Cairn 112 Proviso Capital Gains

8/3/2019 Cairn 112 Proviso Capital Gains

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BEFORE THE AUTHORITY FOR ADVANCE RULINGS (INCOME TAX)NEW DELHI

1st Day of August, 2011

A.A.R. No.950 of 2010

PRESENT

Mr. Justice P.K.Balasubramanyan (Chairman)Mr. V.K. Shridhar (Member)

Name & address of the applicant Cairn U.K. Holdings Ltd.

50 Lothian Road

Edinburg EH 3 9BY

Scotland

Commissioner concerned Director of Income-tax

(International Taxation)- I, Delhi

Present for the applicant Mr. Sunil M.Lalla C.A

Ms. Aarti Sathe, AdvocateMr. Girish Vanwari, C.A.

Mr. Hiren Bhatt, C.A.

Mr. Bhakti Mehta, C.A.

Ms. Shailvi Singhal,C.A.Mr. Katherine Anderson (Cairn)

Mr. Sanjiv Chaudhary, C.A.

Present for the Department Mr. Bhupinderjit Kumar,ADIT

(International Taxation), NewDelhi

Ruling(By Mr. V.K. Shridhar)

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

http://www.itatonline.org


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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 12th

October

2009, Petronas Corporation Intl. Limited (PCIL) acquired 2.29% equity

shares in CIL from the applicant through an agreement dated 14th

October

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% 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% on the long-term capital gains in view of the



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proviso to section 112(1) of the Act was turned down and the applicant

was asked to withhold tax at the rate of 20%.

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% 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% 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%,

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%

as provided in proviso to section 112 of the Act.



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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 Honble Tribunal in case of BASF

Aktiengesellchaft, reported in 293 ITR 1. 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% 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%

under the proviso to section 112, then ZCBs would go out of the

purview of section 112(1), whereas ZCBs have been specifically



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included by way of amendment in the proviso to section 112 so

as to be eligible for the lower rate of tax at 10%. This

interpretation would render the amendment infructuous.

b) The proviso to section 112(1) granting lower rate of tax at

10% 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 at10%

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% 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

Honble Supreme Court in the cases of J.H.Gotla, 156 ITR 323;

C.W.S. (India) Ltd. Etc, 208 ITR 649: Hindustan Bulk Carriers,

259 ITR 449 and Grasim Industries Ltd., (2002) 4 SCC 297.



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7. In order to further explain the meaning ofthe 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. Ifthe revenues interpretation

ofthe 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 revenues 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

Bhaskar Mittal, 202 ITR 612, 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 SAS, AAR 739 of 2009, has



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expressed the view that it would be irrational and even incongruous to

allocate the proviso only to the preceding clause, clause (d) to section112

of the Act. The same view has been taken by Learned ITAT in the case of

BASF cited 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%, 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 assesses. In Timken France SAS cited supra, this

authority has held that double benefit is not a taboo under the law. Similar

was the view in the cases of Mandeep Eng. & Pkg. Ind. (P) Ltd. [2007]

292 ITR 1 (SC), G.V. Venugopal [2005] 273 ITR 207 (Mad) and Nagesh

Devidas Kulkarni & Ors. [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 Honble Supreme Court in Madho Prasad Jatia [1976] 105 ITR

197, Naga Hills Tea Co. Ltd. [1973] 89 ITR 236, J.K. Hosiery Factory

{1986] 159 ITR 85 and Poddar Cement (P) Ltd. Etc. [1997] 226 ITR 625.



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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


is also clear from the explanatory notes to the Finance Act 1992 issued

vide CBDTs Circular No. 636 dated 31/08/1992. 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 legislatures

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%, the



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persons falling under the 1st

proviso would be granted the benefit of lower

rate of 10% 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 case, the Revenue submits that the

applicants contention that if the Revenues 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% 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

VIA 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 VIA, 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



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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 case and

other cases, the Revenue submits that the ruling of the Honble 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, 293 ITR (AT) 1., 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



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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 sectionMurarilal 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



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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 cited 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/foreigncompanies [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 wordedexpressions in the circulars and explanatory notes. That the

expression all assessees used in para 41.2 includes non-

resident assesses 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 areeither 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.



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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 longterm 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, -


income as reduced by the amount of such long term

capital gains, had the total income as so reduced


(ii) the amount of income-tax calculated on such long-

term capital gains at the rate of twenty per cent;



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(d) in any other case of a resident, -


income as reduced by the amount of long term

capital gains, had the total income as so reduced


(ii) the amount of income-tax calculated on such long

term capital gains at the rate of twenty per cent.

Provided xx xx xx

xx xx xx

Explanation.- for the purposes of this section, -

xx xx xx

xx xx xx

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 section112(1) of the Act. In



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other words, the proviso below sub-clause (d) is a proviso to section112

(1) of the Act. To this extent, we are in agreement with the ruling of this

authority in Timken France SAS case cited supra.

19. It is important to have a look at the definition ofzero 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 meaningassigned 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



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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 fulfill 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



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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 bondswhich 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 bondsof 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:

Mode of computation.

48.The income chargeable under the head Capital gains shallbe 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



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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 wordsindexed cost of acquisition and indexed cost of any

improvement had respectively been substituted:

Providedalso 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.

xx xx xx xx xx

Explanation.For the purposes of this section, -

xx xx xx xx

xx xx xx xx

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, 2

ndand 3

rdprovisos, it

transpires that:



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(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 percent of theamount 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



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(i) as defined in clause (h) of section 2 of the Securitiescontracts (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% 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

assesses were taxed @ 10% on the long-term capital gains whereas the

residents were paying tax on the long term capital gains @ 20%. As the

benefit of lower rate of tax at 10% 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



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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 percent 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 taxpayable 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% 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% of the



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capital gains = 10% (full value of consideration cost of

purchase including cost of improvement, if any)]

then,

If the value ofA 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



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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 statue 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% 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 percent 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.



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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% 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% 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,

AAR No.636 of 2004, 275 ITR 434, held that:



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7. .The grievance of the applicant is that the Indiannationals both resident-assessee as well as domestic companies are

entitled to compute their capital gains on the basis of indexed cost ofacquisition and indexed cost of any improvement and on the gains

so determined, they are taxed @ 20% and they are allowed an option tobe taxed @ 10% without indexation under the proviso to sub-section

(1) of section 112 of the Act. We do not think that under proviso tosection 112(1) they have the option to apply the provisions of

indexation for computing capital gains and paying tax @ 10% on thegains so arrived.. The import of the proviso to section 112(1),

discussed above, is that where the tax payable in respect of any incomearising from the transfer of securities (as long term capital assets)

exceeds 10% of the amount of capital gains before giving effect to theprovisions of the second proviso to section 48, then such excess has to

be ignored. In other words, without taking away the right ofcomputation under the second proviso to section 48, FIIs have been

extended the benefit of limiting the tax rate to 10% on the capital gainsarising 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 residentassessees), FIIs are taxed @ 10% of the gains computed under Section48 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 Honble Supreme Court in the case of B.C.Srinivas

Setty, 128 ITR 294 has explained the legal position thus:

. No doubt there is a qualitative differencebetween the charging provision and a computation

provision. And ordinarily the operation of the chargingprovision cannot be affected by the construction of a

particular computation provision. But the question here iswhether it is possible to apply the computation provision at

all if a certain interpretation is placed on the chargingprovision. That pertains to the fundamental integrality of

the statutory scheme provided for each head.



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30. The zero coupon bonds are assets to which 2nd


applies and are entitled to the benefit of indexation. This aspect was not

examined by this authority in Timken France 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 case 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 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% on the capital gains on the sale of shares to PCIL.

(V.K.Shridhar)

Member



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The Chairman (Adding)

The Honble 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

Section112(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.



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Section 112 fixes the tax payable on long term capital gains.

It provides the proportion of tax to be paid at 20% 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% 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% 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



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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% 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% 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



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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 Sec. 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 Timken (294 ITR 513), 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

Clause (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



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cases where effect of inflation is not provided for. That is why the proviso

specifies that the calculation of 10% 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.

(Justice P.K. Balasburamanyan)

Chairman



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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% of the amount of Capital

Gains as per the proviso to Section 112 of the Income-tax Act.

Accordingly, ruling is given and pronounced on 1st

August, 2011.

(P.K. Balasubramanyan) (V.K. Shridhar)

Chairman Member

Cairn 112 Proviso Capital Gains

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