2008 (11) TMI 19 - AAR - Income Tax

Applicant Non-resident held that the tax payable on the long term capital gains arising on sale of equity shares of FIL (Indian company) being listed securities will be 10% of the amount of capital gains as per the proviso to s. 112(1) held that while calculating the long term capital gain chargeable to tax interest paid by the applicant to the shareholders of FIL as per the directives of the SEBI will also be treated as a part of the cost of acquisition of the shares

Issues Involved:
1. Tax rate applicable on long-term capital gains from the sale of listed equity shares.
2. Inclusion of interest paid to shareholders in the cost of acquisition of shares.

Issue-wise Detailed Analysis:

1. Tax Rate on Long-term Capital Gains:
The applicant, a non-resident company, sought clarity on the tax rate applicable to long-term capital gains arising from the sale of equity shares of Foseco India Ltd. (FIL). The shares were held for more than 12 months and were listed on recognized stock exchanges in India. The applicant argued that the tax rate should be 10% as per the proviso to section 112(1) of the Income-tax Act, 1961.

The relevant part of section 112(1) was examined, which outlines the tax rates for different categories of assessees, including non-resident companies. The proviso to section 112(1) states that the tax rate on long-term capital gains from listed securities should not exceed 10%, provided certain conditions are met.

The applicant referenced the ruling in the case of Timken SAS, France, where it was held that the proviso to section 112(1) applies to both residents and non-residents, allowing non-resident foreign companies to benefit from the reduced tax rate of 10%. The Authority for Advance Rulings (AAR) agreed with this interpretation, noting that the applicability of the second proviso to section 48 (related to indexed cost of acquisition) is not a prerequisite for availing the 10% tax rate under section 112(1).

The AAR concluded that the applicant is entitled to the reduced tax rate of 10% on the long-term capital gains from the sale of FIL shares, answering the first question in the affirmative and in favor of the applicant.

2. Inclusion of Interest in Cost of Acquisition:
The second issue concerned whether the interest paid to the shareholders of FIL, as directed by SEBI due to the delay in making the open offer, should be included in the cost of acquisition of the shares. The applicant argued that the interest paid was part of the acquisition cost since it was necessary to compensate the shareholders for the delay and was paid before the acquisition was completed.

Section 48 of the Income-tax Act specifies that the cost of acquisition should include the capital expenditure incurred wholly in connection with the transfer of the asset. The applicant contended that the interest paid falls within this definition.

The AAR found merit in the applicant's argument, noting that the term "cost of acquisition" should be understood in a commercial sense. The interest paid to the shareholders was an integral part of the acquisition process and could not be dissociated from the cost of acquiring the shares. The AAR referenced several judicial precedents, including the Delhi High Court's decision in CIT vs. Mithlesh Kumari and the Supreme Court's rulings in Miss Dhun Dadabhoy Kapadia vs. CIT and Challapalli Sugars vs. CIT, which supported a broader interpretation of acquisition costs.

The AAR concluded that the interest paid to the shareholders should be included in the cost of acquisition of the shares, answering the second question in favor of the applicant.

Conclusion:
The AAR ruled in favor of the applicant on both issues. The tax rate on long-term capital gains from the sale of FIL shares is 10% as per the proviso to section 112(1), and the interest paid to the shareholders should be included in the cost of acquisition of the shares.

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