2009 (7) TMI 32 - AAR - Income Tax

Sale of shares for a non resident to a person in resident in India Rate of Income Tax on Long Term Capital Gain Held that tax on long term capital gain is required to paid at the rate of 10% u/s 112(1) instead of Normal rate of tax equal to 20% - The words before giving effect to 2nd proviso to section 48 only mean that the calculation under the 2nd proviso shall not enter into the computation of capital gain, wherever that proviso is applicable. The said expression cannot be construed as a condition precedent for invoking the proviso to section 112(1). Further LTCG to be computed by applying Section 48 of the Income-tax Act read with first proviso to Section 48 and Rule 115A

Summary

Issues:
1. Determination of the applicable tax rate on long term capital gains from the sale of shares of an Indian company by a non-resident company.
2. Interpretation of the first proviso to section 112(1) of the Income-tax Act, 1961 regarding the tax rate for long term capital gains.

Analysis:

Issue 1:
The applicant, a non-resident company incorporated in the United Kingdom, sold its shares in an Indian company to two buyers for a consideration. The applicant contended that the correct tax rate for long term capital gains should be 10%, while the tax was deducted at 20%. The questions raised for advance ruling pertained to the tax rate applicable on the sale of shares of the Indian company and the computation of long term capital gains. The key contention was whether the applicant, as a non-resident foreign company, could avail the benefit of the proviso to section 112(1) of the Income-tax Act, which prescribes a lower tax rate of 10% for specified long term capital assets like listed securities.

Issue 2:
The ruling involved an in-depth analysis of the first proviso to section 112(1) of the Income-tax Act, which sets out the tax rates for long term capital gains for both residents and non-residents. The Authority considered the applicant's argument that the non-resident foreign company should be entitled to the lower tax rate of 10% despite not being eligible for the benefit of the second proviso to section 48, which provides for indexation. The Authority cited previous rulings to support the position that a non-resident company could benefit from the lower tax rate under the proviso to section 112(1) even if the indexation benefit was not available. The interpretation focused on the wording of the proviso and clarified that the calculation of capital gains should exclude the indexation formula under the second proviso to section 48 for the reduced tax rate to apply.

The ruling affirmed that the applicant was liable to pay tax at the lower rate of 10% as per the proviso to section 112(1) of the Income-tax Act, in addition to surcharge and cess. The decision provided clarity on the tax treatment of long term capital gains for non-resident companies selling shares of Indian companies, ensuring consistency with previous rulings of the Authority.