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TMI Blog2006 (11) TMI 91X X X X Extracts X X X X X X X X Extracts X X X X ..... on the sale of shares of an Indian company which were purchased in foreign currency and, therefore, the long-term capital gain was computed as per the provisions of the first proviso to section 48 of the Income-tax Act, 1961 ("the Act"). According to this proviso, the sale consideration is to be converted in the same foreign currency in which shares were purchased and then the gain or loss is to be determined in the foreign currency which again is to be reconverted into Indian currency. In the course of assessment proceedings, the assessee claimed that such long term capital gain should be taxed at the rate of 10 per cent. in view of the proviso to section 112 of the Act. The Assessing Officer was of the view that the proviso to section 112 of the Act would be applicable to those cases which are covered by the second proviso to section 48 and consequently, the same could not be applied to the present case. Accordingly, the assessee was asked to show cause as to why the proviso to section 112 of the Act should not be held as inapplicable to the case of assessee and the rate of tax of 20 per cent. should not be applied. The assessee, vide letter dated February 16, 2004, replied as u ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , 1989 read with the Central Board of Direct Taxes Circular No. 559, dated May 4, 1990; (ii) The provisions of first proviso to section 48 as substituted by the Finance Act, 1992 read with Central Board of Direct Taxes Circular No. 636, dated August 31, 1992; (iii) The provisions of section 115AD of the Act inserted by the Finance Act 1993 read with Circular No. 657, dated August 30, 1993 (see [1993] 204 ITR (St.) 106); (iv) The provisions of section 112 as inserted by the Finance Act, 1992; (v) The provisions of section 112(1) (c) of the Act as inserted by the Finance Act, 1994 read with the Circular No. 684, dated June 10, 1994; and (vi) The provisions of section 112 as inserted by the Finance Act, 1999. 4 Considering the scheme of the Act, the Assessing Officer was of the view that the intention of the Legislature with reference to the provisions of section 48 was as under (i) It extended relief to all non-residents ; (ii) The first proviso to section 48 prohibits any further relief in terms of indexation; and (iii) Such restriction is based on the premises that protection from fluctuation in rupee value in terms of foreign currency ensures protection from infl ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e existing provisions, long-term capital gains are taxed at the rate of 20 per cent. after giving the benefit of cost inflation index'. It is obvious that the reference here is to the assessees to whom the second proviso to section 48 is applicable. It cannot be said to contain a reference to non-residents, to whom the benefit of cost inflation index is not applicable at all. The circular then goes on to mention that certain categories of non-residents and non-resident Indians are required to pay tax at the rate of 10 per cent, although the benefit of cost inflation index is not available to them. This certainly refers to FIIs, who are covered under section 115AD. The circular that mentions the grievance which the new proviso seeks to address. This pertains to the demand raised by resident investors in share market to create a level playing field between them, and the non-residents, notwithstanding the availability of cost inflation index to the resident investors . Thus, the demand which is sought to be pacified is that of the resident investors, and that too vis a-vis FIIs. This is illustrated by the interpretation made by the said circular in the two cases in the case o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 2(1) would become inapplicable. It was also observed by him that in view of the hon'ble Delhi High Court decision in the case of CWT v. Meattles P. Ltd. [1985] 156 ITR 569, the assessee cannot claim any benefit on the basis of wrong interpretation even such interpretation is given in official publication of the Department. Accordingly, he upheld the order of the Assessing Officer. Aggrieved by the same, the assessee is in further appeal before the Tribunal. 8 Both the parties have been heard at length. The learned counsel for the assessee, Mr. Arvind Sonde, has vehemently assailed the findings given by the Assessing Officer and the learned Commissioner of Income-tax (Appeals) by pointing out the defects in the reasonings given by them and referring to the relevant provisions of the Act and the circulars issued by the Board from time to time. In substance, his propositions are as follows: "1. For the proviso to section 112 to apply, the second proviso to section 48 should not be taken advantage of. It is irrelevant whether the second proviso to section 48 is inapplicable per se or whether it is not availed of by choice. 2. The case of Assessing Officer that the second prov ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d 'Capital gains' shall be computed, by deducting from the full value of the consideration received or accruing as a result of the transfer of the capital asset the following amounts, namely : (i) expenditure incurred wholly and exclusively in connection with such transfer; (ii) the cost of acquisition of the asset and the cost of any improvement thereto : Provided that in the case of an assessee, who is a non-resident, capital gains arising from the transfer of a capital asset being shares in, or debentures of, an Indian company shall be computed by converting the cost of acquisition, expenditure incurred wholly and exclusively in connection with such transfer and the full value of the consideration received or accruing as a result of the transfer of the capital asset into the same foreign currency as was initially utilized in the purchase of the shares or debentures, and the capital gains so computed in such foreign currency shall be reconverted into Indian currency, so, however, that the aforesaid manner of computation of capital gains shall be applicable in respect of capital gains accruing or arising from every reinvestment thereafter in, and sale of, shares, in, or deb ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 rate of twenty per cent. Provided that where the tax payable in respect of any income arising from the transfer of a long-term capital asset, being listed securities or unit exceeds ten per cent. of the amount of capital gains before giving effect to the provisions of the second proviso to section 48, then, such excess shall be ignored for the purpose of computing the tax payable by the assessee. Explanation. For the purposes of this sub-section, (a) 'listed securities' means the securities (i) as defined in clause (h) of section 2 of the Securities Contracts (Regulation) Act, 1956 (32 of 1956); and (ii) listed in any recognised stock exchange in India; (b) 'unit' shall have the meaning assigned to it in clause (b) of Explanation to section 115AB." (emphasis supplied) 11 The perusal of the above provisions shows that the proviso has been placed by the Legislature at the end i.e., after clauses (a) to (d) of section 112(1) of the Act. Accordi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r non-residents. Therefore, by implication, section 112(1)(c) applied to non-residents other than the non-residents specified under sections 115AB and 115AD. Thus, the case of assessee would fall within the ambit of section 112(1) (c) of the Act, Thus, effective from the assessment year 1995-96, the rate of tax on long-term capital gain accruing to such non-residents was 20 per cent. 13 The proviso to section 112(1) was inserted by the Finance Act, 1999, effective from the assessment year 2000-01. Therefore, for the assessment years 1995-96 to 1999-2000, the rate of tax on long-term capital gain accruing to non-residents (except non-residents falling under sections 115AB and 115AD) was 20 per cent. irrespective of the fact whether the case of assessee fell within the scope of first proviso or second proviso to section 48 of the Act. Till then, there was no dispute regarding rate of tax. However, the dispute regarding rate of tax has arisen between the assessee and Revenue after insertion of the proviso to section 112(1). The contention of the assessee is that, the proviso would also apply to non-residents falling under the scope of the first proviso to section 48 while the stand ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the cases falling within the scope of the second proviso to section 48. The different method has been provided to the cases falling within the scope of first proviso to section 48 considering the rapid devaluation of Indian currency. Foreign investors represented that capital gain be computed in accordance with the increase in the value of asset in terms of foreign currency. Accepting such representation of non-residents, the Legislature has provided the different method for computing capital gain in the first proviso to section 48. The Legislature has also used the word "shall" in the first and second provisos to section 48 vis-a-vis the computation of capital gain. On the other hand, the case of non-resident falling within the ambit of the first proviso has been specifically excluded from the computation of long-term capital gain in the second proviso. Thus, neither the assessee nor the Assessing Officer has any option in this matter. Therefore, in our opinion, both the provisos are mutually exclusive and no option lies either with the assessee or with the Assessing Officer in this regard. Thus, the case of assessee would fall within the ambit of the first proviso to section 48 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... under sections 115AB and 115AD. The Legislature has provided only the marginal relief under section 112(1) proviso in those cases where rate of 20 per cent. on net long-term capital gain is more than 10 per cent. rate of tax on gross amount of capital gain. The learned counsel for the assessee has conveniently ignored the provisions of sub-section (2) of section 115AB and sub-section (3) of section 115AD while advancing his arguments. 18 Further, the Legislature was well aware of the first and second provisos to section 48. The Legislature has used the words "second proviso to section 48" in sub-section (2) of section 115AB and the words "first and second provisos to section 48" in sub-section (3) of section 115AD of the Act. Therefore, if the Legislature had intended to give benefit of marginal relief of tax to all non-residents it could have easily used the words "first and second provisos of section 48" in the proviso to section 112(1) of the Act. So, there is a deliberate attempt of the Legislature to restrict the benefit of section 112(1) proviso to those cases where the long-term capital gain is to be computed under the second proviso to section 48 of the Act. 19 The con ..... X X X X Extracts X X X X X X X X Extracts X X X X
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