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TMI Blog2006 (11) TMI 235X X X X Extracts X X X X X X X X Extracts X X X X ..... 1961 (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 @ 10 per cent in view of the proviso to s. 112 of the Act. The AO was of the view that the proviso to s. 112 of the Act would be applicable to those cases which are covered by the second proviso to s. 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 s. 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 dt. 16th Feb., 2004, replied as under: 16.4 The assessee has replied, vide its Authorised Representative's letter dt. 16th Feb., 2004, as below: 1. Why the rate of tax, in respect of capital gain arising on sale of Knoll Pharma shares should be taken at 10 per cent instead of 20 per cent. In this regard we have ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ance Act, 1992; (v) The provisions of s. 112(1)(c) of the Act as inserted by Finance Act, 1994 r/w the Circular No. 684, dt. 10th June, 1994 [(1994) 119 CTR (St) 25]; and (vi) The provisions of s. 112 as inserted by Finance Act, 1999. 3. Considering the scheme of the Act, the AO was of the view that the intention of the legislature with reference to the provisions of s. 48 was as under: (i) It extended relief to all non-residents; (ii) The first proviso to s. 48 prohibits any further relief in terms of indexation and (iii) Such restriction is based on the premise that protection from fluctuation in rupee value in terms of foreign currency ensures protection from inflation. Thus, further benefit of indexation is unwarranted. He was also of the view that after the amendment in 1992, this section creates two sets of assessees for the purpose of computation of capital gains i.e., (a) one set to whom the first proviso applies where benefit of computation of capital gains in foreign currency is allowed and is presumed that it takes care of all inflation and (b) another set which computes capital gains in Indian rupee and gets the benefit of the cost inflation index. 4. Regarding t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... red under s. 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 fields 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 of FIIs, the tax rate is 10 per cent, but they do not have the benefit of indexation and in the case of residents who have benefit of indexation, but the tax rate is 20 per cent. 16.17 Thus, the intent of the legislature in inserting the proviso to s. 112 was to give an option to resident investors towards rate of taxation, if they choose to compute their LTCG without taking the benefit of second proviso to s. 48. If they chose to take advantage of cost inflation index, then the provisions of s. 112(1)(a)/(b)/(d) would apply. To include the class of non-residents within the ambit of proviso to s. 112 will be tantamount to rendering s. 112(1)(c) infructuo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tance, his propositions are as follows: 1. For the proviso to s. 112 to apply, the 2nd proviso to s. 48 should not be taken advantage of. It is irrelevant whether the 2nd proviso to s. 48 is inapplicable per se or whether it is not availed of by choice. 2. The case of AO that the 2nd proviso to s. 48 does not apply to non-residents is erroneous. It applies to non-residents (whether Indian or not other than FII's) who have invested in Indian companies in Indian currency. 3. The proviso to s. 112 is placed after cls. (a) to (d) of s. 112(1). It thus applies to all the clauses. [(1999) 152 CTR (St) 83 : (1999) 236 ITR 77 (St), (1999) 152 CTR (St) 110 : (1999) 236 ITR 105 (St) and (1999) 152 CTR (St) 167 : (1999) 236 ITR 166 (St)]. 4. Circular No. 779 makes it clear that the proviso applies to all assessees. 5. The case of the AO that the phrase all assessees in Circular No. 779 refers to FIIs is erroneous as FIIs are governed by s. 115AD and not s. 112. 6. Sec. 112(1)(c) is not rendered otiose if the interpretation of the assessee is accepted. The 20 per cent rate would apply to non-residents and foreign companies (who are not FIIs governed by s. 115AD) who choose to take advant ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... omputation 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 debentures of an Indian company: Provided further 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, or debentures of an Indian company referred to in the first proviso, the provisions of cl. (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: Sec. 112-Tax on long-term capital gains.-(1) Where the total income of an assessee includes any income, arising from the transfer of a long-term capital asset, which is chargeable under the head Capital gains, the tax payable by the assessee on the total income shall be the aggregate of- (a) in the case of an individual or an HUF, being a resident,- (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 his total inco ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nd i.e., after cls. (a) to (d) of s. 112(1) of the Act. According to literal construction, the proviso would be applicable to all the clauses. Therefore, in our opinion, the AO was not correct in holding that cl. (c) of s. 112(1) is out of the scope of the proviso to s. 112. The stand of the AO is that cl. (c) of s. 112((1) would become infructuous if it is included in the scope of the proviso. We are unable to accept such stand of the AO for the reason that long term capital gain in respect of assets other than shares and debentures sold by non-resident would be covered by the provisions of second proviso to s. 48 and consequently in such cases, the proviso to s. 112(1) would be applicable. Therefore, we are in agreement with the contention of the assessee that the proviso to s. 112(1) would apply to all the clauses contained in sub-s. (1) of s. 112. 10. Having held as above, the next question is whether cl. (c) of s. 112(1) would apply to all non-residents or only to certain category of non-residents. Sec. 112 provides the rate of tax on long term capital gains @ 20 per cent in cases of various categories of assessees including non-residents. On plain reading of cl. (c), it appe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... appreciate the submissions of the parties, it would be appropriate to consider the scope of the two provisos to s. 48 of the Act. The perusal of the same shows that computation of capital gains is bifurcated into two parts. The first proviso covers those cases where the capital asset being the shares in or debentures of an Indian company are acquired by a nonresident by utilizing the foreign currency. In such cases, the cost of acquisition, expenditure incurred wholly and exclusively in connection with transfer of such shares as well as the sale consideration is required to be converted in the same foreign currency which was utilised for acquiring such shares/debentures so as to compute the capital gain in foreign currency. The capital gain so computed is then reconverted into Indian currency for the purpose of computing tax thereon. This method is applicable to short-term as well as long-term capital asset, asset being shares in or debentures of an Indian company. Other assets are not covered under this proviso. On the other hand, second proviso to s. 48 provides the method of computing long term capital gains in respect of any long term capital assets acquired by any assessee ir ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... presupposes the existence of a case where computation of long term capital gain is to be made in accordance with the formula contained in the second proviso to s. 48. Had the legislature intended to cover the cases falling under the first proviso to s. 48, it would not have used the words second proviso to s. 48 in the proviso to s. 112(1). That means, the legislature never intended to give benefit of the proviso to s. 112(1) of those cases where long term capital gain is required to be computed under the first proviso to s. 48. This view of ours is in consonance with the rule of literal construction inasmuch as the language of the proviso is unambiguous. 15. Let us look from another angle. Sec. 115AD provides 10 per cent rate of tax on long term capital gain arising/accruing to Foreign Institutional Investors vis-a-vis securities falling under s. 115-0 but sub-s. (3) of s. 115AD specifically provides that both the provisos to s. 48 would not apply in computing the long term capital gain. Similarly, s. 115AB provides 10 per cent rate of tax on long term capital gain arising/accruing to overseas financial organisation vis-a-vis the units purchased in foreign currency but sub-s. (2 ..... X X X X Extracts X X X X X X X X Extracts X X X X
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