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.