Free Trade Zone : Deduction u/s.10A of Income-tax Act, 1961 : A.Y. 2001-02 : Explanation 1 to S. 10A(9) operative from 1-4-2001 is not retrospective : Assessee treated as newly established undertaking in free trade zone since A.Y. 1997-98 : Explanation 1

[Zycus Infotech (P) Ltd. v. CIT; 191 Taxman 13 (Bom.)]

The assessee-company had been treated as a newly established
undertaking in the free trade zone in the A.Y. 1997-98 and was enjoying
deduction of its profits and gains u/s.10A since then. On 31-3-1998, the two
promoters of the company, viz., ‘A’ and ‘N’ were having 100% of voting power in
respect of shares held by them. During the accounting year ending on 31-3-2001,
the assessee-company issued new shares to NRIs, as a result of which
shareholding of promoters reduced to 42.63% and voting power in respect of
shares held by them was reduced to 51.42%. The Assessing Officer held that the
percentage of shares of the company held by the promoters was reduced to less
than 51% in the year under consideration and, as such, it was clearly
established that the beneficial interest in the undertaking was transferred. He,
therefore, applied the provisions of the Explanation 1 to S. 10A(9) and denied
deduction u/s.10A to the assessee for the A.Y. 2001-02. The order of the
Assessing Officer was confirmed by the Commissioner (Appeals) as well as by the
Tribunal.

The Bombay High Court allowed the appeal filed by the
assessee and held as under :

“(i) The Explanation 1 to S. 10A(9) provides that the
promoters of the assessee-company should continue to hold shares of the
company, carrying not less than 51% of the voting power.

(ii) In the instant case, the assessee-company had issued
shares without voting rights. As a result, original promoters, i.e., ‘A’ and
‘N’ continued to hold shares of the company carrying not less than 51% of the
voting power. It was, thus, clear that during the previous year relevant to
the A.Y. 2001-02, the ownership of the assessee-company was not transferred by
any means and, therefore, the assessee-company was right in claiming
entitlement to deduction u/s.10A(9).

(iii) So far as retrospectivity of provision 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 S. 10A implies continuity. If the
intention is 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.

(iv) In the Explanation 1 to S. 10A(9), present tense has
been 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 were setting up the
undertaking after the new provision, so that in case of others, the date had
to be understood at best, as on 1-4-2001, the date on which the law was
brought in the statute.”