The recent ruling of the Hon’ble High Court of Delhi in the case of Carin U.K. Holdings Limited Vs. Director of Income- Tax1 has been highly welcomed and appreciated. Through this judgment, the Hon’ble High Court has provided benefit of reduced rate of capital gains tax on transfer of shares of an Indian listed company to non-resident shareholder. In the present case, Carin U.K Holdings Limited transferred equity shares of Carin India Limited to Petronas International Corporation Limited through an of-market transaction, which resulted in long term capital gains in the hands of Carin U.K Holdings Limited [taxpayer in present case]. The taxpayer had originally requested a ruling from the Authority of Advance Ruling (AAR) on the applicability of reduced rate. The AAR held that, to benefit from the concessional rate as provided under the Income-tax Act, 1961 (ITA), the taxpayer has to be eligible to adjust the original acquisition costs of the shares using cost inflation index . The taxpayer filed a Special Leave Petition before the Supreme Court (SC). The SC, by its order dated 30 July 2012, directed the Taxpayer to first approach the appropriate High Courts.
ISSUE BEFORE HIGH COURT:
The main issue before the High Court was whether the benefit of the 10% concessional tax rate on long-term capital gains is available to a non-resident where listed equity shares are transferred in an off- market transaction.
OBSERVATION AND DECISION
- Section 48 and section 112 of the Income Tax Act were discussed at length.
Section 48 provides for mode of computation of capital gains. As per the said section, 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:
- expenditure incurred wholly and exclusively in connection with such transfer;
- the cost of acquisition of the asset and the cost of any improvement thereto:
1Provided that in the case of an assessee, who is a non-resident, capital gains arising from the transfer of a capital asset being shares in, or debentures of, an Indian company shall be computed by converting the cost of acquisition, expenditure incurred wholly and exclusively in connection with such transfer and the full value of the consideration received or accruing as a result of the transfer of the capital asset into the same foreign currency as was initially utilised in the purchase of the shares or debentures, and the capital gains so computed in such foreign currency shall be reconverted into Indian currency, so however, that the aforesaid manner of computation of capital gains shall be applicable in respect of capital gains accruing or arising from every reinvestment thereafter in, and sale of, shares in, or debentures of, an Indian company:
Provided further that where long-term capital gains 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:
The first proviso to section 48 is applicable when a non-resident had purchased an asset being a share or debenture with foreign currency, converted into Indian rupee. It stipulates that on transfer of the said share or debenture the consideration received in Indian rupee should be reconverted into the same foreign currency. Therefore the first provision to section 48 of the ITA enables a non-resident to neutralize an exchange rate fluctuation when computing long term capital gains. Both provisos operate independently and have a different purpose and objective.
The second proviso to section 48 is applicable to all others including non-residents, who are not covered by the first proviso and they are entitled to benefit of cost of indexation which neutralize inflation and therefore second proviso enables both residents and non-residents (not governed by the first proviso to section 48) to neutralize the effect of inflation by deducting the indexed costs of acquisition of the shares in computing long- term capital gains . Both these provisos have a distinct area of operation and have different purpose and objective.
- Further, clause (c) sub-section (iii) section 112 of the Income tax Act provides as follows: The amount of income tax on long term capital gains arising from the transfer of a capital asset, being unlisted securities, calculated at the rate of 10 % on the capital gains in respect of such asset as computed without giving effect to the first and second proviso to section 48.
Explanation 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 unit] [or zero coupon bond], exceeds 10% 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 assesse. The above proviso gives a beneficial option to taxpayers on transfer of long-term capital asset being listed securities, units or zero per cent coupon bonds.They are liable to pay tax @ 10% on the amount of capital gains before giving effect to the second proviso of section 48, i.e. ,the assesse have the option to pay tax @10% without benefit of inflation indexation.
- As per the Hon’ble High Court of Delhi, the Income Tax Act, 1961 did not categorically provide that a taxpayer avails the benefits of first proviso to section 48 is not entitled to benefit of 10% tax rate. The intention of the legislature is to tax long-term capital gains on listed shares at 10% rate, without the benefit of indexation under the second proviso to section 48 of the Act
The High Court decision has given a positive direction to the controversies on the provision of concessional rate on transfer of listed securities in an off-market transaction by a non-resident.
Domain of provisos (1) and (2) to section 48 are different, one provides for setting off inflation rate fluctuations and the second provides for lower rate of tax (without availing the benefit of indexation).
Section 112 provides respite in form of lower tax rate of 10% in respect of listed securities, without the benefit of indexation under second proviso to section 48 and the said section is equally applicable for resident as well non-resident taxpayers. Whereas first proviso provides relief from inflation on long term capital gains from currency fluctuations, therefore court has rightly interpreted that both provisos to section 48 are exclusive and independent of each other.