1990 (8) TMI 196 - AT - Income Tax

Concessional Rate, Equity Shares, Foreign Exchange, Indian Company, Short-term Capital Gains

Summary

Issues Involved:
1. Applicability of concessional tax rate on short-term capital gains under Section 115E.
2. Assessment of interest income on debentures on receipt vs. accrual basis.

Detailed Analysis:

1. Applicability of Concessional Tax Rate on Short-Term Capital Gains under Section 115E:

Background:
The assessees, all Non-resident Indians, claimed that short-term capital gains from the sale of equity shares of M/s Oswal Agro Mills Ltd. should be taxed at a concessional rate of 20% under Section 115E of the Income-tax Act, 1961. The Assessing Officer and the CIT(A) rejected this claim, applying the normal tax rates.

Assessee's Argument:
The assessees argued that the shares were purchased in convertible foreign exchange, thus qualifying as foreign exchange assets under Section 115C. They contended that income derived from these assets, including short-term capital gains, falls under the definition of investment income, which should be taxed at the concessional rate of 20% under Section 115E. They cited the Supreme Court decision in Sevantilal Maneklal Sheth v. CIT, asserting that there is no logical difference between income arising from the asset and income from the sale of the asset.

Revenue's Argument:
The Departmental Representative argued that Section 115E explicitly mentions long-term capital gains, implying the exclusion of short-term capital gains. They contended that if the legislature intended to include short-term capital gains, it would have been explicitly mentioned. They cited various High Court decisions to support their stance.

Tribunal's Decision:
The Tribunal held that short-term capital gains are indeed derived from foreign exchange assets and fall within the definition of investment income under Section 115C. Applying the Supreme Court's rationale, the Tribunal concluded that short-term capital gains should be taxed at the concessional rate of 20% under Section 115E. The Tribunal rejected the Departmental Representative's interpretation, stating that the language of the statute is unambiguous and supports the assessee's claim.

2. Assessment of Interest Income on Debentures on Receipt vs. Accrual Basis:

Background:
The assessees disclosed interest income on debentures from M/s Oswal Agro Mills Ltd. on a receipt basis, while the Assessing Officer assessed it on an accrual basis. The CIT(A) confirmed the assessment on an accrual basis.

Assessee's Argument:
The assessees contended that interest on debentures can be assessed on either an accrual or receipt basis. They argued that since they disclosed interest on a receipt basis, the Assessing Officer should not have assessed it on an accrual basis.

Revenue's Argument:
The Departmental Representative supported the orders of the revenue authorities, citing the decision of the Madras High Court in CIT v. Standard Triumph Motor Co. Ltd., which held that income for non-residents should be assessed on an accrual basis, regardless of the method of accounting adopted by the non-resident.

Tribunal's Decision:
The Tribunal upheld the assessment of interest income on an accrual basis, following the Madras High Court's decision. However, it acknowledged the merit in the assessees' contention that income disclosed on a receipt basis should be excluded if assessed on an accrual basis. The Tribunal remitted the issue to the Assessing Officer to reassess the interest income on an accrual basis while excluding the income already disclosed on a receipt basis. The Tribunal also directed the Assessing Officer to consider the assessees' claim regarding the sale of shares and the corresponding interest accrual.

Conclusion:
The Tribunal allowed the appeals partly, granting the concessional tax rate on short-term capital gains under Section 115E and directing a reassessment of interest income on debentures on an accrual basis, excluding the income disclosed on a receipt basis.