Income Tax Act Section 9(1)(i) Explanations 6 and 7 have retrospective effect from 1962, clarifying overseas share taxation rules

Delhi HC held that Explanations 6 and 7 to Section 9(1)(i) of the Income Tax Act, inserted by Finance Act 2015, are clarificatory and curative in nature, thus having retrospective effect from 01.04.1962. The court ruled these explanations must be read with Explanation 5 to provide legislative guidance on vague expressions like "share/interest" and "substantially." The HC determined that gains from overseas company shares deriving less than 50% value from Indian assets are not taxable under Section 9(1)(i), following OECD Model Tax Convention principles. The Tribunal's order was upheld.

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Issues Involved:
1. Whether Explanations 6 and 7 appended to Section 9(1)(i) of the Income Tax Act, 1961, inserted by the Finance Act 2015, can operate retrospectively.
2. Whether Explanations 6 and 7 are clarificatory or amendatory.
3. The applicability of the mischief rule and legislative history in interpreting Explanations 6 and 7.

Summary:

Issue 1: Retrospective Operation of Explanations 6 and 7
The core issue is whether Explanations 6 and 7, added to Section 9(1)(i) of the Income Tax Act, 1961 by the Finance Act 2015, should be applied retrospectively. The Tribunal held that these Explanations operate retrospectively, applying the mischief rule and considering the legislative history behind their insertion. The Tribunal noted that Explanations 4 and 5, introduced by the Finance Act 2012, were given retrospective effect from 01.04.1962.

Issue 2: Clarificatory or Amendatory Nature of Explanations 6 and 7
The Tribunal and the High Court examined whether Explanations 6 and 7 are clarificatory or amendatory. The Tribunal concluded that these Explanations are clarificatory, aimed at addressing the ambiguity in Explanation 5, which was introduced by the Finance Act 2012. The High Court agreed, stating that Explanations 6 and 7 should be read in conjunction with Explanation 5, which operates from 01.04.1962, making them clarificatory and curative.

Issue 3: Mischief Rule and Legislative History
The High Court emphasized the legislative intent and the mischief rule in interpreting Explanations 6 and 7. It noted that the Shome Committee's recommendations and the Finance Minister's speech indicated that the amendments were intended to clarify and cure the unintended consequences of Explanation 5. The Court referred to the legislative history and the need to avoid undue hardship to small investors, concluding that the amendments were curative and should be applied retrospectively.

Conclusion:
The High Court upheld the Tribunal's decision, ruling that Explanations 6 and 7 are clarificatory and curative, and therefore, should operate retrospectively. The appeal by the revenue was dismissed, with the Court finding no substantial question of law for consideration.

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