Introduction
The recent order of the Income Tax Appellate Tribunal, Mumbai (ITAT) in the case of Legatum Ventures Limited v/s Asstt. Commissioner of Income Tax has significant implications for foreign investors who have invested in capital assets in India or Indian companies. The order deals with the computation of capital gains arising from the transfer of shares or debentures of an Indian company by a non-resident assessee.
Sections, Rules & other nitty gritty
Proviso to Sec 48 (1): 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:
Section 112(1)(c)(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;
Practical illustration
A non-resident person invests $1million in unlisted equity shares of an Indian company on 01.04.2015. The person sold these shares on 31.03.2021 for $0.85million. This is how the capital gains is to be computed as per Assessee & Tax Department:
Particulars | Assessee (as per proviso 1 to sec 48) | Rupees/USD* | Tax Dept (as per sec 112(1)(c)(iii) |
Sales (2023) | $8,50,000 | ₹81.00 | ₹6,88,50,000 |
Purchase (2015) | $10,00,000 | ₹63.00 | ₹6,30,00,000 |
Capital Gains/(Loss)$ | $-1,50,000 | | ₹58,50,000 |
Capital Gains/(Loss)(INR) | ₹-1,21,50,000 | ₹81.00 | ₹58,50,000 |
Now, in such a case the foreign investor shall end up paying capital gains tax of approximately $7500 after incurring a loss of $1,50,000. That is why the benefit of forex conversion ratio as per proviso to section 48 is very critical for foreign investors.
Contention of Assessee
- Section 112 provides only the rate of taxation. Mode of computation of capital gains is governed by Section 48.
- Section 112 starts with "Where the total income of an assessee includes any income, arising from transfer of a long term capital asset,...." Since, the assessee had incurred a long term capital loss, this section shall not apply in their case.
Contention of Revenue
- Section 112 supplements section 48 & therefore assessee does not have an option to choose the provisions as per their convenience.
- Word "income" in section 112 also includes loss, based on the decision of Supreme Court in CIT vs Gold Coin Health Food Private Limited, [2008] 304 ITR 308 (SC)
Judgement of ITAT Mumbai Bench
- Generallia specialibus non derogant
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. 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.
- 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.
Assessee's contention that it has a right to choose which mode of computation to follow is erroneous. 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 judgement is ruled in favor of the Tax Department!
Now, what implications does it bring to the foreign investors and how this is interpreted in other jurisdictions remains to be seen. This has the potential to spook the foreign investors considering that the judgement is delivered by the Mumbai bench of ITAT and that is where a significant portion of foreign investments come into the country. Hopefully, we shall get some clarification from the Finance Ministry soon.
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