Cairn UK Holdings Ltd. vs. DIT (Del); W. P. (Civil) No. 6752/2012 dated 07-10-2013:
The petitioner, a non-resident company, had transferred certain equity shares of a company CIL in the relevant year resulting in a long-term capital gain of INR532,84,251 after applying the benefit under the first proviso to section 48 of the Income-tax Act, 1961. The petitioner made an application to AAR for an advance ruling on the following question.
“Whether on the stated facts and in law, the tax payable on long term capital gains arisen to petitioner assessee 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?”
AAR accepted the plea and contention of the Revenue and held that the proviso to section 112(1) was not applicable and therefore, the petitioner cannot avail the lower rate of tax at 10% on capital gains. The reason and ratio applied was that for the proviso to section 112(1) to apply, second proviso to section 48 should be also applicable and as second proviso to section 48 was excluded and was not applicable to the petitioner, benefit of lower rate of tax at 10% was not available.
The petitioner assessee filed a writ petition before the Delhi High Court and challenged the order of the AAR. The petitioner submitted that they are covered by the proviso to section 112(1) as they are not taking benefit of indexation under the second proviso to section 48. The assets sold by them were shares listed on the Bombay Stock Exchange and National Stock Exchange. This satisfies the statutory requirement of assets to be listed securities. The proviso nowhere stipulates that if an assessee takes benefit of first proviso to section 48, the proviso to section 112(1) is not applicable. Neither does the language postulates that the assessee must be entitled to benefit of the second proviso to section 48 and only when the said proviso is applicable but not applied, that an assessee can get benefit under proviso to section 112(1) of the Act. It was further submitted that the view of the petitioner was accepted by the AAR on 01-10-2007 in Timken France SAS, In Re, reported in (2007) 294 ITR 513 (AAR), and was repeatedly followed in the subsequent decisions and even in one decision after the present impugned decision.
The Delhi High Court allowed the writ petition and held as under:“
i) It is not possible to decipher the exact legislative purpose behind the proviso to section 112(1) in a categorical and unambiguous manner. However, if one squarely focuses on the words used in the proviso and interpret them without extracting or subtracting any phrase or word, a non-resident assessee is entitled to benefit of the said provision.
ii) The proviso to section 112(1) does not state that an assessee, who avails benefits of the first proviso to section 48, is not entitled to lower rate of tax at 10%. The said benefit cannot be denied because the second proviso to section 48 is not applicable. In case the legislature wanted to deny the said benefit where the assessee had taken the benefit of the first proviso to section48, it was easy and this would have been specifically stipulated. The fact that by this interpretation, a non-resident becomes entitled to double deductions by way of computation of gains in foreign currency under the first proviso to section 48 and the benefit of lower rate of tax under the proviso to section 112(1) is no reason to interpret the proviso differently.
iii) Further, as the AAR had taken a view in Timken France SAS which was followed in several cases over several years, it ought not to have taken a opposite view and brought about uncertainty in understanding the effect of the proviso to section 112(1). There should be consistency and uniformity in interpretation of provisos as uncertainties can disable and harm governance of tax laws. The AAR should follow its earlier view, unless there are strong grounds and reasons to take a contrary view.”
