Claim Of Non-Residents To Avail Reduced Rate Of Capital Gains From Sale Of Shares Established

Author:Mr Smeeksha Bhola
Profession:Singh & Associates
 
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Introduction:

The recent ruling of the Hon'ble High Court of Delhi in the case of Carin U.K. Holdings Limited Vs. Director of Income-Tax1 has been highly welcomed and appreciated. Through this judgment, the Hon'ble High Court has provided benefit of reduced rate of capital gains tax on transfer of shares of an Indian listed company to non-resident shareholder. In the present case, Carin U.K Holdings Limited transferred equity shares of Carin India Limited to Petronas International Corporation Limited through an of-market transaction, which resulted in long term capital gains in the hands of Carin U.K Holdings Limited [taxpayer in present case]. The taxpayer had originally requested a ruling from the Authority of Advance Ruling (AAR) on the applicability of reduced rate. The AAR held that, to benefit from the concessional rate as provided under the Income-tax Act, 1961 (ITA), the taxpayer has to be eligible to adjust the original acquisition costs of the shares using cost inflation index . The taxpayer filed a Special Leave Petition before the Supreme Court (SC). The SC, by its order dated 30 July 2012, directed the Taxpayer to first approach the appropriate High Courts.

Issue before the High Court:

The main issue before the High Court was whether the benefit of the 10% concessional tax rate on long-term capital gains is available to a non-resident where listed equity shares are transferred in an off- market transaction.

Observation and Decision:

1. Section 48 and section 112 of the Income Tax Act were discussed at length.

2. Section 48 provides for mode of computation of capital gains. As per the said section, 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:

1Provided 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...

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