2009 (3) TMI 40 - AAR - Income Tax

Long-term capital gains arising to applicant (non-resident) from transfer of shares held in Indian listed company revenue seek to deny indexation benefit provided u/s 112(1) on ground that 2nd proviso to s. 48 is not applicable to a non-resident revenue plea rejected applicant can avail relief of lower rate of tax of 10% u/s 112(1) hold that as per S. 55(2)(b)(i), FMV prevailing on April 1, 1981 ought to be taken as cost of acquisition when bonus shares held by applicant on April 1, 1981

Issues Involved:
1. Taxability of long-term capital gains at the rate of 10 percent under Section 112(1) of the Income Tax Act, 1961.
2. Substitution of Fair Market Value as on April 1, 1981, as the cost of acquisition for bonus shares as per Section 55(2)(b)(i) of the Income Tax Act, 1961.

Issue-wise Detailed Analysis:

1. Taxability of Long-term Capital Gains at 10 Percent:
The applicant, a non-resident company, sought an advance ruling on whether the long-term capital gains from the proposed sale of shares in an Indian listed company would be taxable at the rate of 10 percent as per the proviso to Section 112(1) of the Income Tax Act, 1961.

The applicant argued that the second proviso to Section 112(1) is applicable, thereby entitling them to a 10 percent tax rate. They relied on the ruling in Timken France SAS, which supported this interpretation.

The Revenue opposed, arguing that the second proviso to Section 48, which deals with indexation benefits, is not applicable to non-residents. Therefore, the benefit of the lower 10 percent tax rate under Section 112(1) should not extend to non-residents. They contended that the provisions of Section 48 and Section 112(1) are mutually exclusive, and allowing the 10 percent rate would result in double benefits to non-residents, contrary to legislative intent.

The Authority for Advance Rulings (AAR) referred to the Timken France SAS case, which held that the benefit of the 10 percent rate under Section 112(1) should not be denied to non-residents, even if they are entitled to different reliefs under the first proviso to Section 48. The AAR emphasized that the proviso to Section 112(1) is a special provision for certain long-term capital assets and should not be restricted only to residents. The ruling in Timken France SAS was followed, and the first question was answered in the affirmative, favoring the applicant.

2. Substitution of Fair Market Value as on April 1, 1981:
The second question concerned whether the applicant could substitute the Fair Market Value (FMV) as on April 1, 1981, as the cost of acquisition for bonus shares allotted before that date, under Section 55(2)(b)(i) of the Act.

The Revenue argued that the cost of acquisition for bonus shares, being financial assets allotted without payment, should be 'nil' as per Section 55(2)(aa)(iiia).

The applicant contended that Section 55(2)(aa)(iiia) is subject to Section 55(2)(b)(i), which allows adopting the FMV as on April 1, 1981, for assets acquired before that date. They cited the ruling in Kern-Liebers International GmbH, which supported their stance.

The AAR examined the relevant provisions and concluded that the rules of computation laid down in Section 55(2)(aa) are subject to the provisions of Section 55(2)(b). Therefore, for assets acquired before April 1, 1981, the FMV as on that date can be adopted as the cost of acquisition. The ruling in Kern-Liebers International GmbH was applied, and the second question was answered in the affirmative, favoring the applicant.

Ruling:
Both questions were answered in the affirmative, favoring the applicant. The long-term capital gains arising from the sale of shares will be taxable at the rate of 10 percent, and the FMV as on April 1, 1981, can be taken as the cost of acquisition for the bonus shares.

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