The Bombay high court, in a very significant ruling on Wednesday, dismissed telecom major Vodafone International's petition challenging the Income Tax department's show cause notice for payment of capital gains tax of around $2 billion.

The division bench of Justices S Radhakrishnan and Anand Nirgude, however, continued the earlier stay on the I-T Department's show-cause notice for further eight weeks to enable Vodafone file an appeal.

Vodafone's representative said that the company would be filing an appeal in the Supreme Court very soon.

Vodafone Holdings International, a Netherlands-based company, picked up the stake of Hutchisson in Hutchisson-Essar to form the new entity Vodafone-Essar in a $11.2 billion deal in 2006.

I-T authorities issued a notice to Vodafone Essar last year for capital gains tax to the tune of around $2 billion. Though seller of assets has to pay this tax, I-T expected Vodafone to deduct the tax before making payment to Hutch.

Vodafone's lawyer Iqbal Chhagla had argued that Vodafone is a Dutch company, Hutchisson is incorporated in Cayman Islands and Income Tax Act does not apply in such a situation. Secondly, he had argued, a share-purchase did not amount to tranfer of capital assets which could be taxed.

The I-T Department held Vodafone liable because it expected the company to deduct capital gains tax while making payment to Hutchisson.