Section 112(1)(c)(iii) to override the benefits available under section 48 to Non-Residents
As per the recent judgment passed by the Mumbai ITAT in the case of Legatum Ventures Limited ([2023] 149 taxmann.com 436 (Mumbai – Trib.)), Non-Residents (NR) could now be liable to pay tax on their Long-term Capital Losses.
1. FACTS OF THE CASE:
Legatum Ventures Limited (“The Company”, “Assessee”) was a company established in the UAE and was primarily involved in investment activities.
The company sold unlisted shares of an Indian private limited company and filed its return with NIL income and declared long-term capital losses after applying proviso 1 to section 48 of the Income Tax Act (Act).
The case was picked up for scrutiny and the assessee received notices under section 143(2), 142(1) of the Act and the Revenue asked the assessee why section 112(1)(c)(iii) would not be applicable in this case.
2. ASSESSEE’S CONTENTION:
The assessee contended that section 112(1)(c)(iii) provides the rate of tax and not the mechanism for the computation of capital gains. Hence, section 48 of the Act should be applied while calculating the income after giving benefits to effects of foreign currency exchange fluctuations.
Further, the assessee contended that since the computation results in a long-term capital loss after applying section 48, section 112(1)(c)(iii) would not be applicable, as section 112 is only applicable if the transfer of asset results in the generation of Capital Gains.
3. REVENUE’S CONTENTION:
The Assessing Office (“AO”) disregarded the contentions of the assessee while referring to the decision of Hon‟ble Supreme Court in CIT vs Gold Coin Health Food Private Limited, [2008] 304 ITR 308 (SC), Hon‟ble Supreme Court in CIT vs Harprasad & Co Ltd. [1975] 99 ITR 118 were it was held that the term “income” also includes loss.
The AO further contended that provisions of 112(1)(c)(iii) supplements the provision of section 48, which is a special provision applicable in this certain specific circumstance, hence the assessee is not given any option to choose the provision as per their convenience.
Hence, capital gains in the present case have to be computed under section 112(1)(c)(iii) without giving effect to the 1st and 2nd proviso to section 48 of the Act.
4. TRIBUNALS JUDGMENT:
Hearing both sides, the Tribunal Held that, in the case of non-residents section 112(1)(c)(iii) is a special provision for the computation of capital gains arising from the transfer of unlisted shares and securities. Whereas, section 48 of the Act is a general provision, which deals with the mode of computation of capital gains in all the cases of transfer of capital assets.
Further, the Tribunal held that section 112(1)(c)(iii) is the specific provision and the assessee satisfies all the below-mentioned conditions under section 112 for the transaction to be taxed as capital gains:
(i) Case of non-resident or foreign company
(ii) Long-term capital gains arise;
(iii) From the transfer of unlisted shares or securities of a company not being a company in which the public are substantially interested, are fulfilled, capital gains are required to be computed as per the manner provided under the said section.
The Tribunal also concluded that if a special provision is made respecting a certain matter, that matter is excluded from the general provision under the rule which is expressed by the maxim “Generallia specialibus non derogant”.
It is also a well-settled rule of construction that when, in an enactment, two provisions exist, which cannot be reconciled with each other, they should be so interpreted that, if possible, the effect should be given to both. Therefore, if the submission of the assessee that in the present case the income chargeable under the head “capital gains” is to be computed only as per section 48 of the Act is accepted, then the same would render the computation mechanism provided in section 112(1)(c)(iii) of the Act completely otiose and redundant.
Hence the Tribunal found no merits in the assessee’s submission and concluded that capital gains have to be computed only by reference to provisions of section 112(1)(c)(iii) of the Act.
5. IMPLICATIONS OF THE JUDGEMENT:
Before this judgment, NRs use to take advantage of the first proviso to section 48 of The Act where the expenditure they had incurred for the cost of acquisition, any other expenditure they had incurred wholly and exclusively for transfer of assets would be given the benefit of foreign currency fluctuations. This benefit allowed NRs to reduce their capital gains liability and allowed them to carry forward any losses they would have incurred under section 74 of the act.
This Judgement would have wide-ranging implications for all NR Private Equity Investors and Venture capitalists who invest in various start-ups across India. Given how the value of the rupee has been fast depreciating against the dollar in the past year and with the Central banks increasing their interest rates to combat inflation across the world the value of the rupee could further fall in the future. This would have a direct impact on the capital gains calculations and the benefits available under section 48 of the Act. Companies could now be liable to pay long-term capital gains even if they arrive at losses under section 48 of the Act.
Therefore, it would be advisable that NR companies and individuals reconsider and revaluate their tax positions concerning the capital gains on the investments they make in private company shares or securities.
Although this stance was taken by the Mumbai Tribunal, it would be interesting to see if the assessee appeals to higher authorities and how they would interpret this issue.
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