LTCG-Double benefit or additional relief is not a taboo under the law : Advance Ruling

Long term capital gains - sale of original and bonus shares - 10% rate applicable to non-residents as well - Double benefit or additional relief is not a taboo under the law : Advance Ruling 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 - original as well as bonus - constitute 26 per cent of the share capital of NRB Bearings Limited. 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.57.96crores. The applicant seeks advance ruling as regards the manner of computation of capital gains and the rate of tax to be applied. Questions before the AAR : Whether on the stated facts and in law the tax payable on the long-term capital gains arising on sale of 1. 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. 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? The Applicant contents 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, 196 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. 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 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 "listed securities" held for more than 12 months, is liable to be taxed at 10 per cent only. The Advance Ruling Authority held that 1. 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. 2. 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. 3. 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). 4. 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 - "before giving effect to the second proviso to section 48". 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. The Authority further observed, 1. 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. 2. 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 - that is the mandate of controversial phrase in the proviso to section 112(1). 3. It does not say - 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. 4. 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). 5. The second proviso to section 48 is only a mode of computation of capital gains. Is there a contradiction? The Revenue Counsel pointed out 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 - 20 per cent and 10 per cent - would be in force after applying the first proviso to section 48. The AAR did not see any 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. Purpose and legislative intention Revenue wanted the Authority to give effect to the principle of purposive construction and have regard to the object of the provision. Strangely, the applicant also wanted the same thing. That means the purpose is sought to be differently projected by both sides to buttress their divergent arguments. Double Benefit?: The argument of double benefit advanced by the Revenue's counsel did not appeal to the AAR. 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 Revenue's counsel is really not relevant to ascertain the legislative intention behind the proviso to section 112(1). The AAR felt that an enquiry to delve into the legislative intent and purpose would lead to 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. Therefore 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 as explained earlier. The objective is to be inferred from the language itself. The interpretation does not run counter to the language employed nor does it lead to any absurdity or anomaly. So the AAR ruled the first question in favour of the applicant. Bonus shares2nd Question -This 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. The AAR noted, 1. 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. 2. 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. 3. 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. Thus, the answer to question no. 2 was in the affirmative and in favour of the applicant. However the AAR clarified that in computing the capital gains, the cost of acquisition of the asset (bonus shares) shall be taken as Nil. The AAR pronounced its ruling as, 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.