Cairn 112 Proviso Capital Gains
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BEFORE THE AUTHORITY FOR ADVANCE RULINGS (INCOME TAX)NEW DELHI
1st Day of August, 2011
A.A.R. No.950 of 2010
PRESENT
Mr. Justice P.K.Balasubramanyan (Chairman)Mr. V.K. Shridhar (Member)
Name & address of the applicant Cairn U.K. Holdings Ltd.
50 Lothian Road
Edinburg EH 3 9BY
Scotland
Commissioner concerned Director of Income-tax
(International Taxation)- I, Delhi
Present for the applicant Mr. Sunil M.Lalla C.A
Ms. Aarti Sathe, AdvocateMr. 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), NewDelhi
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
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per this share purchase agreement, 135,267,264 equity shares of Cairn
India Holdings Limited (CIHL) were transferred by the applicant to CIL
and as a consideration, CIL issued 861,764,893 equity shares to the
applicant. Accordingly, these equity shares of CIL were allotted to the
applicant under a swap of share arrangement. Approval of the Foreign
Investment Promotion Board of India was also obtained. On 12th
October
2009, Petronas Corporation Intl. Limited (PCIL) acquired 2.29% equity
shares in CIL from the applicant through an agreement dated 14th
October
2009, pursuant to which the applicant transferred 4,36,00,000 equity
shares to PCIL for a consideration of USD 241,426,379.
The transaction took place in off-market-mode and not through the
recognized stock exchange.
2. As per the application, the following question has been framed for a
ruling from this Authority:
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?
3. The applicant submits that in terms of section 195 read with section
9(1) of the Income Tax Act 1961 (Act), PCIL was liable to withhold taxes
from the consideration to be paid to the applicant. An application made
under section 197 of the Act for a certificate for withholding of tax by
PCIL at the rate of 10% on the long-term capital gains in view of the
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proviso to section 112(1) of the Act was turned down and the applicant
was asked to withhold tax at the rate of 20%.
4. The applicant submits that proviso to section 112 provides that where
the tax payable in respect of any income arising from the transfer of a long-
term capital asset, being listed securities or units or zero coupon bond,
exceeds 10% of the amount of capital gains before giving effect to the
provisions of the second proviso to section 48 of the Act, then, such excess
shall be ignored for the purposes of computing the tax payable by the
assessee. The proviso to section 112 was enacted with a view to provide
lower rate of tax of 10% on long-term capital gains in respect of listed
securities or units or zero coupon bonds. The applicant is of the view that
what is relevant is the capital gains arising from transfer of the above
mentioned specified securities and it is immaterial whether the assessee
who has earned the capital gain is a resident or non-resident.
5. The applicant explains 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.
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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 Honble 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:
a) The benefit of lower rate of tax at 10% under the proviso
to section 112 has been extended to zero coupon bond (ZCB)
by an amendment made in the proviso to section 112 by the
Finance Act 2005. However, for computation of capital gains
under section 48 in respect of ZCBs, the benefit of indexation
under the 2nd
proviso to section 48 is specifically excluded by
the 3rd
proviso to section 48. If it is accepted that the eligibility
of benefit of indexation under the 2nd
proviso to section 48 is a
sine qua non for availing the benefit of lower tax rate of 10%
under the proviso to section 112, then ZCBs would go out of the
purview of section 112(1), whereas ZCBs have been specifically
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included by way of amendment in the proviso to section 112 so
as to be eligible for the lower rate of tax at 10%. This
interpretation would render the amendment infructuous.
b) The proviso to section 112(1) granting lower rate of tax at
10% is also applicable to listed securities. Explanation to the
said proviso provides that listed securities means securities as
defined in clause (h) of section 2 of Securities Contracts
(Regulations) Act, 1956, which includes debentures. Thus, the
proviso to section 112 (1) granting lower rate of tax at10%
would be applicable to debentures. But in view of 3rd
proviso to
section 48, the indexation benefit under the 2nd
proviso will not
apply to debentures. If this contention is accepted then a
resident assessee would have to pay tax at 20% for transferring
the listed debentures which would give rise to unintended
results. The law is fairly clear that if an interpretation gives rise
to unintended results or renders a word redundant or
superfluous, then it needs to be avoided as has been held by the
Honble Supreme Court in the cases of J.H.Gotla, 156 ITR 323;
C.W.S. (India) Ltd. Etc, 208 ITR 649: Hindustan Bulk Carriers,
259 ITR 449 and Grasim Industries Ltd., (2002) 4 SCC 297.
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7. In order to further explain the meaning ofthe phrase before giving
effect to or without giving effect to, the learned advocate points out that
the same phrase has been used in the Act in section 88 which provides for
a deduction from the amount of income tax. Ifthe revenues interpretation
ofthe phrase before giving effect to is to be accepted, then it would lead
to an absurd result where an assessee who is an individual 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 revenues 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
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expressed the view that it would be irrational and even incongruous to
allocate the proviso only to the preceding clause, clause (d) to section112
of the Act. The same view has been taken by Learned ITAT in the case of
BASF cited supra. Moreover, this is self-evident from the formatting of
section 112(1) as it appears in the Act.
9. Without prejudice, the applicant submits that merely because a
resident assessee can have one of the benefits i.e. indexation or lower rate
of rate of 10%, non-resident cannot be denied the benefit on the ground
that it is also entitled to the benefit of first proviso to the section 48. For
example, section 115BBA, and section 115E of the Act extend additional
benefits to non-resident assesses. In Timken France SAS cited supra, this
authority has held that double benefit is not a taboo under the law. Similar
was the view in the cases of Mandeep Eng. & Pkg. Ind. (P) Ltd. [2007]
292 ITR 1 (SC), G.V. Venugopal [2005] 273 ITR 207 (Mad) and Nagesh
Devidas Kulkarni & Ors. [2007] 291 ITR 407 (Bom).
10. Learned advocate finally submits without prejudice that where two
views are possible, the view in favour of the assessee should be adopted as
held by the Honble Supreme Court in Madho Prasad Jatia [1976] 105 ITR
197, Naga Hills Tea Co. Ltd. [1973] 89 ITR 236, J.K. Hosiery Factory
{1986] 159 ITR 85 and Poddar Cement (P) Ltd. Etc. [1997] 226 ITR 625.
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11. The revenue submits that the expression before giving effect to the
2nd
proviso to section 48 pre-supposes the existence of a case where
computation of long- term capital gains could be made in accordance with
the formula contained in the 2nd
proviso in section 48. Occasion to apply
the proviso to section 112(1) does not arise as the 2nd
proviso to section 48
is not applicable to non-residents. The 1st
and the 2nd
provisos to section 48
are mutually exclusive as they provide distinct modes of computation of
capital gains to two different sets of persons. The non-resident foreign
company cannot claim to have the double benefit of the protection against
rupee value fluctuation as well as the indexation. In view of the language
employed in the proviso, it has no application to non-residents and foreign
companies specified in clause(c) category assessees. This is further
fortified by the language used in sections 115AB and 115AD which
specifically prohibit application of 1st and 2nd provisos, as the case may be.
The intention of the legislature in introducing the 1st
proviso to section 48
is also clear from the explanatory notes to the Finance Act 1992 issued
vide CBDTs 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 legislatures
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
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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
applicants contention that if the Revenues 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
proviso to section 48 w.e.f. 1-4-1998 and were included to
confer benefit of lower rate of tax at 10% w.e.f. 1.4.2006. There is
nothing inconsistent and rather it supports the contention of the Revenue.
13. Regarding the reference made by the applicant that due to the
mention of the phrase before giving effect to deduction under Chapter
VIA in section 88 would render individual or HUF incapable of availing
the rebate under section 88 because an individual or HUF will not be able
to claim certain deductions under Chapter VIA, the Revenue submits
that it is not a correct analogy as in the case of an individual or HUF, it is
very much possible to give effect to some of the provisions of Chapter-VI
A, which does not exclude individual or HUF, whereas in the case of a
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non-resident, no part of the second proviso to section 48 is applicable and
therefore no effect can be given.
14. The Revenue submits that the applicant is taking a hypothetical
situation when it says that it cannot be barred from claiming double
benefits: one on account of 1st
proviso and the other on account of lower
rate of tax. The applicant cannot pre-suppose the existence of a double
benefit unless so provided by the legislature.
15. Referring to the rulings of this authority in Timken France case and
other cases, the Revenue submits that the ruling of the Honble Authority
is binding only on the applicant and on the concerned CIT and that too in
relation to a specific transaction. It does not have the force of precedent
and is only of persuasive value. On the issue before the authority, reliance
is placed on the order of the ITAT Mumbai bench in the case of BASF
Aktiengesellshaft, 293 ITR (AT) 1., decided in its favour.
16. In the book entitled Indian Double Taxation Agreements and Tax
Laws Volume-1 by Sh. D.P.Mittal, the principles of interpretation of
fiscal statutes of domestic laws are summarized at pages 1.145/6 as under:
The principle of interpretation of domestic statutes are
variously expressed by saying that in fiscal statutes one must
have regard to the letter and the spirit of the law; that the
subject cannot be taxed by inference and analogy; that in a
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taxing Act there is no governing principle to look at but one
has simply to go to the Act itself to see whether the tax claim
is that which the statute imposes; that while construing the
taxing Act, 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 sectionMurarilal 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
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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 section 112(1) was considered at length by this Authority in the case of
Timken France cited supra to arrive at the following conclusion:
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 extending the
benefit of reduced rate of tax in terms of the proviso to
section 112(1) to the non-residents and foreign companies.
They do not speak one way or the other on the point whether
the intention was to exclude the non-residents/foreigncompanies [falling under clause (c) of section 112(1)] in the
matter of availment of reduced rate of tax.
13.4. Neither the expression all assessees in the
CBDT circular on which the applicant is relying nor the
wording level playing field which is sought to be relied
upon by the Revenue are clinching. No definite inference can
be drawn from the terminology of the circular. It hardly needs
any emphasis that the words employed in a Circular intended
for administrative guidance cannot be interpreted as those in a
statute. It is not uncommon to find some loosely wordedexpressions in the circulars and explanatory notes. That the
expression all assessees used in para 41.2 includes non-
resident assesses is not at all clear especially in view of the
fact that the purport of para 41.2 was not to focus attention on
that particular aspect. So also the expression level playing
field is flexible and capable of being understood in more than
one way as amply reflected in the arguments of both the
counsels. There is nothing in the said circulars or explanatory
memoranda to suggest or indicate that the non-residents areeither excluded or not excluded from drawing the benefit of
proviso to section 112(1).
We are of the view that the present issue is to be resolved
by the relevant provisions of the Act as they stand.
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17. Section 112(1) of the Act reads as under:
(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 longterm 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 income-tax calculated on such long-
term capital gains at the rate of twenty per cent;
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(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.
Provided xx xx xx
xx xx xx
Explanation.- for the purposes of this section, -
xx xx xx
xx xx xx
18. From the reading of the section 112(1), it may be noticed that the
sub-clause (a) ends with a proviso, sub-clause (b) had a proviso which was
omitted w.e.f. 1-4-1996, sub-clause (c) does not have a proviso. At the end
of each of the sub-clauses (a),(b) and (c), semi-colon i.e. (;) is placed to
connect independent clauses (a),(b),(c) and (d) to indicate a closer
relationship between them. But, at the end of the clause (d), a full-stop i.e.
(.) is placed to mark the end of declarative sub-clauses (a), (b), (c) and (d).
Thereafter, a proviso is placed below sub-clauses (d). Secondly, the first
limb of the said proviso beginning with: 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,,
applies to a particular kind of long-term capital asset and not to a person
under the Act. These two circumstances would suffice to hold the view
that the ambit of the said proviso extends not only to sub-clause (d) to
section 112(1) but to all the sub-clauses to section112(1) of the Act. In
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other words, the proviso below sub-clause (d) is a proviso to section112
(1) of the Act. To this extent, we are in agreement with the ruling of this
authority in Timken France SAS case cited supra.
19. It is important to have a look at the definition ofzero coupon bond
as it appears in the Act. A zero coupon bond is defined under section
2(48) of the Act as under:
zero coupon bond means a bond
a) issued by any infrastructure capital company or
infrastructure capital fund or public sector company or
scheduled bank on or after the 1st
day of June, 2005;
b) in respect of which no payment and benefit is received or
receivable before maturity or redemption from
infrastructure capital company or infrastructure capital
fund or public sector company or scheduled 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 meaningassigned 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
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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 dealing in zero coupon bonds. In the notification, the CBDT has issued
guidelines stipulating that the application should be made at least three
months before the date of issue of such bonds and cannot be filed for
bonds to be issued beyond two financial years from the year of application.
The applicants have also to fulfill certain conditions relating to tenure of
the bond, credit rating and listing on stock exchanges and more
importantly that the life of the bond should not be less than 10 years and
more than 20 years. The zero coupon bonds are also to be listed at a
recognised stock exchange in India. The money raised is to be invested in
a manner specified in the guidelines. The manner in which pro-rata
amount of discount on a zero coupon bond is to be computed and allowed
a deduction in the hands of the company or fund or public sector company
that issues a zero coupon bond has been provided.
Bonds and debentures are debt instruments with different types of
exposure. They are fixed income instruments and are taken by investors
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looking for regular, fixed income through payment of interest on the
principal purchase. A zero coupon bond pays no coupons and is a distinct
financial instrument different from bond in the common parlance.
The 3rd proviso to section 48 of the Act brings out distinction in
the species of bonds when it excludes bondswhich are capital indexed
bonds issued by the Government. Just as there are capital indexed bonds
issued by the Government, there is another specie of bonds called zero
coupon bondsof separate and distinct nature to which reference is made
by the proviso to section 112(1). The legislature is conscious of this fact.
20. Section 48 of the Act reads as under:
Mode of computation.
48.The income chargeable under the head Capital gains shallbe 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 aforesaid manner of
computation of capital gains shall be applicable in respect of
capital gains accruing or arising from every reinvestment
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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 wordsindexed cost of acquisition and indexed cost of any
improvement had respectively been substituted:
Providedalso that nothing contained in the second proviso shall
apply to the long-term capital gain arising from the transfer of a
long-term capital asset being bond or debenture other than capital
indexed bonds issued by the Government.
xx xx xx xx xx
Explanation.For the purposes of this section, -
xx xx xx xx
xx xx xx xx
21. The 3rd
proviso to section 48 of the Act is a proviso to the 2nd
proviso
and restricts the application of the 2nd
proviso where the capital asset is a
bond or debenture but other than capital indexed bond issued by the
Government. The 3rd
proviso therefore restricts the benefit of indexation to
such assets owned by a person. But the proviso does not apply to long-
term capital assets owned by a person who is a non-resident coming under
the 1st
proviso to section 48. Thus the income chargeable under the head
capital gains is to be computed keeping in mind the restriction imposed
by the 3rd
proviso on the 2nd
proviso in the cases of assessees and assets
coming within its purview. From a reading of 1st, 2
ndand 3
rdprovisos, it
transpires that:
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(i) In the cases of assessees who are non-residents, the 1st
proviso
provides computation of capital gains arising on transfer of shares or
debentures of an Indian company by taking into account fluctuation in
foreign exchange.
(ii) In the cases of those assessees who do not fall under the 1st
proviso, and assets that do not fall under the 1st
proviso, the 2nd
proviso
provides computation of capital gains arising on transfer of shares or
debentures of an Indian company by taking into account indexation.
(iii) If the asset is not a share or debenture, the residents and
non-resident assessees are allowed computation of capital gains on the
basis of indexation. It is clear that in the case of units and zero coupon
bonds, which are other than shares or debentures, all the assessees,
whether residents or non-residents, are eligible to the benefits of
indexation in the computation of capital gains arising on their transfer.
However, the 3rd
proviso denies the benefits of indexation to bonds or
debentures.
22. Proviso to section 112(1) reads as under:
Provided that where the tax payable in respect of any income
arising from the transfer of a long terms capital asset being listed
securities or unit or zero coupon bond, exceeds ten percent of theamount 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 this section, -
(a) Listed securities means the securities
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(i) as defined in clause (h) of section 2 of the Securitiescontracts (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
benefit of lower rate of tax at 10% was already available to non-resident
assessees, in order to bring level playing field with the resident assessees,
proviso under section 112(1) was inserted by the Finance Act 1999 w.e.f
1.4.2000. Thereafter, the Finance Act 2005 inserted zero coupon bond as
one of the assets along with securities and unit in the proviso to section
112(1). We have already noted that zero coupon bond and bond are
different financial instruments. The 3rd
proviso therefore does not include
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zero coupon bond and hence the zero coupon bond is eligible for
indexation under the 2nd
proviso to section 48 of the Act.
24. The importance of the word exceeds occurring between the two
phrases in the above proviso:
where the tax payable in respect of any income
arising from the transfer of a long terms capital asset being listed
securities or unit or zero coupon bond
and
ten percent of the amount of capital gains before
giving effect to the provisions of the second proviso to section 48
means integration of the two limbs of the
proviso. The proviso would stand to nullity if read in isolation. Again at
the end of the two phrases, the phrase used is:
such excess shall be ignored for the purpose of
computing the taxpayable by the assessee.
The application of the proviso can thus be understood in the following
manner:
A. Determine the tax payable on the capital gains
arising from the transfer of long-term capital asset on the income
computed as per section 48 of the Act.
B. Determine 10% of the capital gains arising from
the transfer of long- terms capital asset without giving effect to the
provisions of 2nd
proviso to section 48 of the Act. [10% of the
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capital gains = 10% (full value of consideration cost of
purchase including cost of improvement, if any)]
then,
If the value ofA 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.
25. The assets on which tax is payable in respect of any income arising
from the transfer are listed securities or unit or zero coupon bond. As we
have noted earlier, if the asset is not a share or debenture, the residents
and non-resident assessees are allowed computation of capital gains on the
basis of indexation. In respect of units and zero 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
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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 into the computation
process and is not a condition that unless an assessee is eligible to apply
the indexation formula only then the reduced rate of 10% prescribed by the
proviso to section 112 (1) can be applied. In this regard it may be stated
that the indexation formula already enters into the computation in the first
limb where it is mentioned that tax payable in respect of any income
arising from the transfer of long-term capital asset is to be determined. In
fact there is no issue on this part of proviso whether the 2nd proviso to
section 48 enters into the said computation or not. The issue that arises lies
in the second limb of the proviso starting with the phrase ten percent of
the amount of capital gains before giving effect to the provisions of the
second proviso to section 48. This cannot be read to mean deny the
concessional rate of tax to the category of assessees who are not eligible to
have the benefit of indexed cost of acquisition under the second proviso of
section 48. It only conveys how a particular amount is to be determined.
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Any other meaning would tantamount to rewriting this part of the proviso
of section 112(1).
27. As the indexation on the zero coupon bond is available by virtue of
2nd
proviso, it will affect the computation of capital gains under section 48
on which tax is payable under the first limb of the proviso and thus would
not go out of the purview of the proviso to section 112(1). The zero
coupon bond on which indexation is available will get the benefit of the
lower rate of tax at 10% under the proviso. The exclusion from application
of 1st
and 2nd
provisos to section 48 while calculating the amount of
income tax on the income by way of long-term capital gains in the cases of
non-residents and allow them the benefits of lower tax rates of 10% also
find mention in sections 115AC(3) and 115AD(3) of the Act. The Act has
taken care when, where, and how the 1st
and the 2nd
provisos to section 48
are to be excluded. The long-term capital gains on the sale of shares of the
listed companies are otherwise exempt from tax under section 10(38) of
the Act if the sale of the shares takes place through the recognized stock
exchange on which security transaction tax is paid. However, in this case
such exemption is not available as the shares of the listed company CIL
are sold in the off-market mode.
28. This Authority in the case of Universities Superannuation Scheme,
AAR No.636 of 2004, 275 ITR 434, held that:
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7. .The grievance of the applicant is that the Indiannationals both resident-assessee as well as domestic companies are
entitled to compute their capital gains on the basis of indexed cost ofacquisition and indexed cost of any improvement and on the gains
so determined, they are taxed @ 20% and they are allowed an option tobe taxed @ 10% without indexation under the proviso to sub-section
(1) of section 112 of the Act. We do not think that under proviso tosection 112(1) they have the option to apply the provisions of
indexation for computing capital gains and paying tax @ 10% on thegains so arrived.. The import of the proviso to section 112(1),
discussed above, is that where the tax payable in respect of any incomearising from the transfer of securities (as long term capital assets)
exceeds 10% of the amount of capital gains before giving effect to theprovisions of the second proviso to section 48, then such excess has to
be ignored. In other words, without taking away the right ofcomputation under the second proviso to section 48, FIIs have been
extended the benefit of limiting the tax rate to 10% on the capital gainsarising from the transfer of long-term capital assets being securities.
Under the scheme of section 115AD which applies to FIIs like the
applicant (which does not apply to domestic companies and residentassessees), FIIs are taxed @ 10% of the gains computed under Section48 without indexation, therefore, the proviso puts them on par. ..
This also throws light on this question.
29. We are of the view that as the section 48 must be read with section
112 and if the tax on long-term capital gains provision cannot be given
effect to for any reason, then the provision has no application under the
Act. Where a question had arisen about the interplay and relative scope of
two provisions, the Honble Supreme Court in the case of B.C.Srinivas
Setty, 128 ITR 294 has explained the legal position thus:
. No doubt there is a qualitative differencebetween the charging provision and a computation
provision. And ordinarily the operation of the chargingprovision cannot be affected by the construction of a
particular computation provision. But the question here iswhether it is possible to apply the computation provision at
all if a certain interpretation is placed on the chargingprovision. That pertains to the fundamental integrality of
the statutory scheme provided for each head.
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30. The zero coupon bonds are assets to which 2nd
proviso to section 48
applies and are entitled to the benefit of indexation. This aspect was not
examined by this authority in Timken France and the ruling was given on
the premise that when indexation is not available on bonds in view of the
3rd
proviso to section 48, then explanation to section 112(1) becomes
redundant. Secondly, in Timken France case this authority has read the
reference made to all the assessees in para 41.2 of the explanatory note to
the Finance Act 1999 as reference to all assessees rather than reading it to
such assessees to whom indexation as envisaged in 2nd
proviso to section
48 applies. The ruling in Timken France was thereafter followed by this
Authority in a host of other cases. We are of the view that a ruling under
the Act is confined to the facts and the law projected in the application
leading to the ruling and binding only on that party and the revenue. In a
case where, with respect, certain aspects germane to the issue are not
examined 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
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The Chairman (Adding)
The Honble 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 deals with other capital assets of a non-resident and all
capital assets of a resident and provides for the benefit of indexation; again
to offset inflation. The third proviso introduced with effect from 1.4.1998
then steps in and excludes from the purview of the second proviso
providing for indexation, bonds or debentures other than capital indexed
bonds issued by the Government. Thus, both for a non-resident and a
resident indexation regarding bonds and debentures is excluded.
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Section 112 fixes the tax payable on long term capital gains.
It provides the proportion of tax to be paid at 20% of the Capital Gain,
determined under Section 48, Clause ( c) covers a non-resident (not being a
company) and a foreign company. The proviso introduced with effect
from 1.4.2000, then extends a concession in the matter of payment of tax
in respect of three specified assets by providing that the tax on the capital
gain be 10% and that excess payable under this section be ignored. The
three specified assets are, listed securities, units and zero coupon bonds. It
also provides that calculation of the 10% of tax shall be without resorting
to indexation provided for in the second proviso to Section 48. In the face
of the third proviso to Section 48, no indexation is permissible for bonds
and debentures. The proviso in Section 112 extends relief to the three
categories of assets for those who would have come under the second
proviso to Section 48, but for the third proviso to Section 48.
Does it follow from this that even those assessees who are
entitled to the benefit of the first proviso to Section 48 and the protection
against inflation regarding specified assets, have again to be given a second
benefit. It is said that the intention in introducing the proviso was to bring
about a level playing field. The disadvantage lay with the resident
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assessee regarding bonds and debentures, they being excluded from the
benefit of the first proviso and the second proviso.
Obviously that level playing field had to be by providing relief to the
resident assessee and that is what is done by the proviso in Section 112 in
respect of listed securities, units and zero coupon bonds. The proviso
explicitly mentions that the calculation of the 10% of the Capital Gain
shall be before resorting to indexation contemplated by the second proviso
to Section 48. That means, an assessee not coming under 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
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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 of those assets is kept out of the benefit of
the second proviso. Now a set of securities of those to whom the second
proviso to Sec. 48 applied, that had been kept out of the purview of the
second proviso by the third proviso, have been brought in for relief. This
does not justify an interpretation that what is covered by the first proviso to
Section 48 of the Act is also brought in for a second dose of protection.
In Timken (294 ITR 513), it was stated that the proviso in
Section 112 of the Act was a special provision in relation to the transfer of
certain long term capital assets and that there was no warrant to limit the
reduced rate only to the three categories of resident assessees specified in
Clause (a), (b) and (d). Be it so. It only means that the benefit of the
proviso is also available to a non-resident. But, regarding what asset? It
can only be an asset covered by the second proviso to Section 48 on the
plain language of the proviso. To infer from this that assets of a non-
resident coming under the first proviso to Section 48 has also to be held to
be within the proviso in Section 112 seems to be unwarranted on the
scheme of Section 48 and the language of the first two provisos thereto.
The relief provided for by the proviso to Section 112 is intended to cover
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cases where effect of inflation is not provided for. That is why the proviso
specifies that the calculation of 10% of the Capital Gain should be before
giving effect to indexation.Before giving effect to connotes that effect
has otherwise to be given. That means, the asset must be one qualified for
indexation under the second proviso to Section 48 of the Act. There is no
justification in not giving effect to the words used in the proviso. Nothing
stood in the way of the legislature in specifying that all assets will qualify
for protection. That has not been done. On the scheme of the provisions
and the level playing field sought to be achieved, the natural way of
understanding the proviso is to confine its operations to assets not covered
by the first proviso to Section 48 and the assets specified in the proviso to
Section 112 itself.
When an interpretation of this nature is possible there is no
justification in proceeding on the basis that a double relief is not taboo.
May be it is not taboo, but then, before inferring the grant of it, specific
conferment of such a relief must be found in the Statute.
(Justice P.K. Balasburamanyan)
Chairman
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Ruling
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 of the Income-tax Act.
Accordingly, ruling is given and pronounced on 1st
August, 2011.
(P.K. Balasubramanyan) (V.K. Shridhar)
Chairman Member