The Delhi High Court has held that Explanation 7 of Section 9(1)(i) of the Income Tax Act, 1961has retrospective effect and upheld the deletion of addition towards Long Term Capital Gain (LTCG)
The appellant/revenue challenged the order passed by the Income Tax Appellate Tribunal [“Tribunal”] which was in favour of assessee Augustus Capital PTE.ltd. The issue is whether Explanations 6 and 7 appended to Section 9(1)(i) of the Income Tax Act, 1961, [“the Act”], which was inserted by the Finance Act 2015 [“FA 2015”] with effect from 01.04.2016, can operate retrospectively.
The Tribunal has held that the said Explanations would operate retrospectively and, in reaching this conclusion, has applied the mischief rule and taken into account the legislative history which propelled the insertion of two interconnected Explanations, i.e., Explanation 4 and 5, via the Finance Act 2012 [in short, FA 2012”]. Concededly, Explanations 4 and 5 were given a retrospective effect by the legislature by stating in no uncertain terms that they would apply from 01.04.1962.
The respondent/assessee is a company incorporated under the laws of Singapore on 22.11.2011. Between January 2013 and March 2014, the respondent/assessee invested in equity and preference shares of Accelyst Pte Ltd [ “APL”], a company incorporated in and resident of Singapore. The total value of the investments the respondent/assessee made in APL was Rs. 4,91,20,000/-.
The respondent/assessee sold its investment in APL to an Indian company, Jasper Infotech Pvt. Ltd., for Rs.41,24,35,969/-. The Return of Income (ROI) for the AY in issue, i.e., AY 2015-16, was filed by the respondent/assessee on 31.10.2015. Via the said ROI, the respondent/assessee declared its income as “nil” and claimed a refund of Rs. 17,84,19,800/-.
The respondent/assessee was served with a notice under Section 143(2), followed by a notice under Section 142(1) of the Act on 05.04.2016 and 01.07.2016 respectively, by the Assessing Officer (AO). The respondent/assessee replied that he had acquired only 0.05% of the ordinary share capital and 2.93% of the preference share capital of APL and had no right of management and control concerning the affairs of APL, and hence the capital gains arising on account of transfer of shares was not taxable in India.
The AO proposed an addition of Rs. 36,33,15,969/- towards long-term capital gains (LTGCs). Being dissatisfied, the respondent/assessee filed its objections with the Dispute Resolution Panel (DRP) under Section 144C(2) of the Act on 02.02.2018. In line with the stand taken before the AO, the mainstay of the respondent/assessee’s objection was that Explanation 7 of Section 9(1)(i) ought to have been given retrospective effect, and in not doing so, the AO had committed an error. The respondent/assessee asserted that Explanations 6 and 7 clarified Explanation 5, which was introduced via FA 2012.
The DRP rejected the objections it preferred via an order dated 14.09.2018. As per the order of the DRP, the AO framed the final assessment order on 30.10.2018 under the provisions of Section 143(3) read with 144C of the Act.
Section 9(1)(i) of the Act inter alia seeks to impose tax albeit via a deeming fiction qua all income accruing or arising, whether directly or indirectly, through or from any property in India or through or from any asset or through transfer of asset situate in India, or the transfer of a capital asset situated in India.
Therefore, the Finance Act, of 2003, to the extent indicated above, should be read as retrospective. It would, therefore, operate from 1-4-1988, when the first proviso was introduced. Indeed, Parliament has explicitly stated that the Finance Act, of 2003, will operate with effect from 1-4-2004. However, the matter before us involves the principle of construction to be placed on the provisions of the Finance Act, 2003.
A division bench of Justice Rajiv Shakdher and Justice Girish Kathpalia observed that the object of Explanation 5 was not to extend the scope of Section 9(1)(i) of the Act to income, which had no territorial nexus with India, but to tax income that had a nexus with India, irrespective of whether the same was reflected in a sale of an asset situated outside India.
In view of the above, gains arising from the sale of a share of a company incorporated overseas, which derives less than 50% of its value from assets situated in India would certainly not be taxable under section 9(1)(i) of the Act read with Explanation 5 thereto.
The court refused to interfere with the order passed by the Tribunal and disposed of the appeal.
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