2018 (2) TMI 771 - AAR - Income Tax

Entitlement to benefit of proviso to Section 112 (1) - tax payable on the long term capital gains arising on the sale of equity shares of Hero Honda Motors Ltd. - benefit of indexation under Second proviso to Section 48 - Held that - The benefit of the proviso of Section 112(1) of the Act is applicable in the case of non-resident as well,in spite of section 48. This issue is identical to the above case and the decision in Cairn UK 2013 (10) TMI 430 - DELHI HIGH COURT is squarely applicable. Following the above decision we conclude that the benefit under Section 112(1) of the Act could not be denied to the Applicant. We have been following this line in several cases and more recently in the case of Pan-Asia iGate Solutions, Mauritius, In Re 2014 (5) TMI 631 - AUTHORITY FOR ADVANCE RULINGS . Claim deduction for expenses claimed as incurred in connection with the transfer of shares of HHML, as per provisions of section 48 - Held that - Words wholly and exclusively do not connote necessarily . If the expenses have been incurred in connection with the transfer, they are to be allowed. The words in connection with are of wide import and if such expenses have an intimate connection with the transfer, they have to be allowed u/s 48. In the instant case there is no doubt that the expenses are incurred for effecting the transfer only. Even if it was a mutual decision of the two parties for their convenience, that the shares should be dematerialized and an Escrow account be opened, as contended by the Revenue, this in no way suggests that the expense were not incurred wholly and exclusively in connection with the transfer of shares. During the course of the final hearing, the Revenue has not opposed the Applicant s contentions on the issue. Hence, the same are to be treated as allowable as a deduction under section 48 of the Act. - Appeal Decided in favour of assessee

Summary

Issues Involved:
1. Applicability of the 10% tax rate on long-term capital gains under the proviso to section 112(1) of the Income Tax Act, 1961.
2. Eligibility for deduction of expenses incurred in connection with the transfer of shares under section 48 of the Income Tax Act, 1961.

Detailed Analysis:

Issue 1: Applicability of the 10% Tax Rate on Long-Term Capital Gains

The Applicant, a Japanese corporation, sought a ruling on whether the tax payable on long-term capital gains from the sale of equity shares of Hero Honda Motors Limited (HHML) would be 10% as per the proviso to section 112(1) of the Income Tax Act, 1961. The Applicant argued that it is entitled to this benefit despite not being eligible for indexation under the second proviso to section 48. The Applicant cited the judgment of the Delhi High Court in Cairn UK Holdings Ltd. vs. DIT, which supported their position.

The Revenue opposed this, arguing that the proviso to section 112(1) does not apply to non-residents, as the second proviso to section 48 is not applicable to them. They contended that the first and second provisos to section 48 are mutually exclusive and provide distinct modes of computation for different sets of persons. The Revenue further argued that the legislative intent was to provide a level playing field between resident and non-resident assessees, and allowing the benefit of the proviso to section 112(1) to non-residents would disrupt this balance.

Upon consideration, the Authority noted that the Revenue had conceded that the issue was covered by the judgment in Cairn UK Holdings Ltd. vs. DIT, where the Delhi High Court held that the benefit of the proviso to section 112(1) is available to non-residents. The Authority agreed with this interpretation, stating that the language of the proviso to section 112(1) syntactically and grammatically mandates one interpretation, which does not exclude non-residents from its benefit. The Authority concluded that the benefit under section 112(1) of the Act could not be denied to the Applicant, following the precedent set by Cairn UK Holdings Ltd. and other similar cases.

Issue 2: Eligibility for Deduction of Expenses Incurred in Connection with the Transfer of Shares

The Applicant sought a ruling on whether the expenses incurred for the computerization of share certificates and the opening of an Escrow account, necessary for the transfer of shares, could be deducted under section 48 of the Act. The Applicant argued that these expenses were incurred "wholly and exclusively in connection with such transfer" and should be allowed as deductions.

The Revenue initially agreed that the Applicant was eligible for the deduction but later contended that the expenses were not incurred wholly and exclusively in connection with the transfer and were merely for the convenience of the parties involved.

The Authority examined the nature of the expenses and found that the words "wholly and exclusively" do not imply "necessarily." If the expenses are incurred in connection with the transfer, they should be allowed. The Authority noted that the expenses in question were indeed incurred for effecting the transfer and had an intimate connection with it. Therefore, the expenses were deemed allowable as deductions under section 48 of the Act.

Conclusion:

1. Question (i): The tax payable by the Applicant on the long-term capital gains arising from the sale of equity shares of Hero Honda Motors Limited will be 10% (plus surcharge and cess) of the amount of capital gains as per the proviso to section 112(1) of the Act.

2. Question (ii): The Applicant is eligible to claim a deduction for expenses incurred in connection with the transfer of shares of HHML, as per the provisions of section 48 of the Act.

This ruling was pronounced on 7th February 2018.