2009 (9) TMI 623 - HC - Income Tax

Exemption Newly established undertaking in free trade zone (FTP) Change in shareholding in newly established company - Explanation 1 to section 10A(9) of the Income-tax Act, 1961 was at all applicable - appellant-company has issued shares without voting rights - original promoters, continue to hold shares of the appellant-company carrying not less than 51 per cent. Of the voting power even after change in shareholding resulted in their having less than 50 per cent. Of the shares assessee entitled to deduction under section 10A (1) of the Act. Where the words used are has made, has ceased, has failed and has become , they were found to be words which can be understood as happening both prior and after coming into force of the statute, as it was understood from the words if a person has been convicted to include anterior conviction. In Explanation 1, the present tense is used with an injunction that the shares are not beneficially held by the persons who hold the shares in company . The present tense cannot be assumed to describe the status of the shareholder as the owner, but the status of the shares which are beneficially held. On this interpretation the language of the section can only be understood to describe the date on which the undertaking was set up as applicable only for those who are setting up the undertaking after the new provision, so that in case of others, the date has to be understood at best, as on April 1, 2000, the date on which the law was brought in the statute.

Summary

Issues:
1. Applicability of Explanation 1 to section 10A(9) of the Income-tax Act.
2. Retroactive or prospective operation of Explanation 1 to section 10A(9) of the Income-tax Act.

Analysis:

Issue 1 - Applicability of Explanation 1 to section 10A(9) of the Income-tax Act:
The case involved a private limited company enjoying deductions under section 10A of the Income-tax Act. The shareholding pattern of the company changed, leading to a dispute regarding the application of Explanation 1 to section 10A(9). The Assessing Officer held that the beneficial interest in the company was transferred due to changes in shareholding, applying the provisions of Explanation 1. The Commissioner of Income-tax (Appeals) and the Income-tax Appellate Tribunal upheld this decision. The appellant argued that the focus should be on the voting power, not just the number of shares held. The appellant contended that the promoters still maintained control over the company, meeting the requirements of Explanation 1. The court examined the provisions of Explanation 1 and relevant circulars, ultimately concluding that the ownership of the company was not transferred, allowing the appellant to claim the deduction under section 10A(1) of the Act.

Issue 2 - Retroactive or prospective operation of Explanation 1 to section 10A(9) of the Income-tax Act:
The second issue revolved around the retroactive or prospective application of Explanation 1 to section 10A(9). The appellant argued that the provision should apply prospectively, as the company had already been entitled to exemption under section 10A before the introduction of Explanation 1. The court analyzed the legislative intent and principles of statutory interpretation. It emphasized that retrospectivity should not be assumed unless explicitly stated in the statute. Considering the language used in the provision and the context of the case, the court held that the provision should be understood in a prospective manner. The court ruled in favor of the appellant, stating that the questions were answered in the negative, favoring the assessee and against the Revenue, allowing the appeal with no order as to costs.

In conclusion, the judgment clarified the applicability of Explanation 1 to section 10A(9) of the Income-tax Act and determined the prospective nature of its operation, providing relief to the appellant in this case.