Brief of the case:
The assessee had applied tax rate of 10% in the terms of the proviso to section 112(1) of the Income Tax Act. However, the AO has applied tax rate of 20% as the proviso below section 112(1)(c) was not applicable in the case of non-residents. Does as per ITAT – the long-term capital gain earned by the assessee non-resident on off market sale of shares of listed Indian company is taxable @ 10% under the proviso to section 112 and proviso to section 112(1) does not state that an assessee, who avails benefit of the first proviso to section 48, is not entitled to the benefit of lower rate of tax at 10%.
Fact of the case:
Briefly stated, the facts of the case are that the assessee is a company incorporated under the laws of Japan with its head office in Tokyo. It is engaged in the business of development, design, manufacture, assembly, sales and purchase, importing and other transactions relating to automobiles and to component parts and replacement parts of said automobiles. During the year under consideration, the assessee reported income from three streams, viz., capital gains, royalty and fees for technical services. However, only income under the head ‘Capital gains’
was offered for tax. The dispute in the instant appeal is only qua the application of tax rate on the amount of such capital gain alone. Such capital gains arose from the sale of shares of Eicher Motors Ltd. to Eicher Motors Ltd. (as a part of buy back of shares), Mr. Sidharth Lal, Mr. Simran Lal and Mrs. Tara Lal for a consideration of Rs.27.96 crore. Cost of acquisition of these shares in Indian currency worked out at Rs.9.94 crore, yielding long-term capital gain of Rs.18.01 crore. Since the shares were acquired and held for more than one year, the assessee offered income under this head @ 10% in terms of proviso to section 112(1) of the Act. The AO opined that the proviso below section 112(1) was not applicable and, hence, tax rate of 20% should be applied. The assessee raised objection before the Dispute Resolution Panel (DRP) against the draft order charging tax @ 20% as against 10% offered by the assessee. The DRP found the facts of the instant case similar to those considered by the Hon’ble Delhi High Court in Cairn UK Holdings Ltd. vs. Director of Income-tax (2013) 359 ITR 268 (Del). Following the ratio of this judgment, the DRP accepted the assessee’s claim. The AO in the final order gave effect to the direction of the DRP in applying tax rate of 10%. The instant appeal has been filed by the Revenue on such application of 10% tax rate as against its claim of correct tax rate of 20%.
Contention of AO:
The case of the assessee is that it is covered by the proviso below section 112(1), whereas the AO has held that such proviso is not applicable and going by the mandate of sub-section (1), tax rate of 20% is chargeable.
Judgement of Reputed ITAT:
Again reverting to the main issue of the applicability or otherwise of the proviso below section 112(1)(c), we find that tax is payable in respect of income arising from transfer of a long-term capital asset which is before giving effect to the provisions of second proviso to section 48. In such circumstances, the case gets covered under the proviso and consequently, it is the tax rate of 10% which should be correctly applied.
Our view is fortified by the judgment of the Hon’ble jurisdictional
High Court in Cairn UK Holdings Ltd. (supra) in which it has been held that the long-term capital gain earned by the assessee non-resident on off market sale of shares of listed Indian company is taxable @ 10% under the proviso to section 112 and proviso to section 112(1) does not state that an assessee, who avails benefit of the first proviso to section 48, is not entitled to the benefit of lower rate of tax at 10%. As the view taken by the DRP is in consonance with that of the Hon’ble High Court, we ergo countenance the same.