Taxing provisions on capital gains will prevail over computation provisions in case of unlisted shares

Facts of the Case:

• Legatum Ventures Limited (Assessee) is a non-resident company. It sold unlisted shares of an Indian company/private company during the FY 2017-18 and reported long term capital loss in its ITR by applying the provisions of 1st proviso to Section 48 of the Income Tax Act, 1961 (the Act).
• The return of income was taken up for scrutiny and notices were duly served on the Assessee asking reasons as to why the provisions of Section 112(1)(c)(iii) of the Act was not applicable to the Assessee for computing the tax.
• In response to which the Assessee submitted that the provisions of Section 112(1)(c)(iii) of the Act merely provides the rate of tax for computing tax on income and does not provide a mechanism for the computation of total income (capital gains) and for the purpose of computation of capital gains, provisions of Section 48 shall apply and accordingly the Assessee reported the long-term capital loss. Once the income was computed as per the mechanism provided under the provision of Section 48 of the Act and it resulted in loss then the provisions of Section 112(1)(c)(iii) of the Act will not be applicable as there was no income in nature of capital gains on which tax can be computed.
• The Assessing Officer (AO) did not agree with the submission made by the Assessee and passed the draft assessment order by referring to the decision of Hon’ble Supreme Court in CIT vs Gold Coin Health Food Private Limited, [2008] 304 ITR 308 (SC) in which it was held that the term “income” also includes loss. And accordingly, AO computed the long-term capital gains as per the provisions of Section 112(1)(c)(iii) of the Act.
• The Assessee filed its objections against the draft assessment order passed by AO before Dispute Resolution Panel (DRP) under Section 144C of the Act however, DRP rejected the objections filed by the Assessee and subsequently AO passed the final assessment order. Against which Assessee preferred an appeal before ITAT.
• The question before ITAT was that weather the lower authorities were right in holding that tax had to be computed as per the provisions of Section 112(1)(c)(iii) of the Act even if there was loss computed as per the computation mechanism provided under the provisions of Section 48 of the Act?

Observation And Conclusion:

Hon’ble ITAT held that:

• As per Section 2(24) of the Act, income includes any capital gains chargeable to tax under Section 45 of the Act. Therefore Section 45 of the Act is the charging section which brings the gains arising from transfer of capital asset to tax. Further, provisions of Section 48 of the Act provide the mechanism for computation of capital gains that is chargeable to tax and the benefit of first proviso is also available to the Assessee. Section 112 of the Act deal with determination of tax payable by the Assessee on the total income which includes any income from transfer of long-term capital asset.
• However, in case of non-resident, Section 112(1)(c)(iii) of the Act also provide specific provision. Under this provision, benefit of proviso 1st and 2nd to Section 48 of the Act will not be available for computation of capital gains for the purpose of determining the tax payable on such capital gains arising from transfer of unlisted shares.
• Therefore, Section 112(1)(c)(iii) being a special provision for the computation of capital gains, in case of a non-resident, arising from the transfer of unlisted shares and securities and Section 48 being a general provision, where there was a conflict between special provision and general provision, special provision prevails over the general provision as per the maxim “Generallia Specialibus Non Derogant”. Therefore, the view taken by lower authorities was correct and accordingly appeal was dismissed.

SW Point of View:

“Chapter IV – Computation of Total Income” and “Chapter XII – Determination of tax in certain special cases” of the Act are two different chapter having independent applicability.  While Section 48 of the Act provides for computation of capital gains, Section 112 of the Act deals with determination of tax on capital gains.  Accordingly, this decision does not seem to the finality on applicability of provisions and may see it getting settled at a higher court forum.

Lakshay Prakash Jonwal, Direct Tax Associate, SW India