Case Law Details
Legatum Ventures Limited Vs ACIT (ITAT Mumbai)
ITAT held that capital gains arising on the sale of unlisted shares by a non-resident has to be computed only by reference to the provisions of Section 112(1)(c)(iii) of the Income Tax Act, 1961 without cognizance to the provisions under Section 48 of the Act.
From the perusal of section 112 of the Act, forming part of Chapter XII – Determination of Tax in Certain Special Cases, we find that though the said section deals with the determination of tax payable by the assessee on the total income which includes any income arising from the transfer of a long term capital asset chargeable under the head “capital gains”.
However, in the case of a non-resident (not being a company) or a foreign company, sub-clause (iii) of clause (c) to sub-section (1) also provides the mode of computation of capital gains. As per section 112(1)(c)(iii) of the Act, in case of a non-resident, capital gains arising from the transfer of a long-term capital asset, being unlisted securities or shares of a company in which public are not substantially interested, shall be computed without giving effect to 1st and 2nd proviso to section 48 of the Act. The aforesaid section further provides a tax rate of 10% on the capital gains so computed. Therefore, we are of the considered opinion that section 112(1)(c)(iii) is a special provision for the computation of capital gains, in case of a non-resident, arising from the transfer of unlisted shares and securities.
While, on the other hand, 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, section 112(1)(c)(iii) of the Act does not provide for „re-computation‟ of capital gains for levying tax rate of 10%. Since section 112(1)(c)(iii) is the specific provision, therefore, in case the ingredients of the said section, i.e. (i) in 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 public are substantially interested, are fulfilled, capital gains is required to be computed as per the manner provided under the said section.
It is a well-settled rule of interpretation 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”. Further, 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.
In view of the above, ITAT find no merits in the assessee’s submission that if the case of the assessee is governed under two provisions of the Act, then it has the right to choose to be taxed under the provision which leaves him with a lesser tax burden. In the present case, the capital gains has to be computed only by reference to provisions of section 112(1)(c)(iii) of the Act. As a result, grounds raised by the assessee are dismissed.
Also Read: Will ITAT ruling in ‘Legatum Ventures’ open new doors for Litigation & impact FDI inflow in India?
FULL TEXT OF THE ORDER OF ITAT MUMBAI
The present appeal has been filed by the assessee challenging the impugned final assessment order dated 23/04/2022, passed under section 143(3) r/w section 144C(13) of the Income Tax Act, 1961 (“the Act”), pursuant to the directions 14/03/2022, issued by the learned Dispute Resolution Panel–1, Mumbai, [“learned DRP”], under section 144C(5) of the Act, for the assessment year 20 18–19.
2. In its appeal, the assessee has raised the following grounds:–
“Based on the facts and circumstances of the case, Legatum Ventures Limited (hereinafter referred to as ‘the Appellant) respectfully craves leave to prefer an appeal under section 253 of the Income-tax Act, 1961 (Act), against the order dated 23 April 2022, passed by the Assistant Commissioner of Income-tax (International Taxation)-3(1)(2), Mumbai (hereinafter referred to as ‘the learned AO’), issued under section 143(3) read with section 144C(13) of the Act, in pursuance of the directions issued by Dispute Resolution Panel 3, Mumbai (DRP), on the following grounds:
Ground No. 1:
1. On facts and circumstances of the case, the learned AO, under the directions of the Hon ‘ble DRP, erred in assessing the total income of the Assessee at INR 171,359,838, as against INR ‘Nil’ as reported by the Assessee in its return of income furnished for the AY 2018-19.
Ground No. 2:
2. The learned AO erred in not accepting the Assessee’s computation of capital gains as per the first proviso to section 48 of the Act read with Rule 11 5A of the Income- tax Rules, 1962 (Rules) which is resulting in long term capital loss of INR 36,387,392 for the AY 2018-19 on the ground that in case of the Assessee, the capital gains has to be computed under the section 1 12(1)(c) (iii) of the Act without giving the effect to the first and second proviso to section 48 of the Act.
Ground No. 3:
3. The learned AO erred in initiating penalty proceedings under section 270A of the Act. Each of the grounds of appeal is referred to separately, and may kindly be considered independent of each other.
The Appellant craves leave to add, amend, alter, vary, omit, substitute or amend the above grounds of appeal at any time before or at the time of hearing of the appeal so as to enable the Honorable Income-tax Appellant Tribunal to decide this appeal according to the law.”
3. The only grievance of the assessee is against computation of capital gains by applying the provisions of section 112(1)(c)(iii) instead of 1st proviso to section 48 of the Act.
4. The brief facts of the case as emanating from the record are: The assessee is a company incorporated in the United Arab Emirates and is mainly involved in investment activities. For the year under consideration, the assessee filed its return of income on 19/10/2018 declaring a total income of Rs.Nil. The return of income filed by the assessee was selected for scrutiny and statutory notices under section 143(2) and section 142(1) were issued and served on the assessee. On perusal of the submissions filed by the assessee pursuant to the aforesaid notices, it was observed that during the year under consideration, the assessee has sold the shares of Intellecap Advisory Services Private Limited (Indian Company) and declared a long-term capital loss of Rs.3,63,87,392 after applying proviso 1 to section 48 of the Act. Since the assessee is a foreign company and had sold unlisted shares of an Indian company, therefore, section 112(1)(c)(iii) is applicable, accordingly, the assessee was asked to show cause as to why the fresh computation should not be done without giving effect to the 1st and 2nd proviso to section 48 of the Act. In response thereto, the assessee submitted that section 112(1)(c)(iii) merely provides the rate of tax and does not provide a mechanism for the computation of capital gains, therefore the loss of Rs.3,63,87,392 should be allowed to be carried forward to the subsequent year. The assessee further submitted that the capital gain/loss has been computed applying the mechanism provided under section 48 of the Act after giving effect to exchange fluctuation benefit as provided in 1st proviso to section 48. It was further submitted that since the aforesaid mode of computation results in a long-term capital loss in the present case, section 112(1)(c)(iii) of the Act is not applicable. The assessee submitted that before coming to section 112, the capital gains on shares by applying the 1st proviso to section 48 results in loss, which in terms of section 74 of the Act is required to be carried forward to the subsequent assessment year. Thus, there is no income in the current year to which provisions of section 112 of the Act can be applied.
5. The Assessing Officer vide draft assessment order dated 07/06/2021 passed under section 143(3) of the Act did not agree with the submissions of the assessee and by referring to the decision of Hon‟ble Supreme Court in CIT vs Gold Coin Health Food Private Limited, [2008] 304 ITR 308 (SC) held that the term “income” also includes loss. The Assessing Officer also referred to the decision of the Hon‟ble Supreme Court in CIT vs Harprasad & Co Ltd. [1975] 99 ITR 118 to support the conclusion that income is understood to include losses also. The Assessing Officer further held that provisions of section 112(1)(c)(iii) supplement the provision of section 48, which is a special provision applicable in certain specific circumstances, and therefore the assessee is not given any option to choose the provision as per its It was further held that once the special provisions are in place they need to be acted upon. Therefore, 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. Accordingly, the Assessing Officer computed the long-term capital gains of Rs. 17,13,59,838 under section 112(1)(c)(iii) of the Act.
6. The assessee filed detailed objections before the learned DRP against the addition made by the AO. Vide directions dated 14/03/2022, issued under section 144C(5) of the Act, the learned DRP rejected the objections filed by the assessee. In conformity with the directions issued by the learned DRP, the Assessing Officer passed the impugned final assessment order dated 23/04/2022. Being aggrieved, the assessee is in appeal before us.
7. During the hearing, the learned Authorised Representative (“learned AR”) submitted that section 112 of the Act applies only if the total income of the assessee includes any income arising from the transfer of a long-term capital asset which is chargeable under the head “capital gains” and where such income from transfer of a long-term capital asset forms part of the total income, section 112 provides for the manner in which the tax payable by the assessee on the total income shall be computed. The learned AR further submitted that thus for the applicability of section 112 of the Act, there should be long-term capital gains. Since, in the present case, there is long-term capital loss after indexation, section 112 is not applicable in the present case and the assessee is entitled to carry forward the said loss to subsequent years as per the provisions of section 74 of the Act. It was further submitted that accordingly, the question of payment of tax under section 112 of the Act does not arise in the present case.
8. On the contrary, the learned Departmental Representative (“learned DR”) by vehemently relying upon the orders passed by the lower authorities submitted that the term “income” has a wider connotation and even includes negative income. It was submitted that section 112(1)(c)(iii) is applicable to the present case since the assessee is a non-resident and has sold unlisted shares of an Indian company/private company. The learned DR further submitted that in any case computation as per section 112(1)(c)(iii) of the Act results in long-term capital gains in the present case.
9. We have considered the rival submissions and perused the material available on record. In the present case, it is undisputed that the assessee is a non-resident company and has sold 37,31,750 unlisted shares of an Indian company/private company during the year. The assessee computed the capital gains by applying the provisions of 1st proviso to section 48, which resulted in a long-term capital loss of Rs.3,63,87,392 to the assessee. On the contrary, as per the Revenue, since the assessee is a foreign company and has sold unlisted shares of an Indian company/private company, therefore, section 112(1)(c)(iii) shall be applicable for the computation of capital gains, which specifically excludes the provisions of 1st and 2nd proviso to section 48 of the Thus, as per the Revenue, in the present case, as per the provisions of section 112(1)(c)(iii) of the Act, the assessee has earned long-term capital gains of Rs.17,13,59,838, which is taxable at the rate of 10%.
10. Before proceeding further, it is relevant to analyse certain provisions of the Act, which are necessary for adjudication of the issue at hand. The term “income” has been defined under section 2(24) of the Act by way of an inclusive definition and the same, inter-alia, includes any capital gains chargeable under section 45 of the Act. As per section 45 of the Act, any profits or gains arising from the transfer of a capital asset shall be chargeable to income tax under the head “capital gains” and shall be deemed to be the income of the previous year in which the transfer took place. Section 48 of the Act deals with „mode of computation‟ and the same reads as under:-
48. The income chargeable under the head “Capital gains” shall be computed, by deducting from the full value of the consideration received or accruing as a result of the transfer of the capital asset the following amounts, namely :—
(i) expenditure incurred wholly and exclusively in connection with such transfer;
(ii) the cost of acquisition of the asset and the cost of any improvement thereto;
(iii) in case of value of any money or capital asset received by a specified person from a specified entity referred to in subsection (4) of section 45, the amount chargeable to income-tax as income of such specified entity under that sub-section which is attributable to the capital asset being transferred by the specified entity, calculated in the prescribed manner
11. Further, the 1st and 2nd proviso to section 48 of the Act, reads as under:-
“Provided that in the case of an assessee, who is a non-resident, capital gains arising from the transfer of a capital asset being shares in, or debentures of, an Indian company shall be computed by converting the cost of acquisition, expenditure incurred wholly and exclusively in connection with such transfer and the full value of the consideration received or accruing as a result of the transfer of the capital asset into the same foreign currency as was initially utilised in the purchase of the shares or debentures, and the capital gains so computed in such foreign currency shall be reconverted into Indian currency, so, however, that the aforesaid manner of computation of capital gains shall be applicable in respect of capital gains accruing or arising from every reinvestment thereafter in, and sale of, shares in, or debentures of, an Indian company :
Provided further that where long-term capital gain arises from the transfer of a long-term capital asset, other than capital gain arising to a non-resident from the transfer of shares in, or debentures of, an Indian company referred to in the first proviso, the provisions of clause (ii) shall have effect as if for the words “cost of acquisition” and “cost of any improvement”, the words “indexed cost of acquisition” and “indexed cost of any improvement” had respectively been substituted”
12. Thus, section 45 of the Act is the charging section for the purpose of bringing to tax any profits or gains arising from the transfer of a capital asset, while section 48 of the Act provides the manner of computation of income chargeable under the head “capital gains”. As per section 48 of the Act, income chargeable under the head “capital gains” shall be computed by deducting from the full value of sale consideration the amount of expenditure incurred wholly and exclusively in connection with the transfer, the cost of acquisition of the asset, and the cost of any improvement. 1st proviso to section 48 applies to a non-resident, who has income by way of long-term capital gains arising from the transfer of a capital asset being shares or debentures of an Indian company when the shares and debentures were acquired/purchased by conversion of foreign currency into Indian rupee (i.e. purchase price). In such cases, the capital gain is computed on the reconversion of the Indian rupee into the same foreign currency (i.e. sale price). The purpose of 1st proviso is to neutralise the exchange rate fluctuation. In the present case, the assessee by application of section 48 read with 1st proviso computed the long-term capital loss of Rs.3,63,87,392, as elaborated on page 2 of the draft assessment order. It is this long-term capital loss, which has been sought to be carried forward by the assessee to subsequent years.
13. On the other hand, the 2nd proviso to section 48 of the Act deals with long-term capital gains other than capital gain as referred to in 1st proviso and in such a case benefit of indexation shall be available to the assessee. Since in the present case, the assessee is a non-resident and sold shares (unlisted) of an Indian company, therefore, the assessee has not claimed any benefit of 2nd proviso to section 48 of the Act.
14. Section 112(1)(c)(iii) of the Act, which is relevant for the present appeal, deals with tax on long-term capital gains and same reads as under:-
“1 12. (1) Where the total income of an assessee includes any income, arising from the transfer of a long-term capital asset, which is chargeable under the head “Capital gains”, the tax payable by the assessee on the total income shall be the aggregate of,—
(a) …………
(b) …………
(c) in the case of a non-resident (not being a company) or a foreign company, ²
(i) …..
(ii) ….
(iii) the amount of income-tax on long-term capital gains arising from the transfer of a capital asset, being unlisted securities or shares of a company not being a company in which the public are substantially interested, calculated at the rate of ten per cent on the capital gains in respect of such asset as computed without giving effect to the first and second proviso to section 48;
15. Thus, section 112(1)(c)(iii) of the Act provides that in the case of a nonresident, the income tax on long-term capital gains arising from the transfer of a capital asset, being unlisted securities or shares of a company not being a company in which public are substantially interested, shall be calculated at the rate of 10% on the capital gains. The aforesaid section further provides that the capital gains shall be computed without giving effect to the 1st and 2nd proviso to section 48 of the Act. As per the assessee, section 112 of the Act is not applicable to the present case, as the same deals with a situation where the total income of an assessee includes any income arising from the transfer of a long-term capital asset, which is chargeable under the head “capital gains” and since the assessee incurred loss as per section 48 read with 1st proviso, therefore the same will not fall under section 112 of the Act.
16. Before dealing with this submission of the assessee, it is firstly to be determined, in the facts of the present case, which of the provisions, i.e. section 48 or section 112, shall be applicable for the computation of income chargeable under the head “capital gains”. As per the assessee, section 112 of the Act only provides the rate of tax, which is a step subsequent to the determination of total income and for the computation of income chargeable under the head “capital gains”, section 48 of the Act, which provides the mode of computation of capital gains, is applicable and since the assessee is a nonresident and has earned capital gains from transfer of unlisted shares, therefore the benefit of 1st proviso to section 48 is also available to the assessee.
17. From the perusal of section 112 of the Act, forming part of Chapter XII – Determination of Tax in Certain Special Cases, we find that though the said section deals with the determination of tax payable by the assessee on the total income which includes any income arising from the transfer of a long term capital asset chargeable under the head “capital gains”. However, in the case of a non-resident (not being a company) or a foreign company, sub-clause (iii) of clause (c) to sub-section (1) also provides the mode of computation of capital gains. As per section 112(1)(c)(iii) of the Act, in case of a non-resident, capital gains arising from the transfer of a long-term capital asset, being unlisted securities or shares of a company in which public are not substantially interested, shall be computed without giving effect to 1st and 2nd proviso to section 48 of the Act. The aforesaid section further provides a tax rate of 10% on the capital gains so computed. Therefore, we are of the considered opinion that section 112(1)(c)(iii) is a special provision for the computation of capital gains, in case of a non-resident, arising from the transfer of unlisted shares and securities. While, on the other hand, 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, section 112(1)(c)(iii) of the Act does not provide for „re-computation‟ of capital gains for levying tax rate of 10%. Since section 112(1)(c)(iii) is the specific provision, therefore, in case the ingredients of the said section, i.e. (i) in 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 public are substantially interested, are fulfilled, capital gains is required to be computed as per the manner provided under the said section. It is a well-settled rule of interpretation 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”. Further, 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.
18. In view of the above, we also find no merits in the assessee’s submission that if the case of the assessee is governed under two provisions of the Act, then it has the right to choose to be taxed under the provision which leaves him with a lesser tax burden. In the present case, the capital gains has to be computed only by reference to provisions of section 112(1)(c)(iii) of the Act. Further, it cannot be disputed that if as per section 112(1)(c)(iii), the 1st and 2nd proviso to section 48 of the Act are not given effect, the assessee will have a long-term capital gains of Rs.17,13,59,838 from the sale of unlisted shares of the Indian company. Therefore, we find no infirmity in the orders passed by the lower authorities taxing the long-term capital gains of Rs. 17,13,59,838 as per section 112(1)(c)(iii) of the Act. As a result, grounds raised by the assessee are dismissed.
19. In the result, the appeal by the assessee is dismissed.
Order pronounced in the open Court on 15.03.2023
