2006 (11) TMI 235 - AT - Income Tax

Summary

Issues Involved:
1. Applicability of the proviso to Section 112 of the Income Tax Act, 1961, to non-residents.
2. Interpretation of the first and second provisos to Section 48 of the Income Tax Act, 1961.
3. Determination of the appropriate tax rate for long-term capital gains for non-residents.

Issue-wise Detailed Analysis:

1. Applicability of the Proviso to Section 112:
The primary issue in this case is whether the proviso to Section 112, which allows for a lower tax rate of 10% on long-term capital gains, applies to non-residents whose gains are computed under the first proviso to Section 48. The assessee contended that the proviso to Section 112 should apply, arguing that the proviso applies to any long-term capital asset being listed securities or units, irrespective of whether the second proviso to Section 48 is applicable. The Assessing Officer (AO) and the Commissioner of Income Tax (Appeals) [CIT(A)] disagreed, stating that the proviso to Section 112 is applicable only to cases where the second proviso to Section 48 is applicable, and since the assessee's gains were computed under the first proviso to Section 48, the lower tax rate of 10% did not apply.

2. Interpretation of the First and Second Provisos to Section 48:
The first proviso to Section 48 applies to non-residents and allows for the computation of capital gains in foreign currency, which is then reconverted into Indian currency. This method is designed to protect non-residents from the effects of currency fluctuation. The second proviso to Section 48, on the other hand, provides for indexation benefits to adjust for inflation, applicable to all assessees except non-residents who fall under the first proviso. The Tribunal noted that the two provisos are mutually exclusive, meaning that an assessee cannot choose between them; their applicability is determined by the nature of the asset and the status of the assessee.

3. Determination of the Appropriate Tax Rate:
The Tribunal upheld the AO's and CIT(A)'s view that the proviso to Section 112 does not apply to non-residents whose gains are computed under the first proviso to Section 48. The Tribunal reasoned that the legislature's intent was clear in restricting the benefit of the lower tax rate under the proviso to Section 112 to those cases where the second proviso to Section 48 is applicable. The Tribunal emphasized that if the legislature had intended to extend the benefit of the lower tax rate to non-residents under the first proviso to Section 48, it would have explicitly mentioned so in the proviso to Section 112. Consequently, the Tribunal concluded that the appropriate tax rate for the assessee's long-term capital gains is 20%, as stipulated under Section 112(1)(c).

Conclusion:
The Tribunal dismissed the assessee's appeal, affirming that the proviso to Section 112 does not apply to non-residents whose capital gains are computed under the first proviso to Section 48. Therefore, the long-term capital gains of the assessee are to be taxed at the rate of 20%.