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

In the case of the applicant the first proviso to section 48 is applicable for the computation of capital gains arising from the transfer of shares for the reason that the original shares were purchased by utilizing foreign currency. At the same time, the second proviso will not come into play by reason of the exclu­sionary provision. The question that should be addressed is as to what impact it will have on the application of the proviso to section 112(1). [Para 8] The reason behind the insertion of first proviso to section 48 is discernible from the explanatory notes on the Direct Laws (Second Amendment) Act, 1989 incorporated in the CBDT Circular No. 554, dated 13-2-1990. Non-resident Indians who invest in shares and deben­tures by utilizing foreign currency are adversely affected when they sell such shares or debentures purchased by them by reason of fall in the value of the Indian rupee vis-a-vis the foreign currency; therefore, section 48 was amended in order to compen­sate the non-resident Indian investors for the lower earning in foreign currency on account of the decline of rupee value. Coming to the second proviso, it was conceived as a measure of off-setting the effect of inflation vide the CBDT Circular No. 636, dated 31-8-1992 containing explanatory notes on the provisions of Finance Act, 1992. The cost of acquisition of asset and the cost of improvement thereto are inflated to arrive at the indexed cost of acquisition and indexed cost of improvement and then these amounts are deducted from the sale consideration to arrive at the long-term capital gain. The cut-off date for the purposes of indexation is taken as 1-4-1981. The apparent reason for exclud­ing the non-resident from the purview of second proviso is spelt out in the CBDT’s Circular No. 636, dated 31-8-1992. [Para 9] The proviso to section 112(1) was introduced by the Finance Act, 1999 with effect from 1-4-2000. Prior to the insertion of the proviso, section 112(1) provided for uniform rate of 20 per cent tax on all long-term capital gains accruing to the four catego­ries of the assessees out of which three are residents. However, certain categories of non-residents, viz., foreign institutional investors were having the benefit of lesser rate of tax of 10 per cent (vide section 115AD) in respect of gains arising from the transfer of securities. The proviso in question was enacted with a view to provide maximum rate of 10 per cent on long-term capi­tal gains in respect of listed securities. Later, two more items i.e., units and zero coupon bonds were added. The proviso occur­ring at the end of the section cannot be viewed as the proviso to clause (d) only. [Para 10] Whereas it is the contention of the revenue that having regard to the language employed in the proviso, it has no application to non-residents and foreign companies specified in clause (c), at the same time according to the applicant, the proviso ought to be applied to the clause (c) category assessees also. If the revenue’s contention is accepted, the non-residents who are afforded protection from the adverse effect of rupee volatility under the first proviso to section 48 cannot invoke the benefit of concessional tax under the proviso to section 112(1). [Para 11] 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. 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. 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 the resident assessees specified in clauses (a), (b) and (d). 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 the clause (c) category of assessees who are, of course, entitled to another benefit conferred by the first proviso to section 48. [Para 12.1] 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. 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). It does not say - 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. In other words, the eligibility to avail the benefit on 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). The second proviso to section 48 is only a mode of compu­tation of capital gains. The crucial words relied upon by the revenue cannot be construed as the words of exclusion of a cate­gory of assessees, i.e., non-residents who cannot avail of indexa­tion benefit. [Para 12.2] The CBDT Circular No. 636, dated 31-8-1992 containing the explanatory notes to the provisions of Finance Act, 1992 relied upon by the revenue or the explanatory memoranda to the Finance Bill, 1992 are not 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/foreign companies [falling under clause (c) of section 112(1)] in the matter of availment of reduced rate of tax. [Para 13.3] Neither the expression ‘all assessees’ in the CBDT Circular containing explanatory notes on the provisions of Finance Act, 1999 on which the applicant is relying on 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 worded expressions in the circulars and explanatory notes. That the expression ‘all assessees’ used in para 41.2 of the explanatory notes on provisions of the Finance Act, 1999 includes non-resident assessees 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 parties. There is nothing in the said circulars or explanatory memoranda to suggest or indicate that the non-residents are either excluded or not excluded from drawing the benefit of proviso to section 112(1). [Para 13.4] 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 section 48 made available to a non-resident may be a justification to deny the benefit of cost of indexation as stated in the CBDT Circular No. 636, but the same cannot be said to be application of lesser rate. The passage from the CBDT Circular No. 636 relied upon by the revenue is really not relevant to ascertain the legislative intention behind the proviso to section 112(1). [Para 13.5] 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 in the manner in which it is explained earlier. The objective is to be inferred from the language itself. The above interpretation does not run counter to the language employed nor does it lead to any absurdity or anoma­ly. [Para 13.6] For all the reasons given above, the tax payable on the long-term capital gains arising on sale of originally purchased shares of Indian Company will be 10 per cent of the amount of capital gains as per proviso to section 112 (1). [Para 15] Bonus shares just as original shares of Indian company are listed securities. The proviso to section 112(1) does not make any distinction between original and bonus shares. Once it is held that under the proviso to section 112(1), the benefit of lower rate of tax is not to 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. [Para 16] Thus, long-term capital gains arising on the transfer of bonus shares will be equal to the amount of sale consideration and such gains are liable to be taxed at the rate of 10 per cent as per the proviso to section 112(1). [Para 16.3] Thus, in respect of the long-term capital gain arising from the sale of original and bonus shares of Indian Company 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. [Para 16.3]