10 per cent tax on sale of original and bonus shares by Foreign Resident

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10 per cent tax on sale of original and bonus shares by Foreign Resident

AIT News Network

BSE NEW DELHI. Authority for Advance Rulings vide a significant ruling AIT-2007-360-AAR has ruled that in respect of the long-term capital gain arising from the sale of original and bonus shares of Indian Company; the non-resident company 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.

The Facts:

The applicant a Foreign Resident Company acquired the shares in an Indian company, by making payment in foreign currency i.e. French France. Subsequently, over the years, the applicant also received bonus shares from the said Indian company. Thus, the shares held by the applicant-original as well as bonus-constitute 26 per cent of the share capital of Indian Company. Both the original and bonus shares were held by the applicant for more than 12 months. While so, on 14^th November, 2005 the applicant sold its entire share-holding consisting of original and bonus shares to the Indian promoters for a consideration Rs. 57.96 crores. The applicant sought advance ruling of this Authority as regards the manner of computation of capital gains and the rate of tax to be applied.

The Questions:

1. Whether on the stated facts and in law the tax payable on the long-term capital gains arising on sale of originally purchased shares of NRB Bearing Ltd. will be 10% of the amount of capital gains as per proviso to section 112(1) of the Act?

2. Whether on the stated facts and in law the tax payable on long-term capital gains arising on sale of bonus shares of NRB Bearing Ltd. will be 10% of the amount of capital gains as per proviso to section 112(1) of the Act?

T H E R U L I N G:

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. At the outset, while interpreting the proviso to section 112(1), it should be borne in mind that 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. In our view, 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 resident assesses 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 clause (c) category of assesses who are, of course, entitled to another benefit conferred by the first proviso to Section 48.
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 assesses 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 of 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 assesses i.e. non-residents who cannot avail of indexation benefit.

the answer to the 1^st question should be in the affirmative and in favour of the applicant.

Bonus shares

2nd Question - This question relates to the tax payable on the long-term capital gain arising by virtue of sale of bonus shares. Whether 10 per cent rate in terms of the proviso to section 112(1) should be applied for the transfer of bonus shares is the question.

Bonus shares just as original shares of 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 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.

The answer to question no. 2 shall be in the affirmative and in favour of the applicant. It is clarified, however, that in computing the capital gains, the cost of acquisition of the asset (bonus shares) shall be taken as Nil as per sub-clause (iiia) of clause (aa) of section 55(2) which reads as follows:

(iiia) in relation to the financial asset allotted to the assessee without any payment and on the basis of holding of any other financial asset, shall be taken to be nil in the case of such assessee;

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).

(Click here for full text of Ruling AIT-2007-360-AAR)

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