The Supreme Court has done India proud by the landmark Vodafone decision. Despite the huge tax involved, the court did not hesitate to rightly reject the Income-Tax Department's claim that Vodafone should have deducted tax at source while purchasing shares of the Cayman Island-based Hutch company.
The claim against Vodafone should not have been made in the first place.
It has been repeatedly ruled that purchase of shares, even if it results in acquiring controlling interest, will not amount to purchasing assets of a company.
In 1985, Manu Chabbria acquired controlling interest in Shaw Wallace by acquiring 38.7 per cent shares in a Hong Kong company.
The Enforcement Directorate pleaded that acquiring shares in the Hong Kong company would amount to acquiring immovable and movable assets in India but this was rejected by the Delhi High Court in 1994.
It held that acquiring 38.7 per cent shares did not result in acquisition of 38.7 per cent of the undertaking. Even earlier, in 1955, the Supreme Court had held that a shareholder acquired no right or interest in the assets of a company.
The revenue has a regrettable track record of repeatedly amending the law retrospectively to overturn every adverse ruling. In no other country is the Department so unfair and petulant. The Department has never gracefully accepted any adverse verdict.
irresistible temptation
In this background, there is now an irresistible temptation to amend the Income-Tax Act retrospectively and nullify the ruling of the Supreme Court. In fact, in 2008, the Department had retrospectively amended Section 201 from 2002 only to justify the notices to Vodafone.
Nothing will be more disastrous and counter productive than an attempt to overturn the recent judgment.
The incalculable goodwill that has been earned by the Supreme Court will be lost.
India is now seen as a country where the rule of law prevails and where legal principles matter more than the tax involved.
The Government would do well to realise that direct and indirect taxes that can be generated by this ruling will far outweigh the amount that it is now called upon to refund.
Indeed, it will also generate far more respect for the Department if it graciously accepts this judgment as representing the correct legal principle. If any amendment is still made in the 2012 Budget, it should be made prospectively.
(The author is a senior advocate of the Madras High Court.)