The Telangana High Court in a recent case has held that the capital invested to purchase shares of ‘infrastructure facility’ before June 1998 cannot be included in total income. The Court viewed that Central Board of Direct Taxes ( CBDT ) press release has clarifyied that the exemptions available under Section 10(23G) will continue to govern the investments made prior to June 1998.
The petitioner assessee , V.B.C.Ferro Alloys Ltd filed an appeal under section 260A of the Income Tax Act, 1961 ( Act ) . The Assessee is a Public Limited Company and is in the business of manufacture of Ferro Silicon and Ferro Chrome, against the Order of the CIT (Appeals) IV, Hyderabad, dated 06.10.2004 for the Assessment Year 2001-2002.
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The appellant submitted that the appellant rightly sustained the order of the Assessing Officer in bringing long-term capital gains of Rs.31,43,80,590/- earned by the Appellant on the sale of 26,80,000 shares of Andhra Pradesh Gas Power Corporation Ltd., to tax while computing the income under normal provisions of the Act and also under the Special provisions of section 115JB of the Act stating that the provision of section 10(23G) do not apply to the respondent as the investment was made by the respondent prior to 01.04.1998.
The capital expenditure for purchasing shares falls under the category of infrastructure facilities and shall not be included in total income. This is because merely purchasing shares does not contribute to the income of the respondent/assessee. Since it does not count as income, no amount needs to be paid in taxes.
Section 10(23G) of the Income Tax Act 1961 exempts income by way of long-term capital gains from investment made prior to 01.06.1998 by way of shares in any enterprise carrying on the business of developing, maintaining and operating any infrastructure facility, from being included in computing the total income.
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The Revenue had preferred an appeal against ITAT order allowing exemption to the Respondent, an entity in the business of manufacture of Ferro Silicon and Ferro Chrome. Respondent had registered long-term capital gains of Rs.31,43,80,590/- on the sale of 26,80,000 shares of Andhra Pradesh Gas Power Corporation Ltd. to Hindustan Zinc Ltd. in the year 2000. The initial investment was made in December 1996.
Revenue submitted that exemption from long-term capital gains are effective from April 01, 1997. It contended that when the provision itself did not exist for previous years (1996), the question of allowing exemption under Section 10(23G) prior to April 1997 does not arise. Thus, long term capital gains arising in respect of investments made before the said date are not eligible for exemption under section 10(23G).
Counsel for the appellant submitted that the investment date is important i.e. 04.12.1996. While dealing with the amendment, the Tribunal discussed with regard to investments, whether prospective Legislation or declaratory Legislation and, thus, has to be construed as retroactive.
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Exemption notification should be interpreted strictly; the burden of proving applicability would be on the assessee to show that his case comes within the parameters of the exemption clause or exemption notification. When there is ambiguity in exemption notification which is subject to strict interpretation, the benefit of such ambiguity cannot be claimed by the subject/assessee and it must be interpreted in favour of the revenue.
An infrastructure facility is created by purchasing shares, but this will not be considered income. It is solely for the creation of infrastructure facilities. Once the shares are purchased on February 4, 1996, they are classified as a creation of an infrastructure facility, not as income.
A division bench of Justices Sujoy Paul and Namavarapu Rajeshwar Rao held that merely purchasing shares does not contribute to the income of the respondent/assessee. Since it does not count as income, no amount needs to be paid in taxes.
The authority also cited a CBDT press release, clarifying that the exemptions available under Section 10(23G) will continue to govern the investments made prior to June 1998.
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