2005 (2) TMI 20 - AAR - Income Tax

Applicant, tax resident of UK is registered in India as a Foreign Institutional Investor (FII) with the SEBI - applicant, as trustee of Universities Superannuation Scheme, a FII will not be entitled to opt out of the provisions of section 115AD which deal with the taxability of the income earned by a FII, and cannot claim to be covered by s. 48 r.w.s. 112 together with indexation provisions for computing capital gains/losses arising to it from its investment activities in India.

Issues Involved:
1. Whether the applicant, a Foreign Institutional Investor (FII), can opt out of the provisions of section 115AD of the Income-tax Act, 1961, and apply the normal provisions of the Act, i.e., section 48 read with section 112, for computing capital gains/losses.
2. Whether the applicant, if allowed to opt out of section 115AD in a particular year, is precluded from taking a different position in subsequent years.
3. Whether the provisions of section 115AD are applicable to an assessee who has suffered capital losses on the transfer of securities.

Issue-wise Detailed Analysis:

1. Opting Out of Section 115AD:
The applicant argued that sections 48 and 112, which deal with capital gains, should apply to all assessees, including FIIs, thereby allowing the benefit of indexation. The applicant contended that section 115AD, which provides a concessional tax rate, should not apply when losses are incurred, as no tax is levied on losses. The applicant further argued that FIIs should have the option to choose the more beneficial provisions, similar to domestic companies.

The judgment clarified that section 115AD is a special provision for FIIs and overrides the general provisions of sections 48 and 112. Section 115AD is comprehensive and self-contained, specifying the mode of computation and concessional tax rates for FIIs. The legislative intent behind section 115AD is to provide a special tax regime for FIIs, which includes both profits and losses. Therefore, FIIs do not have the option to opt out of section 115AD and apply sections 48 and 112.

2. Consequential Option in Subsequent Years:
Since the ruling on the first question determined that FIIs cannot opt out of section 115AD, the second question, which is consequential to the first, does not arise. The judgment stated that if the applicant cannot opt out of section 115AD in any year, the question of taking a different position in subsequent years is moot.

3. Applicability of Section 115AD to Capital Losses:
The applicant argued that section 115AD should not apply when capital losses are incurred, as the section is intended for concessional tax rates on gains. The judgment held that section 115AD applies to both capital gains and losses. The section is inclusive and its application does not depend on the result of the computation. The judgment cited the Supreme Court's observation that losses are negative profits and must be included in the computation of taxable income. Therefore, section 115AD applies to an assessee who has suffered capital losses on the transfer of securities.

Non-Discrimination Clause:
The applicant contended that denying the option to opt out of section 115AD is discriminatory and violates Article 26 of the Double Taxation Avoidance Agreement (DTAA) between India and the UK. The judgment clarified that Article 26 forbids discrimination based on nationality, not residential status. FIIs, being non-residents, are given special treatment under section 115AD, which does not amount to discrimination. The different tax treatment is based on residential status, not nationality, and therefore does not violate Article 26 of the DTAA.

Ruling:
1. The applicant, as a Foreign Institutional Investor, cannot opt out of the provisions of section 115AD and apply sections 48 and 112 for computing capital gains/losses.
2. The question of taking a different position in subsequent years does not arise, as the applicant cannot opt out of section 115AD.
3. The provisions of section 115AD apply to an assessee who has suffered capital losses on the transfer of securities.

Conclusion:
The judgment concluded that section 115AD, being a special provision for FIIs, overrides the general provisions of sections 48 and 112. FIIs cannot opt out of section 115AD, and the section applies to both capital gains and losses. The different tax treatment based on residential status does not amount to discrimination under Article 26 of the DTAA.

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