2007 (10) TMI 235 - AAR - Income Tax

Applicant sold its entire shareholding consisting of original and bonus shares to the Indian promoters of NRB - computation of capital gains and the rate of tax to be applied - held that in respect of the long-term capital gain arising from the sale of original and bonus shares of NRB Ltd. the applicant is entitled to the benefit of the first proviso to section 112(1) and, therefore, the quantum of tax payable shall not exceed 10 per cent. of the amount of capital gains.

Issues Involved:
1. Tax rate on long-term capital gains from the sale of originally purchased shares.
2. Tax rate on long-term capital gains from the sale of bonus shares.
3. Computation of long-term capital gains on the sale of bonus shares.

Issue-wise Detailed Analysis:

1. Tax Rate on Long-Term Capital Gains from the Sale of Originally Purchased Shares:
The applicant, a non-resident company, sought an advance ruling on whether the tax payable on long-term capital gains from the sale of originally purchased shares of NRB Bearing Ltd would be 10% as per the proviso to section 112(1) of the Income-tax Act, 1961. The applicant argued that it satisfies all conditions to attract the proviso to section 112(1), thus, the tax on long-term capital gains should be computed at 10%. The Department contended that the applicant cannot avail the lower rate of 10% as the second proviso to section 48, which allows indexation benefits, is not applicable to non-residents. The ruling clarified that the benefit of the proviso to section 112(1) is not limited to residents and can be availed by non-residents as well. The proviso limits the tax rate to 10% on long-term capital gains from listed securities without considering the indexation formula of the second proviso to section 48. The ruling emphasized that there is no exclusionary language in the proviso to section 112(1) that precludes non-residents from availing the benefit. Thus, the applicant is entitled to the benefit of the first proviso to section 112(1), and the tax payable shall not exceed 10% of the capital gains.

2. Tax Rate on Long-Term Capital Gains from the Sale of Bonus Shares:
The applicant also sought clarification on whether the tax payable on long-term capital gains from the sale of bonus shares of NRB Bearing Ltd would be 10% as per the proviso to section 112(1). The ruling held that the proviso to section 112(1) does not distinguish between original and bonus shares. Therefore, the same interpretation applies to bonus shares as well. The ruling further noted that the cost of acquisition for bonus shares should be treated as nil according to section 55(2)(aa)(iiia). Consequently, the long-term capital gains from the sale of bonus shares would be equal to the sale consideration, and such gains are liable to be taxed at the rate of 10% as per the proviso to section 112(1).

3. Computation of Long-Term Capital Gains on the Sale of Bonus Shares:
The applicant initially raised a question on whether the long-term capital gains on the sale of bonus shares should be computed by applying the substantive section 48 without resorting to either the first or the second proviso to the said section. However, the applicant later chose not to press this question, and no answer was called for.

Conclusion:
In conclusion, the ruling affirmed that the applicant is entitled to the benefit of the first proviso to section 112(1) for both original and bonus shares. The tax payable on long-term capital gains from the sale of these shares shall not exceed 10% of the amount of capital gains. The ruling clarified that the cost of acquisition for bonus shares should be taken as nil, and the gains are to be taxed at the concessional rate of 10%.

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