2016 (5) TMI 110 - AT - Income Tax

Entitlement to the benefit of proviso to section 112(1) on sale of the equity shares - Rate application - assessee had applied tax rate of 10% in the terms of the proviso to section 112(1) but the AO has applied tax rate of 20% as the proviso below section 112(1)(c) was not applicable in the case of non-residents - Held that - It is not the case of the Revenue that the assessee did not compute capital gain in terms of the first proviso. Second proviso which is material for our purpose provides that where long-term capital gain arises from the transfer of a long-term capital asset other than capital gain arising to a non-resident from the transfer of shares in an Indian company referred to in the first proviso then the provisions of clause (ii) shall have effect as if for the words cost of acquisition and cost of any improvement the words indexed cost of acquisition and indexed cost of any improvement had respectively been substituted. As capital gain in the instant case has arisen to a non-resident from transfer of shares in an Indian company it is clear that the mandate of second proviso becomes inapplicable and the case gets restricted in the first proviso to section 48 alone. Again reverting to the main issue of the applicability or otherwise of the proviso below section 112(1)(c) we find that tax is payable in respect of income arising from transfer of a long-term capital asset which is before giving effect to the provisions of second proviso to section 48. In such circumstances the case gets covered under the proviso and consequently it is the tax rate of 10% which should be correctly applied. Our view is fortified by the judgment of the Hon ble jurisdictional High Court in Cairn UK Holdings Ltd. (2013 (10) TMI 430 - DELHI HIGH COURT ) in which it has been held that the long-term capital gain earned by the assessee non-resident on off market sale of shares of listed Indian company is taxable @ 10% under the proviso to section 112 and proviso to section 112(1) does not state that an assessee who avails benefit of the first proviso to section 48 is not entitled to the benefit of lower rate of tax at 10%. As the view taken by the DRP is in consonance with that of the Hon ble High Court we ergo countenance the same. - Decided in favour of assessee

Summary

Issues:
1. Dispute over tax rate application on capital gains from the sale of shares.
2. Interpretation of provisions under section 112(1) and section 48 of the Income-tax Act, 1961.

Issue 1: Dispute over tax rate application on capital gains from the sale of shares:
The appeal by the Revenue contested the application of a 10% tax rate by the Assessee on capital gains from the sale of shares, while the Assessing Officer (AO) applied a 20% tax rate. The main contention was whether the proviso to section 112(1) of the Act was applicable to non-residents. The Dispute Resolution Panel (DRP) supported the Assessee's claim based on a judgment by the Delhi High Court in a similar case. The AO applied the DRP's direction and levied a 10% tax rate, leading to the Revenue's appeal against this decision.

Issue 2: Interpretation of provisions under section 112(1) and section 48 of the Income-tax Act, 1961:
The key legal provisions in question were section 112(1) and section 48 of the Income-tax Act, 1961. Section 112(1)(c)(ii) mandated a 20% tax rate on long-term capital gains for non-residents. However, the proviso to section 112(1) allowed for a 10% tax rate if the tax payable exceeded 10% of the capital gains. The case hinged on whether the Assessee's situation fell under the proviso or the general clause. Additionally, section 48 outlined the computation of capital gains, specifying rules for non-residents transferring shares in an Indian company. The judgment referenced the Cairn UK Holdings Ltd. case, where it was established that non-residents could benefit from the 10% tax rate under the proviso to section 112, even if they availed benefits under the first proviso to section 48.

In conclusion, the judgment dismissed the Revenue's appeal, upholding the application of a 10% tax rate on the Assessee's capital gains from the sale of shares. The decision was based on the correct interpretation of the provisions under section 112(1) and section 48, supported by legal precedents and the Delhi High Court's ruling in a similar case.