(By Honble Chairman)
Facts
The applicant, Timken France, SAS, is a non-resident company incorporated under the laws of France. The company is engaged, inter alia, in the business of manufacturing anti-friction bearings and allied products and providing services relating thereto. The applicant submits that during the financial year 1986-87, it acquired the shares in NRB Bearings Limited, an Indian company, by making payment in foreign currency i.e. French Francs. Subsequently, over the years, the applicant also received bonus shares from the said Indian company. Thus, the shares held by the applicant â original as well as bonus â constitute 26 per cent of the share capital of NRB Bearings Limited (hereafter referred to as âNRB). Both the original and bonus shares have been held by the applicant for more than 12 months. The shares of NRB are listed on the Bombay Stock Exchange and the National Stock Exchange. While so, on 14th November, 2005 the applicant sold its entire share-holding consisting of original and bonus shares to the Indian promoters of NRB for a consideration Rs.57.96 crores. The applicant seeks advance ruling of this Authority as regards the manner of computation of capital gains and the rate of tax to be applied. The following are the questions of law that are framed by the applicant:
Questions
1. Whether on the stated facts and in law the tax payable on the long-term capital gains arising on sale of originally purchased shares of NRB Bearing Ltd will be 10% of the amount of capital gains as per proviso to section 112(1) of the Act?
2. Whether on the stated facts and in law the tax payable on long-term capital gains arising on sale of bonus shares of NRB Bearing Ltd will be 10% of the amount of capital gains as per proviso to section 112(1) of the Act?
3.* Whether on the stated facts and in law long-term capital gains arising on the sale of bonus shares of NRB Bearing Ltd are to be computed by applying substantive section 48 of the Act without resort to either the first or the second proviso to the said Section?
* Questions 2 and 3 are renumbered by us as questions 3 and 2 respectively
The learned counsel for the applicant stated that ruling on question No. 3 (question no. 2 as per the application) is unnecessary and therefore the applicant does not wish to press the same. Accordingly, no answer is called for to question no. 3
Contentions broadly
2. The applicant clarifies that under the agreement entered into between India and France for the avoidance of double taxation, the applicant is chargeable to tax in India in respect of capital gains arising on the sale of shares of NRB Limited. It is not in dispute that the original shares held by the applicant constitute a long-term capital asset. The stand of the applicant is that it satisfies all the conditions requisite to attract the proviso to section 112(1) of the Income-tax Act, 1961( for short âthe Actâ) and therefore, the tax on long-term capital gains arising on the sale of original shares should be computed at 10 per cent as prescribed in the said proviso. For the same reasons, it is submitted that the transfer of bonus shares will attract tax at 10 per cent. As regards the mode of computation of capital gains arising on the sale of bonus shares, the applicant submits that it must be computed as per the main provision of Section 48 by deducting from the full value of consideration the cost of acquisition of the shares, treating the same as nil, as enjoined by section 55(2). These are broadly the contentions of the applicant.
3. The contention of the Director of Income-tax (Intl. Taxation) broadly is that the applicant cannot avail of the lower rate of 10 per cent envisaged by section 112 inasmuch as the 2nd proviso to section 48 is not applicable to the non-resident like the applicant. The DIT in his comments submits:
Thus, the intent of the legislature in inserting the proviso to section 112 was to give an option to resident investors towards rate of taxation (i.e. at 10%), if they choose to compute their long-term capital gains without taking the benefit of second proviso to section 48 (i.e. without indexation). If they choose to take benefit of indexation, then the rate of 20% will apply. By no stretch of imagination, this amendment can mean that the non-resident investors to whom benefit of indexation is not available (in view of explicit benefit through appreciation of foreign exchange) can also compute their income at the rate of 10%.
4. The first and foremost question is whether in terms of the proviso to section 112(1) of the Act, the income from capital gains arising from the transfer of shares answering the description of âlisted securitiesâ held for more than 12 months, is liable to be taxed at 10 per cent only. Section 112 sets out the rates at which tax is payable on long-term capital gains. The relevant portion of section 112 is extracted hereunder:
Section 112(1)
â(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 âCapital 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
(iii) 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, or zero coupon bond 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 assesseeâ. (emphasis supplied)
The Explanation defines âlisted securitiesâ for the purposes of sub-section (1) of section 112. Listed securities means, according to the Explanation, the securities as defined in clause (h) of section 2 of the Securities Contracts (Regulation) Act, 1956. Under section 2(h) of the said Act, securities include shares, scrips, stocks, bonds, debentures, debenture stock or other marketable securities of like nature in or of any incorporated company or other body corporate and it also includes Government securities. The other requirement is that it should be listed in recognized stock exchanges in India.
Specific contentions
5. It is the contention of the applicant that the lesser rate of 10 per cent is applicable to long-term capital gains derived by non-resident foreign companies as well and the benefit of reduced rate is not to be confined to residents only. The learned Senior Counsel for the applicant submits that the proviso to section 112(1) applies to all the clauses of sub-section (1) and argues that a non-resident foreign company is not disentitled to invoke the proviso to section 112(1) on the ground that it is not eligible to get the benefit of the 2nd proviso to section 48. In other words, the contention on behalf of the applicant is that the applicability of the 2nd proviso to section 48 is not a condition precedent for availing the benefit of lesser rate of tax of 10 per cent under the proviso to section 112(1). The learned counsel for the applicant submits that the proviso to Section 112(1) is a special provision in respect of shares and a non-resident foreign company can avail of the reduced rate under the said proviso at par with the residents in addition to the benefit of protection afforded by the first proviso to section 48. The learned counsel makes out the point that the phrase in section 112(1) â âbefore giving effect to the provisions of second proviso to section 48 â means before giving effect to the 2nd proviso wherever it is applicable; but, the non-applicability of the 2nd proviso will not preclude the applicant to avail the relief of lower rate of tax of 10 per cent. It is contended that there exists no rationale to delimit the operation of the proviso to section 112(1) only to clause (d) or to maintain a distinction between categories (a), (b), (c) and (d) for the purpose of applying the concessional rate of 10 per cent. The wording in certain other provisions of the Act has been referred to as an intrinsic aid to the interpretation of the proviso to section 112(1).
6. The stand of the Department is that the expression âbefore giving effect to the second proviso to Section 48â pre-supposes the existence of a case where computation of long-term capital gain could be made in accordance with the formula contained in the second proviso to section 48. In other words, according to the Revenue, no occasion arises to apply the proviso to section 112(1) where the 2nd proviso to section 48 in terms is not applicable to the non-residents like the applicant. That means, the Legislature never intended to extend the benefit of proviso to section 112(1) to the long-term capital gains arising to non-residents from the transfer of shares required to be computed under the first proviso to section 48. The non-resident foreign company cannot claim to have the double benefit of protection against rupee value fluctuation as well as the reduced rate of tax of 10 per cent, argues the counsel for Revenue. Reliance is placed on the order of ITAT, Mumbai âH Bench in ITA No. 2552/Mum/2005.
Section 48
7. Before proceeding further, reference to section 48 is necessary. Section 48 of the Act provides for the mode of computation of capital gains. The expressions âindexed cost of acquisitionâ and âindexed cost of improvementâ are also defined in the same section.
* emphasis supplied
Mode of computation.
48. The income chargeable under the head âCapital gainsâ 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-terms 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 âcost of acquisitionâ and âcost of any improvementâ, the words âindexed cost of acquisitionâ and âindexed cost of any improvementâ 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.
Xx xx xx xx xx
Explanation. â For the purposes of this section, -
(i) ---------;
(ii) ---------;
(iii) âindexed cost of acquisitionâ means an amount which bears to the cost of acquisition the same proportion as Cost Inflation Index for the year in which the asset is transferred bears to the Cost Inflation Index for the first year in which the asset was held by the assessee or for the year beginning on the 1st day of April, 1981, whichever is later;
(iv) âindexed cost of any improvementâ means an amount which bears to the cost of improvement the same proportion as Cost Inflation Index for the year in which the asset is transferred bears to the Cost Inflation Index for the year in which the improvement to the asset took place;
8. In the case of the applicant the first proviso to Section 48 is applicable for the computation of capital gains arising from the transfer of shares for the reason that the original shares were purchased by utilizing foreign currency. At the same time, the second proviso will not come into play by reason of the exclusionary provision contained in the underlined words. The question that should be addressed is what impact it will have on the application of the proviso to section 112(1).
9. We may pause here for a short while to notice the purpose of introducing the two provisos to section 48. The reason behind the insertion of first proviso is discernible from the explanatory notes on the Direct Laws (Second Amendment) Act, 1989 incorporated in CBDT Circular No. 554 dated 13.2.1990. Non-resident Indians who invest in shares and debentures by utilizing foreign currency are adversely affected when they sell such shares or debentures purchased by them by reason of fall in the value of the Indian rupee vis-Ã -vis the foreign currency; therefore, section 48 was amended in order to compensate the non-resident Indian investors for the lower earning in foreign currency on account of the decline of rupee value. Coming to the second proviso, it was conceived as a measure of off-setting the effect of inflation vide CBDT circular No. 636 dated 31.8.1992 containing explanatory Notes on the provisions of Finance Act, 1992. The cost of acquisition of asset and the cost of improvement thereto are inflated to arrive at the indexed cost of acquisition and indexed cost of improvement and then these amounts are deducted from the sale consideration to arrive at the long-term capital gain. The cut-off date for the purposes of indexation is taken as 1.4.1981. The apparent reason for excluding the non-resident from the purview of second proviso is spelt out in para 35.3 of CBDT circular No. 636 dated 31.8.1992 as follows: âAs protection from fluctuation in rupee value in terms of foreign currency ensures protection from inflation, further relief in terms of indexation will not be available to non-residents who will enjoy the concession available in the first proviso to section 48.â
Proviso to Section 112(1)
10. The proviso to section 112(1) was introduced by the Finance Act, 1999 with effect from 1.4.2000. The background for introducing the proviso will be adverted to later. Prior to the insertion of the proviso, Section 112(1) provided for uniform rate of 20% tax on all long-term capital gains accruing to the four categories of assesses out of which three are residents. However, certain categories of non-residents viz foreign institutional investors were having the benefit of lesser rate of tax of 10% (vide Sec. 115AD) in respect of gains arising from the transfer of securities. The proviso in question was enacted with a view to provide maximum rate of 10 per cent on long term capital gains in respect of listed securities. Later, two more items i.e. units and zero coupon bonds were added. The proviso occurring at the end of the Section cannot be viewed as the proviso to clause (d) only. In fact, it is not so contended either by the applicant or by the Revenue. Without delving further on this point, suffice it to say that it would be irrational and even incongruous to allocate the proviso only to the preceding clause.
Area of Controversy
11. Whereas it is the contention of the Revenue that having regard to the language employed in the proviso, it has no application to non-residents and foreign companies specified in clause (c), according to the applicant, the proviso ought to be applied to clause (c) category assessees also. That is the area of controversy. Both sides sought to project the objective of the proviso in different light. If the Revenues contention is accepted, the non-residents who are afforded protection from the adverse effect of rupee volatility under the first proviso to section 48 cannot invoke the benefit of concessional tax under the proviso to section112(1).
Interpretation of Proviso
12. What then is the real purport, scope and meaning of the proviso to section 112(1)? Let us address ourselves to that question.
12.1 We are of the view that the benefit of the proviso to section 112(1) cannot be denied to the non-residents/foreign companies who are also entitled to a different relief in terms of first proviso to section 48. At the outset, while interpreting the proviso to section 112(1), it should be borne in mind that the said proviso is a special provision in relation to the transfer of certain long-term capital assets viz. listed securities, units and zero-coupon bonds. In our view, there is no warrant to limit the 10 per cent effective rate provided therein as against the normal rate of 20 per cent only to the three categories of resident assesses specified in clauses (a), (b) and (d). Clear words would have been deployed in the proviso if one particular category i.e. non-residents are to be excluded. It is difficult to hold that such a result was intended to be achieved by means of the phraseology â âbefore giving effect to the second proviso to section 48â. Nor can it be said that the said phrase by necessary implication excludes clause (c) category of assesses who are, of course, entitled to another benefit conferred by the first proviso to Section 48.
12.2. In plain and peremptory words, the proviso limits the rate of tax on the gains from the transfer of listed securities to 10 per cent, but, with an important rider that the quantum of capital gains should be arrived at without taking into account the formula laid down in the second proviso to section 48 based on the indexed cost of acquisition. In other words, while computing the capital gains on the listed securities held for more than 12 months, do not give effect to the calculation spelt out in the second proviso to section 48 wherever it is applicable, or to put it in a different language, let not the indexation formula enter into the computation process â that is the mandate of controversial phrase in the proviso to section 112(1). It does not say â deny the concessional rate of tax to the category of assesses who are not eligible to have the benefit of indexed cost of acquisition under the second proviso. In other words, the eligibility to avail the benefit of indexed cost of acquisition (under the second proviso to Section 48) is not a sine qua non for applying the reduced rate of 10 per cent prescribed by the proviso to section 112(1). The second proviso to section 48 is only a mode of computation of capital gains. The crucial words relied upon by the Revenue cannot be construed as the words of exclusion of a category of assesses i.e. non-residents who cannot avail of indexation benefit.
12.3. We need not travel beyond the crucial provision [proviso to section 112(1)] to demonstrate the fallacy in the argument advanced on behalf of the Revenue. The proviso itself shows the right path to interpretation. In the company of âlisted securities, Units and Zero-Coupon Bonds (for short âZCBs) were also included by the Finance Acts of 2000 and 2005. We shall first turn our attention to ZCBs. The third proviso to section 48 which was introduced by the Finance Act, 1997, ordains ânothing contained in the second proviso shall apply to the long-term capital gains arising from the transfer of a long-term capital asset being bond or debenture other than capital indexed bonds issued by the Governmentâ. Thus, for computation of capital gains under sec. 48 in respect of ZCBs, the benefit of second proviso to Section 48 is specifically excluded by the third proviso to Sec. 48. When the second proviso to section 48 is thus excluded in relation to ZCBs, it should logically follow, if the Revenues contention is accepted, that ZCBs should also go out of the purview of the proviso to section 112(1) whereas ZCB was specifically included by way of amendment of the proviso admittedly with a view to extend the benefit of concessional rate of 10 per cent to such bonds. Otherwise, the amendment inserting ZCBs in the proviso to section 112(1) will be infructuous. It is nobodys case that ZCBs answering the description of long-term assets should be subjected to the normal 20 per cent tax under the substantive provision of Section 112. If the Revenues interpretation of the phrase âbefore giving effect to the second proviso to section 48â has to be accepted, it would, in relation to ZCBs, lead to re-writing of the proviso and unintended results would follow. The resident assessees will have to pay tax at the normal rate of 20 per cent. The entire argument on the side of the Revenue will then break down as a self-effacing exercise. The provision [proviso to section 112(1)] cannot be read in one way in so far as the listed securities /shares are concerned and be read in a different way in relation to the ZCBs. No cannon of interpretation would support such illogical interpretation of the said provision. The only answer of the Revenue in this regard is that ZCB is an investment and not an asset and therefore with a view to extend the concession of 10 per cent tax, it was specifically included in the proviso to section 112(1). We find it difficult to understand this line of distinction. Nor is it a direct answer to the question of interpretation of the particular words used in the proviso.
12.4. Another point - Debentures are also included within the definition of âsecuritiesâ in section 2(h) of the Securities Contracts (Regulation) Act, 1956. Debentures listed in a recognized stock exchange in India fall within the domain of the proviso to S, 112(1) though such listing seems to be rare now-a-days. In view of the third proviso to section 48, indexation benefit under the second proviso will not apply to debentures. If the Revenues interpretation is to be accepted, the resident assessee will have to pay tax at 20 per cent on the capital gain arising from the transfer of such debentures held as long-term assets because the second proviso will not apply. This is obviously an unintended result, which even the Revenue would like to avoid.
12.5. The counsel appearing for the department argued that If the non-residents can also invoke the proviso to Section 112, then, there will be a contradiction between the main Section 112 as applicable to non-residents and the proviso thereto inasmuch as two rates â 20 per cent and 10 per cent â would be in force after applying the first proviso to section 48. We see no such contradiction between the main provision and the proviso. Section 112(1) applies in general to the long-term capital assets whereas the proviso is specific and governs only the enumerated assets, viz, listed securities, units and zero coupon bonds answering the description of long-term capital assets. Obviously, in relation to those specified assets, the Parliament wanted to reduce the tax rate. That is why the proviso was introduced.
12.6. The learned counsel for Revenue then put forward the argument that the expression âbefore giving effect toâ¦â¦â, in the context in which it occurs connotes and visualizes that the tax payable before and after giving effect to the second proviso to section 48 should be compared so that the assessee may be enabled to pay lesser tax. When the second proviso is not applicable to the non-resident assessees, such comparison is not possible and therefore the proviso to section 112(1) would not come into play at all in relation to non-residents/foreign companies. This argument, in our view, is somewhat involved and makes unwarranted intrusions into a self-contained provision. It would amount to putting a gloss on the crucial words which are otherwise unambiguous.
Purpose and legislative intention
13. The counsel for the Revenue persuades us to give effect to the principle of purposive construction and have regard to the object of the provision. It is an interesting coincidence that the learned counsel for the applicant also wants us to interpret the provision keeping in view the purpose and object of the provision.
* Vide CBDT Circular No. 779 dated 14.9.1999
That means, the purpose is sought to be differently projected by both sides to buttress their divergent arguments. Both the counsel have referred to para 41 of the explanatory Notes on the provisions of Finance Act, 1999*
41. Reduction of tax rate on long-term capital gains in regard to securities:
41.1. Under the existing provisions, long-term capital gains are taxed at the rate of 20% after giving the benefit of cost inflation index. However, certain categories of non-residents and non-resident Indians are required to pay tax at the rate of 10% on long-term capital gains on securities and specified assets respectively. However, the benefit of cost inflation index is not available to them. This has led to a widespread demand for level playing field between non-residents and resident investors in share market notwithstanding the availability of cost inflation index to the latter.
41.2. The Act has, therefore, amended section 112 of the Income-tax Act to limit the tax on long term capital gains at 10% of the capital gain on securities as defined in section 2(h) of the Securities Contracts (Regulation) Act, 1956 and listed in recognized stock exchanges in India before allowing adjustment for cost inflation index for all assessees. In other words, the benefit of cost inflation index continue as before but where the tax on long term capital gains without adjustment of cost inflation exceeds 10%, such excess shall be ignored.
13.1. The counsel for the applicant places reliance on the underlined words âall assesseesâ and submits that section 112(1) (as amended by Finance Act 1999) did not intend to maintain the distinction between resident and non-resident assessees. Having
y 194 ITR (Statutes) at 201
regard to the fact that a level playing field between the non-resident and resident investors in share market was intended to be carved out, as evident from para 41.1 a different treatment of non-residents/foreign companies is not called for in the matter of application of lesser rate of tax in terms of the proviso. The learned counsel for the applicant also refers to Explanatory Memorandum to the Finance Bill 1992y explaining the main features of amendment to section 48 as follows:
The provision for deduction from fluctuation of rupee value against foreign currency in respect of capital assets being shares or debentures of Indian companies so far available to non-resident Indian will now be extended to all non-residents. However, in such case no indexation for cost will be available
13.2. On the other hand, the counsel for Revenue submits that as the non-residents are allowed to claim the benefit of first proviso to section 48, extending the benefit of 10% rate after giving effect to first proviso to section 48 would amount to granting them a double benefit which is not intended. It is submitted that level playing field was intended to be created to the residents as certain non-residents institutions were enjoying the benefit of lesser rate and it was not the intention to benefit the other non-residents in that process. In this connection, the counsel for Revenue relies on the CBDT Circular No. 636 dated 31.8.92 containing the explanatory Notes to the provisions of Finance Act, 1992. While referring to the amendment of section 48 which introduced the concept of cost inflation index, it was stated as follows :
âAs protection from rupee value in terms of foreign currency ensures protection from inflation, further relief in terms of indexation will not be available to non-residents who will enjoy the concession available in the first proviso to section 48â
However, the learned counsel for the applicant submits that the first proviso to section 48 is only a rationalization measure and not a substitute for inflationary adjustments under the second proviso inasmuch as inflation in India is irrelevant for a person who invests in foreign currency and ploughs back the gains in the same currency. It is not necessary to go into this controversy which arises on the sidelines.
13.3. We do not think that the CBDT circular or the Explanatory Memoranda are unequivocal and clear enough to throw light on the rationale of extending or not extending the benefit of reduced rate of tax in terms of the proviso to section 112(1) to the non-residents and foreign companies. They do not speak one way or the other on the point whether the intention was to exclude the non-residents/foreign companies [falling under clause (c) of section 112(1)] in the matter of availment of reduced rate of tax.
13.4. Neither the expression âall assesseesâ in the CBDT circular on which the applicant is relying nor the wording âlevel playing fieldâ which is sought to be relied upon by the Revenue are clinching. No definite inference can be drawn from the terminology of the circular. It hardly needs any emphasis that the words employed in a Circular intended for administrative guidance cannot be interpreted as those in a statute. It is not uncommon to find some loosely worded expressions in the circulars and explanatory Notes. That the expression âall assesseesâ used in para 41.2 includes non-resident assesses is not at all clear especially in view of the fact that the purport of para 41.2 was not to focus attention on that particular aspect. So also the expression âlevel playing field is flexible and capable of being understood in more than one way as amply reflected in the arguments of both the counsel. There is nothing in the said circulars or explanatory memoranda to suggest or indicate that the non-residents are either excluded or not excluded from drawing the benefit of proviso to section 112(1).
13.5. The argument of double benefit advanced by the Revenues counsel does not appeal to us. Double benefit or additional relief is not a taboo under the law. From the mere fact that the protection from rupee value fluctuation in terms of foreign currency is made available to the non-residents, it does not follow that the non-residents should not get the benefit of reduced rate of tax which the residents are getting. The protection in terms of first proviso to sec. 48 made available to a non-resident may be a justification to deny the benefit of cost of indexation as stated in CBDT Circular No. 636, but, the same cannot be said of application of lesser rate. The passage from CBDT Circular No. 636 relied upon by the Revenues counsel is really not relevant to ascertain the legislative intention behind the proviso to section 112(1). We feel that an enquiry to delve into the legislative intent and purpose would lead us nowhere and at best, we can only hazard a guess on the point whether Parliament did or did not intend to give the benefit of 10% tax rate to the non-residents.
13.6 We are therefore of the view that it is not safe to interpret the crucial provision, namely, the proviso to section 112(1) with reference to the supposed intention of the legislature when such intention is not clearly ascertainable. The best course would be to go by the plain language which is to be understood in the manner in which we have explained earlier. The objective is to be inferred from the language itself. The interpretation we are placing does not run counter to the language employed nor does it lead to any absurdity or anomaly.
ITATs decision
14. Now we shall turn our attention to the order of the ITAT, âHâ Bench, Mumbai in ITA No. 2552 of 2005 on which strong reliance has been placed by Revenue. The learned Members of the Tribunal held that the Legislature never intended to give the benefit of proviso to Section 112(1) to those cases where long-term capital gain is required to be computed under the first proviso to section 48. The Tribunal purported to reach the conclusion on a literal construction of the proviso, the language of which, the Tribunal acknowledges, is unambiguous. With due respect to the learned Members of Tribunal, we find it difficult to appreciate the observation that the literal construction of proviso leads to the meaning it has attributed to the provision. The Tribunal failed to note that there are no words of exclusion of the assessees like the applicant governed by the first proviso to section 48. Nor can they be inferred by necessary implication. It appears that the Tribunals views is based on the premise that the legislature did not intend to provide two reliefs to a non-resident assessee â one under the proviso to section 48 and another under the proviso to section 112(1). As already discussed in the preceding para, no such legislative intention can be imputed to the legislature except by way of some guess work or a priori reasoning. The assumption of the Tribunal that it was giving proviso to S, 48 cannot be avoided. The only question is about the connotation of the expression âbefore giving effect to the second proviso to section 48â â whether those words have the effect of excluding those who cannot avail of the indexation benefit under the 2effect to literal construction as well as legislative intent is incorrect. The further observation of the Tribunal that if the legislature intended to cover the cases falling under the first proviso to section 48, it would not have used the words âsecond proviso to section 48 [in the proviso to section 112(1)] is based on a wrong premise. One does not follow from the other. The second proviso to section 48 should necessarily be mentioned in the proviso to section 112(1) as the tax rate of 10 per cent should be calculated without reference to the indexation formula that is applicable to the resident assessees. Hence, the reference to 2nd nd proviso, that is to say, the non-residents including foreign companies. We are of the considered opinion, for the reasons already set out, that the crucial phrase in the proviso to section 112(1) does not have such effect.
14.1. The learned Members of the Tribunal placed much reliance on sub-section (3) to section 115AD by way of contrast with the language of the proviso to section 112(1). Section 115AD, inter alia, provides that where the total income of a foreign institutional investor includes income by way of capital gain arising from the transfer of securities, the amount of income-tax calculated on the said income shall be at the rate of 10 per cent. Sub-section (3) says ânothing contained in the first and second provisos to section 48 shall apply for the computation of capital gains arising out of the transfer of securitiesâ¦â¦â¦â. After referring to sub-section (3), the Tribunal makes an observation that âif the legislature had intended to give benefit of marginal relief of tax to all non-residents, it could have easily used the words âfirst and second provisos of section 48.â The Tribunal missed to note that by adding the words âfirst provisoâ, the intended result will not be achieved. On the other hand, the position of non-resident will be worse. For these reasons, we have no hesitation in differing with the view taken by the Tribunal.
Other Provisions - comparison
15. The learned counsel for the applicant wanted to draw support from the phraseology used in other Sections in order to drive home the point that the crucial words do not mean what the Revenue says. He has drawn our attention to some of those provisions in which a similar phrase âbefore giving effect toâ is used in order to fortify his argument that if the interpretation placed by the Revenue on the proviso to section 112(1) is to be applied to those provisions, absurd results will follow. Clause (a) of Explanation to section 158BB(1) is one such provision referred to by the learned counsel. It reads as follows:
158BB. Computation of undisclosed income of the block period.
(1) xxxxxxx
(a) to (f) xx xx xx xx
Explanation : For the purposes of determination of undisclosed income
(a) the total income or loss of each previous year shall, for the purpose of aggregation, be taken as the total income or loss computed in accordance with the provisions of this Act without giving effect to set-off brought forward losses under Chapter VI or unabsorbed depreciation under sub-section (2) of section 32.
It is pointed out that if the same interpretation as the Revenue is adopting on almost similar words occurring in the proviso to section 112(1) is to be accepted, then the computation of undisclosed income cannot be made at all in a case where there is no carry forward loss or unabsorbed depreciation which is absurd. Another provision referred to is Section 88 where a similar expression - âbefore giving effect toâ finds place. Section 88 deals with rebate on life insurance premia, contribution to provident fund, etc. The expression âbefore giving effect to deductions under Chapter VI-Aâ occurs in clauses (i) and (ii) of section 88(1). Take a case where an assessee who is an individual or HUF is not entitled to claim any deduction under the said Chapter. Does it mean that such assessee cannot at all avail of the rebate granted, the counsel submits. Yet another provision referred to by the learned counsel for the applicant is Explanation (1) to section 41(4), wherein a contrasting phraseology âbefore applying the said provisoâ is used. We see considerable force in the contention of the learned counsel. However, the conclusion which we have reached need not rest on this footing. We are not inclined to examine in depth those provisions dealing with a different subject-matter.
For all the reasons given above, the answer to the 1st question should be in the affirmative and in favour of the applicant.
Bonus shares
16. 2nd Question âThis question relates to the tax payable on the long-term capital gain arising by virtue of sale of bonus shares. Whether 10 per cent rate in terms of the proviso to section 112(1) should be applied for the transfer of bonus shares is the question.
Bonus shares just as original shares of NRB are listed securities. The proviso to section 112(1) does not make any distinction between original and bonus shares. Once it is held that under the proviso to section 112(1), the benefit of lower rate of tax is not be denied to the non-residents in respect of long-term capital gains arising from the transfer of original shares, it follows that the same interpretation will hold good in the case of bonus shares as well. In fact it is the contention of the Revenue that the legislature did not intend to differentiate between original and bonus shares in the matter of application of rate of tax.
16.1. We may notice an alternative argument of the applicants counsel according to which the case as regards bonus shares stands on a stronger footing. It is contended that even if the stand of the department that applicability of the second proviso to section 48 is a pre-requisite for invoking the proviso to section 112(1) is accepted, so far as the bonus shares are concerned, the second proviso to Section 48 not being applicable, there is no legal impediment whatsoever to apply the proviso to section 112. The second proviso to section 48, as noticed earlier, excludes from its purview capital gains arising to a non-resident from the transfer of shares referred to in the first proviso. The contention of the learned counsel for the applicant is that the first proviso to Sec. 48 does not come into play in relation to the bonus shares for the reason that such shares were not purchased by utilizing the foreign currency. It is only the original shares that were so purchased. This argument is sought to be met by the departments counsel that the expression âpurchase should be understood in the context as âacquire and that the utilization of foreign currency shall be with reference to the original shares. This argument has been countered by the applicants counsel by pointing out that it would amount to re-writing the words in the proviso and changing the whole complexion of the proviso. The applicants counsel also placed reliance on Sec. 52(aa)(iiia) according to which the cost of acquisition of shares allotted without any payment shall be treated as nil. The counsel for the applicant submits that but for the exclusion of bonus shares from the sweep of first proviso to section 48, the aforesaid provision in Section 55 would become nugatory.
16.2. It is not necessary for us to delve into this aspect and express our views thereon, having regard to the interpretation we have placed on the proviso to section 112(1) and the crucial words therein â âwithout giving effect to the provisions of second proviso to section 48â
16.3. Thus, the answer to question no. 2 shall be in the affirmative and in favour of the applicant. It is clarified, however, that in computing the capital gains, the cost of acquisition of the asset (bonus shares) shall be taken as Nil as per sub-clause (iiia) of clause (aa) of section 55(2) which reads as follows:
(iiia) in relation to the financial asset allotted to the assessee without any payment and on the basis of holding of any other financial asset, shall be taken to be nil in the case of such assessee;
Thus, long-term capital gains arising on the transfer of bonus shares will be equal to the amount of sale consideration and such gains are liable to be taxed at the rate of 10 per cent as per the proviso to section 112(1).
Conclusion
In the light of the above discussion and answers to questions 1 and 2, we hold that in respect of the long-term capital gain arising from the sale of original and bonus shares of NRB Ltd. the applicant is entitled to the benefit of the first proviso to section 112(1) and, therefore, the quantum of tax payable shall not exceed 10 per cent of the amount of capital gain. Accordingly, the ruling is pronounced.