NR can claim benefit of first proviso to Sec. 48 along with Sec. 112 concessional rate; HC quashes Cairn India ruling

Proviso to section 112(1) doesn’t deny benefit of lower tax rate of 10% to a non-resident investor availing benefit of exchange rate neutralization under first proviso to section 48. It is incorrect to say that 10% rate under proviso to section 112(1) applies only where indexation benefit under 2nd proviso to section 48 applies and still assessee opts to not avail it.

The High Court held as under:

1) The proviso to Section 112(1) doesn’t state that an assessee, who had availed benefit of the first proviso to Section 48, was not entitled to benefit of lower rate of tax. The said benefit couldn’t be denied because the second proviso to Section 48 was not applicable;

2) The stipulation for taking advantage of the proviso to Section 112(1) is that the aggregate of long term capital gains to the extent it exceeds 10% of the amount of capital gains, should be before giving effect to the provisions of second proviso to Section 48.;

3) First proviso to Section 48 stipulates that on sale of the securities by the non-resident, the consideration received in Indian rupee should be reconverted into the same foreign currency;

4) For a non-resident who has utilized foreign currency for purchase of securities in Indian rupee, inflation in India was immaterial and inconsequential. He is most concerned with exchange rate fluctuation and his true and actual gain should take into account the exchange rate fluctuation;

5) The second proviso is applicable to all others including non-residents, who are not covered by the first proviso and they are entitled to benefit of cost of indexation which neutralize inflation;

6) It is a misnomer and wrong to state that inflation alone contributes and is the determinative factor in exchange rate fluctuation. Inflation by itself cannot be the sole or even a primary factor in exchange rate depreciation. These are several others complex factors and parameters which can affect the foreign exchange rate fluctuation.

7) The first and second proviso to section 48 cannot be equated as granting same relief or benefit. They operate independently and have different purpose and objective. Thus, it couldn’t be deemed that benefits under the first proviso and the second proviso to Section 48 are identical or serve the same purpose;

8) Thus, it was to be held that assessee was taxable at concessional rate of 10% as per proviso to section 112(1) - CAIRN UK DINGS LTD. V. DIRECTOR OF INCOME-TAX (2013) 38 taxman 179 (Delhi)