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Unit 12: Income under the Head Capital Gains

Clause (iia) of section 204 was inserted w.e.f. 1-6-1986 by Finance Act, 1986. The Reserve Notes
Bank of India has given an elaborate circular dated 11-2-1987 for the computation of
long-term capital gains of an non-resident Indian for enabling the Banks or Foreign
Exchange dealers to deduct tax at source as required under clause (iia) of section 204 of the
IT Act and a copy of the circular may be seen at page - 5126, Vol. V, 8th Edition of Sampat
Iyengar. It is to be noticed that only in respect of long-term capital gains the authorised
dealer is made responsible for TDS which as evident from the said circular of the Reserve
Bank of India is to facilitate the remittances of the sale proceeds of the foreign exchange
assets from India. It is to be noted that such a facility is extended only to consideration in
respect of long term capital assets. If short-term capital gains are also to be taxed at the
same rate as applicable to the long-term capital gains, no meaningful purpose is served by
restricting the facility of easy remittance of sale proceeds only to long-term capital gains
as is done under section 204.
Part-II of the First Schedule to the relevant Finance Act stipulates the rates at which the tax
is to be deducted at source from income subject to such deduction under the provisions of
sections 193 to 195 of the IT Act. The provisions of Chapter XII-A which related to the
incomes of non-residents were introduced by Finance Act, 1983 w.e.f. 1-6-1983 and Part-II
of the Finance Act, 1983 stipulated that in the case of a non-resident Indian the tax should
be deducted @ 20% on investment income and long-term capital gains and on other income
other than interest on tax-free securities at 30%. In other words, the scheme for deducting
tax at source has made a specific distinction between the rates applicable for investment
income and long-term capital gains on one hand and other income (other than interest on
tax-free Securities) on the other. If the same rate is applicable for (a) investment income
other than capital gains, (b) long-term capital gains and (c) short-term capital gains there
was no point for specifying the rate applicable at 20% only to investment income and
long-term capital gains. In other words, the same rate of 20% could have been made
applicable to simply what could be described as “investment income” as, this covers, if the
claim advanced by the appellant is to be accepted, both normal income and income by
way of capital gains, both short-term and long-term. As the legislature has taken pains to
make the concessional rate of 20% applicable only for investment income and long-term
capital gains both in the provisions relating to the deduction of tax at source and section
115E, we have to take the view that investment income does not include short-term capital
gains for the purpose of levy of tax under section 115E. The Delhi Bench of the Tribunal did
not consider the scheme of the Act particularly the provisions relating to deduction of tax
at source which we have considered above. Had these provisions been specifically brought
to the notice of the Hon’ble Members of the Tribunal we are of the view that the decision
of the Bench would have been different from what it was.
We also find that the decision of the Hon’ble Bombay High Court in the case of Manubhai
A. Sheth (supra) relied upon by the Tribunal Bombay Bench and also before us by the
learned counsel for the assessee is distinguishable inasmuch as the decision was given in
the context of interpreting entry No. 82 in List-I of the Second Schedule of the Constitution
and their Lordships of the Bombay High Court were not considering a provision which
specifically extended the benefit of concessional tax rate to only one type of capital gains
as done under section 115E of the IT Act.
For the above reasons we are of the view that the benefit of concessional tax rate under
section 115E cannot be extended to short-term capital gains. We also find support from the
method of interpretation adopted by us in the decision of the Hon’ble Andhra Pradesh
High Court in the case of M. Krishna Murthy v. CIT [1985] 152 ITR 163/23 Taxman 126. The
question there considered was whether amount received on leave encashment was
includible in salary for the purpose of levy of tax. While holding that the amount received
Contd...

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