CIT vs. Anuj A. Sheth HUF (Bombay High Court)

DATE: (Date of pronouncement)
DATE: May 2, 2010 (Date of publication)

Click here to download the judgement (anuj_sheth_capital_gains_112_proviso.pdf)

Benefit of lower tax rate under Proviso to s. 112 available to bonus shares despite no indexation

The proviso to s. 112(1) provides that “where the tax payable in respect of any income arising from the transfer of a long-term capital asset, being listed securities … exceeds ten per cent of the amount of capital gains before giving effect to the provisions of the second proviso to section 48 (i.e. indexation), then, such excess shall be ignored for the purpose of computing the tax payable by the assessee“. The assessee sold bonus shares of Infosys for Rs. 6.13 crores. As there was no cost of acquisition of bonus shares and no indexation, the long-term capital gains were computed at Rs. 6.13 crores. The assessee sold other shares and computed a long-term capital loss of Rs. 2.68 crores after indexation, which was claimed as a set off against the LTCG of Rs. 6.13 crores. On the balance of Rs. 3.45 crores (comprising of gains on the bonus shares), the assessee paid tax at 10% as per the Proviso to s. 112. The AO took the view that as the assessee was not eligible to claim indexation benefits in respect of the bonus shares, it was not entitled to the option given by the Proviso to s. 112 and tax was payable on the entire gains at the rate of 20%. The AO’s stand was upheld by the CIT (A) though reversed by the Tribunal. On appeal by the revenue, HELD dismissing the appeal:

(i) U/s 45 (1), the capital gains on the transfer of each capital asset have to be computed separately. Under the second proviso to s. 48, the gains have to be computed by deducting the “indexed cost of acquisition” from the consideration. U/s 70, the assessee is entitled to set off the loss sustained on the sale of shares from the capital gains realized from the sale of the bonus shares of Infosys resulting in the net capital gain of Rs.3.45 crores. U/s 112, the said long term capital gains are chargeable to tax at the rate of 20% subject to the Proviso;

(ii) In the case of bonus shares, the question of indexation does not arise because the cost of acquisition is taken to be nil. What the proviso to s. 112 essentially requires is that where the tax payable in respect of a listed security (being LTCG) exceeds 10% of the capital gains before indexation, such excess beyond 10% is liable to be ignored. The proviso to s. 112 requires a comparison to be made between the tax payable at 20% after indexation with the tax payable at 10% before indexation. If the shares were acquired at a cost, it becomes necessary for purposes of the proviso to s. 112(1) to compute capital gains before giving effect to indexation. However, that does not arise in respect of bonus shares. There is nothing in the s. 112 to suggest that the assessee would be entitled to a set off of the loss u/s 70 but without the benefit of indexation;

(iii) Circular Nos. 721 and 779 dated 13.9.1995 and 14.9.1999 respectively are significant because they reflect the Revenue’s understanding that (i) the benefit of a set off would be available while computing the income arising from the transfer of a long term capital asset, which is part of the total income of an assessee and (ii) The benefit of the cost inflation index or indexation would continue to be available subject to the condition that where the tax on long term capital gains without adjustment for indexation exceeds 10%, such excess shall be ignored.

See Also: Chicago Pneumatic vs. DDIT 25 DTR 24 (Mum) (Non-residents are eligible for the benefit under the Proviso to s. 112 (1) even though they are not entitled to indexation) and G.K. Ramamurthy vs. JCIT (ITAT Mumbai) (Non-exempt capital loss cannot be set off against exempt capital gains)