Assets sold by non-residents

Section 112 of the Income-Tax Act, 1961 provides for tax on long-term capital gains at the rate of 20% in case of various categories of assessees including non-residents. Clause (c) applies to all non-residents including a foreign company. Section 112 as originally enacted, effective from the assessment year 1993-94, did not apply to non-residents but section 115-AB, which provided for a rate of tax of 10% on long-term capital gains in respect of units purchased in foreign currency by an overseas financial organisation, was already on the statute book effective from the assessment year 1992-93.

Subsequently, section 115-AD, which provided 10% rate of tax on long-term capital gains in respect of securities other than units purchased by foreign institutional investors, was brought on the statute book effective from the assessment year 1993-94. Other non-residents were taxable at a higher rate vis-?-vis long-term capital gains. Subsequently, clause (c) was inserted in section 112(1) by the Finance Act, 1994 (effective from the assessment year 1995-96) in order to provide a uniform rate of tax on long-term capital gains accruing to other non-residents.

Therefore, by implication, section 112(1)(c) applies to non-residents other than the non-residents specified under sections 115-AB and 115-AD. Thus, effective from the assessment year 1995-96, the rate of tax on long-term capital gains accruing to such non-residents was 20%.

The proviso to section 112(1) was inserted by the Finance Act, 1999, effective from assessment year 2000-01.

Therefore, for the assessment years 1995-96 to 1999-2000, the rate of tax on long-term capital gains accruing to non-residents (except non-residents falling under sections 115-AB and 115-AD) was 20%, irrespective of whether the case of the assessee fell within the scope of the first or second proviso to section 48 of the Act.

A perusal of the two provisos to section 48 of the Act shows that computation of capital gains is bifurcated into two parts. The first proviso covers those cases where the capital asset being shares in or debentures of an Indian company are acquired by a non-resident in foreign currency.

In such cases, the cost of acquisition, expenditure incurred wholly and exclusively in connection with transfer of such shares as well as the sale consideration, is required to be converted in the same foreign currency, which was utilised for acquiring such shares/debentures so as to compute the capital gains in foreign currency.

The capital gains so computed are then reconverted into Indian currency for the purpose of computing tax thereon. This method is applicable to short-term as well as long-term capital assets, being shares in or debentures of an Indian company. Other assets are not covered under this proviso.

On the other hand, the second proviso to section 48 provides the method of computing long-term capital gains in respect of any long-term capital assets acquired by any assessee irrespective of his status except long-term capital gains arising to a non-resident from the transfer of long-term capital assets specified in the first proviso to section 48. According to this method ?the cost of acquisition? and the cost of improvement mentioned in section 48(ii) is to be substituted by ?the indexed cost of acquisition? and ?the indexed cost of improvement? which would be deducted from the sale consideration for computing the long-term capital gain. Application of this method is restricted to cases falling within the scope of the second proviso to section 48.

The legislature has used the word ?shall? in the first and second provisos to section 48 vis-?-vis the computation of capital gains. Both provisos are mutually exclusive and no option lies either with the assessee or with the assessing officer in this regard.

The expression in the proviso to section 112(1) ?before giving effect to the provisions of the second proviso to section 48? presupposes the existence of a case where computation of long-term capital gain is to be made in accordance with the formula contained in the second proviso to section 48. This means that the legislature never intended to give benefit of the proviso to section 112(1) to those cases where long-term capital gain is required to be computed under the first proviso to section 48. The language of the proviso is unambiguous.

Section 115-AB provides a rate of tax of 10% on long-term capital gain arising or accruing to overseas financial organisations vis-a-vis units purchased in foreign currency but section 115-AB(2) specifically provides that the second proviso to section 48 would not apply for computing such capital gain.

The first proviso to section 48 is not applicable to units purchased in foreign currency and, therefore, the legislature has not mentioned the first proviso to section 48 in section 115-AB(2). Consequently, the legislature has provided the concessional rate of 10% on the gross amount of long-term capital gains, i.e., computed without claiming any deduction or benefit under the first and second provisos to section 48 of the Act. It is in this context that the legislature thought that the assessees falling under the second proviso to section 48 should not be put to a disadvantage as compared to assessees falling under sections 115-AB and 115-AD.

The legislature has provided only marginal relief under section 112(1) proviso in those cases where rate of 20% on net long-term capital gains is more than 10% rate of tax on gross amount of capital gains. There is a deliberate attempt by the legislature to restrict the benefit of section 112(1) proviso to those cases where the long-term capital gains are to be computed under the second proviso to section 48 of the Act.

To conclude, long-term capital gains in respect of assets other than shares and debentures sold by a non-resident would be covered by the provisions of the second proviso to section 48 of the Act.

Consequently, the benefit of indexation of the cost of acquisition of long-term capital assets, other than shares and debentures, would be available to non-residents, irrespective of whether these assets had been purchased in foreign exchange or not.

?The author is advocate, Supreme Court