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TMI Blog2013 (10) TMI 430X X X X Extracts X X X X X X X X Extracts X X X X ..... 426,379. This transaction dated 12th October, 2009, pursuant to an agreement dated 14th October, 2009, was an off market transaction i.e. not through a stock exchange. The transaction resulted in long-term capital gain of US$ 85,584,251 in the hands of the petitioner, after applying the benefit under first proviso to Section 48 of the Income Tax Act, 1961 (Act, for short). The question raised relates to the rate of tax applicable/payable on the long term capital gains earned. 4. On an application filed by the petitioner, AAR had framed the following question to be answered:- "Whether on the stated facts and in law, the tax payable on long term capital gains arisen to CUHL on sale of equity shares of CIL will be 10% of the amount of capital gains as per proviso to Section 112(1) of the Act?" 5. The case of the petitioner was that under proviso to Section 112(1) they are liable to pay lower rate of tax @ 10% on the said long-term capital gains. The case of the Revenue i.e. Director of Income Tax (International Taxation) was that the proviso to Section 112(1) of the Act was not applicable and, therefore, the petitioner was liable to pay tax @ 20% on the long-term capital gains. 6. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cost of acquisition" and "indexed cost of any improvement" had respectively been substituted. Provided also that nothing contained in the second proviso shall apply to the long-term capital gain arising from the transfer of a long-term capital asset being bond or debenture other than capital indexed bonds issued by the Government. Provided also that where shares, debentures or warrants referred to in the proviso to clause (iii) of Section 47 are transferred under a gift or an irrevocable trust, the market value on the date of such transfer shall be deemed to be the full value of consideration received or accruing as a result of transfer for the purposes of this section. Provided also that no deduction shall be allowed in computing the income chargeable under the head "Capital gains" in respect of any sum paid on account of securities transaction tax under Chapter VII of the Finance (No. 2) Act, 2004. Explanation.-For the purposes of this section,- (i) "foreign currency" and "Indian currency" shall have the meanings respectively assigned to them in Section 2 of the Foreign Exchange Regulation Act, 1973 (46 of 1973); (ii) the conversion of Indian currency into foreign currency ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as so reduced been its total income; and (ii) the amount of income tax calculated on such long-term capital gains at the rate of 4[twenty per cent]: (c) in the case of a non-resident (not being a company) or a foreign company,- (i) the amount of income tax payable on the total income as reduced by the amount of such long-term capital gains, had the total income as so reduced been its total income; and (ii) the amount of income tax calculated on long-term capital gains except where such gain arises from transfer of capital asset referred to in sub-clause (iii) at the rate of twenty per cent; and (iii) the amount of income tax on long-term capital gains arising from the transfer of a capital asset, being unlisted securities, calculated at the rate of ten per cent on the capital gains in respect of such asset as computed without giving effect to the first and second proviso to Section 48. [(d)] in any other case of a resident- (i) the amount of income tax payable on the total income as reduced by the amount of long-term capital gains, had the total income as so reduced been its total income; and (ii) the amount of income tax calculated on such long-term capital gains at the ra ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of inflation, to ensure that the true gain or increase in capital value is tax and the gain as a result of inflation is not taxed. However, second proviso is not applicable to non-resident on transfer of shares or debentures of Indian company, referred to in the first proviso of Section 48. Thus, a non-resident, who is entitled to take benefit of the first proviso, i.e., neutralization of exchange rate fluctuation, cannot take benefit of "index cost of acquisition" or "index cost of improvement". 11. The third proviso to Section 48 stipulates that the second proviso will not apply when long-term capital gain arises from transfer of a bond or debenture, other than capital index bonds issued by the Government. 12. Section 112(1) as the heading suggests, deals with rate of tax payable on the long-term capital gains. In case of a non-resident, sub-clause (c) to Section 112(1) applies. As per clause (c), income tax is calculated on long-term capital gains @ 20%. 13. Proviso to Section 112(1), however, gives a beneficial option to taxpayers on transfer of long-term capital asset being listed securities, units or zero per cent coupon bonds. They are liable to pay tax @ 10% on the amoun ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... en adopted, whereas in the earlier decision of Timken France SAS, In re (supra), literal interpretation rule was applied and contextual interpretation, it was held, should not be adopted because the purpose itself was ambiguous. It has also been observed that contextual interpretation put forward by the Revenue was faulty and misconceived. 17. In Timken France SAS, In re (supra), the reasoning of AAR can be crystallized as under: (i) The proviso was applicable to the entire sub-section (1) to Section 112 and was not a proviso to clause (d) only. It would be irrelevant and incongruous to read or treat the proviso as applicable to clause (d) only. (This finding stands accepted by AAR in the impugned order). (ii) Proviso to Section 112(1) applies to all assessees and was not restricted to resident assessees. There was no such express stipulation in the proviso itself. The words used in the proviso were plain and preemptory. While interpreting them we should not travel beyond what was stated and specified. The proviso limits the rate of tax on the gains on transfer of listed securities to 10% but with an important rider that the quantum of capital gains should be arrived at without ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... icable to residents. (d) Proviso to Section 112(1) was introduced by Finance Act, 1999 w.e.f. 1st April, 2000. Prior to insertion, long term capital gains was payable under Section 112(1) at uniform rate of 20%. However, certain categories of non-residents viz. foreign institution investors were entitled to benefit of lesser rate of tax of 10% vide Section 115AD. Proviso was enacted with a view to provide minimum rate of tax of 10% on long term capital gains in respect of listed securities. Later on two more items, ‗units' and ‗zero bond coupons' were added. (e) The proviso to Section 112(1) was applicable to listed securities, units and zero coupon bonds which were included by Finance Act 2000 and 2005. The third proviso to Section 48 introduced by Finance 1997 ordains that nothing contained in the second proviso shall apply to the transfer of long term capital asset being bond or debenture other than capital indexed bonds. The third proviso, therefore, restricts or excludes benefits of the second proviso. Zero-coupon bonds were not eligible for benefit of indexation under second proviso to Section 48 in view of the third proviso. If the contention of the Revenue was ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... all be ignored for the purpose of computing the tax payable by the assessee." The application of the proviso can thus be understood in the following manner: A. Determine the tax payable on the capital gains arising from the transfer of long-term capital asset on the income computed as per section 48 of the Act. B. Determine 10% of the capital gains arising from the transfer of long-term capital asset without giving effect to the provisions of 2nd proviso to section 48 of the Act. [10% of the capital gains = 10% (full value of consideration - cost of purchase including cost of improvement, if any) then, If the value of A is greater than B, ignore the excess Like is thus compared with the likes, observing the principles of equality amongst the equals in legislating the above proviso." 4. The reduced rate of 10% tax on the amount of capital gains before giving effect to the provisions of second proviso to Section 48 was a second limb and when read distinctively it means 10% of the full value of consideration less cost of purchase including cost of improvement, if any. This interpretation will result in equality i.e. residents and non-residents should be treated alike. There sho ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... long-term capital gains to the extent it exceeds 10% of the amount of capital gains, should be before giving effect to the provisions of second proviso to Section 48. Inflation indexation shall be ignored. In case the Legislature wanted to deny the said advantage/benefit where the assessee had taken benefit of the first proviso to Section 48, it was easy and this would have been specifically stipulated, that an assessee, who takes advantage of neutralization of exchange rate fluctuation under the first proviso to Section 48 would not be entitled to pay lower rate of tax @10%. Legislature had a far easier and simpler way to deny benefit of the proviso to Section 112(1) by using different words and phrases had thus been the intention. The legislature in fact did not intend to deny the said benefit. 21. In Section 115AD(3) it is noticeably stipulated that nothing contained in the first and second proviso to Section 48 shall apply to transfer of securities and capital gains referred to in sub-section 1(b) of the said section. 22. High Court of Andhra Pradesh in their recent decision in W.P.(C) 14212/2010, Sanofi Pasteur Holding SA Vs. Department of Revenue has lucidly observed and la ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Parliament is to be credited with good sense; so that when such an approach produces injustice, absurdity, contradiction or stultification of statutory objective the language may be modified sufficiently to avoid such disadvantage, though no further, a passage quoted with approval in Harbhajan Singh v. Press Council of India; (iii) Identifying the legal meaning of an enactment from its grammatical meaning requires an informed interpretation, which according to the rule propounded by Oliver, LJ, in relation to taxing statutes in - Wicks v. Firth (Inspector of Taxes), is however of general application. The formulation reads: accepting once more that the subject is not to be taxed except by clear words, the words must, nevertheless, be construed in the context of the provisions in which they appear and of the intention patently discernible on the face of those provisions from the words used; (iv) Where, in relation to the facts of a given case, the enactment is grammatically ambiguous, the legal meaning is the one to which on balance of factors arising from the relevant interpretative criteria accord the greater weight; (v) Ambiguity could be semantic, syntactical or contextual. T ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ent, would justify contemporaneous construction, as verbal texts do not get frozen in time. (Refer Bennion on Statutory Interpretation, fifth edition). 24. Blackstone has written "In general law all cases cannot be foreseen, or if foreseen cannot be expressed: some will arise that will fall within the meaning, though not within the words of the Legislation, and others which may fall within the letter may be contrary to the meaning, though not expressly expected. These cases thus out of the letter, are often said to be within the equity of an act of Parliament, so cases within the letter are often out of the equity." 25. The above principles elucidate that literal meaning of the provision carry weight but Judges and interpreters recognize that some cases justify another interpretational criterion. However, the textual ambiguity should not be presumed on the basis of apriori ideas or thinking as to the Legislative intent or readily accepting the argument of fallible drafter. Court should not doubt the grammatical meaning merely on conjecture or fanciful reasoning to hold that doubt or ambiguity is real and substantial. Hairsplitting and unduly recondite arguments have to be reject ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... efit was not a taboo under law and protection against exchange rate fluctuation under the first proviso to Section 48 does not go against the concept of lower rate of tax. It has been further observed that enquiry to delve into legislative intent and purpose would be a hazardous guess. 28. Argument of the Revenue on the surface is plausible, but on deeper scrutiny, we do not think that contextual interpretation underscoring contention of the Revenue is applicable and the contention or plea is in fact reflective of the true intention of the legislature. 29. First proviso to Section 48 is applicable when a non-resident had purchased an asset being a share or debenture with foreign currency, converted into Indian rupee. It stipulates that on transfer or sale of the said share or debenture the consideration received in Indian rupee should be reconverted into the same foreign currency. Sale and purchase of shares has to be in Indian rupee, the legal tender in India, but the foreign investor had brought in foreign currency and, therefore, logically and naturally for him, the gain should be computed in foreign currency. The said investor would like to convert the sale consideration rece ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t, who utilized his foreign currency, is taxed after taking into consideration the fluctuation in exchange rate. Indian rupee can and has in past appreciated against foreign currencies. In such cases, the long-term capital gains payable can increase. On the contrary we are not aware of occasions of deflation in India in last two decades and it would be incorrect to hold that the Legislature while enacting the second proviso had in mind or assumed that there would be deflation. The two provisos cannot be equated as granting same relief or benefit. They operate independently and have different purpose and objective. 32. In view of the above, it is difficult to state that benefits under the first proviso and the second proviso to Section 48 are identical or serve the same purpose. 33. There is some merit in the contention that if proviso to Section 112(1) is applied, then almost all assessees covered by the first proviso to Section 48 would be liable to pay tax @ 10% only and not @ 20% on long-term capital gains. This appears to be correct and a logical consequence of the proviso to Section 112(1) and the interpretation given by us, but this cannot be a ground to contextually read t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tainty is integral to rule of law. Certainty and stability form the basis foundation of any fiscal laws. Highlighting this fact in Vodafone International Holding B.V. Vs. Union of India, [2012] 341 ITR 0001, the Supreme Court has observed that foreign direct investment flows towards a location with a strong governance infrastructure which includes enforcement of laws and how well the legal system work. There should be consistency and uniformity in interpretation of provisions as uncertainties can disable and harm governance of tax laws. Authority should follow their earlier view, unless there are strong grounds and reasons to take a contrary view, but in the present case there is no compelling justification and reason to override and disturb the earlier view. 36. With the aforesaid observations, we allow the present writ petition and a writ of certiorari is issued and the impugned decision dated 1st August, 2011 passed by the Advance Ruling Authority in AAR No.950/2010 is quashed. It is declared that the petitioner will be entitled to benefit of proviso to Section 112(1) of the Act on sale of equity shares in question. This direction is being issued as it is not disputed and conte ..... X X X X Extracts X X X X X X X X Extracts X X X X
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