Intro: Considering the present stand of the Government that the foreign capital has to be invited in infrastructural activities the decision of not to file an appeal against the judgment by the Modi Government is a right decision and it will go a long way while considering the present monetary policy of the Government.
The much halloo was raised in some quarters when the Finance Minister and the Cabinet of Narendra Modi decided not to file appeal in Supreme Court against the Vodafone judgment. Those who are unable to understand the provisions of the Income Tax Act may not be able to comprehend and understand the issues involved in the Vodafone case. In fact Income Tax Department earlier tried to rope in a transaction of Vodafone Company which has taken place outside the borders of India. The transaction was of a different nature. A non-resident company entered into contract with a non-resident company connected with Vodafone for buying the shares and the said transaction took place outside India. The Bombay High Court took the view that the on sale of shares what is transferred is a source of income and since the source of income is in India hence this amounts to an indirect transfer and the income there from is to be taxed under Section 45 of the Income Tax Act. However the Supreme Court of India in its judgment reversed the judgment of the Bombay High Court.
The then Chief justice of India SH Kapadia along with Justice Swatanter Kumar delivered common judgment and Justice KS Radha Krishnan agreeing with two other judges delivered a concurring judgment. The Supreme Court has very clearly stated that the so-called concept of ‘Look though’ is not a part of the Statute Book and the transfer of shares in a foreign company by a non-resident to non-resident does not amount to transfer on capital account in India and hence such a transaction cannot be taxable in India under Indian Income Tax Act. The Supreme Court has very clearly stated that the taxing statues are to be interpreted in a strict way and one cannot enlarge the scope of the Sections of the Income Tax Act. The share holding in Foreign Company cannot be treated as an asset situated in India and if any transaction takes place between non-Indian residents outside India the taxing law cannot be made applicable. The judgment deals with MacDowell as well as Azadi Bachao cases. The Judgment is with reasons and logic. However, the erstwhile Government was not very happy with the situation and they amended the definition of Income under Section 2(24) of the Income Tax Act, 1961.as well as provision of Section 56 (2) of Income Tax Act 1961.
Inspite of the above two amendments the Bombay High Court in a case of Vodafone India Services Pvt Ltd, reported in 368 ITR page 1, took the view that while interpreting a fiscal or taxing statues, the intent or purpose is irrelevant and the words of the taxing statue have to be interpreted strictly. In the case of taxing statutes, the provision by itself being susceptible to two or more meanings, it is not permissible to forgo the strict rules of interpretation while construing it and while interpreting the provisions of Section 2(24) the court took the view that even though the provision is inclusive income in the normal course will not include in it the receipt on account of capital unless it is so specified and in the absence of express legislation, no amount received, accrued or arising on capital account transaction can be subjected to tax as income. They however said that even though Section 56 includes income of any kind it has to be an income which is to be included and at no stretch of imagination the capital receipt can be treated as an income. It is true that the amendment referred above has been made applicable from the Assessment Year commencing as on from April 1, 2013 and the assessment which was under challenge was assessment year 2008-2009. But while considering the issue of capital subscription of Vodafone India Services Pvt Ltd., by a subsidiary of non-resident company Vodafone Teleservices (India) Holding Ltd, the court was aware that the judgment which is being delivered will have a direct impact on the incoming capital in India and in that context it is worth referring the paragraph which has been referred by the Hon’ble Court. The Court was aware that the judgment has an impact on foreign capital which is coming in India and that can be seen in the judgment itself. The issue involved was market prices of the share were higher than the actual amount which has been received by the company and hence there was an effort on the part of the department to tax the difference between the actual receipt and the prevailing market price. The court rejected the argument of the department stating that the provisions of Section 56 cannot be made applicable because the share premium amount is in the nature of a capital account and gives rise to no income.
Considering all these aspects and considering the present stand of the Government that the foreign capital has to be invited in infrastructural activities the decision of not to file an appeal against the judgment by the Modi Government is a right decision and it will go a long way while considering the present monetary policy of the Government.
Bombay High Court judgment on Vodafone is very clear and deserves to be seen from the point of view of capital flow from foreign source. In fact the approval of the earlier Government of amending section 2(24) and section 56(2) is certainly not conducive to foreign capital. In fact I have expressed on various occasions that transfer pricing chapter should be deleted from Income Tax Act. But that is a separate issue and we will deal with it at an appropriate time. One thing is certain that by deciding not to file Supreme Court appeal against the above referred judgment will demonstrate the Government policies and send a message and may help in inviting the foreign capital.
Arun Sathe (The writer is a senior Advocate and former member of National Executive Committee of BJP)