2016 (4) TMI 386 - AT - Income Tax

Entitlement for benefit of indexation - capital gain computation - Held that - The assessee company being a non-resident is not covered by the first proviso to Sec. 48, however, it is entitled for benefit of indexation since the shares were purchased in Indian currency. The first proviso to Sec. 48 ensures that a non-resident, who utilizes his foreign currency, is taxed after taking into consideration the fluctuation in the exchange rate. The Indian rupee, which has in the past appreciated against various currency, long term capital gains payable can increase. Therefore, the NRI assessee who had purchased shares in Indian currency would be entitled to benefit of second proviso to Sec. 48 on sale of equity shares in question. No merit in the action of the lower authorities declining the benefit of second proviso to Sec. 48. AO is accordingly directed to re-compute the capital gains.

Summary

Issues:
1. Interpretation of second proviso to section 48 for non-resident assessee's eligibility for indexation.
2. Allowance of carry forward of long term capital loss from the assessment year 2003-04.

Issue 1: Interpretation of Second Proviso to Section 48
The appeal involved a non-resident company seeking the benefit of the second proviso to Section 48 of the Income Tax Act, 1961, for indexation on long-term capital gains. The Assessing Officer (AO) denied this benefit, stating that indexation was not available to non-residents. The contention was that since the shares were purchased in Indian rupees, the first proviso to Section 48 would not apply, making the second proviso applicable. The Commissioner of Income Tax Appeals (CIT(A)) upheld the AO's decision, leading to the appeal. The Hon'ble Delhi High Court's judgment in the case of Cairn UK Holdings Ltd. was cited, emphasizing that non-residents under the first proviso are entitled to neutralize exchange rate fluctuation for capital gains, while the second proviso allows indexation. The Court highlighted the different purposes of the two provisos and concluded that a non-resident purchasing shares in Indian currency should benefit from the second proviso for indexation.

Issue 2: Carry Forward of Long Term Capital Loss
The second issue pertained to the disallowance of carry forward of a long-term capital loss of a significant amount from the assessment year 2003-04. The assessee contended that this loss should be allowed to be carried forward. However, the decision did not delve deep into this issue, as the primary focus was on the interpretation of the second proviso to Section 48. The judgment did not provide detailed reasoning or analysis regarding the carry forward issue, as the decision primarily revolved around the interpretation of provisions related to indexation for non-resident assessee's capital gains.

In conclusion, the judgment primarily addressed the interpretation of the second proviso to Section 48 concerning the eligibility of non-resident assessee's for indexation on long-term capital gains. The decision relied on the Hon'ble Delhi High Court's ruling to allow the benefit of indexation to a non-resident company that purchased shares in Indian currency. The judgment did not extensively discuss the carry forward issue, as the main focus was on the applicability of provisions related to indexation for non-residents.