Authority For Advance Rulings (Income Tax), New Dlehi
Cairn U.K. Holdings Ltd., In Re
Section 112, 48
Justice P.K. Balasubramanyan, Chairman And V.K. Shridhar, Member
A.A.R. No. 950 Of 2010
August 1, 2011
RULING
V.K. Shridhar, Member. – The applicant, Cairn UK Holding Ltd. (CUHL), is a private limited company registered in Scotland. It acquired the equity shares of Cairns India Limited (CIL) in 3 tranches: 50,000 equity shares were acquired by way of initial subscription in August, 2006; 365,028,898 equity shares by way of allotment as fully paid up equity shares and another 861,764,893 equity shares pursuant to a share purchase agreement on 12-10-2006. As per this share purchase agreement, 135,267,264 equity shares of Cairn India Holdings Limited (CIHL) were transferred by the applicant to CIL and as a consideration, CIL issued 861,764,893 equity shares to the applicant. Accordingly, these equity shares of CIL were allotted to the applicant under a swap of share arrangement. Approval of the Foreign Investment Promotion Board of India was also obtained. On 12-10-2009, Petronas Corporation Intl. Limited (PCIL) acquired 2.29 per cent equity shares in CIL from the applicant through an agreement dated 14-10-2009, pursuant to which the applicant transferred 4,36,00,000 equity shares to PCIL for a consideration of USD 241,426,379.
The transaction took place in off-market-mode and not through the recognized stock exchange.
2. As per the application, the following question has been framed for a ruling from this Authority:
‘Whether on the stated facts and in law, the tax payable on long term capital gains arisen to CUHL on sale of equity shares of CIL will be 10 per cent of the amount of capital gains as per proviso to section 112(1) of the Act?’
3. The applicant submits that in terms of section 195 read with section 9(1) of the Income-tax Act, 1961 (Act), PCIL was liable to withhold taxes from the consideration to be paid to the applicant. An application made under section 197 of the Act for a certificate for withholding of tax by PCIL at the rate of 10 per cent on the long-term capital gains in view of the proviso to section 112(1) of the Act was turned down and the applicant was asked to withhold tax at the rate of 20 per cent.
4. The applicant submits that proviso to section 112 provides that where the tax payable in respect of any income arising from the transfer of a long- term capital asset, being listed securities or units or zero coupon bond, exceeds 10 per cent of the amount of capital gains before giving effect to the provisions of the second proviso to section 48 of the Act, then, such excess shall be ignored for the purposes of computing the tax payable by the assessee. The proviso to section 112 was enacted with a view to provide lower rate of tax of 10 per cent on long-term capital gains in respect of listed securities or units or zero coupon bonds. The applicant is of the view that what is relevant is the capital gains arising from transfer of the above mentioned specified securities and it is immaterial whether the assessee who has earned the capital gain is a resident or non-resident.
5. The applicant explains that the proviso limits the rate of tax to 10 per cent, but with a rider that the quantum of capital gains should be arrived at without taking into account the benefit of indexation laid down in the second proviso to section 48 of the Act. An assessee cannot simultaneously claim two benefits: the benefit of indexation provided in the second proviso to section 48 and the benefit of lower rate of tax at 10 per cent as provided in proviso to section 112 of the Act.
6. Learned advocate contends that the phrase ‘before giving effect to provisions of second proviso to section 48’ used in the proviso to section 112 has been misinterpreted by the Hon’ble Tribunal in case of BASF Aktiengesellchaft v. Dy. Director of IT [2007] 293 ITR 1 (AT) (Mum.). The view of the learned ITAT that as the second proviso to section 48 is not applicable to non-residents who are covered by the first proviso to section 48, the proviso to section 112 will also not apply to the non-residents and that the eligibility to avail benefit of indexation under 2nd proviso to section 48 is a sine qua non to avail the benefit of lower rate of tax under the proviso to section 112, is not the correct position in law for the following reasons:
(a) The benefit of lower rate of tax at 10 per cent under the proviso to section 112 has been extended to zero coupon bond (‘ZCB’) by an amendment made in the proviso to section 112 by the Finance Act, 2005. However, for computation of capital gains under section 48 in respect of ZCBs, the benefit of indexation under the 2nd proviso to section 48 is specifically excluded by the 3rd proviso to section 48. If it is accepted that the eligibility of benefit of indexation under the 2nd proviso to section 48 is a sine qua non for availing the benefit of lower tax rate of 10 per cent under the proviso to section 112, then ZCBs would go out of the purview of section 112(1), whereas ZCBs have been specifically included by way of amendment in the proviso to section 112 so as to be eligible for the lower rate of tax at 10 per cent. This interpretation would render the amendment infructuous.
(b) The proviso to section 112(1) granting lower rate of tax at 10 per cent is also applicable to listed securities. Explanation to the said proviso provides that listed securities means securities as defined in clause (h) of section 2 of Securities Contracts (Regulations) Act, 1956, which includes debentures. Thus, the proviso to section 112(1) granting lower rate of tax at 10 per cent would be applicable to debentures. But in view of 3rd proviso to section 48, the indexation benefit under the 2nd proviso will not apply to debentures. If this contention is accepted then a resident assessee would have to pay tax at 20 per cent for transferring the listed debentures which would give rise to unintended results. The law is fairly clear that if an interpretation gives rise to unintended results or renders a word redundant or superfluous, then it needs to be avoided as has been held by the Hon’ble Supreme Court in the cases of CIT v. J.H. Gotla [1985] 156 ITR 323 /23 Taxman 14J; C.W.S. (India) Ltd. v. CIT [1994] 208 ITR 649/ 73 Taxman 174; CIT v. Hindustan Bulk Carriers [2003] 259 ITR 449 / 126 Taxman 321 and Grasim Industries Ltd. v .Collector of Customs [2002] 4 SCC 297.
7. In order to further explain the meaning of the phrase ‘before giving effect to’ or ‘without giving effect to’, the learned advocate points out that the same phrase has been used in the Act in section 88 which provides for a deduction from the amount of Income-tax. If the revenue’s interpretation of the phrase ‘before giving effect to’ is to be accepted, then it would lead to an absurd result where an assessee who is an individual or HUF and who is not eligible to claim deduction under the said chapter VI-A, would not be able to avail the rebate at all. That obviously is not the intention of the legislature. Similarly, clause (a) to Explanation to section 158BB(1) of the Act provides that for the purposes of determination of undisclosed income, the total income/loss shall be calculated ‘without giving effect to set-off of brought forward losses…’ If the revenue’s interpretation of the phrase ‘before giving effect to’ is to be accepted, it would lead to an absurd result as it would not be possible to compute undisclosed income of an assessee who did not have any brought forward losses. In the case of CWT v. Bhaskar Mitter [1993] 202 ITR 612/ 71 Taxman 392 (Cal.) it has been held that the same expression appearing in another provision of the Act should carry the same meaning which otherwise would give unintended results.
8. Learned advocate then submits that the proviso below clause (d) to the section 112(1) of the Act applies to all clauses to section 112(1). This Authority in case of Timken France, In re, AAR 739 of 2009/[2007] 294 ITR 513 / 164 Taxman 354 (AAR – New Delhi), has expressed the view that it would be irrational and even incongruous to allocate the proviso only to the preceding clause, clause (d) to section 112 of the Act. The same view has been taken by Learned ITAT in the case of BASF Aktiengesellshaft (supra). Moreover, this is self-evident from the formatting of section 112(1) as it appears in the Act.
9. Without prejudice, the applicant submits that merely because a resident assessee can have one of the benefits i.e. indexation or lower rate of rate of 10 per cent, non-resident cannot be denied the benefit on the ground that it is also entitled to the benefit of first proviso to the section 48. For example, section 115BBA, and section 115E of the Act extend additional benefits to non-resident assessees. In Timken France’s SAS case (supra), this authority has held that double benefit is not a taboo under the law. Similar was the view in the cases of Jt. CIT v. Mandeep Engg. & Pkg. India (P.) Ltd. [2007] 292 ITR 1/ 163 Taxman 337 (SC), CIT v. G.V. Venugopal [2005] 273 ITR 307 / 144 Taxman 784 (Mad.) and CIT v. Nagesh Devidas Kulkarni [2007] 291 ITR 407 (Bom).
10. Learned advocate finally submits without prejudice that where two views are possible, the view in favour of the assessee should be adopted as held by the Hon’ble Supreme Court in CIT v. Madho Prasad Jatia [1976] 105 ITR 197, CIT v. Naga Hills Tea Co. Ltd. [1973] 89 ITR 236 , CIT v. J.K. Hosiery Factory [1986] 159 ITR 85/25 Taxman 80A and CIT v. Podar Cement (P.) Ltd. [1997] 226 ITR 625 / 92 Taxman 541 (SC).
11. The revenue submits that the expression ‘before giving effect to the 2nd proviso to section 48’ pre-supposes the existence of a case where computation of long- term capital gains could be made in accordance with the formula contained in the 2nd proviso in section 48. Occasion to apply the proviso to section 112(1) does not arise as the 2nd proviso to section 48 is not applicable to non-residents. The 1st and the 2nd provisos to section 48 are mutually exclusive as they provide distinct modes of computation of capital gains to two different sets of persons. The non-resident foreign company cannot claim to have the double benefit of the protection against rupee value fluctuation as well as the indexation. In view of the language employed in the proviso, it has no application to non-residents and foreign companies specified in clause (c) category assessees. This is further fortified by the language used in sections 115AB and 115AD which specifically prohibit application of 1st and 2nd provisos, as the case may be. The intention of the Legislature in introducing the 1st proviso to section 48 is also clear from the explanatory notes to the Finance Act, 1992 issued vide CBDT’s Circular No. 636, dated 31-8-1992. The two parts of the proviso are integral parts of the proviso and cannot have independent application. It would not be a logical interpretation that Legislature’s intention could be that while the persons falling under the 2nd proviso have to forego the benefit of indexation to avail the lower rate of 10 per cent, the persons falling under the 1st proviso would be granted the benefit of lower rate of 10 per cent after having availed the benefit of 1st proviso, even when nothing is mentioned about it in the proviso to section 112 (1). Whenever the Legislature intended to refer to persons falling under either of the two provisos to section 48, it specifically mentioned either or both of the provisos depending upon its intention.
12. Referring to the Timken France’s case (supra) the revenue submits that the applicant’s contention that if the revenue’s interpretation is accepted then zero coupon bonds would go out of the purview of proviso to section 112 (1), is not acceptable as the zero coupon bonds were taken out of the purview of 2nd proviso to section 48 w.e.f. 1-4-1998 and were included to confer benefit of lower rate of tax at 10 per cent w.e.f. 1-4-2006. There is nothing inconsistent and rather it supports the contention of the revenue.
13. Regarding the reference made by the applicant that due to the mention of the phrase ‘before giving effect to deduction under Chapter VI-A’ in section 88 would render individual or HUF incapable of availing the rebate under section 88 because an individual or HUF will not be able to claim certain deductions under Chapter VI-A, the revenue submits that it is not a correct analogy as in the case of an individual or HUF, it is very much possible to give effect to some of the provisions of Chapter VI-A, which does not exclude individual or HUF, whereas in the case of a non-resident, no part of the second proviso to section 48 is applicable and therefore no effect can be given.
14. The revenue submits that the applicant is taking a hypothetical situation when it says that it cannot be barred from claiming double benefits: one on account of 1st proviso and the other on account of lower rate of tax. The applicant cannot pre-suppose the existence of a double benefit unless so provided by the Legislature.
15. Referring to the rulings of this authority in Timken France’s case (supra) and other cases, the revenue submits that the ruling of the Hon’ble Authority is binding only on the applicant and on the concerned CIT and that too in relation to a specific transaction. It does not have the force of precedent and is only of persuasive value. On the issue before the authority, reliance is placed on the order of the ITAT Mumbai Bench in the case of BASF Aktiengesellshaft (supra) decided in its favour.
16. In the book entitled “Indian Double Taxation Agreements and Tax Laws” Volume-1 by Sh. D.P. Mittal, the principles of interpretation of fiscal statutes of domestic laws are summarized at pages 1.145/6 as under:
“The principle of interpretation of domestic statutes are variously expressed by saying that in fiscal statutes one must have regard to the letter and the spirit of the law; that the subject cannot be taxed by inference and analogy; that in a taxing Act there is no governing principle to look at but one has simply to go to the Act itself to see whether the tax claim is that which the statute imposes; that while construing the taxing Act, it is not the function of the court to give to the words used a strained or unnatural meaning and that the subject can be taxed only if the revenue satisfies the court that the case falls strictly within the provisions of the law; that if the statute contains a lacuna or a loophole, it is not the function of the court to plug it by strained construction to the supposed intention of the legislation; that the court ought not to hunt out ambiguities by an unnatural construction of a taxing section – Murarilal Mahabir Prasad AIR 1976 SC 313. The duty of the court is to give effect to the intention of the Legislature. That intention is to be gathered from the language employed, having regard to the context in connection with which it is employed. … but once that is ascertained it is not open to the Court to narrow or whittle down the operation of the Act by considerations of hardship or business convenience or like – Attorney-General [1899] 2 QB 158. The Court should study the tax laws as a whole and even if it resorts to a reasonable and liberal construction, care should be taken not to defeat the intention of the Legislature.”
The purpose and legislative intention of the proviso to section 112(1) was considered at length by this Authority in the case of Timken France (supra) to arrive at the following conclusion:
“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 “all assessees” in the CBDT circular on which the applicant is relying nor the wording “level playing field” 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 “all assessees” used in para 41.2 includes non-resident assessee 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 ‘level playing field’ is flexible and capable of being understood in more than one way as amply reflected in the arguments of both the counsels. 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).”
We are of the view that the present issue is to be resolved by the relevant provisions of the Act as they stand.
17. Section 112(1) of the Act reads as under:
“(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.
Provided
Explanation.—for the purposes of this section, –
18. From the reading of the section 112(1), it may be noticed that the sub-clause (a) ends with a proviso, sub-clause (b) had a proviso which was omitted w.e.f. 1-4-1996, sub-clause (c) does not have a proviso. At the end of each of the sub-clauses (a),( b) and (c), semi-colon i.e. (;) is placed to connect independent clauses (a ),(b),( c) and (d) to indicate a closer relationship between them. But, at the end of the clause (d), a full-stop i.e. (.) is placed to mark the end of declarative sub-clauses (a), (b ), (c) and (d). Thereafter, a proviso is placed below sub-clauses (d). Secondly, the first limb of the said proviso beginning with: “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,………”, applies to a particular kind of long-term capital asset and not to a person under the Act. These two circumstances would suffice to hold the view that the ambit of the said proviso extends not only to sub-clause (d) to section 112(1) but to all the sub-clauses to section 112(1) of the Act. In other words, the proviso below sub-clause (d ) is a proviso to section 112 (1) of the Act. To this extent, we are in agreement with the ruling of this authority in Timken France’s case (supra).
19. It is important to have a look at the definition of ‘zero coupon bond’ as it appears in the Act. A ‘zero coupon bond’ is defined under section 2(48) of the Act as under:
“zero coupon bond” means a bond –
(a) issued by any infrastructure capital company or infrastructure capital fund or public sector company or scheduled bank on or after the 1st day of June, 2005;
(b) in respect of which no payment and benefit is received or receivable before maturity or redemption from infrastructure capital company or infrastructure capital fund or public sector company or scheduled bank; and
(c) which the Central Government may, by notification in the Official Gazette, specify in this behalf.
Explanation—For the purposes of this clause, the expression “scheduled bank” shall have the meaning assigned to it in clause (ii) of the Explanation to sub-clause (c) of clause (viia) of sub-section (1) of section 36.”
As per the above definition introduced in Finance Act, 2005, a zero coupon bond would mean a bond in which no benefit is received or receivable before the maturity or redemption and which are issued on or after June 1, 2005, by an infrastructure capital company or infrastructure capital fund or public sector company and specified by the Central Government in the official gazette. The definition came into effect from 1-4-2006. The Finance Ministry has also come up with the guidelines to be followed for recognition of the zero coupon bonds issued by an infrastructure capital company or an infrastructure capital fund or a public sector company. The tax treatment of zero coupon bonds has also been rationalized. It had specified that income on transfer of a zero coupon bond would be treated as capital gains, except the income arising from business of dealing in zero coupon bonds. In the notification, the CBDT has issued guidelines stipulating that the application should be made at least three months before the date of issue of such bonds and cannot be filed for bonds to be issued beyond two financial years from the year of application. The applicants have also to fulfil certain conditions relating to tenure of the bond, credit rating and listing on stock exchanges and more importantly that the life of the bond should not be less than 10 years and more than 20 years. The zero coupon bonds are also to be listed at a recognised stock exchange in India. The money raised is to be invested in a manner specified in the guidelines. The manner in which pro-rata amount of discount on a zero coupon bond is to be computed and allowed a deduction in the hands of the company or fund or public sector company that issues a zero coupon bond has been provided.
Bonds and debentures are debt instruments with different types of exposure. They are fixed income instruments and are taken by investors looking for regular, fixed income through payment of interest on the principal purchase. A zero coupon bond pays no coupons and is a distinct financial instrument different from bond in the common parlance.
The 3rd proviso to section 48 of the Act brings out distinction in the species of bonds when it excludes ‘bonds’ which are ‘capital indexed bonds issued by the Government’. Just as there are ‘capital indexed bonds issued by the Government’, there is another specie of bonds called ‘zero coupon bonds’ of separate and distinct nature to which reference is made by the proviso to section 112(1). The Legislature is conscious of this fact.
20. Section 48 of the Act reads as under:
’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-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 “cost of acquisition” and “cost of any improvement”, the words “indexed cost of acquisition” and “indexed cost of any improvement” had respectively been substituted:
Provided als o 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.
Explanation—For the purposes of this section, -“
21.The 3rd proviso to section 48 of the Act is a proviso to the 2nd proviso and restricts the application of the 2nd proviso where the capital asset is a bond or debenture but other than capital indexed bond issued by the Government. The 3rd proviso therefore restricts the benefit of indexation to such assets owned by a person. But the proviso does not apply to long-term capital assets owned by a person who is a non-resident coming under the 1st proviso to section 48. Thus the income chargeable under the head “capital gains” is to be computed keeping in mind the restriction imposed by the 3rd proviso on the 2nd proviso in the cases of assessees and assets coming within its purview. From a reading of 1st, 2nd and 3rd provisos, it transpires that:
(i) In the cases of assessees who are non-residents, the 1st proviso provides computation of capital gains arising on transfer of shares or debentures of an Indian company by taking into account fluctuation in foreign exchange.
(ii) In the cases of those assessees who do not fall under the 1st proviso, and assets that do not fall under the 1st proviso, the 2nd proviso provides computation of capital gains arising on transfer of shares or debentures of an Indian company by taking into account indexation.
(iii) If the asset is not a share or debenture, the residents and non-resident assessees are allowed computation of capital gains on the basis of indexation. It is clear that in the case of units and zero coupon bonds, which are other than shares or debentures, all the assessees, whether residents or non-residents, are eligible to the benefits of indexation in the computation of capital gains arising on their transfer. However, the 3rd proviso denies the benefits of indexation to bonds or debentures.
22. Proviso to section 112(1) reads as under:
“Provided that where the tax payable in respect of any income arising from the transfer of a long-terms 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 assessee.
Explanation—for the purposes of this 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.”
23. Section 115AD was inserted by the Finance Act, 1993, allowing the FIIs the benefit of lower rate of tax at 10 per cent on the long-term capital gains arising on securities computed without applying the 1st and the 2nd proviso to section 48 of the Act. The securities mean the securities as defined in section 2(h) of the Securities Contracts (Regulation) Act, 1956, and include bonds and debentures. The 3rd proviso to section 48 was inserted by the Finance Act, 1997 w.e.f. 1-4-1998, whereby, benefit of indexation to the resident assessee on bond or debenture was denied. The non-resident assessees were taxed @ 10 per cent on the long-term capital gains whereas the residents were paying tax on the long-term capital gains @ 20 per cent. As the benefit of lower rate of tax at 10 per cent was already available to non-resident assessees, in order to bring level playing field with the resident assessees, proviso under section 112(1) was inserted by the Finance Act, 1999 w.e.f 1-4-2000. Thereafter, the Finance Act, 2005 inserted ‘zero coupon bond’ as one of the assets along with ‘securities’ and ‘unit’ in the proviso to section 112(1). We have already noted that ‘zero coupon bond’ and ‘bond’ are different financial instruments. The 3rd proviso therefore does not include ‘zero coupon bond’ and hence the ‘zero coupon bond’ is eligible for indexation under the 2nd proviso to section 48 of the Act.
24. The importance of the word ‘exceeds’ occurring between the two phrases in the above proviso:
“where the tax payable in respect of any income arising from the transfer of a long-terms capital asset being listed securities or unit or zero coupon bond”
and
“ten per cent of the amount of capital gains before giving effect to the provisions of the second proviso to section 48”
means integration of the two limbs of the proviso. The proviso would stand to nullity if read in isolation. Again at the end of the two phrases, the phrase used is:
“such excess shall be ignored for the purpose of computing the tax payable by the assessee”.
The application of the proviso can thus be understood in the following manner:
A. Determine the tax payable on the capital gains arising from the transfer of long-term capital asset on the income computed as per section 48 of the Act.
B. Determine 10 per cent of the capital gains arising from the transfer of long- terms capital asset without giving effect to the provisions of 2nd proviso to section 48 of the Act. [10 per cent of the capital gains = 10 per cent (full value of consideration – cost of purchase including cost of improvement, if any)]
then,
If the value of A is greater than B, ignore the excess.
Like is thus compared with the likes, observing the principles of equality amongst the equals in legislating the above proviso.
25. The assets on which tax is payable in respect of any income arising from the transfer are listed securities or unit or zero coupon bond. As we have noted earlier, if the asset is not a share or debenture, the residents and non-resident assessees are allowed computation of capital gains on the basis of indexation. In respect of units and zero coupon bonds, which are other than shares or debentures, all the assessees, whether residents or non-residents, are eligible to the benefit of indexation in the computation of capital gains arising on their transfer. However, the 3rd proviso denies the benefit of indexation to bonds or debentures. While applying the proviso to section 112(1) to determine the tax payable, the computation mechanism includes such assets. There is thus no dichotomy in the proviso to section 112(1) and the 3rd proviso to section 48 of the Act as pointed by the applicant. section 48 is a section which governs mode of computation of income whereas section 112 determines the tax payable on such income. It may be important to keep in mind that the application of the proviso is based on the capital asset to which the provisions of 2nd proviso to section 48 of the Act apply. If it is the case that it applies to the 1st proviso meant for a non-resident assessee then the proviso would have made a mention of it. We are unable read anything more in the statute than what is stated therein.
26. It is averred that the mandate of the phrase in the proviso to section 112(1) is not to let the indexation formula enter into the computation process and is not a condition that unless an assessee is eligible to apply the indexation formula only then the reduced rate of 10 per cent prescribed by the proviso to section 112 (1) can be applied. In this regard it may be stated that the indexation formula already enters into the computation in the first limb where it is mentioned that “tax payable in respect of any income arising from the transfer of long-term capital asset” is to be determined. In fact there is no issue on this part of proviso whether the 2nd proviso to section 48 enters into the said computation or not. The issue that arises lies in the second limb of the proviso starting with the phrase “ten per cent of the amount of capital gains before giving effect to the provisions of the second proviso to section 48”. This cannot be read to mean “deny the concessional rate of tax to the category of assessees who are not eligible to have the benefit of indexed cost of acquisition under the second proviso of section 48”. It only conveys how a particular amount is to be determined. Any other meaning would tantamount to rewriting this part of the proviso of section 112(1).
27. As the indexation on the zero coupon bond is available by virtue of 2nd proviso, it will affect the computation of capital gains under section 48 on which tax is payable under the first limb of the proviso and thus would not go out of the purview of the proviso to section 112(1). The zero coupon bond on which indexation is available will get the benefit of the lower rate of tax at 10 per cent under the proviso. The exclusion from application of 1st and 2nd provisos to section 48 while calculating the amount of Income-tax on the income by way of long-term capital gains in the cases of non-residents and allow them the benefits of lower tax rates of 10 per cent also find mention in sections 115AC(3) and 115AD(3) of the Act. The Act has taken care when, where, and how the 1st and the 2nd provisos to section 48 are to be excluded. The long-term capital gains on the sale of shares of the listed companies are otherwise exempt from tax under section 10(38) of the Act if the sale of the shares takes place through the recognized stock exchange on which security transaction tax is paid. However, in this case such exemption is not available as the shares of the listed company CIL are sold in the off-market mode.
28. This Authority in the case of Universities Superannuation Scheme Ltd., In re, AAR No. 636 of 2004, [2005] 275 ITR 434 /14 5 Taxman 1 41, held that:
“7. ….The grievance of the applicant is that the Indian nationals both resident-assessee as well as domestic companies are entitled to compute their capital gains on the basis of “indexed cost of acquisition” and “indexed cost of any improvement” and on the gains so determined, they are taxed @ 20 per cent and they are allowed an option to be taxed @ 10 per cent without indexation under the proviso to sub-section (1) of section 112 of the Act. We do not think that under proviso to section 112(1) they have the option to apply the provisions of indexation for computing capital gains and paying tax @ 10 per cent on the gains so arrived….. The import of the proviso to section 112(1), discussed above, is that where the tax payable in respect of any income arising from the transfer of securities (as long-term capital assets) exceeds 10 per cent of the amount of capital gains before giving effect to the provisions of the second proviso to section 48, then such excess has to be ignored. In other words, without taking away the right of computation under the second proviso to section 48, FIIs have been extended the benefit of limiting the tax rate to 10 per cent on the capital gains arising from the transfer of long-term capital assets being securities. Under the scheme of section 115AD which applies to FIIs like the applicant (which does not apply to domestic companies and resident assessees), FIIs are taxed @ 10 per cent of the gains computed under section 48 without indexation, therefore, the proviso puts them on par. …..”
This also throws light on this question.
29. We are of the view that as the section 48 must be read with section 112 and if the tax on long-term capital gains provision cannot be given effect to for any reason, then the provision has no application under the Act. Where a question had arisen about the interplay and relative scope of two provisions, the Hon’ble Supreme Court in the case of CIT v. B.C. Srinivasa Setty[1981] 128 ITR 294/1 5 Taxman 1 has explained the legal position thus:
“…. No doubt there is a qualitative difference between the charging provision and a computation provision. And ordinarily the operation of the charging provision cannot be affected by the construction of a particular computation provision. But the question here is whether it is possible to apply the computation provision at all if a certain interpretation is placed on the charging provision. That pertains to the fundamental integrality of the statutory scheme provided for each head.”
30. The zero coupon bonds are assets to which 2nd proviso to section 48 applies and are entitled to the benefit of indexation. This aspect was not examined by this authority in Timken France’s case (supra) and the ruling was given on the premise that when indexation is not available on bonds in view of the 3rd proviso to section 48, then Explanation to section 112(1) becomes redundant. Secondly, in Timken France’s case (supra) this authority has read the reference made ‘to all the assessees’ in para 41.2 of the explanatory note to the Finance Act, 1999 as reference to all assessees rather than reading it to such assessees to whom indexation as envisaged in 2nd proviso to section 48 applies. The ruling in Timken France’s case (supra) was thereafter followed by this Authority in a host of other cases. We are of the view that a ruling under the Act is confined to the facts and the law projected in the application leading to the ruling and binding only on that party and the revenue. In a case where, with respect, certain aspects germane to the issue are not examined and the authority has taken a view, we think that we are not hampered from taking a fresh look on that issue when raised before us.
31. In view of the above, the question raised by the applicant is answered in the negative. The applicant is not eligible to avail the benefit of lower rate of tax of 10 per cent on the capital gains on the sale of shares to PCIL.
The Chairman (Adding)
The Hon’ble Member (R) has ruled that assessees and assets covered by the first proviso to section 48 of the Income-tax Act are not entitled to the benefit of the proviso occurring after clause (d) of section 112(1) of the Income-tax Act. I fully agree with that ruling. I have thought it proper to add a few words in view of the fact that the ruling involves the interpretation of two sections of the Income-tax Act relating to computation and taxation of capital gains.
Section 48 is the computing section. It provides the mode for computing capital gains. The first proviso looks at a non-resident, takes out a species of capital asset and provides for relief against inflation. The assets are specified as shares in or debentures of an Indian company. The second proviso deals with other capital assets of a non-resident and all capital assets of a resident and provides for the benefit of indexation; again to offset inflation. The third proviso introduced with effect from 1-4-1998 then steps in and excludes from the purview of the second proviso providing for indexation, bonds or debentures other than capital indexed bonds issued by the Government. Thus, both for a non-resident and a resident indexation regarding bonds and debentures is excluded.
Section 112 fixes the tax payable on long-term capital gains. It provides the proportion of tax to be paid at 20 per cent of the Capital Gain, determined under section 48, clause (c) covers a non-resident (not being a company) and a foreign company. The proviso introduced with effect from 1-4-2000, then extends a concession in the matter of payment of tax in respect of three specified assets by providing that the tax on the capital gain be 10 per cent and that excess payable under this section be ignored. The three specified assets are, listed securities, units and zero coupon bonds. It also provides that calculation of the 10 per cent of tax shall be without resorting to indexation provided for in the second proviso to section 48. In the face of the third proviso to section 48, no indexation is permissible for bonds and debentures. The proviso in section 112 extends relief to the three categories of assets for those who would have come under the second proviso to section 48, but for the third proviso to section 48.
Does it follow from this that even those assessees who are entitled to the benefit of the first proviso to section 48 and the protection against inflation regarding specified assets, have again to be given a second benefit. It is said that the intention in introducing the proviso was to bring about a level playing field. The disadvantage lay with the resident assessee regarding bonds and debentures, they being excluded from the benefit of the first proviso and the second proviso.
Obviously that level playing field had to be by providing relief to the resident assessee and that is what is done by the proviso in section 112 in respect of listed securities, units and zero coupon bonds. The proviso explicitly mentions that the calculation of the 10 per cent of the Capital Gain shall be before resorting to indexation contemplated by the second proviso to section 48. That means, an assessee not coming under the first proviso to section 48, in respect of specified assets is given protection against inflation which has already been given to a non-resident, in respect of specified assets, thus achieving a level playing field.
When this seems to be the position, are we compelled to interpret the proviso to section 112 in a different manner for the reason that debentures or zero coupon bonds, may be covered by the third proviso to section 48 of the Act? Sale of zero coupon bonds was not eligible for indexation to determine Capital Gain if it is understood as a species of bond. Now by the proviso, the concept of indexation is introduced for it, notwithstanding the third proviso to section 48 assuming, it is covered by it. Be it noted that it is only in respect of payment of tax. If the 10 per cent of Capital Gain determined without reference to indexation is less than the tax payable in respect of an income arising on the transfer of a long-term capital asset of that nature, the assessee can take advantage of it. As regards a non-resident assessee, gain from sale of shares in or debentures of an Indian company continues to attract the first proviso to section 48 and that assessee to the extent of those assets is kept out of the benefit of the second proviso. Now a set of securities of those to whom the second proviso to section 48 applied, that had been kept out of the purview of the second proviso by the third proviso, have been brought in for relief. This does not justify an interpretation that what is covered by the first proviso to section 48 of the Act is also brought in for a second dose of protection.
In TimkenFrance’s case (supra), it was stated that the proviso in section 112 of the Act was a special provision in relation to the transfer of certain long-term capital assets and that there was no warrant to limit the reduced rate only to the three categories of resident assessees specified in clauses (a), (b) and (d ). Be it so. It only means that the benefit of the proviso is also available to a non-resident. But, regarding what asset? It can only be an asset covered by the second proviso to section 48 on the plain language of the proviso. To infer from this that assets of a non-resident coming under the first proviso to section 48 has also to be held to be within the proviso in section 112 seems to be unwarranted on the scheme of section 48 and the language of the first two provisos thereto. The relief provided for by the proviso to section 112 is intended to cover cases where effect of inflation is not provided for. That is why the proviso specifies that the calculation of 10 per cent of the Capital Gain should be “before giving effect to” indexation. ‘Before giving effect to’ connotes that effect has otherwise to be given. That means, the asset must be one qualified for indexation under the second proviso to section 48 of the Act. There is no justification in not giving effect to the words used in the proviso. Nothing stood in the way of the Legislature in specifying that all assets will qualify for protection. That has not been done. On the scheme of the provisions and the level playing field sought to be achieved, the natural way of understanding the proviso is to confine its operations to assets not covered by the first proviso to section 48 and the assets specified in the proviso to section 112 itself.
When an interpretation of this nature is possible there is no justification in proceeding on the basis that a double relief is not taboo. May be it is not taboo, but then, before inferring the grant of it, specific conferment of such a relief must be found in the Statute.
Ruling
The tax payable on long-term Capital Gains arising to CUHL on sale of equity shares of CIL by it will not be 10 per cent of the amount of Capital Gains as per the proviso to section 112 of the Income-tax Act.
[Citation : 337 ITR 131]
