Income Tax Appellate Tribunal - Mumbai
Basf Aktiengesellschaft vs Ddit, International Taxation ... on 22 November, 2006
Equivalent citations: [2007]293ITR1(MUM), (2007)110TTJ(MUM)741
ORDER
K.C. Singhal, Judicial Member
1. The following ground has been raised by the assessee in this appeal:
On the facts and in the circumstances of the case and in law, the Learned Commissioner of Income Tax (Appeals) has erred in confirming that Long Term Capital Gain arising on account of sale of a Listed Security is to be taxed at 20% and not at 10% as per the proviso to Section 112. He ought not to have gone so.
2. Briefly stated the facts giving rise to this appeal are these: The assessee is a non resident which declared its total income at Rs. 10,66,16,500/- which included the long term capital gain of Rs. 5,40,96,853/- pertaining to assessment year 2001-02. The long term capital gain had arisen 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 (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% 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% should not be applied. The assessee, vide letter dated 16.2.2004, replied as under:
16.4 The assessee has replied, vide its A.R.'s letter dated 16.02.2004, 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% instead of 20%.
In this regard we have to state that firstly the capital gain is to be computed as per the provisions of Section 45 to 55 and thereafter the rate at which the capital gain tax is to be paid is determined as per the provisions of Section 112.
Therefore our clients have computed the capital gains as per the first proviso to Section 48 which deals with a situation of capital gain arising to a non-resident, from the transfer of a capital asset being shares in or debentures of an Indian company which are acquired in foreign currency.
Now as per the proviso to Section 112 "where the tax payable in respect of any income arising from the transfer of a long term capital asset, being listed securities or units exceeds ten percent 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.
We understand that your honour wants to tax the capital gains at 20% since the benefit of the proviso to Section 112 is not available to a non-resident, computing capital gain under the first proviso to Section 48. However we may point out to your honour that the proviso to Section 112 will be applicable in respect of transfer of a long-term' capital assets being a listed securities or unit. Therefore once a listed share is sold, the benefit of 10% will be available if the capital gain so computed is not arrived at by indexing the cost of acquisition, irrespective of the fact that the shares so sold were acquired in foreign currency. In our clients' case the question of indexation does not arise since they are covered by the first proviso to Section 48. Therefore the capital gain so computed is to be taxed at 10% and not at 20%.
The Assessing Officer considered the reply of the assessee in the light of the scheme of the Act and various circulars issued by the Board. In this connection, he referred to the following:
(i) The provisions of Section 48 of the Act as substituted by Direct Tax Laws (Amendment) Act, 1989 r/w the CBDT Circular No. 559 dated 4.5.1990;
(ii) The provisions of first proviso to Section 48 as substituted by Finance Act, 1992 r/w CBDT Circular No. 636 dated 31.8.1992;
(iii) The provisions of Section 115-AD of the Act inserted by Finance Act, 1993 r/w Circular No. 657 dated 30.7.1993;
(iv) The provisions of Section 112 as inserted by Finance Act, 1992;
(v) The provisions of Section 112(1)(c) of the Act as inserted by Finance Act, 1994 r/w the Circular No. 684 dated 10.6.1994; and
(vi) The provisions of Section 112 as inserted by Finance Act, 1999.
3. 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 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 the rate of tax, he was of the view that as per the provisions of Section 112 proviso, the rate of tax on long term capital gains in the case of assessee should be 20% for the reasons given by him in Paras-16.14 to 16.18 which are being reproduced as under:
16.14 The proviso to Section 112 envisages a situation where the tax payable on the long term capital gains exceeds 10% of the amount of such capital gains before giving effect to provisions of second proviso to Section 48. Thus, for the application of this proviso, in a particular case, the applicability of second proviso to Section 48 is a sine Qua non. Otherwise, the phrase 'before giving effect' will be rendered meaningless. A situation of 'before giving effect' can only arise if the act of giving effect' is a possibility. In the case of non residents, the effect of the second proviso to Section 48 can not be given at all with reference to capital gains arising from transfer of shares or debentures, In the case of B.C. Srinivasa Shetty 128 ITR 294, the Apex Court had held that the charging section and the computation provisions together constitute an integrated code. When there is a case to which computation provisions can not apply at all, it is evident that such a case was not intended to fall within the charging section.
16.15 The premises behind not extending the benefit of cost inflation index to non residents was very clear, as far as the intent of Legislature is concerned. This is amply illustrated by CBDT's Circulars 559 and 636, as cited supra. Such premise has not been removed by inserting the proviso to Section 112.
16.16 In fact, para 57 of CBDT's Circular 779, as cited by the assessee, begins with this premise only. It states that, Under the existing provisions, long term capital gains are taxed at the rate of 20% after giving the benefit of cost inflation index It is obvious that the reference here is to assesses to whom the second proviso to Section 48 is applicable. It can not 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 residents Indians are required to pay tax @ 10%, 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 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%, but they do not have be benefit of indexation and in the case of residents who have benefit of indexation, but the tax rate is 20%.
16.17 Thus, the intent of the Legislature in inserting the proviso Jo Section 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 Section 48. If they chose to take advantage of cost inflation index, then the provisions of Section 112(1)(a)/(b)/(d) would apply. To include the class of non-residents within the ambit of proviso to Section 112 will be tantamount to rendering Section 112(1)(c) infructuous. It would be pertinent to keep in mind that while inserting the proviso to Section 112, the Legislature has not omitted or amended Section 112(1)(c) of the Act.
16.18 In view of the preceding discussion, the proviso to Section 112 is held to be non applicable in the case of non resident companies having long term capital gains from transfer of shares/debentures of an Indian Company and the arguments raised by the assessee are rendered otiose. The rate of tax on the long-term capital gains of the assessee is determined to be twenty percent Under Section 112(1)(c), on the capital gains computed as per the method laid down in the 1st proviso to Section 48 of the I.T. Act, 1961.
5. On appeal, the Learned CIT (A) noted that the assessee has not claimed any benefit under the second proviso to Section 48. Accordingly, he posed the question as to how to interpret the expression "before giving effect to the second proviso to Section 48" appearing in the proviso to Section 112 of the Act. According to him, the legislative intent appeared to all the assessees to compare the effective tax that they would pay if they took the benefit of indexation and the rate of 20% as against the tax @ 10% if no such benefit is taken. So, the benefit Under Section 112(1) proviso can be taken only by the assessees who have the option of benefit of indexation under the second proviso to Section 48. Thus, he opined that where the assessee opted for the benefit under the first proviso to Section 48, he was not entitled to further benefit under the second proviso to Section 48 and consequently, the proviso to Section 112(1) would became inapplicable. It was also observed by him that in view of Hon'ble Delhi High Court decision in the case of Meattles (P) Ltd. 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.
6. 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 CIT (A) 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 2nd Proviso to Section 48 should not be taken advantage of. It is irrelevant whether the 2nd proviso to Section 48 is inapplicable per se or whether it is not availed of by choice.
2. The case of AO that the 2nd proviso to Section 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 Co's in Indian currency.
3. The proviso to Section 112 is placed after Clauses (a) to (d) of Section 112(1). It thus applies to ail the clauses. See 236 ITR 77 (St), 236 ITR 105 @ 138 (St) and 236 ITR 166 (St).
4. Circular 779 makes it clear that the proviso applies to "all assessees".
5. The case of the AO that the phrase "all assessees"' in Circular 779 refers to FII's is erroneous as FII's are governed by Section 115AD and not Section 112.
6. Section 112(1)(c) is not rendered otiose if the interpretation of the assessee is accepted. The 20% mate would apply to non-residents and foreign companies (who are not FII's governed by Section 115AD) who choose to take advantage of the 2nd proviso to Section 48.
7. If the legislature intended that the lower rate ought not to apply to non-residents investing in Indian companies in foreign exchange, a reference to the first proviso to Section 48 would have found place in the proviso to Section 112.
7. On the other hand, the Learned Sr. D.R has reiterated the reasonings given by the Assessing Officer and the Learned CIT (A) and, therefore, need not be repeated as already narrated by us in detail. However, it was emphasised by him that provisions of the first and second provisos to Section 48 of the Act are mutually exclusive and, therefore, neither the assessee nor the Assessing Officer has any option in computation of long term capital gain. Since assessee's case falls under the first proviso to Section 48, it is not entitled to any benefit of the proviso to Section 112(1) as such benefit is restricted to there cases only where long term capital gain has been computed under the second proviso to Section 48 of the Act.
8. Rival submissions of the parties have been considered carefully. The issue for our consideration relates to the interpretation of the provisions of the proviso to Section 112 of the Act. In order to appreciate the contentions of both the parties, it would be appropriate to refer to the relevant provisions of Sections 48 and 112 of the Act.
Section - 48 - Mode of computation The income chargeable under the head "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 utilised 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 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 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:
Section - 112 - Tax on long-term capital gains.
112. (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 a Hindu undivided family, [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 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 total income as reduced by such long-term capital gains is below the maximum amount which is not chargeable to income-tax, then, such long-term capital gains shall be reduced by the amount by which the total income as so reduced falls short of the maximum amount which is not chargeable to income-tax and the tax on the balance of such long-term capital gains shall be computed at the rate of twenty per cent;
(b) in the case of a [domestic] 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 such long-term capital gains at the rate of [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 such long-term capital gains at the rate of twenty per cent;
[(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 rate of [twenty] per cent.
Explanation....
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 givin 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.
9. 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. According to literal construction, the proviso would be applicable to all the clauses. Therefore, in our opinion, the Assessing Officer was not correct in holding that Clause (c) of Section 112(1) is out of the scope of the proviso to Section 112. The stand of the Assessing Officer is that Clause (c) of Section 112((1) would become infructuous if it is included in the scope of the proviso. We are unable to accept such stand of the Assessing Officer 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 Section 48 and consequently in such cases, the proviso to Section 112(1) would be applicable. Therefore, we are in agreement with the contention of the assessee that the proviso to Section 112(1) would apply to all the clauses contained in Sub-section (1) of Section 112.
10. Having held as above, the next question is whether Clause (c) of Section 112(1) would apply to all non-residents or only to certain category of non-residents. Section 112 provides the rate of tax on long term capital gains @ 20% in cases of various categories of assessees including non-residents. On plain reading of Clause (c), it appears that it applies to all non-residents (not being a company) and a foreign company. According to literal construction, Clause (c) would apply to all non-residents except provided otherwise by the legislature expressly or impliedly. Section 112 as originally enacted, effective from assessment year 1993-94, did not apply to nonresidents but Section 115AB was already on statute book effective from assessment year 1992-93 which provided rate of tax of 10% on long term capital gain in respect of units purchased in foreign currency by an overseas financial organisation. Subsequently, Section 115AD was also brought on statute book effective from assessment year 1993-94 which provided 10% rate of tax on long term capital gain in respect of securities other than units purchased by foreign institutional investors. Other non-residents were taxable at higher rate vis-a-vis long term capital gain. Subsequently, Clause (c), as existing today, was inserted by Finance Act, 1994 (effective from assessment year 1995-96) in order to provide uniform rate of tax on long term capital gains accruing to other 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 assessment year 1995-96, the rate of tax on long term capital gain accruing to such non-residents was 20%
11. The proviso to Section 112(1) was inserted by Finance Act, 1999, effective from assessment year 2000-01. Therefore, for assessment years 1995-96 to 19-200, the rate of tax on long term capital gain accruing to non-residents (except non-residents falling under Sections 115AB and 115AD) was 20% 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 of Revenue is that the proviso is exclusively applicable to those cases which fall within the ambit of the second proviso to Section 48. The Tribunal is required to adjudicate this dispute.
12. In order to appreciate the submissions of the parties, it would be appropriate to consider the scope of the two provisos to Section 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 non-resident 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 Section 48 provides the method of computing long term capital gains in respect of any long term capital assets acquired by any assessee irrespective of his status except the long term capital gain arising to non-resident from the transfer of long term capital asset specified in the first proviso to Section 48. According to this method "the cost of acquisition" and the cost of improvement mentioned in Section 48(ii) shall be substituted by "the indexed cost of acquisition" and "the indexed cost of improvement" which shall be deducted from the sale consideration for computing the long term capital gain.
13. Thus, it is seen that legislature has provided two different categories for computing the long term capital gain. The intention of the legislature appears to be that no gains be taxed to the extent it relates to general inflation of price in the market. That is why, the legislature has related "the indexed cost of acquisition" and "the indexed cost of improvement" to the "cost inflation index" which is defined in Clause (v) of the Explanation to Section 48. Application of this method is restricted to 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 representations 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 proviso 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 of the Act.
14. Having held that long term capital gain accruing to assessee has to be computed under the first proviso to Section 48, we are of the humble view that the proviso to Section 112 cannot be applied to the present case. The expression "before giving effect to the provisions of the second proviso to Section 48" 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 Section 48. Had the legislature intended to cover the cases falling under the first proviso to Section 48, it would not have used the words "second proviso to Section 48" in the proviso to Section 112(1). That means, the legislature never intended to give benefit of the proviso to Section 112(1) of those cases where long term capital gain is required to be computed under the first proviso to Section 48. This view of ours is in consonance with the rule of literal construction in as much as the language of the proviso is unambiguous.
15. Let us look from another angle. Section 115-AD provides 10% rate of tax on long term capital gain arising/accruing to Foreign Institutional Investors vis-a-vis securities falling Under Section 115-0 but Sub-section (3) of Section 115-AD specifically provides that both the provisos to Section 48 would not apply in computing the long term capital gain. Similarly, Section 115-AB provides 10% 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-section (2) of this Section specifically provides that the second proviso to Section 48 would not apply for computing such capital gain. The first proviso to Section 48 is not applicable to units purchased in foreign currency and, therefore, the legislature has not mentioned about the first proviso to Section 48 in Sub-section (2) of Section 115-AB. So, the study of both the provisions reveals that legislature has provided concessional rate of 10% on gross amount of long term capital gain i.e., computed without claiming any deduction/benefit provided in the first and second proviso to Section 48 of the Act. It is in this context that the legislature thought that the assessee falling under the second proviso to Section 48 should not be put to disadvantageous position as compared to assessees falling under Sections 115-AB and 115-AD. The legislature has provided only the marginal relief Under Section 112(1) proviso in those cases where rate of 20% on net long term capital gain is more than 10% 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 115-AB and Sub-section (3) of Section 115-AD while advancing his arguments.
16. 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 115-AB and the words "first and second provisos to Section 48" in Sub-section (3) of Section 115-AD 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.
17. The contention of assessee's counsel that if the legislature had intended not to give benefit of lower rate of tax to non-residents investing in Indian companies in foreign exchange, a reference to the first proviso to Section 48 would have found place in the proviso to Section 112, in our opinion, is without force. We have already discussed the scheme of the Act and consequently held that provisions of both the provisos to Section 48 are mutually exclusive and, therefore, there was no necessity to make such reference in the proviso to Section 112(1) as suggested by Mr. Sonde. On the contrary, reference to the first proviso to Section 48 was necessary in the proviso to Section 112(1) if the legislature had intended to give benefit non-resident falling under the first proviso to Section 48.
18. In view of the above discussion, it is held that the proviso to Section 112(1) of the Act does not apply to the case of assessee and consequer the rate of tax on long term capital gain computed under the first provisi Section 48 would be 20%. The order of the Learned CIT (A) is, theref upheld.
19. In the result, assessee's appeal stands dismissed.
Pronounced on 22nd November 2006.