A new look at capital gains

Published : Apr 20, 2012 00:00 IST

The Vodafone office in Mumbai. The Finance Bill, 2012, proposed explanatory amendments to the Income Tax Act, 1961, asserting thatcontrolling interest falls under the definition of capital assets.-PAUL NORONHA

The Vodafone office in Mumbai. The Finance Bill, 2012, proposed explanatory amendments to the Income Tax Act, 1961, asserting thatcontrolling interest falls under the definition of capital assets.-PAUL NORONHA

On March 20, a three-judge Bench of the Supreme Court comprising the Chief Justice of India, S.H. Kapadia, and Justices K.S. Radhakrishnan and Swatanter Kumar dismissed the Central government's review petititon on the court's January 20 judgment in the Vodafone case ( Frontline, March 23).

In a brief order, the Bench said it had studied the petition carefully but found no merit in it. It did not state any reasons.

In its January 20 judgment the court held that the Income Tax Department had no jurisdiction to impose capital gains tax of about Rs.11,000 crore on the overseas transaction between Vodafone International Holdings and the Hutchison Group although it had to do with the transfer of the latter's assets in India.

The review petition raised a number of issues that lacked clarity. The court followed a predictable pattern while deciding the case. Review petitions are considered in the judges' chambers in the absence of litigants or their lawyers and are mostly dismissed without stating any reason. No one expected the same Bench that delivered the judgment on January 20 to undergo a change of heart within two months and decide the review petition in favour of the government.

But the dismissal of the petition appears to have left the government with no choice but to amend the law retrospectively so as to undo the effects of the January 20 judgment.

The Supreme Court had held that the transfer of a controlling interest in India did not imply transfer of capital assets in India.

The Finance Bill, 2012, proposed explanatory amendments to the Income Tax Act, 1961, asserting that controlling interest falls under the definition of capital assets; thereby signalling intent to tax Vodafone type cross-border deals. Clause 4 of the Bill seeks to amend Section 9 of the Income Tax Act by adding an explanation as follows:

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 or interest derives directly or indirectly, its value substantially from the assets located in India.

The Bill made it clear that the amendments would take effect retrospectively from April 1, 1962. As per Clause 113 of the Finance Bill, the amendment will operate notwithstanding anything contained in any judgment, decree or order of any court or tribunal or any authority.

A spokesperson of the Finance Ministry told the media that the amendment proposed was only clarificatory in nature and, therefore, only reiterates what was already part of the Act. However, critics read the proposed amendment as an effort to give a fresh lease of life to the Revenue Department's notice to Vodafone to pay the capital gains tax over its deal with Hutch. Observers say that once the Finance Bill is enacted, the Revenue Department will be well within its rights to pursue its tax demand from Vodafone, apart from reopening similar transactions involving other companies. The department expects a revenue collection of over Rs.40,000 crore by demanding tax afresh from these transactions.

Meanwhile, the department complied with the January 20 judgment of the Supreme Court by refunding Rs.2,500 crore with interest to Vodafone. Vodafone had deposited the amount with the court's registry in 2010, and the court had given the department liberty to withdraw the amount from the registry with an undertaking that it would refund the amount if the case went against it. The department has also returned to Vodafone the bank guarantee for around Rs.8,500 crore, deposited by it.

Observers expect a fresh round of legal battle between the government and the offshore companies that benefited from tax avoidance once the Finance Bill's retrospective amendments are enacted.

V. Venkatesan
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