TMI Blog2011 (8) TMI 32X X X X Extracts X X X X X X X X Extracts X X X X ..... isos thereto - The tax payable on long term Capital Gains arising to CUHL on sale of equity shares of CIL by it will not be 10% of the amount of Capital Gains as per the proviso to Section 112 - Ruling is given - A.A.R. No.950 of 2010 - - - Dated:- 1-8-2011 - Mr. Justice P.K.Balasubramanyan, Mr. V.K. Shridhar, JJ. Present for the applicant Mr. Sunil M.Lalla C.A Ms. Aarti Sathe, Advocate Mr. Girish Vanwari, C.A. Mr. Hiren Bhatt, C.A. Mr. Bhakti Mehta, C.A. Ms. Shailvi Singhal,C.A. Mr. Katherine Anderson (Cairn) Mr. Sanjiv Chaudhary, C.A. Present for the Department Mr. Bhupinderjit Kumar,ADIT (International Taxation), New Delhi Ruling (By Mr. V.K. Shridhar) The applicant, Cairn UK Holding Ltd. (CUHL), is a private limited company registered in Scotland. It acquired the equity shares of Cairns India Limited (CIL) in 3 tranches: 50,000 equity shares were acquired by way of initial subscription in August, 2006; 365,028,898 equity shares by way of allotment as fully paid up equity shares and another 861,764,893 equity shares pursuant to a share purchase agreement on 12.10.2006. As per this share purchase agreement, 135,267,264 equity shares of Cairn India Hol ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... xplains that the proviso limits the rate of tax to 10%, but with a rider that the quantum of capital gains should be arrived at without taking into account the benefit of indexation laid down in the second proviso to section 48 of the Act. An assessee cannot simultaneously claim two benefits: the benefit of indexation provided in the second proviso to section 48 and the benefit of lower rate of tax at 10% as provided in proviso to section 112 of the Act. 6. Learned advocate contends that the phrase before giving effect to provisions of second proviso to section 48‟ used in the proviso to section 112 has been misinterpreted by the Hon‟ble Tribunal in case of BASF Aktiengesellchaft, reported in 293 ITR 1. The view of the learned ITAT that as the second proviso to section 48 is not applicable to non-residents who are covered by the first proviso to section 48, the proviso to section 112 will also not apply to the non-residents and that the eligibility to avail benefit of indexation under 2nd proviso to section 48 is a sine qua non to avail the benefit of lower rate of tax under the proviso to section 112, is not the correct position in law for the following reasons: ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... dual or HUF and who is not eligible to claim deduction under the said chapter VI-A, would not be able to avail the rebate at all. That obviously is not the intention of the legislature. Similarly, clause (a) to Explanation to section 158BB(1) of the Act provides that for the purposes of determination of undisclosed income, the total income/loss shall be calculated without giving effect to set off of brought forward losses..‟. If the revenue‟s interpretation of the phrase before giving effect to‟ is to be accepted, it would lead to an absurd result as it would not be possible to compute undisclosed income of an assessee who did not have any brought forward losses. In the case of Bhaskar Mittal, 202 ITR 612, it has been held that the same expression appearing in another provision of the Act should carry the same meaning which otherwise would give unintended results. 8. Learned advocate then submits that the proviso below clause (d) to the section 112(1) of the Act applies to all clauses to section 112(1). This Authority in case of Timken France SAS, AAR 739 of 2009, has expressed the view that it would be irrational and even incongruous to allocate the proviso ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he 1st proviso to section 48 is also clear from the explanatory notes to the Finance Act 1992 issued vide CBDT‟s Circular No. 636 dated 31/08/1992. The two parts of the proviso are integral parts of the proviso and cannot have independent application. It would not be a logical interpretation that legislature‟s intention could be that while the persons falling under the 2nd proviso have to forego the benefit of indexation to avail the lower rate of 10%, the persons falling under the 1st proviso would be granted the benefit of lower rate of 10% after having availed the benefit of 1st proviso, even when nothing is mentioned about it in the proviso to section 112 (1). Whenever the legislature intended to refer to persons falling under either of the two provisos to section 48, it specifically mentioned either or both of the provisos depending upon its intention. 12. Referring to the Timken France case, the Revenue submits that the applicant‟s contention that if the Revenue‟s interpretation is accepted then zero coupon bonds 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... it is not the function of the court to give to the words used a strained or unnatural meaning and that the subject can be taxed only if the revenue satisfies the court that the case falls strictly within the provisions of the law; that if the statute contains a lacuna or a loophole, it is not the function of the court to plug it by strained construction to the supposed intention of the legislation; that the court ought not to hunt out ambiguities by an unnatural construction of a taxing section Murarilal Mahabir Prasad, AIR 1976 SC 313. The duty of the court is to give effect to the intention of the legislature. That intention is to be gathered from the language employed, having regard to the context in connection with which it is employed. but once that is ascertained it is not open to the Court to narrow or whittle down the operation of the Act by considerations of hardship or business convenience or like Attorney-General [1899] 2 QB 158. The Court should study the tax laws as a whole and even if it resorts to a reasonable and liberal construction, care should be taken not to defeat the intention of the legislature. The purpose and legislative intention of the proviso to s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... total income as so reduced been his total income; and (ii) the amount of income-tax calculated on such long term capital gains at the rate of twenty per cent: Provided that where the total income as reduced by such long-term capital gains is below the maximum amount which is not chargeable to income-tax, then, such long-term capital gains shall be reduced by the amount by which the total income as so reduced falls short of the maximum amount which is not chargeable to income-tax and the tax on the balance of such long-term capital gains shall be computed at the rate of twenty per cent; (b) in the case of a domestic company,- (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 its total income; and (ii) the amount of income-tax calculated on such long term capital gains at the rate of [twenty] per cent; [***] (c) in the case of a non-resident (not being a company) or a foreign company, - (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 its total income; and (ii) the amount of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... bank; and c) which the Central Government may, by notification in the Official Gazette, specify in this behalf. Explanation. For the purposes of this clause, the expression scheduled bank shall have the meaning assigned to it in clause (ii) of the explanation to sub clause (c) of clause (viia) of sub section (1) of section 36. As per the above definition introduced in Finance Act 2005, a zero coupon bond would mean a bond in which no benefit is received or receivable before the maturity or redemption and which are issued on or after June 1, 2005, by an infrastructure capital company or infrastructure capital fund or public sector company and specified by the Central Government in the official gazette. The definition came into effect from 1.4.2006. The Finance Ministry has also come up with the guidelines to be followed for recognition of the zero coupon bonds issued by an infrastructure capital company or an infrastructure capital fund or a public sector company. The 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 dealin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t 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-terms capital gain arises from the transfer of a long-term capital asset, other than capital gain arising to a non-resident from the transfer of shares in, or debentures of, an Indian company referred to in the first proviso, the provisions of clause (ii) shall have 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... then, such excess shall be ignored for the purpose of computing the tax payable by the assessee. Explanation.- for the purposes of this section, - (a) Listed securities means the securities (i) as defined in clause (h) of section 2 of the Securities contracts (Regulation) Act, 1956 (32 of 1956); and (ii) listed in any recognised stock exchange in India: (b) unit shall have the meaning assigned to it in clause (b) of Explanation to section 115AB). 23. Section 115AD was inserted by the Finance Act 1993, allowing the FIIs the benefit of lower rate of tax at 10% on the long-term capital gains arising on securities computed without applying the 1st and the 2nd proviso to section 48 of the Act. The securities mean the securities as defined in section 2(h) of the securities Contracts (Regulation) Act 1956, and include bonds and debentures. The 3rd proviso to section 48 was inserted by the 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 b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... coupon bonds, which are other than shares or debentures, all the assessees, whether residents or non-residents, are eligible to the benefit of indexation in the computation of capital gains arising on their transfer. However, the 3rd proviso denies the benefit of indexation to bonds or debentures. While applying the proviso to section 112(1) to determine the tax payable, the computation mechanism includes such assets. There is thus no dichotomy in the proviso to section 112(1) and the 3rd proviso to section 48 of the Act as pointed by the applicant. Section 48 is a section which governs mode of computation of income whereas section 112 determines the tax payable on such income. It may be important to keep in mind that the application of the proviso is based on the capital asset to which the provisions of 2nd proviso to section 48 of the Act apply. If it 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n the case of Universities Superannuation Scheme, AAR No.636 of 2004, 275 ITR 434, held that: 7. .The grievance of the applicant is that the Indian nationals both resident-assessee as well as domestic companies are entitled to compute their capital gains on the basis of indexed cost of acquisition and indexed cost of any improvement and on the gains so determined, they are taxed @ 20% and they are allowed an option to be taxed @ 10% without indexation under the proviso to sub-section (1) of section 112 of the Act. We do not think that under proviso to section 112(1) they have the option to apply the provisions of indexation for computing capital gains and paying tax @ 10% on the gains so arrived .. The import of the proviso to section 112(1), discussed above, is that where the tax payable in respect of any income arising from 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and the authority has taken a view, we think that we are not hampered from taking a fresh look on that issue when raised before us. 31. In view of the above, the question raised by the applicant is answered in the negative. The applicant is not eligible to avail the benefit of lower rate of tax of 10% on the capital gains on the sale of shares to PCIL. (V.K.Shridhar) Member The Chairman (Adding) The Hon‟ble Member (R) has ruled that assessees and assets covered by the first proviso to Section 48 of the Income-tax Act are not entitled to the benefit of the proviso occurring after clause (d) of Section112(1) of the Income-tax Act. I fully agree with that ruling. I have thought it proper to add a few words in view of the fact that the ruling involves the interpretation of two sections of the Income-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 d ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... er the first proviso to Section 48, in respect of specified assets is given protection against inflation which has already been given to a non-resident, in respect of specified assets, thus achieving a level playing field. When this seems to be the position, are we compelled to interpret the proviso to Section 112 in a different manner for the reason that debentures or zero coupon bonds, may be covered by the third proviso to Section 48 of the Act? Sale of zero coupon bonds was not eligible for indexation to determine Capital Gain if it is understood as a species of bond. Now by the proviso, the concept of indexation is introduced for it, notwithstanding the third proviso to Section 48 assuming, it is covered by it. Be it noted that it is only in respect of payment of tax. If the 10% of Capital Gain determined 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X
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