2011 (8) TMI 32 - AAR - Income Tax

Capital gain - 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 - both for a non-resident and a resident indexation regarding bonds and debentures is excluded - 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 - 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 - 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 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

Issues Involved:
1. Applicability of the proviso to Section 112(1) of the Income Tax Act, 1961 for determining the tax rate on long-term capital gains for non-residents.
2. Interpretation of the phrase "before giving effect to the provisions of the second proviso to section 48" in the context of non-residents.
3. Eligibility of non-residents for the benefit of a lower tax rate of 10% on long-term capital gains without indexation.

Issue-wise Detailed Analysis:

1. Applicability of the proviso to Section 112(1) of the Income Tax Act, 1961 for determining the tax rate on long-term capital gains for non-residents:

The applicant, Cairn UK Holding Ltd. (CUHL), sought a ruling on whether the tax payable on long-term capital gains from the sale of equity shares of Cairns India Limited (CIL) would be 10% as per the proviso to Section 112(1). The proviso to Section 112(1) provides a lower tax rate of 10% on long-term capital gains arising from the transfer of listed securities, units, or zero-coupon bonds if the tax payable exceeds 10% of the capital gains before giving effect to the second proviso to Section 48. The applicant argued that this lower rate should apply regardless of whether the assessee is a resident or non-resident.

2. Interpretation of the phrase "before giving effect to the provisions of the second proviso to section 48" in the context of non-residents:

The applicant contended that the phrase "before giving effect to the provisions of the second proviso to section 48" has been misinterpreted by the ITAT in the BASF Aktiengesellchaft case. The applicant argued that the eligibility for indexation under the second proviso to section 48 is not a prerequisite for availing the benefit of the lower tax rate under the proviso to section 112. They highlighted that zero-coupon bonds, which are excluded from indexation benefits under the third proviso to section 48, are still eligible for the lower tax rate, indicating that indexation eligibility is not a condition for the lower rate.

3. Eligibility of non-residents for the benefit of a lower tax rate of 10% on long-term capital gains without indexation:

The Revenue argued that the proviso to section 112(1) does not apply to non-residents as the second proviso to section 48, which provides for indexation benefits, is not applicable to them. They asserted that the first and second provisos to section 48 are mutually exclusive, and non-residents cannot claim double benefits of protection against rupee value fluctuation and the lower tax rate. The Revenue further emphasized that the legislative intent was to exclude non-residents from the benefit of the lower tax rate under section 112(1).

Ruling:

The Authority for Advance Rulings concluded that the proviso to section 112(1) applies to all sub-clauses of section 112(1) and not just to clause (d). However, they determined that the benefit of the lower tax rate of 10% is only available to assets that are eligible for indexation under the second proviso to section 48. Since non-residents are not eligible for indexation benefits under the second proviso, they cannot avail the lower tax rate of 10% on long-term capital gains. The Authority ruled that the tax payable on long-term capital gains arising to CUHL on the sale of equity shares of CIL will not be 10% of the amount of capital gains as per the proviso to Section 112 of the Income-tax Act.

Conclusion:

The ruling clarified that non-residents are not entitled to the benefit of the lower tax rate of 10% on long-term capital gains under the proviso to section 112(1) as they are not eligible for indexation benefits under the second proviso to section 48. The decision emphasized the legislative intent and the specific provisions of the Income Tax Act, highlighting that double benefits are not conferred unless explicitly provided by the statute.

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