian rupee vis-à-vis the foreign currency; therefore, section 48 was amended in order to compensate the non-resident Indian investors for the lower earning in foreign currency on account of the decline of rupee value. Coming to the second proviso, it was conceived as a measure of off-setting the effect of inflation vide CBDT circular No. 636 dated 31.8.1992 containing explanatory Notes on the provisions of Finance Act, 1992. The cost of acquisition of asset and the cost of improvement thereto are inflated to arrive at the indexed cost of acquisition and indexed cost of improvement and then these amounts are deducted from the sale consideration to arrive at the long-term capital gain. The cut-off date for the purposes of indexation is taken as 1.4.1981. The apparent reason for excluding the non-resident from the purview of second proviso is spelt out in para 35.3 of CBDT circular No. 636 dated 31.8.1992 as follows: "As protection from fluctuation in rupee value in terms of foreign currency ensures protection from inflation, further relief in terms of indexation will not be available to non-residen....
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....oviso to section 112(1), it should be borne in mind that the said proviso is a special provision in relation to the transfer of certain long-term capital assets viz. listed securities, units and zero-coupon bonds. In our view, there is no warrant to limit the 10 per cent effective rate provided therein as against the normal rate of 20 per cent only to the three categories of resident assesses specified in clauses (a), (b) and (d). Clear words would have been deployed in the proviso if one particular category i.e. non-residents are to be excluded. It is difficult to hold that such a result was intended to be achieved by means of the phraseology - "before giving effect to the second proviso to section 48". Nor can it be said that the said phrase by necessary implication excludes clause (c) category of assesses who are, of course, entitled to another benefit conferred by the first proviso to Section 48. 12.2. In plain and peremptory words, the proviso limits the rate of tax on the gains from the transfer of listed securities to 10 per cent, but, with an important rider that the quantum of capital gains should be arrived at without taking into account the formula laid do....
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....end the benefit of concessional rate of 10 per cent to such bonds. Otherwise, the amendment inserting ZCBs in the proviso to section 112(1) will be infructuous. It is nobody's case that ZCBs answering the description of long-term assets should be subjected to the normal 20 per cent tax under the substantive provision of Section 112. If the Revenue's interpretation of the phrase "before giving effect to the second proviso to section 48" has to be accepted, it would, in relation to ZCBs, lead to re-writing of the proviso and unintended results would follow. The resident assessees will have to pay tax at the normal rate of 20 per cent. The entire argument on the side of the Revenue will then break down as a self-effacing exercise. The provision [proviso to section 112(1)] cannot be read in one way in so far as the listed securities /shares are concerned and be read in a different way in relation to the ZCBs. No cannon of interpretation would support such illogical interpretation of the said provision. The only answer of the Revenue in this regard is that ZCB is an investment and not an asset and therefore with a view to extend the concession of 10 per cent tax, it was specifical....
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....r view, is somewhat involved and makes unwarranted intrusions into a self-contained provision. It would amount to putting a gloss on the crucial words which are otherwise unambiguous. Purpose and legislative intention 13. The counsel for the Revenue persuades us to give effect to the principle of purposive construction and have regard to the object of the provision. It is an interesting coincidence that the learned counsel for the applicant also wants us to interpret the provision keeping in view the purpose and object of the provision. That means, the purpose is sought to be differently projected by both sides to buttress their divergent arguments. Both the counsel have referred to para 41 of the explanatory Notes on the provisions of Finance Act, 1999* 41. Reduction of tax rate on long-term capital gains in regard to securities: 41.1. Under the existing provisions, long-term capital gains are taxed at the rate of 20% after giving the benefit of cost inflation index. However, certain categories of non-residents and non-resident Indians are required to pay tax at the rate of 10% on long-term capital gains on securities and specified assets respectively. However, t....
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....other non-residents in that process. In this connection, the counsel for Revenue relies on the CBDT Circular No. 636 dated 31.8.92 containing the explanatory Notes to the provisions of Finance Act, 1992. While referring to the amendment of section 48 which introduced the concept of cost inflation index, it was stated as follows : "As protection from rupee value in terms of foreign currency ensures protection from inflation, further relief in terms of indexation will not be available to non-residents who will enjoy the concession available in the first proviso to section 48" However, the learned counsel for the applicant submits that the first proviso to section 48 is only a rationalization measure and not a substitute for inflationary adjustments under the second proviso inasmuch as inflation in India is irrelevant for a person who invests in foreign currency and ploughs back the gains in the same currency. It is not necessary to go into this controversy which arises on the sidelines. 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 extendin....
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....where and at best, we can only hazard a guess on the point whether Parliament did or did not intend to give the benefit of 10% tax rate to the non-residents. 13.6 We are therefore of the view that it is not safe to interpret the crucial provision, namely, the proviso to section 112(1) with reference to the supposed intention of the legislature when such intention is not clearly ascertainable. The best course would be to go by the plain language which is to be understood in the manner in which we have explained earlier. The objective is to be inferred from the language itself. The interpretation we are placing does not run counter to the language employed nor does it lead to any absurdity or anomaly. ITAT's decision 14. Now we shall turn our attention to the order of the ITAT, "H" Bench, Mumbai in ITA No. 2552 of 2005 on which strong reliance has been placed by Revenue. The learned Members of the Tribunal held that the Legislature never intended to give the benefit of proviso to Section 112(1) to those cases where long-term capital gain is required to be computed under the first proviso to section 48. The Tribunal purported to reach the c....
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....y way of capital gain arising from the transfer of securities, the amount of income-tax calculated on the said income shall be at the rate of 10 per cent. Sub-section (3) says "nothing contained in the first and second provisos to section 48 shall apply for the computation of capital gains arising out of the transfer of securities………". After referring to sub-section (3), the Tribunal makes an observation that "if the legislature had intended to give benefit of marginal relief of tax to all non-residents, it could have easily used the words "first and second provisos of section 48." The Tribunal missed to note that by adding the words "first proviso", the intended result will not be achieved. On the other hand, the position of non-resident will be worse. For these reasons, we have no hesitation in differing with the view taken by the Tribunal. Other Provisions - comparison 15. The learned counsel for the applicant wanted to draw support from the phraseology used in other Sections in order to drive home the point that the crucial words do not mean what the Revenue says. He has drawn our attention to some of those provisions in which a similar phras....
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....ve and in favour of the applicant. Bonus shares 16. 2nd Question -This question relates to the tax payable on the long-term capital gain arising by virtue of sale of bonus shares. Whether 10 per cent rate in terms of the proviso to section 112(1) should be applied for the transfer of bonus shares is the question. Bonus shares just as original shares of NRB are listed securities. The proviso to section 112(1) does not make any distinction between original and bonus shares. Once it is held that under the proviso to section 112(1), the benefit of lower rate of tax is not be denied to the non-residents in respect of long-term capital gains arising from the transfer of original shares, it follows that the same interpretation will hold good in the case of bonus shares as well. In fact it is the contention of the Revenue that the legislature did not intend to differentiate between original and bonus shares in the matter of application of rate of tax. 16.1. We may notice an alternative argument of the applicant's counsel according to which the case as regards bonus shares stands on a stronger footing. It is contended that even if the stand of the department that app....