TMI Blog2007 (10) TMI 235X X X X Extracts X X X X X X X X Extracts X X X X ..... quired the shares in NRB Bearings Limited, an Indian company, by making payment in foreign currency i.e. French Francs. Subsequently, over the years, the applicant also received bonus shares from the said Indian company. Thus, the shares held by the applicant - original as well as bonus - constitute 26 per cent of the share capital of NRB Bearings Limited (hereafter referred 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 pe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s rate of taxation (i.e. at 10%), if they choose to compute their long-term capital gains without taking the benefit of second proviso to section 48 (i.e. without indexation). If they choose to take benefit of indexation, then the rate of 20% will apply. By no stretch of imagination, this amendment can mean that the non-resident investors to whom 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 th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Explanation, the securities as defined in clause (h) of section 2 of the Securities Contracts (Regulation) Act, 1956. Under section 2(h) of the said Act, securities include shares, scrips, stocks, bonds, debentures, debenture stock or other marketable securities of like nature in or of any incorporated company 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... The expressions "indexed cost of acquisition" and "indexed cost of improvement" are also defined in the same section. Mode of computation. 48. The income chargeable under the head "Capital gains" shall be computed, by deducting from the full value of the 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 af ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tes on the Direct Laws (Second Amendment) Act, 1989 incorporated in CBDT Circular No. 554 dated 13.2.1990. Non-resident Indians who invest in shares and debentures by utilizing foreign currency are adversely affected when they sell such shares or debentures purchased by them by reason of fall in the value of the Indian rupee vis-ŕ-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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ion 112(1) cannot be denied to the non-residents/foreign companies who are also entitled to a different relief in terms of first proviso to section 48. At the outset, while interpreting the proviso 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 fr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o go out of the purview of the proviso to section 112(1) whereas ZCB was specifically included by way of amendment of the proviso admittedly with a view to extend 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 Re ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and therefore the proviso to section 112(1) would not come into play at all in relation to non-residents/foreign companies. This argument, in our 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-residen ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... certain non-residents institutions were enjoying the benefit of lesser rate and it was not the intention to benefit the 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 Me ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 112(1). We feel that an enquiry to delve into the legislative intent and purpose would lead us nowhere 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e total income of a foreign institutional investor includes income by 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he 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 applicability of the second proviso to section 48 is a pre-requisite for invoking the proviso to section 112(1) ..... X X X X Extracts X X X X X X X X Extracts X X X X
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