2023 (12) TMI 104 - HC - Income Tax

Income taxable in India - Gain or income arising from the transfer of shares of a company located outside India - 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 are clarificatory and curative and, therefore, should be given retrospective effect or amendatory? - HELD THAT - Section 9(1)(i) of the 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. The judgment of the Supreme Court rendered in Vodafone 2012 (1) TMI 52 - SUPREME COURT excluded from the scope and ambit of Section 9(1)(i) of the Act gain or income arising from the transfer of shares of a company located outside India, although the value of the shares was dependent on assets which were situated in India. It is to cure this gap in the legislation, Explanations 4 and 5 were introduced via FA 2012, which were given effect from 01.04.1962. 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/assessees where the percentage of share or interest transferred was insignificant. As evident upon perusal of Explanations 6 and 7, some recommendations were accepted. The Finance Minister's Speech while introducing the amendments via FA 2015 is revelatory since a dim view was taken of the retrospective amendment brought about by Explanations 4 and 5, effective from 01.04.1962. The legislature took a curative step regarding the vague expressions used in Explanation 5, i.e., share/interest and substantially . The argument advanced on behalf of the appellant/revenue, shorn of gloss, boils down to the fact that the insertion of Explanations 6 and 7 via FA 2015 was to take effect from 01.04.2016 and could only be treated as a prospective amendment. The argument advanced in support of this plea was that Explanations 6 and 7 brought about a substantive amendment in Section 9(1)(i) of the Act. In our view, this submission is misconceived because 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. The legislature took recourse to the mischief rule to clarify Explanation 5, which otherwise was in danger of being struck down as vague and arbitrary. If Explanations 6 and 7 are not read along with Explanation 5, no legislative guidance would be available to the AO regarding what meaning to give to the expression share/interest or substantially found in Explanation 5. There is good authority for us to conclude 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. The observations made in Commissioner of Income Tax vs Alom Extrusions Ltd. 2009 (11) TMI 27 - SUPREME COURT and Commissioner of Income Tax I, Ahmedabad vs Gold Coin Health Food Private Ltd. 2008 (8) TMI 5 - SUPREME COURT to hold that the Finance Act, 2003, to the extent indicated above, is curative in nature, hence, it is retrospective and it would operate with effect from 1-4-1988 (when the first proviso came to be inserted). An explanatory Act is generally passed to supply an obvious omission or to clear up doubts as to the meaning of the previous Act. It is well settled that if a statute is curative or merely declaratory of the previous law retrospective operation is generally intended. The language shall be deemed always to have meant or shall be deemed never to have included is declaratory, and is in plain terms retrospective. In the absence of clear words indicating that the amending Act is declaratory, it would not be so construed when the amended provision was clear and unambiguous. An amending Act may be purely clarificatory to clear a meaning of a provision of the principal Act which was already implicit. A clarificatory amendment of this nature will have retrospective effect and, therefore, if the principal Act was existing law when the Constitution came into force, the amending Act also will be part of the existing law. Also decided in Copal Research Limited, Moody s Group Limited, Moody s Analytics, USA 2014 (8) TMI 606 - DELHI HIGH COURT even before the amendment was brought about by FA 2015, has taken the view that Explanation 5 had to be construed narrowly. The OECD Model Tax Convention on Income and on Capital provides a means of settling on a uniform basis the most common problems that arise in the field of international juridical double taxation. Article 13 of the said Convention deals with the taxes on capital gains. Article 13(1) provides that the gains derived by a resident of a Contracting State from the alienation of immovable property situated in another Contracting State may be taxed in that other State. Article 13(4) of the said Convention provides that the gains derived by a resident of a Contracting State from the alienation of shares or comparable interests deriving more than 50 per cent of their value directly or indirectly from immovable property situated in the other Contracting State may be taxed in that other State. In view of the above, 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. We are informed that the appellant/revenue has preferred an appeal concerning the aforesaid judgment, which has been admitted, although no stay has been granted. Thus, for the foregoing reasons, we are not inclined to interfere with the order passed by the Tribunal. According to us, no substantial question of law arises for consideration.

Summary

Issues Involved:
1. Whether Explanations 6 and 7 appended to Section 9(1)(i) of the Income Tax Act, 1961, inserted by the Finance Act 2015, can operate retrospectively.
2. Whether Explanations 6 and 7 are clarificatory or amendatory.
3. The applicability of the mischief rule and legislative history in interpreting Explanations 6 and 7.

Summary:

Issue 1: Retrospective Operation of Explanations 6 and 7
The core issue is whether Explanations 6 and 7, added to Section 9(1)(i) of the Income Tax Act, 1961 by the Finance Act 2015, should be applied retrospectively. The Tribunal held that these Explanations operate retrospectively, applying the mischief rule and considering the legislative history behind their insertion. The Tribunal noted that Explanations 4 and 5, introduced by the Finance Act 2012, were given retrospective effect from 01.04.1962.

Issue 2: Clarificatory or Amendatory Nature of Explanations 6 and 7
The Tribunal and the High Court examined whether Explanations 6 and 7 are clarificatory or amendatory. The Tribunal concluded that these Explanations are clarificatory, aimed at addressing the ambiguity in Explanation 5, which was introduced by the Finance Act 2012. The High Court agreed, stating that Explanations 6 and 7 should be read in conjunction with Explanation 5, which operates from 01.04.1962, making them clarificatory and curative.

Issue 3: Mischief Rule and Legislative History
The High Court emphasized the legislative intent and the mischief rule in interpreting Explanations 6 and 7. It noted that the Shome Committee's recommendations and the Finance Minister's speech indicated that the amendments were intended to clarify and cure the unintended consequences of Explanation 5. The Court referred to the legislative history and the need to avoid undue hardship to small investors, concluding that the amendments were curative and should be applied retrospectively.

Conclusion:
The High Court upheld the Tribunal's decision, ruling that Explanations 6 and 7 are clarificatory and curative, and therefore, should operate retrospectively. The appeal by the revenue was dismissed, with the Court finding no substantial question of law for consideration.