Section 112, read with section 48, of the Income-tax Act, 1961

Court :
Authority for Advance Rulings, New Delhi

Brief :
Section 112, read with section 48, of the Income-tax Act, 1961 - Capital gains Tax on long-term capital gains - Whether benefit of proviso to section 112(1) cannot be denied to non-residents/foreign companies who are also entitled to a different relief in terms of first proviso to section 48 - Held, yes - Whether eligibility to avail benefit of indexed cost of acquisi­tion under second proviso to section 48 is not a sine qua non for applying reduced rate of 10 per cent prescribed by proviso to section 112(1) - Held, yes - Whether, therefore, tax payable on long-term capital gains arising on sale of originally purchased shares of Indian company to non-residents/foreign companies will be 10 per cent of amount of capital gains as per proviso to section 112(1) - Held, yes - Whether proviso to section 112(1) does not make any distinction between original and bonus shares - Held, yes - Whether once it is held that under proviso to section 112(1), benefit of lower rate of tax is not to be denied to non-residents in respect of long-term capital gains arising from transfer of original shares, it follows that same interpretation will hold good in case of bonus shares as well - Held, yes Circulars and clarifications : Circular No. 554, dated 13-2-1990; Circular No. 636, dated 31-8-1992 Interpretation of statutes : Rule of legislative intention : rule of purposive construction. Facts The applicant, a non-resident company, was engaged, inter alia, in the business of manufacturing anti-friction bearings and allied products and providing services relating thereto. During the financial year 1986-87 it acquired the shares of a listed Indian company by making payment in foreign currency. Subsequently, over the years, the applicant also received bonus shares from the said company. Both the original and bonus shares were held by it for more than one year; thereafter, the same were sold to the Indian promoters of said Indian company for certain consideration. The applicant sought advance ruling of the Authority on the questions of law as to whether the tax payable on the long-term capital gains arising on sale of : (1) originally purchased shares of the Indian company will be 10 per cent of the amount of capital gains as per proviso to section 112(1); and (2) on bonus shares of said company will be 10 per cent of the amount of capital gains as per proviso to section 112(1). The stand of the applicant is that it satisfies all the conditions requisite to attract the proviso to section 112(1) and, therefore, the tax on long-term capital gains on the sale of original as well as bonus shares should be comput­ed at 10 per cent as prescribed in the said proviso. 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). The Jurisdic­tional Commissioner commented that the applicant could not avail of the lower rate of 10 per cent envisaged by section 112 inasmuch as the second proviso to section 48 is not applicable to the non-residents like the applicant.

Citation :
Authority for Advance Rulings, New Delhi Timken France SAS, In re