Monday, May 19, 2014

NR’s capital gains are taxable at concessional rate under Proviso to sec. 112(1); Cairn’s judgment followed

The first and second proviso to section 48 can't be said to be granting the same relief or benefit. Both provisos are neither identical nor they serve the same purpose. Hence, benefit of Proviso to section 112(1) is allowable to non-resident availing of benefit of first proviso to section 48.

a)'P', a Mauritian Company ('applicant'), purchased listed shares of an Indian company from 'I' (a US based Company).

b)The applicant sought advance ruling on the issue whether tax had to be deducted at 10% under section 195 on long-term capital gain arising to such non-resident as per proviso to section 112(1)?

The Authority held as under:

1)The observations of the High Court in case of Cairn UK Holdings Ltd. v. DIT [2013] 38 179 (Delhi provided as under:

a)Proviso to section 112(1) gives an option to assessee to tax long-term capital gain at lower rate of 10% (without giving benefit of indexation as per second proviso to section 48) in case of transfer of listed securities, units or zero coupon bonds.

b)The first proviso to section 48 ensues that non-resident would be given benefit to adjust fluctuation in foreign exchange while computing capital gain.

c)The second proviso to section 48, which provides for cost inflation index, is applicable to all assessees including non-residents, if such non-residents are not covered by the first proviso.

d)The two provisos to Section 48 cannot be equated as granting same relief or benefit. They operate independently and have different purposes and objectives.

e)It is difficult to state that benefits under the first proviso and second proviso to section 48 are identical or serve the same purpose.

f)Thus, the legislative intent was to allow benefit of Proviso to section 112(1) to non-residents as well who are claiming benefit of first proviso to section 48.

2)Following the order of High Court (supra), the Mauritian Company was directed to deduct tax at source at the rate of 10% under proviso to section 112(1). - PAN-ASIA IGATE SOLUTIONS, IN RE [2014] 45 322 (AAR - New Delhi)