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TMI Blog2014 (1) TMI 34X X X X Extracts X X X X X X X X Extracts X X X X ..... ed under section 10(23G) - on both the counts, i.e., by virtue of the Double Taxation Avoidance Agreement as well as by virtue of section 10(23G), the assessee's claim of exemption from capital gain is to be upheld - The Assessing Officer is directed to treat the amount as exempt from tax under the income-tax provisions. Issue of interest received on delayed payment - Sale consideration paid by the buyer – Applicability of Section 9(1)(v) of the Act - Held that:- Payment of sale consideration and payment of interest are of two different transactions - The interest was calculated for the period of delay on the balance amount of sale consideration which was due on a given day - The Assessing Officer as well as the Commissioner of Income-tax (Appeals) relied on section 9(1)(v) of the Act to consider that this amount is taxable as per the provisions of the Act - Sub-clause (c) only is applicable in respect of income by way of interest under section 9(1)(v) - the interest payment payable on any debt incurred or moneys borrowed and used for the purpose of a business or profession carried on by such persons in India - neither assessee nor the purchaser is carrying on any business i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d by the buyer. The assessee has raised the following grounds : " On the facts and circumstances of the case and in law, the learned Commissioner of Income-tax (Appeals) : 1. Erred in not considering the submissions, judicial precedents submitted by the appellant and not passing a speaking order in relation to all the grounds of appeal filed by the appellant. 2. Erred in not applying the provisions of article 13(4) and 13(5) of the Double Taxation Avoidance Agreement which specifically deal with the taxation of capital gains arising on alienation of shares. 3. Erred in holding that the company owning the industrial park is nothing but an immovable property along with furniture and fixtures and that the alienation of 100 per cent. shares of such company implies that the rights to enjoy the industrial park is now vested with the purchaser, disregarding the appellant's submissions that the property of the company is not the property of the shareholder. 4. Erred in holding that the transaction of alienation of shares falls wit. 5. Erred in law, in not following the decision of the Authority for Advance Ruling which is on similar facts, in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ,67,476 on the interest payment and remitted the same to the authorities. 5. The assessee filed its return of income on 1st November 2005 for the assessment year 2005-06 claiming a refund of the taxes withheld amounting to Rs. 35,44,67,476. In the return of income, the assessee had claimed that the long-term capital gains arising on the transaction were liable to be taxed in India. However, under the provisions of article 13 of the Double Taxation Avoidance Agreement between India and the Netherlands ("DTAA" or "tax treaty") the same is not taxable in India. Further the assessee also claimed that the interest income is not liable to tax in India as the same does not accrue or arise in India. The assessee has also mentioned that the Indian company had made an application under section 10(23G) of the Act before the Central Government, which once approved and notified, exempts the long-term capital gains. 6. The return of income was selected for scrutiny under section 143 and notices were issued calling for detailed information for claiming the exemption, which was submitted from time to time. The Assistant Director of Income tax-II (International taxation) ("Assessing Officer" or ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Department has filed an appeal before the hon'ble Andhra Pradesh High Court. That in relation to taxability of the interest income, the interest income arose or accrued to the assessee through a transaction involving sale of capital asset situated in India and is hence taxable in India as the interest is deemed to accrue or arise in India as per the provisions of section 9 of the Act. 8. Aggrieved by the order passed by the Assessing Officer, the assessee filed an appeal before the Commissioner of Income-tax (Appeals)-VI. The Commissioner of Incometax (Appeals)-V issued notices from time to time in response to which the assessee made appropriate submissions. 9. The learned Commissioner of Income-tax (Appeals) in his order under section 250 of the Act has held that the long-term capital gains derived by assessee on the sale of shares is taxable in India after analysing the applicability of the Double Taxation Avoidance Agreement to the present case. He approved the contention of the Assessing Officer about the applicability of article 13(1) of the Double Taxation Avoidance Agreement to the transaction of sale of shares, thereby rejecting the applicability of article 13(4) a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... siness from the industrial park. It was submitted that the shareholders of the Indian company neither occupy nor enjoy any such ownership rights in the property of the Indian company in accordance with the articles of association. It was his submission that the Indian company was claiming benefit under section 80-IA and the assessee has no right or interest in the immovable property of the company but has only interest in shares. It was further submitted that as a shareholder in the company as per the Companies Act, the rights are limited to electing directors, participating in dividends and sharing in the surplus on winding-up of the company. Therefore, it cannot be stated that the assessee has a right in the property as a shareholder and relied on the principles laid down by the hon'ble Supreme Court in the case of Life Insurance Corporation of India v. Escorts Ltd., [1986] 59 Comp Cas 548 (SC) ; AIR 1986 SC 1370. He further submitted that the company registered under the Companies Act, 1956 is a legal person separate and distinct from its individual members. The property of the Indian company is not the property of the shareholders, i.e., the assessee. For this he relied on the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... decision of the hon'ble Bombay High Court in the case of CIT v. Mahendra J. Shah [1979] 118 ITR 902 (Bom) for the definition of owner and the decision of the Income-tax Appellate Tribunal in the case of Westwind Realtors P. Ltd. v. Deputy CIT [2006] 9 SOT 572 (Mum) for the proposition that in the absence of right to use the property the opinion of the Assessing Officer does not stand. He then referred to the decision of the hon'ble Supreme Court in the case of Andhra Pradesh State Road Transport Corpn. v. ITO [1964] 52 ITR 524 (SC) wherein the hon'ble Supreme Court held that the income of the corporation is not the income of the State to submit that owning shares in an Indian company is not equivalent to owning the property of the Indian company as contemplated by the Assessing Officer. Learned counsel also relied on the decision of the hon'ble Supreme Court in the case of Vodafone International Holdings B.V. v. Union of India (SLPC (C) No. 26529 of 2010) to support the contention that the shares in the Indian company cannot be equated to the property of the company. He also relied on the decision of Carrasco Investments Ltd. v. Special Director [1994] 79 Comp Cas 631 (Delhi) for ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , 1998 are also eligible for exemption under section 10(23G). It was his submission that long-term capital gain arising to the assessee-company was also exempt under section 10(23G). He also relied on the decision of the Income-tax Appellate Tribunal in the case of Crompton Greaves Ltd. v. Joint CIT in ITA Nos. 4672/Mum/2003 and 2785/Mum/2007 that investments made earlier on any infrastructure project were also applicable even though such section was not in existence when the investments were made. 15. With reference to the issue of taxability of interest income it was submitted that the interest was paid for the delayed payment of sale consideration by the Singapore company and was arising out of the contractual obligations imposed on the purchaser for delay in payment of sale consideration. Learned counsel submitted that section 9 of the Income-tax Act cannot be invoked as debt was not incurred or moneys borrowed and used for the purpose of business or profession carried on in India. Since the interest payment was received outside India and was made by a non-resident, neither in relation to any debt incurred or moneys borrowed the interest income thereon is not taxable under th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the Double Taxation Avoidance Agreement in the first instance or in the alternate by virtue of provisions of section 10(23G) which allows the exemption of longterm capital gain on investments made in infrastructure projects. It was the Assessing Officer's contention that the capital gains arising out of sale of shares in the Indian company is taxable in India as he invoked the provisions of article 13(1), whereas the assessee claims exemption by virtue of article 13(4) and article 13(5) of the Double Taxation Avoidance Agreement. In the alternate the assessee also claims exemption from capital gains as the benefit of exemption under section 10(23G) was eligible as the Central Board of Direct Taxes granted permission to the Indian company. Therefore, it was the contention that the capital gains is not taxable in India. The Assessing Officer for the purpose of invoking article 13(1) relied on the definition of "immovable property" as provided under section 269UA(d) of the Act. 18. After considering the detailed submissions on the issue by both the parties, we are of the opinion that the assessee is eligible for exemption for the capital gains earned. For arriving at that decisio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... such gains are realised in the course of a corporate organisation, re-organisation, amalgamation, division or similar transaction, and the buyer or the seller owns at least 10 percent of the capital of the other. 6. The provisions of paragraph 3 shall not affect the right of each of the States to levy according to its own law a tax on gains from the alienation of the shares or "jouissance" rights in a company, the capital of which is wholly or partly divided into shares and which under the laws of that State is a resident of that State, derived by an individual who is a resident of the other State and has been a resident of the first-mentioned State in the course of the last five years preceding the alienation of the shares or "jouissance" rights. In this article, sub-articles 2, 3 and 6 are not applicable for the present situation. Article 13(1) refers to article 6 which is as under (page 77 of 177 ITR (St.)): Article 6. Income from immovable property 1. Income derived by a resident of one of the States from immovable property (including income from agriculture or forestry) situated in the other State may be taxed in that other State. 2. The term "immovable proper ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... conversion or treatment ; or (v) any transaction involving the allowing of the possession of any immovable property to be taken or retained in part performance of a contract of the nature referred to in section 53A of the Transfer of Property Act, 1882 (4 of 1882) ; or (vi) any transaction (whether by way of becoming a member of, or acquiring shares in, a co-operative society, company or other association of persons or by way of any agreement or any arrangement or in any other manner whatsoever) which has the effect of transferring, or enabling the enjoyment of, any immovable property. Explanation.-For the purposes of sub-clauses (v) and (vi), 'immovable property' shall have the same meaning as in clause (d) of section 269UA ;" 21. Explaining the provisions of introduction of the above provisos (v) and (vi) in section 2(47) the Central Board of Direct Taxes has issued circular No. 495 dated September 22, 1987 ([1987] 168 ITR (St.) 87) explaining the reasons for introduction of above two clauses in the act as under : "Definition of 'transfer' widened to include certain transactions : 11.1 The existing definition of the word 'transfer' in section 2(47) does no ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... vable property for specific purposes. Even in section 2(47), the definition of immovable property has a restricted applicability. Therefore, it cannot be considered that "immovable property" as defined in section 269UA(d) has a general purpose definition under the common law. It is also to be noted that immovable property has also been defined differently under section 11(5), clause (x) of the Income-tax Act. In the case of income from property held for charitable or religious purpose under section 11, in the forms and modes of investing and depositing money, sub-section (5) prescribes various modes. Clause (x) is also one such mode of investment which is as under : "Section 11(5) clause (x) (x) investment in immovable property: Explanation.-'Immovable property' does not include any machinery or plant (other than machinery or plant installed in a building for the convenient occupation of the building) even though attached to or permanently fastened to, anything attached to the earth ;" 24. As can be seen from the above, the definition of immovable property for the purpose of section 11(5) of the Income-tax Act does not include any machinery or plant even though attached to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ss". Therefore, it is clear from the above definitions that immovable property include land, building or any rights pertains to that but, share in a company cannot be considered as immovable property. What the assessee had sold was shares in an Indian company. 27. In the case of Andhra Pradesh State Road Transport Corpn. v. ITO [1964] 52 ITR 524 (SC) the hon'ble Supreme Court held that the "corporation, though statutory, has a personality of its own and this personality is distinct from that of the State or other shareholders. It cannot be said that the shareholder owns the property of the corporation or carries on the business with which the corporation is concerned. The doctrine in the corporation has a separate legal entity of its own is so firmly rooted in our notions derived from common law that it is hardly necessary to deal with elaborately ; and so, prima facie, the income derived by the appellant from its trading activity cannot be claimed by the State which is one of the shareholders of the corporation". Thus the hon ble Supreme Court established that the shareholder is different from the property of the company. 28. Likewise in the case of Vodafone International Hold ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... be liable to tax as per the provisions of India-Netherlands treaty. The issue was elaborately discussed vide paras 6 to 8 in the said order as under: "6. The learned advocate contended that as the shares of ORGIMS are not immovable property or movable property forming part of the business property of a permanent establishment or any gain from alienation of ships or aircraft operated in international traffic or movable property pertaining to such business, the transfer of shares of ORG-IMS by the applicant would not be governed by articles 13(1) to (3) of the tax treaty. As the shares of ORG-IMS do not derive their value from any immovable property situated in India, article 13(4) would also not apply to any capital gain earned by the applicant from sale of shares of ORG-IMS. The learned advocate further contended that the capital gains earned by the applicant on transfer of shares would be covered by article 13(5) of the tax treaty and shall be taxable only in the state in which the transferor is a resident. As the applicant is a resident of the Netherlands, any capital gain earned by it would be taxable in the Netherlands. Further condition under article 13(5) that ga ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... The applicant is entitled to invoke the benefit of the provisions in the treaty notwithstanding the provisions of the Income-tax Act, 1961 on the same subject. Section 90(2) of the Income-tax Act recognises this principle. It lays down that in relation to the assessee to whom the agreement (treaty) applies, the provisions of the Act shall apply to the extent they are more beneficial to the assessee. The opening sentence of paragraph 5 of article 13 mandates that the gains from the alienation of any property (other than that referred to in the following paragraphs) are liable to be taxed only in the State of which the alienator is a resident. Property in the form of shares is not excluded from the purview of the above opening provision in paragraph 5. That being the position, the Government of India is precluded from subjecting to tax the gains on account of transfer of shares of the Indian company to a non-resident. This clear legal position is not in dispute. However, the Revenue contends that 'the beneficial owner of capital gains arising out of the transactions, if and when undertaken, would be the German company' and accordingly the provisions of the India-Germany Double Taxati ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he transfer of shares held in the Indian company would not enure to the benefit of the applicant or will not enter into the profit and loss account of the applicant or that the gains will be just passed on to the ultimate holding company (i.e., German company), dictated by its mandate. It is not possible to assume that the applicant would merely act as a conduit to siphon off the gains to the ultimate holding company by means of a colourable device contrary to its corporate status and the stake in the Indian company. It is of course open to the tax authorities to look to the facts at the time of transfer, but, on principle and in the light of the facts stated and substantiated in this application, we cannot reach the conclusion that the beneficial ownership in the gains resulting from the transfer of shares is vested with the ultimate holding company, i.e., German company. As stated earlier, we find no reason and no basis to characterise the proposed transaction as a mere device to avoid the capital gains tax by unlawful means. 3.3. In the comments furnished on behalf of the Revenue, it is pointed out that no details are available now and therefore the question cannot be adjudica ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... risdiction of income. The first two circumstances enumerated above are covered under the provisions of paragraph (4) of article 13 as per which, in the first circumstance above, the capital gain arising on alienation of shares would be liable to tax in India ; whereas in the second circumstance the capital gain is not liable to tax in India because of the specific exclusion provided therein. The third, fourth and fifth circumstances of alienation of shares enumerated above are covered under the provision of paragraph (5) of article 13. Article 13(5) provides for circumstance where the shares forming at least 10 per cent. of the capital stock of the Indian company are transferred to a resident of India, then such capital gains would be taxable in India. In all other circumstances, the capital gain arising on alienation of shares would be taxable only in the country of residence of the alienator. Therefore, only capital gain arising in the fourth circumstance of alienation of shares would be liable to tax in India. Capital gain arising on the third and fifth circumstances of alienation of shares would be taxable only in the Netherlands. 35. Considering what the assessee has sold is ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... jects/undertakings. 38. The Assessing Officer mentioned that the industrial park was not considered as infrastructure facility for the purpose of section 10(23G) of the Act till financial year 1999-2000. In this regard, the assessee claimed that the industrial parks set up from April 1, 1997 were included in the definition of infrastructural facilities for purposes of section 10(23G) from the financial year 1999-2000. The Central Government had formulated Industrial Park Scheme, 1999 for providing tax exemption under section 80-IA of the Act for setting up industrial parks for the period beginning on April 1, 1997 vide Gazette Notification (Extraordinary) bearing S.O. No. 193(E) dated March 30, 1999. The said scheme was operational since 1997 and deduction was allowed for such industrial park as infrastructure facility. Further reliance can also be placed on the Finance Act, 1999's amendment which included the industrial parks as infrastructural facility under section 80-IA(4)(iii) of the Act. The amendment made to section 80-IA(4)(iii) is as under : "any undertaking which develops, develops and operates or maintains and operates an industrial park notified by the Ce ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eligible investments. 42. The above view has also been upheld by the Hyderabad Bench of the Income-tax Appellate Tribunal in the case of VBC Ferro Alloys Ltd. [2007] 107 TTJ (Hyd.) 925. In the said case it was held as under : "Held : When the Explanation is read with Circular No. 772, dated December 23, 1998 it is clear that this Explanation is a declaratory statute inserted to supply an obvious omission and to clear doubts. The new Act, i.e., 'Explanation 2', is to explain an earlier Act and thus would be without object unless constructed retrospectively. The law applicable to investments made prior to June 1, 1998 is declared to remove doubts. Thus, the Explanation is declaratory or explanatory and has to be construed as retrospective as it is retroactive in nature. A plain reading of Explanation 2, as introduced by the Finance Act, 1999, does not permit an interpretation that the investment should have been made between the first day of April, 1998 and the first day of June, 1998 for being eligible for the deduction. All that it says is that the investment should be made before the first day of June, 1998. Thus, the interpretation sought to be placed b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... The term 'immediately before' means provision existing in the Finance Act, 1997, has to be applied in this case. As section 10(23G) as it existed immediately before amendment by the Finance (No. 2) Act, 1998, clearly states that any income by way of long-term capital gain of an infrastructure capital fund is exempt under section 10(23G), there is no hesitation whatsoever in holding that the capital gain in question is exempt from tax under section 10(23G) as per the provisions of the statute existing in 1997 read with Explanation 2 introduced by the Finance Act, 1999. Explanation 2 mandates that income by way of long-term capital gain of an infrastructure capital company from investments made before 1st June, 1998, by way of shares in any enterprise which is an infrastructure facility shall not be included in the total income, i.e., it shall not form part of the total income. Coming to the computation of book profits, i.e., reduction of this long-term capital gain, which is exempt under section 10(23G), from the book profits of the company under the special provisions of section 115JB, the Revenue authorities have committed an error, as the disallowance is in violation o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... /s. Skycell Communication Ltd. The Assessing Officer observed that clause (23G) of section 10 was inserted by the Finance (No. 2) Act, 1996 with effect from the assessment year 1997-98. He opined that when the first lot of shares was purchased on January 31, 1996 this section was not in existence. He, therefore, refused to allow the exemption under section 10(23G) in respect of such a lot of shares. However the assessee's claim for exemption under section 10(23G) on sale of shares which were purchased on December 23, 1997 and March 8, 1998 was accepted. The learned Commissioner of Income-tax (Appeals) upheld the assessment order on this issue. 38. We have heard the rival submissions and perused the relevant material on record. The Finance (No. 2) Act, 1996 introduced clause (23G) to section 10 providing exemption in respect of any income by way of dividend, interest or long-term capital gains of an infrastructure capital fund or an infrastructure capital company or investment made by way of shares or long-term finance in any enterprise carrying on the business of developing, maintaining and operating any infrastructure facility, which fulfils the conditions specified in su ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 8) shall apply to such income. (Emphasis supplied by us) 40. Prior to the issuance of Circular No. 772, dated December 23, 1998, a press note dated July 21, 1998 was issued clarifying that the amended provisions of section 10(23G) come into effect from April 1, 1999, i.e., for the assessment year 1999-2000, the return for which is due after April 1, 1999. Any income of the nature covered by section 10(23G) arising for and up to the assessment year 1998-99 would continue to be governed by the old provisions. 41. There is no dispute on the availability of exemption under section 10(23G) to the assessee in respect of capital gain arising from the transfer of shares of M/s. Skycell Communication Ltd. which secured the cellular phone operator licence. Rather the Assessing Officer has himself allowed exemption in the current year in respect of the shares which were purchased by the assessee on December 23, 1997 and March 8, 1998. The only reason for the denial of benefit in respect of shares purchased on January 31, 1996 given by the authorities below is that section 10(23G) itself was introduced with effect from the assessment year 1997-98 and hence the shares purc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... judgment, the learned Departmental representative contended that the shares purchased by the assessee on January 31, 1996 could not be made eligible for exemption under section 10(23G) because clause (23G) of section 10 itself was inserted from the assessment year 199798. The distinguishing feature in the facts of the instant case vis-a-vis those of the hon'ble Supreme Court in Reliance Jute and Industries Ltd. is that in that case the loss was incurred in the assessment year 1950-51 which was claimed to be eligible for set off in the assessment year 1960-61. In the present case we are not concerned with any profit arising to the assessee available for exemption under section 10(23G) prior to the insertion of the provision with effect from 199798. The capital gain itself has resulted in a later year unlike the loss incurring in the assessment year 1950-51 in the case of Reliance Jute and Industries Ltd. If the assessee had sold some shares prior to introduction of the provision and claimed the benefit under section 10(23G), his case would have been definitely hit by the above judgment. Here we are confronted with a case in which the profit has in fact resulted during the previous y ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... med to accrue or arise in India as per section 9(1)(v) of the Act as it has inextricably linked to the original transaction of payment for sale of shares. The learned Commissioner of Income-tax (Appeals) also holds that since the payment of sale of shares from VITP Ltd. involved two components, i.e., original payment plus penal payment on account of delay, it is only logical that the entire payment to be brought to tax. He further holds that interest payments cannot be divorced from the original payment as both pertain to the same transaction. 46. We are afraid we cannot agree with the above opinion. Payment of sale consideration and payment of interest are of two different transactions. The interest was calculated for the period of delay on the balance amount of sale consideration which was due on a given day. The Assessing Officer as well as the Commissioner of Income-tax (Appeals) relied on section 9(1)(v) of the Act to consider that this amount is taxable as per the provisions of the Act. Section 9(1)(v) is as under : "9(1)(v). Income by way of interest payable by (a) The Government ; or (b) A person who is a resident, except where the int ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . This appeal is preferred by the assessee directly on the directions of the Dispute Resolution Panel, Hyderabad under section 144C(5) consequent to which the Assessing Officer completed the assessment under section 143(3) read with section 147. As briefly considered in the above appeal, the issue is with reference to levy of income tax on long-term capital gain and the interest income which are claimed exempt by the assessee. The original assessment under section 143(3) was completed on February 25, 2008 bringing the amounts to tax. The Assessing Officer noticed that the company had claimed the expenditure of Rs. 5,27,13,857 in connection with the transfer of shares but debited in the profit and loss account of Rs.4,09,48,050. He came to a conclusion that the amount claimed in connection with the transfer of shares is found to be excessive. He also noticed that the consideration as per the memorandum of understanding should be Rs. 228 crores whereas the assessee admitted the sale consideration of Rs.224.50 crores. With reference to the rate of tax also he had differed from the predecessor officer. For these reasons the assessment was reopened under section 147 as it is within four ..... X X X X Extracts X X X X X X X X Extracts X X X X
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