Capital gains tax has always been at the focal point of dispute between revenue and taxpayers. While the Government has been active and consistent in coming out with clarifications through circulars and notifications, it appears that there is still a wide variety of issues that await their attention.

One such issue pertains to the interplay between applicability of Section 48 vis-à-vis Section 112 of the Income Tax Act, 1961 (‘IT Act’) for the purposes of computing long term capital gains on sale of unlisted securities by non-residents. In terms of the first proviso to Section 48 of IT Act (introduced by way of the Finance Act, 1989 w.e.f April 01, 1990), any capital gains in the hands of the non-resident investors may be calculated in the currency that was utilized for making purchase so as to immunize the taxpayers against fluctuation in the value of the Indian currency.^[1]

Thereafter, by way of the Finance Act, 2012, another beneficial amendment was inserted under Section 112(1)(c)(iii) whereby rate of tax on long term capital gains on sale of unlisted shares in the hands of non-resident investors was reduced from 20% to a flat rate of 10%, without giving effect to the benefits of indexation and foreign exchange fluctuation. The intention behind such restriction was to treat non-resident investors at par with foreign institutional investors prescribing a uniform rate of 10% on sale of unlisted securities.^[2]

Recently, in an appeal filed before the Mumbai Bench of the Income Tax Appellate Tribunal (‘ITAT/Tribunal’), in the case of Legatum Ventures Limited v. ACIT^[3], the issue regarding whether the non-resident assessee was permitted to compute capital gains in their indigenous currency and avail the benefit of the first proviso to Section 48 of the IT Act was raised. The Tribunal whilst answering in negative, ruled that the benefit of foreign exchange fluctuation cannot be availed by the non-resident taxpayers whilst computing long term capital gains on sale of unlisted shares, in view of the express exclusion carved out under Section 112(1)(c)(iii) of the IT Act.

To give a brief factual background, the assessee was a tax resident of United Arab Emirates and was mainly involved in investment activities. During the Assessment Year (‘AY’) 2018-19, the assessee sold the shares of an Indian company, namely, Intellicap Advisory Services Private Limited and declared long term capital losses after applying the first proviso to Section 48 of the IT Act. The assessing officer (‘AO’), however, rejected the assessee’s claim and recomputed long term capital gains in accordance with the provisions of Section 112(1)(c)(iii) of the IT Act. The action of the AO was assailed by the assessee in appeal preferred before the Tribunal.

The Tribunal concurred with the approach of the AO and observed that Section 112(1)(c)(iii) of the IT Act is a special provision that not only provides the rate of computation but also prescribes the method of computation. It was also observed that the assessee could not be allowed to compute capital gains in accordance with the provision of Section 48 as that would have the effect of rendering the computation mechanism provided in Section 112(1)(c)(iii) of the IT Act, otiose. The Tribunal, whilst relying upon the legal principles of “Generallia specialbus non derogant” held that when, in an enactment, two similar provisions exist, special provision would overshadow the applicability of the general provision.

Though, on a prima facie evaluation of the provisions, one cannot find fault with the interpretation propounded by the Tribunal, it also cannot be denied that the same has led to taxation of notional income in the hands of the taxpayer despite incurring losses in their indigenous currency.  It is clear that the legislature did not envisage a scenario where literal interpretation of the provisions of Section 112(1)(c)(iii) would lead to absurd outcome and tax notional gains in the hands of the taxpayers. Thus, there is a need for the legislature to revisit these provisions and devise suitable exclusions so as to provide relief to a genuine assessee.

[1] For legislative intent, please refer to CBDT Circular No. 554/ 1990, dated February 13, 1990.

[2] Circular No. 3 of 2012, dated June 12, 2012.

[3]  Legatum Ventures Limited v. ACIT, [2023] 149 taxmann.com 436 (Mumbai – Trib.).