Friday, March 16, 2012

Budget 2012: Retrospective Amendments to Sections 2(14), 2(47) and 9


Copies of the Finance Bill, 2012 and the Explanatory Memorandum are now available. During the course of the day, we will highlight the important changes made and examine their implications. The purpose of this post, however, is to highlight that the Bill proposes a retrospective amendment to sections 2(14), 2(47) and 9 of the Income Tax Act, 1961, and this amendment purports to be clarificatory.
The amendments are set out below with brief comments.
Section 2(14): This provision defines a “capital asset”. Readers may recall that both the Bombay High Court and the Supreme Court held in Vodafone that “controlling interest” is not a capital asset. The Finance Bill proposes to add the following Explanation:
Cl. 3(i):
In clause (14), at the end, the following Explanation shall be inserted and shall be deemed to have been inserted with effect from the 1st day of April 1962, namely:
Explanation- For the removal of doubts, it is hereby clarified that ‘property’ includes and shall be deemed to have always included any rights in or in relation to an Indian company, including rights of management or control or any other rights whatsoever
Section 2(47): This provision defines a “transfer”. Readers may recall that the Revenue’s primary case in Vodafone in the Supreme Court was that there was an “extinguishment” under this provision.
Cl. 3(iv):
In clause 47, the Explanation shall be numbered as Explanation 1 thereof and after Explanation 1 as so numbered, the following Explanation shall be inserted and shall be deemed to have been inserted with effect from the 1st day of April, 1962, namely:
Explanation 2: For the removal of doubts, it is hereby clarified that “transfer” includes and shall be deemed always to have included disposing of or parting with an asset or any interest therein, or creating any interest in any asset in any manner whatsoever, directly or indirectly, absolutely or conditionally, voluntarily or involuntarily, by way of an agreement (whether entered into in India or outside India) or otherwise, notwithstanding that such transfer of rights has been characterised as being effected or dependent upon or flowing from the transfer of a share or shares of a company incorporated outside India.”
Section 9: This provision defines when income is deemed to accrue or arise in India, and the Supreme Court held in Vodafone that the words “directly or indirectly” do not qualify the transfer of the asset.
Cl. 4: In section 9 of the Income Tax Act, in sub-section (1)-
(a) in clause (i), after Explanation 3, the following Explanations shall be inserted and shall be deemed to have been inserted with effect from the 1st day of April 1962, namely:-
Explanation 4: For the removal of doubts, it is hereby clarified that the expression “through” shall mean and include and shall be deemed to have always meant and included “by means of”, “in consequence of” or “by reason of”.
Explanation 5: For the removal of doubts, it is hereby clarified that an asset or a capital asset being any share or interest in a company or entity registered or incorporated outside India shall be deemed to be and shall always be deemed to have been situated in India, if the share of the interest derives, directly or indirectly, its value substantially from the assets located in India.

The Budget Memorandum (at page 16) describes this as a clarificatory amendment. Readers will recall that the fulcrum of the judgment of the Supreme Court in Vodafone was that a controlling interest is not a capital asset and that section 9 of the Act is not a “look-through” provision. Indeed, in ¶69 of the judgment, the Chief Justice records that the Revenue’s argument in Vodafone was that the word “through” means “in consequence of”, which was rejected. The proposed amendments to sections 9, 2(14) and 2(47) are an attempt to make such transactions taxable. All three amendments are proposed to be made applicable with retrospective effect from 1 April, 1962.
We will discuss these and other proposals in more detail in subsequent posts.

3 comments:

vswami said...

This write-up necessarily requires one going back and examining the highlighted proposed amendments in the light of /having regard to what even otherwise was clearly to be the long intended attempt. The reference is to the connected proposed provisions in the DTC. If nothing else, true to his words and proclaimed conviction, what the FM is seen to have done is to advance the coming into force of the selfsame proposed provisions to be brought into being on enactment of the DTC; more so, in the self-same unmistakably clumsy language, thereby keeping intact, as ever before, the inherent potentials and abundant scope for perennial litigation, though at the peoples’/taxpayers’ cost.
No need to be surprised, unpleasantly or otherwise, much less to be agitated about or shocked.
In a nut shell, the FM has merely chosen, - in his wisdom (one cannot daresay or commit by ascribing / attributing it to his seniority in the political arena, if not to his age),- to stick to and faithfully follow /go by the ‘beaten track’, ‘come what may’.
Of all, what is noteworthy is that, he has thereby reaffirmed, for the n’th time, in no mistakable terms, the historically obtaining common belief in the political circles , not to speak of the officialdom in the backdrop; that is, that the legislature is ‘supreme’, has the prerogative to rewrite any enactment at any point in time, that too with retroactivity, with no regard or respect to what is the consistently held ’ judicial’ view on any given point OR what the principles of natural justice have to dictate. No wonder, the wisdom of the judiciary itself, once upon a time / conceptually respected as the very backbone of any democracy, has come to be increasingly ridiculed/ shamed; not realising the disastrous consequences / demoralising effect on the entire society - ‘the people’.

>(thoughts just keyed in, with no attempt to 'edit'; realizing that, after all, it is not worthwhile the trouble)

may be contd !...

Anonymous said...

Thanks for the informative post.

Anonymous said...

WHAT IS THE EFFECT OF THIS AMENDMENT TO LONG TERM LEASE OF IMMOVABLE PROPERTY. WILL IT HAVE TAX IMPLICATIONS?