No addition of LTCG from sale of share as Explanation 7 of Section 9(1)(i) had retrospective effect

CIT Vs Augustus Capital Pte Ltd (Delhi High Court)

Conclusion: Gains arising from 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.

Held: Assessee-company incorporated under the laws of Singapore. It had 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 assessee made in APL was Rs. 4,91,20,000/-. 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 assessee on 31.10.2015. Via the said ROI, assessee declared its income as “nil” and claimed a refund of Rs. 17,84,19,800/-. Assessee was served with a notice under Section 143(2), followed by a notice under Section 142(1) by AO. 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. AO proposed an addition of Rs. 36,33,15,969/- towards long-term capital gains (LTGCs). Being dissatisfied, assessee filed its objections with the Dispute Resolution Panel (DRP) under Section 144C(2). In line with the stand taken before AO, the mainstay of assessee’s objection was that Explanation 7 of Section 9(1)(i) ought to have been given retrospective effect, and in not doing so, AO had committed an error. Assessee asserted that Explanations 6 and 7 clarified Explanation 5, which was introduced via FA 2012. DRP rejected the objections it preferred via an order dated 14.09.2018. As per the order of the DRP, AO framed the final assessment order on 30.10.2018 under the provisions of Section 143(3) read with 144C of the Act. The short issue which arose for consideration was whether Explanations 6 and 7 appended to Section 9(1)(i), which was inserted by the Finance Act 2015 with effect from 01.04.2016, could operate retrospectively. It was held that although Explanations 6 and 7 were indicated in FA 2015 to take effect from 01.04.2016, they could be treated as retrospective, having regard to the legislative history which led to the insertion of Explanations 6 and 7.  Gains arising from 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.

FULL TEXT OF THE JUDGMENT/ORDER OF DELHI HIGH COURT

1. This appeal concerns Assessment Year (AY) 2015-16. Via the instant appeal, the appellant/revenue seeks to assail the order dated 15.10.2020 passed by the Income Tax Appellate Tribunal [in short, “Tribunal”].

Please become a Premium member. If you are already a Premium member, login here to access the full content.