Case: Zycus Infotech Private Limited Vs. Commissioner of Income Tax

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 w.e.f. 1st April, 2000 and it cannot apply to those undertakings which had commenced production before 1st April, 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 w.e.f. 1st April, 2000 and therefore, the new section cannot impair the right already acquired prior to the introduction of section 10(A)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.CONSIDERATION10. 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% of the voting power. The said explanation reads as under:"Explanation 1 : For the purpose 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% of the voting power are not beneficially held by persons who held the shares of the company carrying not less than 51% 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 9th August, 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 A.Y. 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% of the voting power are not beneficially held by persons who held the shares of the company carrying not less than 51% 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 I.T.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 w.e.f. 13th December, 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 i.e. Shri Atish Dedhia and Shri Nanji Dedhia cotninue to hold shares of the appellant company carrying not less than 51% of the voting power. It is thus clear that during the previous year relevant to A.Y.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(1) 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 1st April, 2000, the date on which the law was brought in the statute.

Decision (1 = appeal accepted, 0 = rejected): 1

Explanation:
1[ds]12. Having examined the aforesaid provisions of the I.T.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 w.e.f. 13th December, 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 i.e. Shri Atish Dedhia and Shri Nanji Dedhia cotninue to hold shares of the appellant company carrying not less than 51% of the voting power. It is thus clear that during the previous year relevant tothe 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(1) 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 1st April, 2000, the date on which the law was brought in the statute.