S.10(23G) IT Act | Capital Invested To Purchase Shares Of 'Infrastructure Facility' Before June 1998 Can't Be Included In Total Income: Telangana HC

A division bench of Justices Sujoy Paul and Namavarapu Rajeshwar Rao reasoned,

“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.

In the case at hand, 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 (arising from sale of investments) 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 u/s 10(23G).

Respondent-company however cited SEBI v. Rajkumar Nagpal and others on 'retroactive application' of statutory principles.

ITAT 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.

In this backdrop, the High Court held, “When doubts arise about whether long-term capital gains exempt under section 10(23G) are available, the CBDT has clarified the issue through a press release, resolving the matter….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.”

Accordingly, it dismissed Revenue's appeal.

Appearance: Senior Standing counsel J.V. Prasad for Income Tax; Advocate Challa Gunaranjan for respondent

Case title: Commissioner of Income Tax III vs M/S.V.B.C.Ferro Alloys Ltd