INTRODUCTION

Last year, Vodafone won an arbitration case against the Indian Government of amount worth Rs. 20,000 crores. There was this company Hutch. Vodafone in 2007 bought Hutch. There is a particular tax levied on the capital gain. Vodafone bought Hutch. Hutch got capital gain. Here Vodafone made payment to Hutch.

Legally, Vodafone if is making payment to Hutch; Vodafone will have to hold its capital gain and pay rest to Hutch. Now here the capital gain tax; which was supposed to be paid to Government was Rs. 22,100 Crore; which was not put on hold.

This matter went to the Permanent Court of Arbitration. It held that the taxation put here is wrongful; as there was breach of the guarantee of fair and equitable treatment to the Vodafone.

Background

In May 2007, Vodafone had bought a 67% stake in Hutch for 11 billion dollars. Here Hutch is gaining capital gain. Here instead of Hutch; Vodafone is supposed to pay the tax.

Vodafone contended that, Income Tax Act has no such provisions; and we are not liable to make the payment. Vodafone went to Bombay High Court; however, Bombay High Court ruled in the favour of Income Tax Department. Vodafone challenged it in the Supreme Court.

Supreme Court overruled it and held that Vodafone Group’s interpretation of IT Act, is correct. This ruling was passed in the year 2012. The then finance minister, Pranab Mukherjee, circumvented the Supreme Court’s ruling.

As Government was unhappy with the decision, it decided to amend the Finance Act retrospectively.  There was global backlash upon this decision. After much criticism, Government decided to proceed to amicably settle the dispute. It didn’t go well.

There was an investment treaty between Netherland and India. (Bilateral Investment Treaty – hereinafter referred as Treaty) in the year 1995. Vodafone invoked Clause 9 of the Treaty. This treaty sought to protect the interest of investors. This Court accordingly go to Permanent Court of Arbitration.

The Arbitration Tribunal decided that the retrospective change in the tax law is wrongful. Court also directed India to reimburse a sum of Rs. 40.3 Crore to Vodafone. Afterward, there seems to have a very limited scope now; to pursue the matter anymore.

The new notification

In order to settle the past disputes with the Vodafone, The Central Board of Direct Taxes on 13^th October notified “Relaxation of Validation (Section 119 of the Finance Act, 2012) Rules, 2021”. It prescribed the forms and conditions for the declaration; that has to be filed by the company if they decided to settle the case.

Government first of all brought law to scrap the taxes; which was demanded from the Vodafone. Now Government came up with this Rule to settle the dispute. Government clarified, that if any sum was collected as tax before under the 2012 amended IT Law; it will be refunded without any interest. Company also needs to withdraw all pending legal proceedings; in order to claim such benefit.

After this notification, Vodafone will have 45 days to approach the Government for the settlement.

Author’s Remarks

Article 51(c) of the Constitution seeks to respect the international treaties. The treaty abovementioned; became the major cause for it to go to international forum. The same could not again be challenged before the Supreme Court; as Article 131 of the Constitution, which clearly describe the Jurisdiction of Supreme Court put restraints here.

It clearly describes that if any dispute arises out of treaty, the Court will not have jurisdiction for the same. For the same reason, the scope of further dispute resolution became bleak. Respecting the DPSPs of Constitution and considering the restrictive provisions in the Constitution; Government had no other means; except to adhere to the Tribunal’s award.

Here, to minimize the damages, this rule was brought up. It will now be up to the company to decide on the settlement. If company decides to proceed with the dispute, the Government may have to remit the cost, to the Vodafone.

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In the further hearing the Assessing Officer also contended that there was error of law and facts made by the CIT(A) when they reversed the Assessing Officer’s action of adding the unaccounted expenditure and income. All the statements of the Assessing Officer, Directors, Assessees, and other persons were recorded accordingly. The Cit(A) review shows that all the twin additionals of unrevealed spending and unrevealed revenue (supra), which are contested in the case of the M /s. VNR Infrastructure Limited Assessee’s firm, have been removed for the sole reason that they have been evaluated properly.

After listening to all the contentions, the tribunal held that the CIT(A) has correctly withdrawn such twin additions in the hands of the assessee/individual, as its M/s. VNR Infrastructure Limited carrying on the market in its own name is responsible for the corresponded unknown and unacknowledged revenues. The ITAT made it clear that the revenue did not even show the fact that the profits itself exceeded the business evaluation.

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After the verification of the document and reports, it was determined that there are excess and unaccounted stock of raw materials in the factory premises. Due to this, the appellants were given a show cause notice which proposed the seizure of the raw materials to be confiscated with the imposition of penalty. On this, the appellant has urged that the accounts for the excess raw material was yet to be recorded and there was no such allegation that the records were not maintained by the appellant for a long time. It was also submitted that there was no evidence which reiterated that the impugned allegations of clandestine removal as the excess goods present on the factory premises were not for the production of more than one day. Therefore, the non-entry of that day’s production record cannot be a reason to impose penalty.

Considering all the arguments and submissions the court held that it is apparent from the records that the appellant requested for the opportunity of cross-examining the witnesses the said opportunity has been denied cross-examination is the basic rule of ensuring fair trial the denial thereof in the case which lacks any cogent evidence adversely affects the Department. Department has not brought any such evidence which may prove their allegations. In the absence thereof, however, in view of the acknowledgment that the notice shortage is just of one-day production even if recording as required under Rule 10 is missing, but the same does not warrant the application of Rule 25 (1) (b) of Central Excise Rules, 2002.

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Section 54 of Income Tax Act: Exemption for Capital Gains

Many homeowners must sell their homes for a variety of reasons, including relocating to a new area, changing jobs, retiring, and so on. According to section 54 of the Income Tax Act, if a seller of a residential property purchase or constructs another residential property with that money, he or she is entitled to capital gains tax benefits.

Thus, under Section 54 of the Income Tax Act, an assessee is excluded from capital gains when he or she sells a residential property and buys or builds another residential property.[i] Since an individual needed to relocate for a variety of reasons, he sold his old home and used the money to buy a new one.

The seller’s goal, in this case, was not to make money by selling the old house but to find some other suitable home. It would be a disadvantage for the seller if he were to pay income tax on capital gains resulting from the selling of the old building. Section 54 provides relief from such a hardship. It provides tax exemption to a taxpayer who sells his primary residence and buys another primary residence with the proceeds of the sale.[ii]

Moreover exempts persons and Hindu Undivided Families (HUF) from paying tax on long-term capital gains resulting from the sale of a residential property if certain conditions are met. The section was created to alleviate the rigours of tax liability under Section 45 and to promote residential property investment.[iii]

A residential house selling is a capital asset sale, and the benefit is taxed as a capital gain. Property of any kind, movable or immovable, tangible or intangible, owned by the assessee for any reason is included in the scope of a capital asset under section 2(14) of the Income Tax Act. Assets are divided into two categories for capital gains purposes under the income tax act, based on how long they have been held:[iv]

• Short Term Capital Asset: A short-term capital asset is owned by a person for less than 36 months. From FY 2017-18 onwards, the 36-month criteria for immovable assets such as land, buildings, and houses have been reduced to 24 months.
• Long Term Capital Asset: Long-term capital assets are those that have been retained for more than 36 months. Movable property, such as jewellery and mutual funds, is not eligible for the limited duration of 24 months. These movable properties would be listed as a long-term capital asset if kept for more than 36 months, as previously stated.[v]

In the case of CIT v. Ananda Basappa,[vi] it was decided that the phrase “a residential house” should not be interpreted as referring to a single number. The assessee is entitled to a deduction under section 54 because he bought two residential flats that are next to each other and the contractor combined them into one unit.

The conditions under section 54 are:

1. Asset should be a long term capital asset.
2. A Residential House is a commodity that was sold. The income from such a house must be taxed as House Property Income.
3. A residential house should be purchased by the purchaser either one year before or two years after the date of sale or move. If the seller is building a home, he or she has an extra three years from the date of sale/transfer to complete the project. If the compulsory acquisition is required, the acquisition or construction period will be determined by the court.
4. India should be the location of the new residential building. The seller cannot seek the exemption if he or she buys or sells a home in another country.

The conditions mentioned above are cumulative. As a result, even though one of the conditions is not met, the seller is not eligible for the Section 54 exemption.

The Finance Act of 2019 amended Section 54 with effect from Assessment Year 2020-21 to expand the value of exemption in respect of investments made in two residential house properties. If the amount of long-term capital gains does not exceed Rs.2 crores, an exemption would be applicable for investments made by way of acquisition or development in two residential house properties.

Amount of Capital Gain Exempted under Section 54

The lower of the two is allowed as an exemption sum for a taxpayer under Section 54 of the Income Tax Act:

• Amount of capital gains on transfer of residential property or
• An investment made for building or buying a new residential property.

The remaining sum (if any) would be taxed in accordance with the income tax act.[vii]

In the case of I.T.O. v P.C.Rama Krishna,[viii] the assessee purchased two flats in the same house, one on the ground floor and the other on the third floor. Since the two flats were in the same house, it was agreed that the assessee could seek benefits under section 54.

In the case of Prem Prakash Bhutani v. ACIT,[ix] a capital gains deduction was permitted where the assessee purchased three flats in the same house. It was decided that the residential house must be a structure, and that section 54 does not require the structure to be built in a particular way.

In the case of Jt. CIT v. S.K.Jasani,[x] by installing an internal staircase, the assessee was able to turn two flats on separate floors into a residential unit. The exception under section 54 was allowed because the proceeds of the transfer were invested in the purchase of two flats within a short period of time. As a result, two flats were deemed to fall under the definition of “a residential building.”

Deductions under section 54 were permitted in Vyas (K.G.) v ITO[xi] when the assessee bought four flats on separate floors in the same house.

The exception under section 54 cannot be asserted if the assessee purchased seven houses in a row by seven different purchasing agreements. In the case of Krishnagopal Nagpal v. DCIT,[xii] the court reached this conclusion. The logic was that each row house could be used as a single unit independent of the others. As a result, a deduction can be provided for the purchase of one residential home.

Several self-occupied dwelling units that were contiguous and located in the same compound and within the common boundary and had unity of structure should be considered as one residential home, according to the decision in Shiv Narain Chaudhari v. CWT.[xiii]

In Shri Humayun S. Rangila v. ITO,[xiv] the assessee sold two flats and bought two new flats with the proceeds. The exemptions would apply to any number of residential houses as long as other section 54 requirements are met, it was decided. The selling of any number of residential properties will be exempted as long as there are corresponding investments. The total capital gain is impossible to quantify. The deduction must be determined for each combination of sale and expenditure that benefits the assessee the most. In Rajesh Keshav Pillai v. ITO,[xv] the assessee sold two flats and used the capital gain from the sale to buy two more flats. The exception can only be sought on a one-to-one basis when more than one house is sold and purchased, and each package of

[i] Section 54 of the Income Tax Act: Capital Gains Exemption, https://tax2win.in/guide/section-54-of-income-tax-act

[ii] Section 54 Exemption for Capital Gains Arising on Transfer of Residential House Property, Income Tax Department, https://incometaxindia.gov.in/tutorials/16.%20exemption%20under%2054.pdf

[iii] Transfer of Residential Property: Capital Gains and Exemptions under Ss. 54 & 54F, http://saprlaw.com/taxblog/s54.pdf

[iv] Section 54 of Income Tax Act – Capital Gains Exemption, https://cleartax.in/s/section-54-capital-gains-exemption#:~:text=Under%20Section%2054%20the%20IncomeTax,or%20construction%20of%20residential%20property.&text=The%20seller%20cannot%20buy%20or,abroad%20and%20claim%20the%20exemption.

[v] Ritesh Sonavane, What is a Capital Asset? And What are Long Term and Short Term Capital Assets, https://blog.kohinoorpune.com/what-is-a-capital-asset-and-what-are-long-term-and-short-term-capital-assets

[vi] (2009) 223 CTR (Kar) 186.

[vii] Supra Note 1.

[viii] (2007)107 TTJ (Chennai) 351.

[ix] 110 TTJ (Del) 440 ( 2007).

[x] Reported in BCAJ, August, 2005

[xi] 16 ITD 195 (Bom.)(1986).

[xii] (2004) 82 TTJ (Pune) 481.

[xiii] (1977) 108 ITR 104.

[xiv] ITA No.1239/M/2010 Mumbai.

[xv] 7Taxmann 11 (Mum) (2010)

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The appeal to the Commissioner of Income Tax against this decision was made by Salve which further rejected. Further, Salve approached the Income Tax Appellate Tribunal. He stated that he has been taking matters in London and Singapore to create his name and develop contacts abroad, he started focusing on his international practice. He further submitted that his juniors, who have been helping him in preparing the cases involving international matter, are his juniors and he wanted to help them to study in Oxford.

Therefore, the decision to fund the students was a business decision to support the assessee in his profession as a lawyer. The ITAT, on hearing the arguments, allowed the expenses as expenditure wholly and exclusively for the purposes of the business and disallowed the claim of the department that the expenditure was in the nature of capital expenditure under  Section 37(1) of the IT Act, 1961.

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Real estate industry being one of the most dominant industries in India and taxation being the most important aspect of our country, Laws regulating these are prominently emerging today. Identifying the legal scope or the legal career opportunities in these fields, the Centre for Real estate and Taxation has been set up at SLS Hyderabad. CRAT is a forum for research and advocacy on Real Estate and Taxation laws. It aims towards increasing awareness among people about the laws on Real Estate and Taxation and the updated regulations of the same. The Centre also aims to provide a platform to the budding lawyers to enhance their skills in this field and get a clearer picture of career options available in this particular area. CRAT shall ensure optimum use of the resources and provide the ultimate benefit to members, students and the college as well.

About the Webinar

CRAT is planning to organize a webinar on the topic “Aspects related to tax Avoidance”.

The webinar will cover the following topics:

1. Meaning of the concept

2. The topic from the point of view of the taxpayers and income tax department.

3.Impact of tax avoidance

4. The need to draw a line between tax avoidance and tax evasion in the Indian tax system.

Speaker

Reward

• e- certificates will be given to all the participants 

How to Register?

• Registration link: https://forms.gle/VHHhWCb45CEwDGkQA

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