Explanations 6 & 7 Appended To Section 9(1)(i) Income Tax Act To Be Given Retrospective Effect: Delhi High Court

The Delhi High Court has held that Explanations 6 and 7 appended to section 9(1)(i) Of the Income Tax Act, 1961 to be given retrospective effect.

The bench of Justice Rajiv Shakdher and Justice Girish Kathpalia has observed that Section 9(1)(i) of the Income Tax 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.

Explanations 4 and 5 presented difficulties in that the expressions 'share and interest' and 'substantially' found in the explanations were vague, resulting in undue hardship for transferors where the percentage of share or interest transferred was insignificant. Explanations 6 and 7 alone would have no meaning if they were not read along with Explanation 5. Therefore, if Explanations 6 and 7 have to be read along with Explanation 5, which concededly operates from 1.4.1962, they would have to be construed as clarificatory and curative.

The respondent/assessee is a company incorporated under the laws of Singapore. Between January 2013 and March 2014, the 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 assessee made in APL was Rs. 4,91,20,00.

The assessee sold its investment in APL to an Indian company, Jasper Infotech Pvt. Ltd., for Rs.41,24,35,969. The Return of Income was filed by the assessee. The assessee declared its income as “nil” and claimed a refund.

The record shows that the assessee was served with a notice under Section 143(2), followed by a notice under Section 142(1) by the Assessing Officer (AO).

The record also discloses that queries were raised during the assessment proceedings, which led to the assessee filing written replies. The sum and substance of the content of these replies was that the assessee 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. Hence the capital gains arising on account of transfer of shares was not taxable in India.

The AO did not accept the explanation, and accordingly, he passed a draft Assessment Order proposing an addition towards long-term capital gains (LTGCs). The AO arrived at the figure by adjusting the total sale consideration against the cost of acquisition.

The assessee filed its objections with the Dispute Resolution Panel (DRP) under Section 144C(2). The DRP rejected the objections it preferred via an order.

The assessee filed an appeal with the Tribunal. The Tribunal ruled in favour of the assessee and thus directed the deletion of the addition.

The department contended that even where an amendment to the law is described as clarificatory, it is not always given a retrospective effect if it results in a substantial amendment. Explanations 6 and 7 appended to Section 9(1)(i) are thus not merely declaratory or clarificatory but introduce a new set of exemptions for small taxpayers. Therefore, it is like substantive amendments, which can only apply prospectively.

The assessee contended that all that Explanations 6 and 7 did was to cure the unintended consequences flowing from Explanation 5, which was introduced via FA 2012. Given this context, Explanations 6 and 7 should be made applicable retrospectively from when Explanation 5 became operational. Otherwise, the mischief sought to be cured would persist for the period preceding 01.04.2016, when FA 2015 was brought into force.

The court held that Explanations 6 and 7 alone would have no meaning if they were not read along with Explanation 5. Therefore, if Explanations 6 and 7 have to be read along with Explanation 5, which concededly operates from 01.04.1962, they would have to be construed as clarificatory and curative.

Counsel For Petitioner: Aseem Chawla

Counsel For Respondent: Mayank Nagi

Case Title: CIT Versus Augustus Capital Pte. Ltd.

Citation: 2023 LiveLaw (Del) 1244

Case No.: ITA 405/2022

Click Here To Read The Order