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Citicorp International Finance Corporation C/o. A.F. Ferguson & Co. Versus Dy. Director of Income-tax – 1 (2) , Mumbai

2016 (4) TMI 386 - ITAT MUMBAI

Entitlement for benefit of indexation - capital gain computation - Held that:- The assessee company being a non-resident is not covered by the first proviso to Sec. 48, however, it is entitled for benefit of indexation since the shares were purchased in Indian currency. The first proviso to Sec. 48 ensures that a non-resident, who utilizes his foreign currency, is taxed after taking into consideration the fluctuation in the exchange rate. The Indian rupee, which has in the past appreciated again .....

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arjit Singh, Judicial Member For the Petitioner : Shri Arvind Sonde For the Respondent : Dr. S. Pandian (DR) ORDER Per R. C. Sharma, AM This is an appeal filed by the assessee against the order of CIT(A)-10, Mumbai dt. 5.10.2010 for the A.Y 2004-05, in the matter of order passed u/s. 143(3) of the Income Tax Act, 1961, wherein following grounds have been taken by the assessee. 1. The Commissioner of Income tax Appeals-10, Mumbai [hereinafter referred to as CIT(A)] erred in upholding the action o .....

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st proviso to section 48 of the Act is not applicable to your appellant. The CIT(A) ought to have held that the second proviso to section 48 of the Act is applicable as the shares are either acquired in Indian currency or are converted from preference shares and so are outside the scope of the first proviso to section 48 of the Act. 3. The CIT(A) erred in upholding the AO's action of not allowing carry forward of long term capital loss of ₹ 6,15,64,083 pertaining to the assessment year .....

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m capital loss in shares of M/s. Kumaran System Pvt. Ltd. and M/s. Signe Software Pvt. Ltd. for which documentary evidence and RBI permission of sale of shares filed. On perusal of computation of total income submitted with return of income, the AO found that the assessee has adopted index cost of acquisition with regard to the determination of capital gains/loss. The AO observed that since the assessee is a non-resident company, the benefit of indexation is not available to it. The assessee quo .....

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oviso to that section is not available to non-resident assessee s. This is so because; the effect of exchange fluctuation has already been taken care of by the first proviso. 3. By the impugned order, CIT(A) confirmed the action of the AO for declining the benefit of second proviso to Sec. 48. 4. It was contended by the ld. AR that the issue under consideration is squarely covered by the order of the Hon'ble Delhi High Court in the case of Cairn UK Holdings Ltd. (359 ITR 268), wherein the Ho .....

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tles an assessee to claim benefit of indexation while computing long-term capital gains. Thus the second proviso to section 48 has object of neutralizing the effect of inflation. Proviso to section 112(1) is certainly not applicable in case where an assessee is entitled to benefit of indexation under the second proviso to section 48. If an assessee does not take benefit of indexation under the second proviso of section 48, they are eligible for the lower rate of tax @10%. Otherwise, an assessee .....

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second proviso to section 48. [Para 26] Similar contention was raised on behalf of the revenue in the case of Timken France SAS (supra) but was rejected observing that the circular of the Central Board of Direct Taxes or explanatory memoranda were not equivocal 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). The expression 'level playing field' was flexible and capable of being u .....

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e is applicable and the contention or plea is in fact reflective of the true intention of the legislature. [Para 28] 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 rupe .....

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d 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 for repatriation after the sale. From the said assessee's view point and objective, he is most concerned with exchange rate fluctuation and his true and actual gain should take into account the exchange rate fluctuation. The second proviso is applicable to all others including non-residents, who are not covered by the first proviso .....

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reciation in their currency value. Inflation by itself cannot be the sole or even a primary factor in exchange rate depreciation. Current account deficit and public debt, terms of trade, political stability, economic performance, etc. are various other factors, which determine the exchange rate. These are complex factors and several parameters can affect the foreign exchange rate fluctuation and, therefore, persons affected by exchange rate fluctuation indulge in hedging. [Para 29] Inflation in .....

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opaque in principle and difficult to decipher and pin-point in practice. [Para 30] The first proviso to section 48 ensures that a non-resident, who utilized his foreign currency, is taxed after taking into consideration the fluctuation in exchange rate. Indian rupee can and has in past appreciated against foreign currencies. In such cases, the long-term capital gains payable can increase. On the contrary there happened no occasions of deflation in India in last two decades and it would be incorr .....

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ecurities 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 share or debentures in Indian company, whether or not the said shares or debentures are listed or not. Thus, proviso to section 112(1) is more restrictive and will not necessarily apply in all cases covered by the first proviso to section 48. Secondly, the proviso to section 112(1) is not applicabl .....

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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 sec 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. Legislative policy and object is nothing more, and it is impermissible to read into the said p .....

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