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Capital gains: now is it computed for non-residents?

First proviso to Sec. 48(1) provides for a concession by way of exchange neutralisation to non-residents, who acquire shares as investments “into the same foreign currency as was initially utilised in the purchase of shares or debentures” so that the utilisation of foreign currency is expected both for purchase and sale.

A liberal view may be that the source of investment from foreign currency should also qualify for the first proviso. But the plain language would appear to suggest that both acquisition and the sale should have been by way of transactions in foreign currency. In fact, such a view has been taken by the Bombay High Court in Asbestos Cement Ltd. v CIT (1993) 203 ITR 358 (Bom).

The High Court reasoned as under:

“Both the purchase price and the sale price were in rupees. None of the two transactions were expressed in foreign currency. The fact that income did arise to the assessee in India is also not in dispute. That being so, we do not find any reason why the Income-tax Officer should convert the cost of acquisition and the sale price in the currency of the country where the assessee resides at the rates prevailing at the particular point of time and find out the difference between the two in that currency and then convert the same in terms of the Indian rupee for the purpose of computation of capital gain. Such an exercise becomes necessary only in cases where the transactions are expressed in terms of foreign currency because the assessment has to be made in India by the Indian income-tax authorities on the income to be determined in terms of Indian rupee. The sole ground on which the assessee claims the right to compute the capital gain in such a manner is that the assessee had paid for the purchase of these shares in pound sterling in the U.K.”

The High Court further observed that “in this case, the transaction of transfer of share took place in India. The acquisitions of shares were made in India. The cost of acquisition was expressed in terms of Indian rupees so also the sale price”.

It would appear that the benefit of adjustment for fall in value of Indian rupee under the first proviso would not be available in a case where source of funds is from present or past remittances. It is a hard interpretation, but where conditions are prescribed for a benefit, they should be strictly satisfied.

It follows that where the benefit of first proviso is not available to the non-resident, he is eligible for the benefit of indexation under the second proviso, which is available for all taxpayers irrespective of their residential status.

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