Sunday, September 12, 2010

HC (MUM):- 10 A

(2010) 35 (I) ITCL 109 (Bom-HC)

Zycus Infotech (P) Ltd. v. CIT

JUDGMENT

This appeal was admitted on 21-7-2008 to consider following substantial questions of law :

(a) Whether on the facts and in the circumstances of the case, the Tribunal was right in applying the provisions of Explanation 1 to section 10A(9) in the present case?

(b) Whether on the facts and in the circumstances of the case, Explanation 1 to section 10A(9) of the Income Tax Act, 1961 was at all applicable to the facts of the present case as the Explanation 1 to section 10A(9) has been inserted with effect from 1-4-2001 and will apply only to those entities which for the first time got entitled to exemption under section 10A of the Act with effect from 1-4-2001 and it will not apply to those entities which have become entitled to Explanation under section 10A of the Act on the date prior to 1-4-2001, as in the present case, the exemption has been available to the appellant from the assessment year 1998-99. In other words, whether the Explanation I has retrospective operation as held by the Appellate Tribunal or whether it has prospective operation as contended by the appellant?

The Facts

2. The appellant is a private limited company which has been treated as a newly established undertaking in Free Trade Zone in accounting period relevant to assessment year 1997-98 and is enjoying deduction of its profits and gains as are derived by the undertaking as provided under section 10A of the Income Tax Act, 1961 (hereinafter referred to as `the Act). There was a change in the shareholding pattern of the company which has been reproduced by the assessing officer. In the Assessment order reading as under:—

Shareholding pattern as on 31-3-1998

Name of the Shareholder
No. of shares of Rs. 10 face value
Share
holding (%)
Voting power (%)

Aatish Dedhia
100
50
50

Nanji Dedhia
100
50
50

Total number of shares issued by the company
200
100
100


Shareholding pattern as on 31-3-2001

Name of the Shareholder
No. of shares of Rs. 10 face value
Share
holding (%)
Voting power (%)

Aatish Dedhia
73,78,800
42.30
51.02

Nanji Dedhia
57,200
0.33
0.39

NRIs& Others
1,00,28,544
57.37
48.58

Total shares
1,74,64,544
100.00
100.00


3. Before the issue of new shares, Shri Aatish N. Dedhia and Shri Nanji N. Dedhia were having 100 per cent of voting power in respect of the shares held by them. After the issue of shares to NRIs, after obtaining the approval of the Reserve bank of India, the voting powers in respect of shares held by Shri Aatish Dedhia and Shri Nanji Dedhia were reduced to 51.42 per cent. The assessing officer held that the percentage of shares of the company held by shareholders in the year in which the undertaking was set up, were reduced to less than 51 per cent, i.e., 42.63 per cent (in the year under consideration) of the shares as against 100 per cent held previously by the Dedhia Group. He, as such, held that it is clearly established that the beneficial interest in the undertaking is transferred. He applied the provisions of Explanation 1 to section 10A of the Act.

4. Being aggrieved by the aforesaid order of the assessing officer, an appeal was preferred before the Commissioner (Appeals)wherein the Commissioner (Appeals) confirmed the order of the assessing officer. Consequently, an appeal came to be filed before the Income-tax Appellate Tribunal against the order of the Commissioner (Appeals) whereby, the Tribunal has concurred with the findings of the Commissioner (Appeals) and disallowed the exemption by invoking the provisions of section 10A(9) of the Income Tax Act. Aggrieved thereby, the appellate jurisdiction of this court is invoked by the appellant under section 260A of the Act for consideration of substantial question of law framed in the opening part of this judgment.

Submissions

5. Learned counsel for the appellant submits that the provisions of section 10A(9) read with Explanation 1 are not applicable to the facts of the case because shares having more than 51 per cent of voting power still continue to be held by the Dedhia Group after the issue of new shares to the NRI entities, even though the number of shares held by the Promoters are less than 51 per cent of the total shares issued by the Appellant-Company. According to learned counsel for the appellant, the Tribunal has committed a serious error in coming to the conclusion that the focus of the explanation is on the holding of the shares carrying not less than 51 per cent of the voting power and not on the holding of 51 per cent of the voting power.

6. The learned counsel for the appellant further submits that the Explanation 1 to section 10A(9) of the Act requires the original holders of shares of the appellant-company to keep control and management of the appellant-company by holding 51 per cent of the voting power irrespective of the number of shares held by them. It is thus submitted that the promoters of the appellant-Company viz. Shri Aatish Dedhia and Shri Nanji Dedhia are continuing to have 51.42 per cent of the voting power even though the number of shares held by them are 42.63 per cent of the total shares issued by the appellant-company.

7. Learned counsel for the appellant further submitted that during the previous year relevant to the assessment year 2001-02 the ownership of the beneficial interest in the appellant-company is not transferred by any means and, therefore, the appellant-company is entitled to deduction under section 10A(1) of the Act.

8. So far as question (&) referred to hereinabove is concerned, learned counsel for the appellant submits that sub-section (9) of section 10A which was inserted with effect from assessment year 2001-02 but omitted from assessment year 2004-05 would apply prospectively, i.e., the undertaking to which section 10A applies with effect from 1-4-2000. It is submitted that in sections 10A and 10B, there is a block concept for 10 years, the transfer that may forfeit relief has to be considered with reference to the last day of the previous year, when the claim for relief is made and "the last day of the year in which undertaking was set up". Learned counsel for the appellant thus submits that, it is the block concept, which holds the key to the reference to "the year of setting up", therefore, the provision will apply only for those whose block of 10 years starts with effect from 1 -4-2000 and it cannot apply to those undertakings which had commenced production before 1-4-2000. It is also submitted that section 10A has been substituted by a new section of 10A by the Finance Act, 2000 whereby sub-section (9) has been inserted for the first time with effect from 1-4-2000 and, therefore, the new section cannot impair the right already acquired prior to the introduction of section 10A(9) unless specifically stipulated.

9. In reply, the learned counsel for the revenue tried to support the impugned order and reiterated the observations made therein and prayed for dismissal of appeal with costs.

Consideration

10. Having heard rival parties, before considering the rival submissions, it is necessary to turn to Explanation 1 of section 10A(9), which provides that the promoters of the appellant company should continue to hold shares of the company carrying not less than 51 per cent of the voting power. The said Explanation reads as under:—

"Explanation 1: For the purposes of this section, in the case of a company, where on the last day of any previous year, the shares of the company carrying not less than 51 per cent of the voting power are not beneficially held by persons who held the shares of the company carrying not less than 51 per cent of the voting power on the last day of the year in which the undertaking was set up, the company shall be presumed to have transferred its ownership or the beneficial interest in the undertaking."

11.At this juncture, it would also be useful to turn to paragraph No. 15.9 of the Circular of the CBDT bearing No. 794, dated 9-8-2000, which explains the insertion of sub-section (9) and Explanation 1 thereto by the Finance Act, 2000 which reads as under :—

"15.9 Sub-section (9) provides that in case there is a transfer of ownership or the beneficial interest in the undertaking by any means, the deduction under sub-section (1) shall not be allowed to the assessee for the assessment year relevant to such previous year in which the transfer takes place and in the subsequent years. Explanation 1 further provides that in the case of a company where on the last date of any previous year the shares of the company carrying not less than 51 per cent of the voting power are not beneficially held by persons who held the shares of the company carrying not less than 51 per cent of the voting power on the last day of the year in which the undertaking was set up, the company shall be deemed to have transferred its ownership or the beneficial interest in the undertaking."

12. Having examined the aforesaid provisions of the Income Tax Act and the sweep of circular issued by the CBDT, it is necessary to take stock of the provisions of the Companies Act, 1956.

13. Section 86 of the Companies Act has been substituted by the Companies (Amendment) Act, 2000 with effect from 13-12-2000 whereby a company incorporated under the Companies Act, 1956 has been allowed to issue two kinds of shares viz., `equity shares' and `preference shares' and the equity shares can be with voting rights or with differential rights as to dividend, voting or otherwise in accordance with such rules as may be prescribed. Accordingly, Company (Issue of Shares Capital with Differential Voting Rights) Rules, 2001 have been framed, which permits the issuance of equity shares with differential voting rights. Accordingly, the appellant company has issued shares without voting rights. In the result, the original promoters, ie., Shri Aatish Dedhia and Shri Nanji Dedhia continue to hold shares of the appellant-company carrying not less than 51 per cent of the voting power. It is thus clear that during the previous year relevant to assessment year 2001-02 the ownership of the appellant company was not transferred by any means and, therefore, the appellant company is right in claiming entitlement to deduction under section 10A(7) of the Act.

14. So far as second question is concerned, one has to keep in mind the settled principle of interpretation that retrospectivity cannot be lightly inferred unless it is clearly provided for in the statute. The first proviso to section 10A implies continuity. If the intention was to deprive the existing industries or to impose a condition, which is not capable of being fulfilled in the context of transfer having already occurred prior to the statute, it would have been specifically made clear. Under these circumstances, keeping in mind the general principle that vested right cannot be divested, one cannot assume retrospectivity to a greater extent than what the section intends.

15. At this juncture, it is needless to mention that, 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 the Explanation 1, 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 1-4-2000, the date on which the law was brought in the statute.

16. In the aforesaid view of the matter and the findings recorded, both the questions stand answered in negative, le., in favour of the assessee and against die revenue. Appeal is allowed with no order as to costs.

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