TMI Blog2013 (10) TMI 430X X X X Extracts X X X X X X X X Extracts X X X X ..... 48 would not be entitled to pay lower rate of tax @10%. Legislature had a far easier and simpler way to deny benefit of the proviso to Section 112(1) by using different words and phrases had thus been the intention. The legislature in fact did not intend to deny the said benefit. It is not possible to decipher and clearly elucidate the exact legislative purpose and object behind the proviso to Section 112(1) in a categorical and unambiguous manner. The purpose and object behind the proviso to Section 112(1) itself is somewhat debatable, except that the legislative intention was to tax long-term capital gain on listed shares, bonds and units @ 10%, without benefit of indexation under second proviso to Section 48 of the Act. Legislative policy and object is nothing more, and it is impermissible to read into the said provision an affirmative legislative intention on assumption and guess work and this would be beyond the acceptable principles of interpretation. Further, Certainty is integral to rule of law. Certainty and stability form the basis foundation of any fiscal laws – Reliance has been placed upon the judgment in the case of Vodafone International Holding B.V. Vs. Union ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e petitioner, AAR had framed the following question to be answered:- 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? 5. The case of the petitioner was that under proviso to Section 112(1) they are liable to pay lower rate of tax @ 10% on the said long-term capital gains. The case of the Revenue i.e. Director of Income Tax (International Taxation) was that the proviso to Section 112(1) of the Act was not applicable and, therefore, the petitioner was liable to pay tax @ 20% on the long-term capital gains. 6. AAR has accepted the plea and contention of the Revenue and has held that the proviso to Section 112(1) was not applicable and, therefore, the petitioner cannot avail the lower rate of tax @ 10% on capital gains. The reason and ratio applied was that for the proviso to Section 112(1) to apply, second proviso to Section 48 should be also applicable and as second proviso to Section 48 was excluded and was not applicable to the petitioner, benefit of lower rate of tax @10% was not available. 7. In order to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the market value on the date of such transfer shall be deemed to be the full value of consideration received or accruing as a result of transfer for the purposes of this section. Provided also that no deduction shall be allowed in computing the income chargeable under the head Capital gains in respect of any sum paid on account of securities transaction tax under Chapter VII of the Finance (No. 2) Act, 2004. Explanation.-For the purposes of this section,- (i) foreign currency and Indian currency shall have the meanings respectively assigned to them in Section 2 of the Foreign Exchange Regulation Act, 1973 (46 of 1973); (ii) the conversion of Indian currency into foreign currency and the reconversion of foreign currency into Indian currency shall be at the rate of exchange prescribed in this behalf; (iii) indexed cost of acquisition means an amount which bears to the cost of acquisition the same proportion as Cost Inflation Index for the year in which the asset is transferred bears to the Cost Inflation Index for the first year in which the asset was held by the assessee or for the year beginning on the 1st day of April, 1981, whichever is later; (iv) indexed c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... where such gain arises from transfer of capital asset referred to in sub-clause (iii) at the rate of twenty per cent; and (iii) the amount of income tax on long-term capital gains arising from the transfer of a capital asset, being unlisted securities, calculated at the rate of ten per cent on the capital gains in respect of such asset as computed without giving effect to the first and second proviso to Section 48. [(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]; Explanation.- Provided that where the tax payable in respect of any income arising from the transfer of a long-term capital asset, [being listed securities or unit] [or zero coupon bond], exceeds ten per cent of the amount of capital gains before giving effect to the provisions of the second proviso to Section 48, then, such excess shall be ignored for the purpose of computing the tax payable by the assessee. Explanation.-For the purposes of th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... or index cost of improvement . 11. The third proviso to Section 48 stipulates that the second proviso will not apply when long-term capital gain arises from transfer of a bond or debenture, other than capital index bonds issued by the Government. 12. Section 112(1) as the heading suggests, deals with rate of tax payable on the long-term capital gains. In case of a non-resident, sub-clause (c) to Section 112(1) applies. As per clause (c), income tax is calculated on long-term capital gains @ 20%. 13. Proviso to Section 112(1), however, gives a beneficial option to taxpayers on transfer of long-term capital asset being listed securities, units or zero per cent coupon bonds. They are liable to pay tax @ 10% on the amount of capital gains, but before giving effect to the provisions to the second proviso of Section 48, i.e., the assessee have the option to pay tax @ 10% without benefit of inflation indexation. Tax @ 10% is payable on the consideration received, less the expenditure wholly and exclusively incurred on the transfer, and the cost of acquisition and cost of improvement. 14. The petitioner submits that they are covered by the proviso to Section 112(1) as they are no ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cable to the entire sub-section (1) to Section 112 and was not a proviso to clause (d) only. It would be irrelevant and incongruous to read or treat the proviso as applicable to clause (d) only. (This finding stands accepted by AAR in the impugned order). (ii) Proviso to Section 112(1) applies to all assessees and was not restricted to resident assessees. There was no such express stipulation in the proviso itself. The words used in the proviso were plain and preemptory. While interpreting them we should not travel beyond what was stated and specified. The proviso limits the rate of tax on the gains on transfer of listed securities to 10% but with an important rider that the quantum of capital gains should be arrived at without taking into account indexation in the second proviso to Section 48. The Legislature has not stated that reduced rate of tax would not be applicable to an assessee who takes benefit of the first proviso. The words were not exclusionary. (iii) In case the legislative intent was different, it could have been spelt out and clearly stated in the proviso to Section 112(1). (iv) Eligibility to avail benefit of indexed cost of requisition (under second proviso ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ins in respect of listed securities. Later on two more items, ‗units and ‗zero bond coupons were added. (e) The proviso to Section 112(1) was applicable to listed securities, units and zero coupon bonds which were included by Finance Act 2000 and 2005. The third proviso to Section 48 introduced by Finance 1997 ordains that nothing contained in the second proviso shall apply to the transfer of long term capital asset being bond or debenture other than capital indexed bonds. The third proviso, therefore, restricts or excludes benefits of the second proviso. Zero-coupon bonds were not eligible for benefit of indexation under second proviso to Section 48 in view of the third proviso. If the contention of the Revenue was accepted, zero coupon bonds would also be excluded from the purview of benefit of 10% rate of tax stipulated under Section 112(1), thus, leading to conflict between two sections, a prescription and self-effacing exercise. This illogical interpretation should not be accepted. (f) Debentures or securities listed on a stock exchange fall within the domain or proviso to Section 112(1). In view of the third proviso to Section 48 benefit of indexation does n ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s of 2nd proviso to section 48 of the Act. [10% of the capital gains = 10% (full value of consideration cost of purchase including cost of improvement, if any) then, If the value of A is greater than B, ignore the excess Like is thus compared with the likes, observing the principles of equality amongst the equals in legislating the above proviso. 4. The reduced rate of 10% tax on the amount of capital gains before giving effect to the provisions of second proviso to Section 48 was a second limb and when read distinctively it means 10% of the full value of consideration less cost of purchase including cost of improvement, if any. This interpretation will result in equality i.e. residents and non-residents should be treated alike. There should be level playing field. 5. Before giving effect to the words used in proviso to Section 112(1) connotes that the effect and benefit under the said provision could otherwise have been given. The asset of the assessee should qualify and should be entitled to indexation under the second proviso to Section 48 of the Act. Proviso to Section 112(1) applies when the gains on the transfer of the capital asset could be computed by applyin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... advantage of neutralization of exchange rate fluctuation under the first proviso to Section 48 would not be entitled to pay lower rate of tax @10%. Legislature had a far easier and simpler way to deny benefit of the proviso to Section 112(1) by using different words and phrases had thus been the intention. The legislature in fact did not intend to deny the said benefit. 21. In Section 115AD(3) it is noticeably stipulated that nothing contained in the first and second proviso to Section 48 shall apply to transfer of securities and capital gains referred to in sub-section 1(b) of the said section. 22. High Court of Andhra Pradesh in their recent decision in W.P.(C) 14212/2010, Sanofi Pasteur Holding SA Vs. Department of Revenue has lucidly observed and laid down the following principles:- We notice and have endeavored to conform to principles of statutory construction, relevant to the lis before us. We are conscious that the democratic integrity of law, depends entirely upon the degree to which its processes are legitimate and as Judge Robert H. Bork cautioned, a judge who announces a decision must be able to demonstrate that he began from recognized legal principles and reaso ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... med interpretation, which according to the rule propounded by Oliver, LJ, in relation to taxing statutes in - Wicks v. Firth (Inspector of Taxes), is however of general application. The formulation reads: accepting once more that the subject is not to be taxed except by clear words, the words must, nevertheless, be construed in the context of the provisions in which they appear and of the intention patently discernible on the face of those provisions from the words used; (iv) Where, in relation to the facts of a given case, the enactment is grammatically ambiguous, the legal meaning is the one to which on balance of factors arising from the relevant interpretative criteria accord the greater weight; (v) Ambiguity could be semantic, syntactical or contextual. The latter is where there is a conflict between the enactment and its internal or external context. Thus, where there are two possible grammatical meanings of the enactment in relation to its internal or external context, it is ambiguous; (vi) Grammatical ambiguity in the above sense could be general or relative, the latter when it is ambiguous only in relation to certain facts; (vii) In a case of relative ambiguity the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ontrary to the meaning, though not expressly expected. These cases thus out of the letter, are often said to be within the equity of an act of Parliament, so cases within the letter are often out of the equity. 25. The above principles elucidate that literal meaning of the provision carry weight but Judges and interpreters recognize that some cases justify another interpretational criterion. However, the textual ambiguity should not be presumed on the basis of apriori ideas or thinking as to the Legislative intent or readily accepting the argument of fallible drafter. Court should not doubt the grammatical meaning merely on conjecture or fanciful reasoning to hold that doubt or ambiguity is real and substantial. Hairsplitting and unduly recondite arguments have to be rejected. The rule laid down by Oliver LJ in relation to taxing statute is that the subject is not to be taxed except by clear words, the words must, nevertheless, be construed in the context of the provisions in which they appear and of the intention patently discernible on the face of those provisions from the words used . [see Wicks Vs. Firth (Inspector of Taxes, 1982 Ch.355)] . 26. From the reasoning given in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ation underscoring contention of the Revenue is applicable and the contention or plea is in fact reflective of the true intention of the legislature. 29. First proviso to Section 48 is applicable when a non-resident had purchased an asset being a share or debenture with foreign currency, converted into Indian rupee. It stipulates that on transfer or sale of the said share or debenture the consideration received in Indian rupee should be reconverted into the same foreign currency. Sale and purchase of shares has to be in Indian rupee, the legal tender in India, but the foreign investor had brought in foreign currency and, therefore, logically and naturally for him, the gain should be computed in foreign currency. The said investor would like to convert the sale consideration received in Indian rupee into foreign currency. This would reflect the true gain or income earned. For a non-resident who has utilized/brought in foreign currency for purchase of shares or debentures in Indian rupee, inflation in India is immaterial and inconsequential. For him, the gain or loss is to be computed with reference to the foreign currency utilized for purchase and foreign currency available to him ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... g the second proviso had in mind or assumed that there would be deflation. The two provisos cannot be equated as granting same relief or benefit. They operate independently and have different purpose and objective. 32. In view of the above, it is difficult to state that benefits under the first proviso and the second proviso to Section 48 are identical or serve the same purpose. 33. There is some merit in the contention that if proviso to Section 112(1) is applied, then almost all assessees covered by the first proviso to Section 48 would be liable to pay tax @ 10% only and not @ 20% on long-term capital gains. This appears to be correct and a logical consequence of the proviso to Section 112(1) and the interpretation given by us, but this cannot be a ground to contextually read the proviso to Section 112(1) differently. The said proviso is applicable to listed securities or units or zero coupon bonds. Long-term capital gain is not payable on listed securities sold through stock exchanges as STT is payable. First proviso to Section 48 is applicable on sale of shares or debentures in Indian company, whether or not the said shares or debentures are listed or not. Thus, proviso to ..... X X X X Extracts X X X X X X X X Extracts X X X X
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