In Re Cairn U.K. Holdings Ltd (AAR)

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DATE: (Date of pronouncement)
DATE: August 2, 2011 (Date of publication)
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Click here to download the judgement (cairn_112_proviso_capital_gains.pdf)


Non-residents not eligible for benefit of second proviso to s. 112

The applicant, a company based in Scotland sold shares of Cairns India Limited to Petronas Corporation Intl. Limited for a consideration of USD 241,426,379 in off-market-mode and not through a recognized stock exchange. The assessee filed an application for advance ruling claiming that it was entitled to the benefit of the Proviso to s. 112 (1) and liable to pay tax at 10% of the capital gains. The Revenue resisted the plea on the ground that the benefit of the Proviso to s. 112 was available only to assessees who were eligible to the benefit of indexation in the second proviso to s. 48 and as the assessee was not eligible for indexation, it could not claim the benefit of the lower rate of tax in the Proviso to s. 112. HELD upholding the Revenue’s plea:

The expression “before giving effect to the 2nd proviso to s. 48‟ in the Proviso to s. 112(1) pre-supposes the existence of a case where computation of long-term capital gains could be made in accordance with the formula contained in the 2nd proviso in s. 48. It means that the asset must be one qualified for indexation under the second proviso to s. 48. There is no justification in not giving effect to the words used in the proviso. As the 2nd proviso to s. 48 is not applicable to non-residents, occasion to apply the proviso to s. 112(1) does not arise. A non-resident foreign company cannot claim the double benefit of protection against rupee value fluctuation as well as indexation (Timken 294 ITR 513 (AAR) not followed; BASF AG 293 ITR (AT) 1 followed).

Note: See the contrary view in Chicago Pneumatic vs. DDIT (ITAT Mumbai) 25 DTR 24 (Mum) (Trib) (appeal pending in High Court in ITA 2251 of 2009) & Burmah Castrol Plc vs. DIT 16 DTR 145 (AAR). See also CIT vs. Anuj A. Sheth HUF 324 ITR 191 (Bom) where it was held that though bonus shares are not eligible for indexation, the benefit of the Proviso to s. 112 is available.

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