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

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 A.Y.and is enjoying deduction of its profits and gains as are derived by the undertaking as provided u/s.10A of the Income Tax Act,1961 ("the Act" for short). There was a change in the shareholding pattern of the company which has been reproduced by the A.O. In the Assessment Order reading as under:Shareholding pattern as on 31st March, 1998Name of the Shareholder No.of shares of Shareholding VotingRs.10 face value (%) power(%)Aatish Dedhia 100 50 50Nanji Dedhia 100 50 50Total number of shares issued by the Company 200 100 100Shareholding pattern as on 31st March, 2001Name of the Shareholder No.of shares of Shareholding VotingRs.10 face value (%) power(%)Aatish Dedhia 73,78,800 42.30 51.02Nanji Dedhia 57,200 0.33 0.39NRIsOthers 1,00,28,544 57.37 48.58Total shares 1,74,64,544 100.00 100.003. Before the issue of new shares, Shri Aatish N.Dedhia and Shri Nanji N.Dedhi were having 100% 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%. 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% i.e. 42.63% (in the year under consideration) of the shares as against 100% 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 of Income Tax (Appeals) wherein the CIT(A) 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 CIT(A) whereby, the Tribunal has concurred with the findings of the CIT(A) and disallowed the exemption by invoking the provisions of Section 10A(9) of the I.T.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.

Court's reasoning:
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.