Augustus Capital Pte Ltd Vs DCIT (ITAT Delhi)
On 27.03.2015, the appellant sold its entire shareholding in Accelyst to an Indian company, namely, Jasper Infotech Private Limited. The sale consideration was Rs. 41,24,35,969/-. The buyer, Jasper Infotech Private Limited, withheld taxes at source amounting to Rs. 17,84,19,800/- being 43.26% on the entire sales consideration.
Keeping in view the amended provisions of section 9(1)(i) of the Act, read with Explanations 5, 6 and 7, the assessee was of the firm belief that the transaction involving sale of shares of foreign company, which held investment in India, was not taxable.
During the course of assessment proceedings, the Assessing Officer asked the assessee to explain as to why capital gains arising from sale of shares from Accelyst to Jasper Infotech Private Limited should not be brought to tax in India u/s 9(1)(i) of the Act.
In response, the appellant company submitted detailed reply, which has been incorporated by the Assessing Officer in his assessment order. The main contention of the assessee was that Explanation 7 to Section 9(1)(i) of the Act states that the impugned transaction is not taxable.
The Assessing Officer disregarded the submissions of the assessee as the Assessing Officer was of the firm belief that operation of Explanation 7 to section 9(1)(i) of the Act is prospective, since it has been inserted by the Finance Act, 2015 and made effective from 01.04.2016 and, therefore, not applicable in the year under consideration.
Held by ITAT
Section 9(1)(i) of the Act was amended and Explanation 5 was inserted by the Finance Act, 2012 giving retrospective effect from 01.04.1962 because of apprehensions and ambiguities in the said Explanation Shome Committee was constituted and on the recommendations of Shome Committee, Explanations 6 and 7 were inserted by the Finance Act, 2015.
Both the Explanations 6 and 7 start with “For the purposes of this clause”. In our understanding, the reference to “this clause” is to Section 9(1)(i) of the Act and Explanation 5 starts with “For removal of doubts”. In our understanding of the law, Explanations 6 and 7 have to be read with Explanation 5 to understand the provisions of Section 9(1)(i) of the Act. Since Explanation 5 has been given retrospective effect and Explanations 6 and 7 have been inserted in furtherance of the object of insertion of Explanation 5, these two explanations cannot be read in isolation, but have to be tagged alongwith Explanation 5 so that both the Explanations have to be given a retrospective effect, keeping in mind the decision of the Hon’ble High Court of Delhi in the case of Copal [supra].
We, accordingly, direct the Assessing Officer to read Explanation 7 as applicable for the year under consideration and delete the impugned addition.
FULL TEXT OF THE ITAT JUDGEMENT
This appeal by the assessee is preferred against the order dated 30.10.2018 pertaining to A.Y 2015-16 framed u/s 143(3) r.w.s 144C(13) of the Income tax Act, 1961 [hereinafter referred to as ‘the Act’ for short].
2. The sum and substance of the grievance of the assessee is that the Assessing Officer erred in assessing the total income at Rs. 36,33,15,970/-, as against NIL returned income, thereby denying applicability of provisions of Explanation 7 to Section 9(1)(i) of the Income-tax Act, 1961 [hereinafter referred to as ‘The Act’] holding that the applicability of the said Explanation is prospective.
3. Briefly stated, the facts of the case are that the appellant company is in the business of incubation of companies i.e. providing new businesses, with necessary financial support and technical services. During the course of its business, the appellant made investments in Accelyst Pte Ltd, being company incorporated in and resident of Singapore.
4. The appellant made investment at total cost of Rs. 4,91,20,000/-in the following manner:
• 10,000 equity shares purchased on January 9, 2013
• 13,80,000 preference shares purchased on January 9, 2013
• 394,782 preference shares purchased on March 14, 2014
5. On 27.03.2015, the appellant sold its entire shareholding in Accelyst to an Indian company, namely, Jasper Infotech Private Limited. The sale consideration was Rs. 41,24,35,969/-. The buyer, Jasper Infotech Private Limited, withheld taxes at source amounting to Rs. 17,84,19,800/- being 43.26% on the entire sales consideration.
6. Keeping in view the amended provisions of section 9(1)(i) of the Act, read with Explanations 5, 6 and 7, the assessee was of the firm belief that the transaction involving sale of shares of foreign company, which held investment in India, was not taxable.
7. During the course of assessment proceedings, the Assessing Officer asked the assessee to explain as to why capital gains arising from sale of shares from Accelyst to Jasper Infotech Private Limited should not be brought to tax in India u/s 9(1)(i) of the Act.
8. In response, the appellant company submitted detailed reply, which has been incorporated by the Assessing Officer in his assessment order. The main contention of the assessee was that Explanation 7 to Section 9(1)(i) of the Act states that the impugned transaction is not taxable.
9. The Assessing Officer disregarded the submissions of the assessee as the Assessing Officer was of the firm belief that operation of Explanation 7 to section 9(1)(i) of the Act is prospective, since it has been inserted by the Finance Act, 2015 and made effective from 01.04.2016 and, therefore, not applicable in the year under consideration.
10. The relevant para of the assessment order reads as under:
“As is clear from the above, that the provisions as contained in Explanation-7 are provisions introduced into the Act to bring only such part of capital gain into the ambit of the income deemed to accrue or arise in India as is reasonably attributable to assets located in India and determined in the prescribed manner. This explanation is not applicable to the cases of assessment years prior to AY2016-17 as it is made effective only from 01.04.2016. If the legislature has intentionally made certain provisions effective from specific date, there should not be any speculation or doubt about its applicability from certain date in the past. If the Parliament has intended to introduce Explanation-7 with retrospective effect it would have made it so as it has done in case of Explanation 4 & 5 of Section- 9(1)(i) of the Act. Therefore, it is clear that provisions of Explanation- 7 are not applicable the assessee’s case as these are not applicable to AY 2015-16.”
11. Accordingly, the Assessing Officer computed the long term capital gains arising from the transfer of shares of Accelyst as under:
