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Shri Analjit Singh Versus DCIT, Circle-16 (2) , Delhi

2017 (12) TMI 306 - ITAT DELHI

Determination of sale value of shares - accrual of sale consideration - deeming fiction of Section 50CA - Held that:- In view of the finding given above, following conclusions are drawn on the issues/questions we have framed for the purpose of our adjudication:- - * Firstly,the sale value of SBPL as shown by the assessee is not in consonance with the contractual obligations entered by the parties under various Framework Agreements wherein it has been repeatedly envisaged that the value of SB .....

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in exercise of call/put option, for which transfer price of the shares was determinable on FMV of the share value of VIL. What has been accrued to the assessee is the price of the shares which was to be determined as per the mechanism provided in the Framework Agreements, which stipulated FMV of VIL. - * Thirdly, section 50D as invoked by Ld. CIT (A) would not be applicable on the facts and circumstances of the case; and if at all it could have been brought to tax in the hands of the transf .....

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and rights renouncements - not allowing the cost of interests expenditure capitalized from the acquisition of ‘right shares’ at the time of transfer - Held that:- In our opinion in case of the assessee who has subscribed to ‘right shares’ by paying the actual amount of ₹ 300 crores, then by virtue of specific provision contained in section 55(2), only amount to be allowed as cost of acquisition would be ₹ 300 crores; and no other cost, like interest expenditure incurred on loan take .....

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prior to 31.03.2014, therefore, the newly amended Act would not be applicable at all and the assessee will get the benefit of shorter period, i.e., period of less than 36 months as given in section 2(42A) read withproviso thereto as per the relevant provision existed for the A.Y. 2014-15. Thus, we hold that the AO as well as Ld.CIT(A) are not justified in law in re-characterizing/re-classifying the ‘long term capital gain’ to ‘short term capital gain’ shown by the assessee. Accordingly, the gai .....

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appeal has been filed by the assessee against the impugned order dated 07.07.2017 passed by Ld.CIT(Appeals)-6, Delhi for the quantum of assessment passed u/s 143(3) of the Income Tax Act, 1961 (in short Act ) for the AY 2014-15. In the grounds of appeal, the assessee has raised the following grounds:- 1. That the CIT(A) erred on facts and in law in upholding the action of the assessing officer in treating the gain arising from sale of unlisted shares as 'short term capital gain', instead .....

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capital asset' was only applicable to unlisted shares sold during the period 01.04.2014 to 10.07.2014, in terms of second proviso to Section 2(42A), which was inserted by the Finance (No.2) Act, 2014 with effect from 01.04.2015. 2.That the CIT(A) erred on facts and in law in re-computing the amount of capital gain arising from sale of shares of M/s Scorpio Beverages Pvt. Ltd. ('SBPL') by substituting actual sales consideration of ₹ 9,97,92,44,200 with alleged fair market value .....

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regating to ₹ 39,95,01,050, as part of the cost of acquisition/cost of improvement while calculating capital gains on sale of shares of SBPL. 3.1. That the CIT(A) erred on facts and in law in observing that there was no direct nexus between the interest bearing borrowed funds and investment in shares of SBPL. 4. That the CIT(A) erred on facts and in law in not admitting and considering the additional evidence filed by the appellant in accordance with Rule 46A of the Income Tax Rules, 1962 .....

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he period of 36 months and not 12 months as per the proviso to Section 2(42A)of the Act as was applicable during the year under consideration; * Secondly,Ld.CIT(A) has erred in law and on facts in re-computing the amount of capital gain from sale of shares of M/s Scorpio Beverages P. Ltd. (in short SBPL ) by substituting the actual sale consideration of ₹ 9,97,92,44,200/-with alleged fair market value of ₹ 2,23,34,28,50,070/- crores by adopting price per share of ₹ 142.70; and .....

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d., a company owned by assessee and his wife and later on by other entities. * MVH:MV Health Care Services Pvt.Ltd., a subsidiary of SBPL. * NDS:ND Callus Info Services Pvt.Ltd., a subsidiary of MVH. * CGP: CGP Investment Ltd.,a Mauritius based company and subsidiary /an affiliate of earlier Hutchison Group and later on Vodafone International; * 3GSPL: 3 Global Services Pvt. Ltd., affiliate of Vodafone Group * TIL:Telecom Investments India Pvt. Ltd., in which Vodafone had direct and indirect int .....

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ssue first. Both the parties have made their detailed submissionsduring the course of hearing. At the time of hearing, the Revenue has filed a petition for admission of additional evidences under Rule 29 of ITAT Rules, 1963 by bringing on record; (i)Framework Agreement of 01.03.2006; (ii) write up on the structure of erstwhile Hutchison Group and the details of its acquisition of interests pertaining to Indian Telecommunication Market; and (iii) financial statements of SBPL and its step down sub .....

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, CGP Investment Ltd. (in short CGP) which was an affiliate of Vodafone International Holdings Pvt. Ltd. (in short VIHL ) holding for a total consideration of ₹ 9,97,92,44,200/-,resultantlytheLongTerm Capital Gain of ₹ 7,82,92,66,249/- was offered to tax in accordance with the provision of Section 45 r.w.s. 48. The AO observed that the assessee had sold the shares @ 63.69 per share on the basis of his calculation which was the amount of sale consideration divided by number of shares .....

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shares of SBPL were originally issued at ₹ 10 per share in year 2006 and after acquiring the shares at that value, the assessee had sold 4,900 shares @ ₹ 10.88 lakhs per shares totaling to ₹ 533.33 crores in the FY 2009-10. Again in the F.Y. 2012-13, SBPL issued rights shares at par value of ₹ 10; and now assessee had sold all the shares (including rights shares) in March, 2014 showing the valuation of shares @ ₹ 63.65.Due to this huge variation in the price/valuat .....

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e basis of Discounted Cash Free Flow Method (DCF).Thereafter, he noticed that, while determining the share value of SBPL, the Valuer first adopted the DCF method in determining the value of VIL but later on switched to Net AssetValue method (NAV) while arriving the value of SBPL. He thus, held that theNAV method cannot be the correct basis of valuation of SBPL shares, because the value of SBPL shares have been arrived at ₹ 5.40 per share, while the valuation of VIL was ₹ 56,448.30 cr .....

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is assessment order.In sum and substance, the facts as discussed by the AO are that assessee alongwith his wife, Mrs. Neelu Analjeet Singh, held 100% of equity shares of SBPL, the entire share capital divided into 10,000 equity shares of ₹ 10 each.TheSBPLthrough its step down subsidiaries like, MV Health Care Services Pvt.Ltd. (MVH) and ND Callus Info Services Pvt.Ltd. (in short NDS ) and others downstream entities held equity shares Hutchison Essar Ltd. (HEL) which was subsequently taken .....

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all have the option to acquire the shares of SBPL from the assessee for which the assessee was entitled to call option fee in lieu of assurance to VIL and Vodafone International Holdings Pvt. Ltd. and the share of SBPL would be sold only on the consent of VIL.In the year 2009, 49% of the SBPL holding were sold to CGP India Investment Ltd., a Mauritius based company and subsidiary of Vodafone Group for sum of ₹ 533 crores in the FY 2009-10. In the F.Y. 2012-13, SBPL offered right shares whi .....

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The assessee before the AO submitted that the entire transfer price as well as the call option fee which was received by the assessee arose from the Framework agreement of 2007 and in the said agreement itself, the transfer price of the entire SBPL shares were determined at US $266.250 which was to be converted on the then prevailing exchange rate to INR and the market value of the entire share capital of HEL was taken at US $ 25 billion and incase the price of the HEL exceeds US $ 25 billion t .....

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the assessee had sold at ₹ 1241.32 crores was more than ₹ 855 crores payable as per the framework agreement. The AO, however after detailed discussion held that the assessee had indirectly held shareholding in VIL at 3.95% through chain of intermediaries from SBPL to VIL and the valuation adopted by the valuer of VIL comes out to ₹ 56448.30 crores and if the value of 3.95 % share held by the assessee is to be worked out, then the same comes to ₹ 2233.73 crores and accordi .....

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termining the value of shares at ₹ 5.40 per share is also not correct. Thus, he worked out the capital given by taking the consideration received/accrued to the assessee from the sale of shares at ₹ 2233.37 crores by taking the value per share at ₹ 142.70 and thereby worked out the Short Term Capital Gain of ₹ 2075.75 crores (which has been contested by the assessee vide Ground no. 1, that it is Long Term Capital Gain as the right shares which were sold were held for more .....

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f the Act.In impugned appellate order, Ld.CIT(A) has dealt with the various submissions made by the assessee as well as the finding of the AO, but has confirmed the said action on the ground that the AO was justified under the provisions of the law and in terms of section 50D of the Act. Apart from that there is not much improvement in the impugned order of the Ld.CIT(A) on this issue. B. Admissibility of additional evidence filed by the Revenue vide application made under Rule 29 of the ITAT Ru .....

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1st March, 2006 between Mr. Analjit Singh, Scorpio Beverages Pvt. Ltd., MV Healthcare Services Pvt. Ltd., 3 Global Services Pvt. Ltd. ( 3 GSPL ) and ND Callus Info Services Pvt. Ltd. b) A write up on the structure of Hutchison Group and the details of its acquisition of interest pertaining to the Indian telecommunications market, titled History Hutchison Group-India. c) Financial statements of Scorpio Beverages Pvt. Ltd. and its step down subsidiaries, namely, ND Callus Info Services Pvt. Ltd., .....

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ovides the basis for determination of valuation of shares which is the subject matter of the dispute. The argument put forth by the Special Counsel on these documents can be summarized in the following manner:- A) Framework Agreement of 2006:- (i) This agreement is executed amongst the assessee (AS) and the companies in which he has direct or indirect interest and 3 GSPL, a company in which HEL had indirect interest. The agreement grants call option or put option to the parties and seek to deter .....

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Framework Agreement of 2006 which forms part of additional evidence, was the first document executed by the assessee in the context of call/put options, which was never brought to the notice of the authorities below. (iv) The agreement sought to be led by the Revenue as additional evidence is the earliest of the agreements which defines the rights and obligations and provide a basis for determination of the sale consideration of shares on the exercise of the option. (v) The document goes to the .....

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n India:- (i) This document gives a historical perspective of the involvement of the assessee in telecommunication sector and the joint venture operations of the companies in which he had substantial interest with Hutch in India. (ii) Revenue seeks to refer to this document to give a historical background to the evolution of the call/put option resulting in transfer of shares. (iii) The document also explains how some part of shareholding of HEL got vested in TIL which is a step down subsidiary .....

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the value of shares of HEL and whether or not the valuation of shares done by Kotak Mahindra and relied upon by the appellant before the lower authorities and the Hon ble ITAT should account for the liabilities of the step down subsidiaries. The financials as contained in the paper book contain copies of the Balance Sheet and its corresponding schedules which give details of such liabilities. In the event the liabilities are to be taken into consideration, as urged by the appellant, the correct .....

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. Mr. Srivastava further submitted that the Framework Agreement of 2006 and the history of Hutchison Group of India forms part of the record of Vodafone International Holdings which has been subject matter of dispute before the Hon ble Supreme Court in the case of Vodafone International Holdings BV vs. UOI CA 733/2012 and the documents at Sl. No.3 has been downloaded from the website of MCA as filed by the respective companies which is in the public domain. He emphasized that though these docume .....

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ents needs to be admitted. He further pointed out that Framework Agreement of 2006 , completes the chain of different framework agreements entered into by the assessee in relation to call/put option, because all the agreements entered subsequently flow from the Framework Agreement of 2006 only, which is the evident from the fact that the subscription of share capital of HEL, the loan financing, the call/ put option and the stipulation of the transfer price of the shares on the exercise of option .....

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ements. In support of the admissibility of additional evidence by the revenue, he strongly referred and relied upon the judgment of Special Bench of the Tribunal in the case of L.G. Electronics Pvt. Ltd. (ITA No.510/Del/2011), wherein the Special Bench after referring to catena of decisions held that the additional evidence produced by the Revenue should be entertained provided opportunity is given to the opposite party to controvert the additional evidence. In this case also, the additional doc .....

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se documents. Lastly, he prayed that when the question of substantial justice involved, all procedural and technical aspects must yield in the interests of justice. 12. Vehemently, opposing the filing of such additional evidence, Mr. Ajay Vohra had filed detailed rejoinder in writing which for the sake of ready reference are reproduced hereunder:- At the outset, before dealing with specific objections qua admission of each of the aforesaid additional evidences submitted by the Revenue, it may be .....

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ssessing officer is not empowered to substitute the actual declared sale consideration with any hypothetical, artificial consideration/fair market value of the capital asset subject of transfer, for computing capital gains under the said section. In view of the aforesaid legal position, the entire discussion on justifying/computing the fair market value of the shares is purely irrelevant and academic. In that view of the matter, the impugned additional evidences furnished by the Revenue needs to .....

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submit that such additional evidences must be relevant to and confined to the case set up by the assessing officer. In other words, the additional evidence can be placed on record by the respondent Revenue, admitted with the leave of Hon ble Tribunal, provided the same are relevant to the controversy at hand and do not change the complexion of the case / case set up by the AO. [Refer: Motiram v. CIT: 34 ITR 646 (SC); CIT v. Babulal Nim: 47 ITR 864 (MP)] Viewed in the said overall broad conspect .....

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ellant. (The detailed terms and conditions of the said agreement are discussed in detail infra.) The aforesaid agreement has been sought to be produced as additional evidence by the Revenue to draw analogy from the methodology for determining the sale consideration for shares on exercise of certain options outlined under the said agreement, with the method for determination of sale consideration agreed between the parties under the impugned Framework agreement dated 5.7.2007. It is further alleg .....

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f providing telecommunication services across different circles in India, prior to takeover by Vodafone International in May 2007, was held by Hutchison Group, Hong Kong with certain other Indian partners and was known as Hutchison Essar Limited, ( HEL ). • The aforesaid agreement dated 01.03.2006 was entered amongst the appellant, Scorpio [a company wholly owned by the appellant], MV Healthcare Services Private Limited, [a wholly owned subsidiary of Scorpio (hereinafter referred to as MVH .....

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.2 and Schedule I of the agreement); • Call option with GSPL to purchase equity shares of MVH from Scorpio (Refer Clause 0 of the Preamble read with Clause 4.4 of the agreement); • Put option with Scorpio to sell equity shares of MVH to GSPL (Refer Clause H of the preamble read with Clause 4.3 of the agreement). Akin to the reasons behind granting such options for sale of shares of companies belonging to the appellant under the impugned Framework agreement dated 05.07.2007, viz., trans .....

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so as to increase their investment in such company, as and when permitted by FDI regulations. It is a matter of record that the aforesaid agreement was never acted upon nor various options vested with different parties under the aforesaid agreement were exercised, in as much as neither any fresh shares were issued by NDC to GSPL nor shares of MVH were acquired by GSPL from Scorpio. Before the aforesaid agreement could have been acted upon or the various options Rested with different parties ther .....

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t dated 01.03.2006 was rescinded and fresh agreement dated 05.07.2007 was entered into between the parties ( Analjit Singh and Neelu Analjit Singh ), with inclusion of Vodafone International Holdings BV as a confirming party, on completely fresh terms and conditions agreed between the parties. Reference in this regard can be made to Clause 11.11 of the impugned agreement dated 05.07.2007 which clearly provided that on execution of the said agreement all earlier agreements between the parties wou .....

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plied by law which may be excluded by contract. In this sub-Clauses this Agreement includes all documents entered into pursuant to this Agreement. In that view of the matter, it would be appreciated that the agreement dated 01.03.2006, being entered between different set of parties, i.e., during the tenure of the operating company being held by Hutchison Group, stood rescinded and superseded by the new agreement dated 05.07.2007, which was entered into between new set of parties, with inclusion .....

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er consideration and, therefore, was neither required to be furnished by the appellant before the lower authorities nor the same needs to be admitted as evidence at this stage. It is pertinent to point out that the AO has accepted that the disinvestment of shares in Scorpio was in terms of the binding agreement dated 5.07.2007 read with the amendments thereto, in as the assessing officer accepted the: (i) initial disinvestment of 51% shares of Scorpio in the year 2009 at the proportionate consid .....

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the transaction, being subject matter of ground No.2 and 2.1, does not, therefore, call for being admitted. (b) Re:Write up on the structure of Hutchison Group in India As pointed out by the Ld. Special Counsel of the Revenue during the course of oral arguments, the captioned write up on the structure of Hutchison Group has been drawn from the written statements filed by Vodafone Group in their SLP filed before the Supreme Court in the case reported at 341 ITR 1. Even the preamble to the afores .....

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at the time of the due diligence process. ii. At places where there were gaps, enquiries were made from the HutchisonGroup. While the Hutchison Group was unwilling to provide any formal written notes, their officials did provide some information to our English lawyers, through their English lawyers, that has assisted us in drawing up a complete chronology of events. Information as to the Hutchison Group s first associates.viz. the Max Group has also been similarly derived. The Revenue seeks to .....

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impugned transaction of sale of shares and computation of fair market value thereof, it is submitted that aforesaid document does not constitute evidence that can be relied upon by the Revenue. The same, therefore, deserves to be rejected and ignored for the following reasons: In this regard, attention is invited to the meaning of the term evidence and admissible , as defined in Black s law dictionary, as follows: Evidence Something (including testimony, documents, and tangible objects) that te .....

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ources of inaccuracy and untrustworthiness, cannot be considered as legally admissible evidence. Similarly, a statement contained or recorded in any book, document or record whatever, proof of which is not admitted on other grounds, are deemed to be irrelevant for the purpose of proving the truth of the matter stated therein. In view of the above position, the aforesaid write up, which was prepared by a third party, i.e., Vodafone International Holding BV in their pleadings filed before the Supr .....

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n this regard, is placed on the decision of the Supreme Court in the case of Kishanchand Chela Ram vs. CIT 125ITR 713, wherein, the Court while allowing the appeal of the assessee observed that third party document, based on hearsay, was not a legally valid and admissible piece of evidence. The relevant observations of the Court in this regard are as: Moreover, this letter was said to have been addressed by the manager of the bank to the ITO on 18-2-1955 in relation to a remittance alleged to ha .....

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h he gathered the information conveyed by him to the ITO. The statements contained in this letter addressed by the manager of the bank to the ITO were in the nature of hearsay evidence and could notbe relied upon by the revenueauthorities. The revenue authorities could have very well called upon the manager of the bank to produce the documents and papers on the basis of which he made the statements contained in his letter and confronted the assessee with those documents and papers but instead of .....

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upon by the Revenue authorities to prove or disprove a fact in such assessment. The relevant observations of the Court are as under:- Therefore, it is very clear that Choodamani Iyer, who gave evidence in the proceedings relating to Harihara Iyer, had no opportunity to state what he had to say independently nor had he the opportunity to cross-examine Iyer. Apart from the fact that the Tribunal in this case has not considered the existence of an association of persons, from the point of view of .....

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assessee was not aware of them. Once again, we may point out that this is not a correct approach to thisobjection. A counsel may be appearing in several matters closely connected with oneanother, but when the parties sought to be are knowledge of the Counsel cannot, certainly be treated as the knowledge of the party In this case there is no dispute that Choodamani Iyer as such was not a party to any the previousproceedings. In fact, his grievance is that his family was not permitted to cross-ex .....

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d on by the Tribunal is the evidence adduced in Harihara Iyer's case.It is also contended by the learned counsel appearing for the Department that a business which was admittedly being carried on escapes without anybody being made liable to pay the tax. We are fully alive to this situation, but the question before us is whether there is legal evidence to support the finding of the Tribunal in this case. Almost all the circumstances pointed, out by the Tribunal during the proceedings of Harih .....

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ed by the sales tax department to the Income- tax Officer were not legal and admissible evidence on which the Income-tax Officer could act for imposing extra burden of income-tax on the assessee. Relevant observations of the Court are as under: It is evident from his statement that Sagar Mal did not support the entries in Uchanti Bahi and no other material was brought on the record to connect the entries the Uchanti Bahi with any transaction between the assessee-firm and M/s. Goel Iron Stores. I .....

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dian Evidence Act cannot be resorted to judge the admissibility or legality of a particular piece of evidence on which the Income-tax relies for the purpose of assessment. The Income-tax hasthe power to collect evidence from any source but it is his duty to put it to the assessee before making it the basis of his assessment....... But he has no rigid to burden the assessee with an extra amount of tax on vagueinformation given to him without himself verifying its truthfulness or reliability. Inth .....

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Officer gravely erred in relying on the entries from the Uchanti Bahi without ascertaining their correctness from any other source andacted on a mere suspicion which was not justified. For these reasons, we hold that theedgy of entries from the Uchanti Bahi supplied to the Incometax Officer by the sales tax department was not legal and admissible evidence on which the Income-taxOfficer could act far imposing extra burden of income-tax on the assessee. We are further of the opinion that the Appe .....

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ision of Gujarat High Court in the case of Dr. Devendra D. Patel : 56 taxmann.com 457 wherein the Hon ble Court held that third party evidence(s) could not be relied upon by the Revenue authorities for making addition in case of other assessee. In view of the above, considering that the written note on the structure of Hutchison Group, for the reasons stated above, does not constitute legally valid and/ or authentic evidence, the same deserves to be rejected at the threshold. (c) Re: Financial S .....

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f arriving at the value of Scorpio; b. To verify the utilization of funds procured by Scorpio on right issue of shares to the appellant and CGP. In this regard, it is respectfully submitted as under:- The Revenue has placed on record balance sheet of the various intermediate companies for several years commencing from financial year 2004-05 and going up to FY 2013-14. At the outset, it is submitted that considering the shares of Scorpio were sold by the appellant in the month of March, 2014, the .....

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irrelevant and, therefore, the request for admission thereof needs to be rejected at the threshold. That apart, since Kotak had arrived at the net asset value of the intermediaries/ step down subsidiary companies on the basis of the books of accounts of such companies as on 31.12.2013 or 28.02.2014, the aforesaid financial statements are, in any case, irrelevant. Attention in this regard is invited to the following extract from the valuation report at page 90 of the paper book: VALUATION METHODO .....

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reference shares, the same is been valued as on 28 February. 2014 as per its contractual terms. In view of the above, the financial statements of the earlier year(s) or even for the year ending 31.03.2014 will not be relevant and / or determinative of the value adopted by Kotak for such companies. Further, (while adopting the book value of assets as on 31.12.2013 or 28.02.2014, Kotak has reduced the accrued liability towards outstanding preference shares, such as, for premium payable on redempti .....

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an independent and a well reputed d carried out the valuation at the request of the purchaser, on a rational and scientific determine the minimum floor price below which shares could not have been acquired in-resident purchaser from the appellant, in terms of the applicable FDI regulations. The Assessing officer and CIT(A) did not dispute the methodology or figures adopted by Kotak using each company, i.e., all the intermediate / step down subsidiary companies and fact, the assessing officer ado .....

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any arrived at by Kotak. Any dispute to the valuation of each intermediate company, for the first time before the Tribunal would, in our respectful submission, tantamount to the Revenue making out a completely new case and / or raising a fresh plea, which as submitted above, is not permissible. As regards the other issue raised by the Revenue with regard to verifying the utilisation of funds procured by Scorpio on right issue of shares, the same, too, in our respectful submission, is completely .....

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et of various companies so as to dispute the valuation arrived at by Kotak for the various companies, which issue, as submitted earlier, has been raised without prejudice and in the alternate to the main submission, namely, no power with the assessing officer to substitute actual consideration with any other hypothetical / notional value. PRAYER For the aforesaid cumulative reasons, it is submitted that the aforesaid various additional evidenced sought to be placed by the Revenue for the first t .....

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PL and NDS. 3 GSPL is a company in which HEL had indirect interest and the said agreements grants call/put option to the parties whereby,3 GSPL or its nominee got the right to exercise the option of acquiring the shares held by the assessee in HEL through chain of subsidiaries for a transfer price set out in Schedule 2 of the said framework agreement. This was the first agreement through which not only the call and put option was to be exercised by the parties was elaborated, but it also defines .....

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ne out from the Framework agreement dated 05.07.2007 is that, though the conditions, purpose and terms remained by and large the same as stipulated in Framework Agreement of 2006, but the parties have rescinded from the earlier agreement and have decided to refer the Framework Agreement of 2007 for all the future references and subsequent agreements. However, to understand the entire historical background of the call/put options and the rights and the obligations of the parties and the concept o .....

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Rule 29 for the purpose of our adjudication and understanding all the issues involved here in this appeal. 14. Now coming to the write-up of the structure Hutchison Group in India which has been drawn from the written statement filed by the Vodafone before the Hon ble Supreme Court in the case of Vodafone International Holdings, since reported in 341 ITR 01, merely gives the prequel of the various entities as how they have been involved in the share holding pattern of Hutchison Group in India a .....

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refore, we are not taking any much cognizance of this document filed before us and, therefore, we are rejecting the said document for admission,exceptthat slight reference may be made in our order only for the purpose of giving the prequel of the events. 15. Lastly, so far as the various financial statements of intermediary companies are concerned, these documents have been filed by the Revenue only in support of the valuation of the shares which has been considered by the independent valuer Kot .....

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tements from the F.Y.s 2004-05 till 2011-12 are not relevant for the purpose of our adjudication except for the balance sheet for the F.Y. 2012-13, as the transaction of sales took place on 12th of March 2014. Accordingly, we do not find any reason to admit the financial statement for the earlier years as they are not much relevant, because even if the valuation of the shares has to be worked out, the relevant balance sheet of these intermediary companies would be for the F.Y. 2012-13 and not th .....

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f the assessee. Arguments on behalf of the assessee on this issue:- 16. Mr. Ajay Vohra, Ld. Sr. Counsel, firstof all narrated the relevant facts and the background of the case emerging from the record as submitted before the AO and Ld. CIT (A). He submitted that SBPL wasincorporated under Companies Act, 1956 on 02.02.2006 with entire share capital divided into 10,000 equity shares of ₹ 10 each, which was wholly held by the assessee along with his wife i.e. Mrs. Neelu Analjit Singh (AS). SB .....

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p sold its entire stake with respect to telecom business being carried on in India through HEL to Vodafone International Holdings BV and consequently the name of HEL was changed to VIL.Pursuant to the aforesaid change in shareholding of HEL from Hutchison to Vodafone Group, a Framework Agreement was entered on 05.07.2007 amongst the following: * Assessee and Mrs. Neelu Analjit Singh (i.e. AS); * SBPL and two subsidiaries thereof, i.e., MVH and NDC; * Vodafone international Holdings B.V. ( Vodafo .....

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Scorpio from AS. The relevant clauses of the Agreement are reproduced hereunder for the sake of ready reference: (d) In consideration of the grantof the Call Option by AS to GSPL, GSPL or an Affiliate shall pay to AS an aggregate amount of US$10.2 million per annum accruing on a daily basis (the Option Payment ). GSPL s obligation to pay AS the Option Payment as aforesaid shall be deemed to be effective from 1 May 2007. The Option Payment for the period from 1 May 2007 to 30 April 2008 be paid .....

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ffiliates by wire transfer to AS s bank account in India designated by AS in advance. 4.6 Transfer price (a) Except as stipulated by Clause 4.6(b) and Clause 4.7 and subject to the requirements of any applicable regulatory requirements, the price payable to AS for the Shares to be transferred ( 'Transfer Price ) pursuant to the Put Option or the Call Option shall be as determined in accordance with the formula set out in Schedule 1 on each exercise of the relevant option, subject to a maximu .....

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ed into Indian rupees at the prevailing exchange rate as on the completion date prescribed in the agreement i.e., 08.05.2007, to be further increased by the appropriate proportion, to be computed in the prescribed manner, if the fair market value of the entire issued share capital of VIL exceeded USD 25 billion (to be converted into Indian rupees at the prevailing exchange rate as on the completion-date i.e. 08.05.2007). The relevant portion of Schedule I of the Framework Agreement-dated 5.7.200 .....

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n the London edition of the Financial Times on the business day immediately prior to the Completion Date PLUS (ii) Where the fair market value of the entire issued share capital of HEL exceeds US$25,000,000,000, the SBP Value, converted into Rs. at the prevailing US$:Rs. Exchange rate published in the London edition of the Financial Times on the Business Day immediately prior to the Completion Date such aggregate amount being the Transfer Price. For the avoidance of doubt, the Transfer Price sha .....

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the methodology and assumptions set out in Schedule 2. For the avoidance of doubt, if the Put Option is exercised more than once, the SBP Value shall be computed each such time, with respect to the Put Shares proposed to be transferred pursuant to such exercise, based on the fair market value of the entire issued share capital of HEL as on the date of the relevant Transfer Notice. For purposes of paragraph (2)(ii) of this Schedule 1, the fair market value of the share capital of- HEL shall be ar .....

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Be such fair market value as may be determined by the London, UK office of UBS Investment Bank and if there is no such office then the Hong Kong office of UBS Investment Bank and if there is no such office then the New York City, New York USA office of UBS Investment Bank and if UBS Investment Bank declines to act then Goldman Sachs International or falling them Lehman Brothers) whose decision shall be final and, for which purpose they shall act as an expert and not as an arbitrator: 18. Mr. Voh .....

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rdingly, the transfer price for the 100% share capital of SBPL determined on the basis of exchange rate of ₹ 40.88 per USD prevailing on 08.05.2007, aggregated to ₹ 1088 crores. He pointed out that as per the exchange rate of ₹ 40.88 per USD as on 08.05.2007, the amount equivalent to USD 25 billions, aggregated to ₹ 1,02,200 crores. The option fee received has been offered and assessed to tax as revenue receipt, year after year. In the financial year 2009-10, there was ch .....

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; 1088 crores agreed under the Framework Agreement dated 05.07.2007; appellant sold 4900 shares, i.e., 49% stake in SBPL, to CGP for ₹ 533 crores (i.e., 49% of ₹ 1088 Crores). Necessary applications were filed before FIPB, for the aforesaid divestment which was approved by FIPB on 04.12.2009. Pursuant to the aforesaid approval, consideration of ₹ 533 crores was paid by CGP and 4900 shares of Scorpio were transferred by AS to CGP on 16.12.2009. He stressed upon the fact that lon .....

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g shareholding. Accordingly, AS subscribed to 19,44,99,979 shares and CGP subscribed to 18,73,52,921 shares of SBPL. Since AS and CGP subscribed to the right shares offered in full, the percentage shareholding of both the groups continued to be the same, viz., 51:49 prior to the rights issue. He submitted that it would be pertinent to mention that, out of the aforesaid 51% stake held by AS, the assessee held 41% and the remaining 10% was held by Mrs. Neelu Analjit Singh. In view of the increase .....

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on of ₹ 300 crores, on exercise of option by GSPL as and when permissible as per the FD1 regulations. In view of the terms of original Framework Agreement dated 05.07.2007 read with the Fourth Supplement thereto dated 07.08.2012, the consideration receivable by AS for 51% stake in Scorpio (represented by Original Shares and Rights Shares) aggregated to ₹ 855 crores, in the following manner: * For Original Shares: ₹ 555 crores (Rs.1088 crores - ₹ 533 crores received on 16. .....

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ated 07.08.2012, in the manner incorporated above. Accordingly, CGP filed necessary application before FIPB seeking approval for the aforesaid acquisition, wherein the proposed consideration of ₹ 1241.32 crores, was duly disclosed and thereafter approved by FIPB on 20.02.2014. Pursuant to the aforesaid approval from FIPB, AS and CGP entered into Share Purchase Agreement dated 12.03.2014, prescribing the terms and conditions for transfer of the entire 51% stake held by AS in SBPL to CGP for .....

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eunder: 2. Sale and Purchase: 2.1 Subject to the terms and conditions herein and the terms the Framework Agreement, CGP hereby undertakes to purchase 195,005,079 Shares from AS (the Sale Shares ) and AS hereby undertakes to sell to CGP the Sale Shares, free and clear from all Encumbrances, on the Closing Date for a consideration equal to the Transfer Price. 2.2 In consideration for the Sale Shares, CGP hereby agrees to pay AS an aggregate amount of ₹ 12,413,206,200/- (Rupees Twelve Billion .....

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t and Mrs. Neelu Analjit Singh was as under: • Analjit Singh: 41/51 *Rs. 1241,32,06,200 = ₹ 997,92,44,200. • Mrs. Neelu Analjit Singh: 10/5l* ₹ 1241,32,06,200 = ₹ 243,39,62,000. Accordingly, the actual sale consideration received by the assessee on sale of 15,67,68,789 equity shares of SBPL (i.e. 4,100 Original Shares and 15,67,64,689 Rights Shares) was ₹ 997,92,44,200and the long term capital gains on sale of SBPL shares amounting to ₹ 7,82,92,66,249 was .....

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he full value of consideration received or accruing as a result of transfer of the capital assets. The terms used in section 48 are the full value of consideration received or accruing , which connotes to the actual consideration received and there is no authority or power with the AO to substitute such actual consideration with a notional consideration or any fair market value. The Courts have held that the word full value of consideration received does not mean the fair market value and in sup .....

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ami Singh 256 ITR 165 (Del) • CIT V. Smt. Sushila Devi 256 ITR 179 (Del.) • CIT v. Nilofer I. Singh: 309 ITR 233 (Delhi) • CIT v. Nilofer I Singh :309 ITR 233 (Del.) • Dev Kumar Jain v. ITO : 309 ITR 240 (Del.) • Sanjay Chawla v. ITO: 89 ITD 586 (Del.) • Bigjos Stores (P) Limited v. ACIT: 106 Taxman 127 (Del.) 21. Clarifying the intention of legislature, Mr. Vohra submitted that, wherever the legislature intended to substitute the actual consideration with the fair .....

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ing section 50CA w.e.f. 01.04.2018 which provides for substitution of the actual consideration with the fair market value in the case of transfer of unlisted shares of company from 01.04.2018. There is no such provision by which full value of consideration for transfer of unlisted /unquoted shares can be enhanced by taking the fair market value.This provision cannot be made retrospective as this is a substantial provision brought in the statute from a particular date i.e., from A.Y. 2018-19. 22. .....

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ongly referred and relied upon the recent judgment of Hon ble Supreme Court in the case of CIT vs. Balbir Singh Maini (CA No.15619/2017) [SLP No.35248/2015, judgment and order dated 04.10.2017]. The relevant paragraph of the said judgment stressed upon by him reads as under:- 14. First of all, it is now well settled that income tax cannot be levied on hypothetical income. In CIT v. Shoorji Vallabhdas and Co. [CIT v. Shoorji Vallabhdas and Co., (1962) 46 ITR 144 (SC)] it was held as follows: (ITR .....

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s that it remains the income of the recipient, even though given up, the tax may be payable. Where, however, the income can be said not to have resulted at all, there is obviously neither accrual nor receipt of income, even though an entry to that effect might, in certain circumstances, have been made in the books of account. 15. The above passage was cited with approval in Morvi Industries Ltd. v. CIT [Morvi Industries Ltd. v. CIT, (1972) 4 SCC 451 : 1974 SCC (Tax) 140 : (1971) 82 ITR 835] in w .....

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sponding liability of the other party from whom the income becomes due to pay that amount . 17. It follows from these decisions that income accrues when it becomes due but it must also be accompanied by a corresponding liability of the other party to pay the amount. Only then can it be said that for the purposes of taxability that the income is not hypothetical and it has really accrued to the assessee. 18. Insofar as the present case is concerned, even if it is assumed that the assessee was ent .....

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hat the income from capital gain on a transaction which never materialized is, at best, a hypothetical income. It is admitted that, for want of permissions, the entire transaction of development envisaged in the JDA fell through. In point of fact, income did not result at all for the aforesaid reason. This being the case, it is clear that there is no profit or gain which arises from the transfer of a capital asset, which could be brought to tax under Section 45 read with -Section 48 of the Incom .....

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ncome Tax Act. 29. We are, therefore, of the view that the High Court was correct in its conclusion, but for the reasons stated by us hereinabove. The appeals are dismissed with no order as to costs. 23. Mr. Ajay Vohra, further submitted that if one goes as per the scheme of the Act, then capital gains is to be computed in the hands of the transferors taking into account the actual consideration received or accruing and not any hypothetical/notional consideration/ fair market value of the asset .....

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e transferor or the transferee. In order to overcome the aforesaid lacuna, sub-clauses (vii)/(viia) were inserted in section 56(2) of the Act by the Finance Act, 2009 and 2010, with effect from 01.10.2009/ 01.06.2010, respectively, to deem the difference between the fair market value of the capital asset, subject of transfer, determined on the basis of prescribed method in Rule 11U/11UA of the Rules and the actual consideration paid, therefore, as income chargeable to tax under the head income f .....

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ands of the transferor, but is taxable, in the hands of the transferee in accordance with the provisions of section 56(2)(vii)/(viia) of the Act. The scope and width of the deeming fiction enacted in sections 56(2)(vii)/(viia) has been enlarged by insertion of section 56(2)(x) in the statute by the Finance Act, 2017 w.e.f. 1.04.2017 to provide for taxation in the hands of the transferee recipient, the difference between the fair market value of the property and the consideration paid therefor. W .....

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tax the transferee on difference between the fair market value of the unquoted shares and the declared consideration in respect of shares transferred during the previous year relevant to assessment year 2018-19 and onwards. As a consequence of insertion of the above deeming provision from assessment year 2018-19, the transferor would be liable to tax under the head; (i) capital gains with respect to the difference between the declared / actual consideration received and the cost of acquisition; .....

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taxation in the hands of the transferee in terms of sections 56(2)(vii) /(viia) /(x) of the Act. Accordingly, in the absence of any provision providing the assessing officer with the power of substituting the actual consideration with the fair market value, the action of the assessing officer and upheld by the CIT(A) cannot be sustained, being contrary to law. 24. He further submitted that the assessee has computed long term capital gain on shares of SBPL by taking into account, the actual consi .....

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ase that the assessee or his wife Mrs. Neelu Analjit Singh had received anything over and above the sale consideration of ₹ 1241.32 crores as disclosed and approved by FIPB. Otherwise also, the hypothetical amount of ₹ 2233.42 crores as determined by the AO cannot be reckoned as accrued to the assessee and to demonstrate that such right vested in the assessee lies wholly to the Revenue that there was a corresponding debt owed by CGP to pay such higher amount to the assessee. The Reve .....

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t judgment of the Supreme Court in the case of CIT vs. Balbir Singh Maini & Ors. (supra), is squarely applicable to the facts of the present case in as much as; firstly, the alleged fair market value of the shares of SBPL computed by the Revenue was not agreed to be exchanged between the appellant and CGP under the terms of the agreement and, therefore, no right to receive the same vested with the appellant nor was a corresponding obligation to pay the said amount fastened on to the transfer .....

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llant for the purposes of taxing the same as capital gains under section 45 readwith section 48 of the Act. 25. The next limb of Mr. Vohra s arguments was that, the principle of consistency should have been followed by the Department, because in the present case, part of the shares of SBPL, i.e., 49% stake of the assessee in SBPL wastransferred to CGP at ₹ 533 crores being amount arrived as per the clause of lump sum consideration agreed in Schedule I of the framework agreement dated 05.07 .....

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upport of principle of consistency to be followed, he relied upon catena of judgments which are as under:- • Radhasoami Satsang vs. CIT: 193 HR 321 (SC) • CIT vs. Excel Industries Ltd.: 358 ITR 295 (SC) • DIT(E) vs. Apparel Export Promotion Council:244 ITR 734 (Del) • CIT vs. Neo Polypack (P) Ltd.: 245 ITR 492 (Del.) • CIT vs. Dalmia Promoters Developers (P) Ltd.: 281 ITR 346 (Del.) • DIT vs. Escorts Cardiac Diseases Hospital: 300 ITR 75 (Del.) • CIT vs. P. Khr .....

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f the assets. He submitted that the said section has no application in a case where transfer of capital assets is for determination/ascertained consideration duly reflected in the agreement for sale of the capital assets which is actually changed hands between the contracting parties viz., transferor or the transferee. Section 50D would be applicable in a transaction involving exchange of assets or mode or transfer where the consideration is not fixed. By way of illustrative reference, he referr .....

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rly spelt out in the Share Purchase Agreement dated 12.03.2014 and it is not a case where the full value of consideration is either not ascertainable or not determinable. He submitted that it would further be appreciated that if section 50D is to be applied for substituting actual consideration with the fair market value in any and every situation of transfer of all kinds of capital asset, then, the law would have provided for the said section to override section 48 of the Act, which is not the .....

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e.f. 01.04.2018. The very fact that section 50CA has been brought in the Statute in the case of unlisted shares, it goes to show that section 50D does not empower the Revenue authorities to substitute the declared/determined consideration agreed between the parties with the fair market value of the assets subject to transfer. Thus, he submitted that the substitution of actual sale consideration of ₹ 1241.32 crores with hypothetical consideration of ₹ 2233.42 crores is sans any author .....

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e in the assessment order is based on several factual inaccuracy, inconsistency etc. which otherwise cannot be sustained. He highlighted the following discrepancies in the order of the AO and point wise rebuttal of such observations and conclusions of the Assessing Officer in the assessment order which by and large have been confirmed by the Ld. CIT(A):- (i) Allegation of the assessing officer: The assessing officer has alleged that while 49% of the shares were sold at a value of ₹ 10.88 l .....

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scribed by AS would be sold for lumpsum consideration of ₹ 300 crores, as and when permitted by the FDI regulations. On that basis, the right shares subscribed in the year 2012 and sold in March, 2014 resulted in average realization of ₹ 15.38 per share. The original 5100 shares have been sold for ₹ 941.32 crores (Rs. 1241.32 crores - 300 crores) giving an average realization of ₹ 18,45,726.71 per share, which is much more than the price realized while selling 49% of the .....

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fair market value of shares of SBPL at ₹ 142.70 per share.On that basis, the assessing officer taking fair market value of appellant s shareholding in Scorpio at ₹ 2233.42 crores, substituted the same for declared consideration crores while computing capital gains. Rebuttal by the Assessee: The assessing officer erred in taking the indirect interest of Scorpio in VIL at 9.65% as against 8.9055% as evident from the structure chart annexed to the Chart of Date filed by the appellant. .....

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he assessing officer directly applied the indirect interest of the appellant/Scorpio in VIL to enterprise value of VIL, i.e., ₹ 56448 crores, to compute the FMV of Scorpio at ₹ 2233.36 crores, thereby ignoring the value of intermediary companies. Rebuttal by the Assessee: A. Reasons behind engagement of Kotak: As per clauses 2.1 and 2.2 of the Share Purchase Agreement dated 12.3.2014,the entire shares held by AS in Scorpio were agreed to be sold for transfer price of ₹ 1241.32 .....

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from April 5, 2013), which was applicable during the period in question, price of shares of an unlisted Indian company, transferred by resident to a non-resident, shall not be less than fair value determined by a SEBI registered Category I Merchant Banker or Chartered Accountant as per the discounted free cash flow ( DCF ) method. In order to determine whether the enterprise valuation of VIL exceeded US $ 25 billion, which would trigger payment of additional, consideration in terms of clause a(i .....

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ntly negotiated and agreed between the parties, as spelt out in clauses 2.1 and 2.2 of the Share Purchase Agreement dated 12.3.2014. The-valuation report obtained from Kotak in terms of clause 3.2 of the said Agreement was only a confirmation thatthe transfer price agreed between the parties was not below the minimum threshold in terms of the applicable Government/Foreign Exchange regulations and also to determine whether any additional consideration was payable in terms of clause a(ii)of Schedu .....

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at the consideration agreed between the parties, being more than the fair market value determined for shares of Scorpio was not violative of applicable Government regulations. B. Valuation methodology followed by Kotak: Our attention, in this regard, was drawn to the following relevant extracts of the valuation report issued by Kotak regarding the valuation methodology followed for valuing different downstream companies. Background CGP, as a shareholder of SBP, has requested Kotak Mahindra Capit .....

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ecom services across all telecom circles in India) and the value of VIL s42% equity stake in Indus. The valuation of both VIL Group and Indus has been done using the Discounted Cash Flow methodology ( DCF ) - primarily based on the information and representations received from CGP and VIL. The valuation of VIL so arrived at has been factored in while valuing each of the companies in the HoldCo Chain and SBP considering the net value of other assets and liabilities in the respective companies, to .....

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for the net value of other assets and liabilities of such company based on the books of accounts of such company as on 31 December, 2013, except that in case of any outstanding preference shares, the same has been valued as on 28 February 2014 as per its contractual terms. As per the aforesaid method, Kotak had arrived at a fair market value of shares of Scorpio by taking the value/ valuation of underlying companies including VIL. The fair market value of the main underlying operating company, i .....

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f negative net assets), as the case may be, from the fair value of VIL arrived on the basis of DCF method as pointed above.It would further be pertinent to point out that the NAV of the intermediaries/step down subsidiary companies was computed on the basis of books of account of such companies as on 31.12.2013 or 28.02.2014. Further, while adopting the book value of assets as on 31.12.2013 or 28.02.2014, Kotak reduced the accrued liability towards outstanding preference shares, such as, premium .....

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Valuation Report. On perusal of the same, he submitted that it would be seen that SBPLwas not directly holding shares in VIL, but held economic interest therein through several intermediate companies, which had independent assets and liabilities. Although, the said companies were mainly investment companies, having shareholding in subsidiary companies, such investments were financed through third party borrowings, which in our respectful submission ought to be considered while computing the val .....

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ally acceptable method and was also factored in by the parties at the time of negotiating the consideration for transfer of shares under the Framework Agreements, in the following manner:- I. The erstwhile Rule 12 relating to valuation of unquoted equity shares of an investment companies contained under the Wealth Tax Act, 1957 provided that the value of shares of an investment company shall be computed by applying the net assets value method and the value of shares held by such investment compa .....

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any; III. Schedule 2 of the Framework Agreement dated 05.07.2007, which prescribed for the method to be followed for computing the fair market value /enterprise value of the shares of HEL/VIL for the purposes of Clause (a)(ii) of Schedule 1 to check whether the said value exceeds USD 25 billion also provided that NAV of intermediary companies will need to be added and / or reduced from the enterprise value of HEL, for arriving at the fair market value of the shares of Scorpio.In that view of the .....

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tted that the said Framework Agreement has been brought on record by the Revenue to contend that the assessee should have received consideration on the basis of fair market value of HEL/VIL, without considering the value of intermediary companies and for the aforesaid conclusion, the Revenue has sought to rely upon the methodology prescribed for determination of the sale consideration agreed between the parties under the impugned framework agreement dated 01.302.006. He submitted that the relian .....

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quired to be admitted nor should be considered for adjudication or the impugned issued. VIL, i.e., the company engaged in the business of providing telecommunication services across different circles in India, prior to takeover by Vodafone International in May 2007, was held by Hutchison Group, Hong Kong with certain other Indian partners and was known as Hutchison Essar Limited, ( HEL ). Accordingly, in the aforesaid agreement, Vodafone International Holding BV was not a party, which joined as .....

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- i Analjit Singh; and ii. Scorpio Beverages Pvt. Ltd.; and iii MV Healthcare Services Pvt. Ltd.; and iv 3 Global Services Pvt. Ltd.; and v. ND Callus Info- Services Pvt. Ltd Agreement was entered between- i Analjit Singh and Neelu Analjit Singh (' AS ') and ii Scorpio Beverages Pvt. Ltd. and iii. MV. Healthcare Services Pvt. Ltd. and iv. 3 Global Services Pvt. Ltd. and v. ND Callus Info Services Pvt. Ltd. and vi.Vodafone International Holdings- BV ('Confirming Party') 2. Rights .....

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n to SBP to require GSPL to purchase equity shares of MVH. iv Clause 4.2(a): GSPL or its nominee shall have the right to subscribe for a maximum no. of shares at par value of each share.(Schedule 1- GSPL had the right to subscribe 97% of the total issued and paid up equity capital of NDC) v Clause 4.3: GSPL or its nominee could subscribe to such shareholding which would result in GSP or its nominee holding more than 50% of the issued share capital of NDC. acquisition of TII shares, AS granted GS .....

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ies, and if the parties fail to reach agreement within 30 days of the date of the Transfer Notice, then; ii. Transfer price shall be such FMV as determined in accordance with schedule 2 to the agreement. Schedule 2 For the purpose of determining Transfer Price, the following formula shall be applied: Clause 4.6: Transfer price shall be determined in accordance with formula set out in Schedule 1, subject to a maximum of an aggregate of ₹ 150 billion as reduced by the amount payable to AS as .....

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n MVH or any other company in which MVH has an interest and irrespective of the fact that SBP is not a direct shareholder in HEL. ii. Where FMV of the entire issued share capital of HEL exceeds USD 25,000,000,000 (Rs. 102200 crores converted at an exchange rate of ₹ 40.88), the SPB value; converted into INR at the prevailing exchange rate published in London Edition of Financial times on the business day immediately prior to the completion date, 29. Thus, he submitted that considering the .....

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e existing option agreements entered by the various Indian partners including the assessee with Hutchison Group were rescinded and superseded by new agreement dated 05.07.2007 entered with the Vodafone Group on fresh terms and circumstances. He drew our specific attention to clause No. 11.11 of the Framework Agreement dated 05.07.2007 which clearly provided that on acquisition of the said agreement of earlier agreements between the parties would stand superseded. Thus, the agreement dated 01.03. .....

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ent dated 5.07.2007read with the amendments thereto as also approved by FIPB from time to time, in as much as the assessing officer accepted the:- (i) initial disinvestment of 51% shares of Scorpio in the year 2009 at the proportionate consideration agreed in the agreement dated 5.7.2007; (ii) number of shares held by the appellant in Scorpio (after the initial disinvestment and pursuant to right issue in terms of the amended agreement dated 7.8.2012); and (iii) Option fee received and offered t .....

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al. 31. Without prejudice to the aforesaid arguments, Mr. Ajay Vohra submitted that even the relevant clause i.e. clause 4.6 read with Schedule II relating to determination of transfer price contained in the aforesaid agreement dated 1.3.2006, do not support the fresh plea of the respondent Revenue qua accrual of notional fair market value as the consideration for transfer of shares of SBPL for the following reasons:- a. The computation of transfer price of the shares at 0.23% of the fair market .....

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alue of the issued share capital of HEL, was to be resorted to.In that view of the matter, it would be appreciated that, even under the aforesaid agreement of 2006, the transfer price of shares was to be determined as per the mutual agreement between the parties. The said price was not to be automatically computed on the basis of the interest held by appellant in the FMV of HEL. b. Further without prejudice to the above, even applying the formula prescribed in the aforesaid agreement of 2006, i. .....

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relying upon the agreement dated 01.03.2006, which is completely irrelevant for the impugned transaction, admittedly governed by the fresh agreement dated 05.07.2007. So far as the relevant clause of transfer price under agreement dated 05.07.2007, the assessee had granted call option right to GSPL to acquire shares of Scorpio. In consideration thereof, GSPL had agreed to pay an option fee of USD 10.2 million per-annum accruing on a daily basis under clause 4.4 (d) of the Agreement. Clause 4.6 .....

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6.25 million (converted into rupees at prevailing exchange rate on the completion date i.e. 08.05.2007). Clause (a) (ii) provided for payment of additional consideration, to be computed as per the prescribed method, in the event the fair market value of the entire issued share capital HEL/VIL exceeded USD 25 billion, converted into rupees at prevailing exchange rate as on the completion date i.e. 08.05.2007. It would be pertinent to point out that, the exchange rate r a i l i n g as on 08.05.200 .....

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7; 56,448 crores, did not exceed the threshold FMV of ₹ 1,02,200 crores as stipulated in Schedule 1 of the Framework Agreement, the aforesaid clause (a)(ii) relating to computation and payment of additional consideration never became applicable. In that view of the matter, in accordance with the terms of the Framework Agreement dated 05.07.2007, AS was entitled to receive lump sum consideration of USD 266.25 million only for the entire shares of Scorpio held at that point of time, i.e., pr .....

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urth Supplement thereto dated 07.08.2012 accrued to the assessee/AS under the said agreements,which could be brought to tax as capital gains in the hands of the assessee under section 45 read withsection48oftheAct. 33. Coming to the actual consideration received as per the share purchase agreement dated 12.03.2014, Mr. Vohra submitted that although in terms of original framework agreement s was entitled to receive aggregate consideration of ₹ 855 crores (Rs.1088 crores - ₹ 533 crores .....

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for such transfer. It was always open to the parties to mutually vary/alter such original terms and conditions subsequently. Reference, in this regard, can be made section 62 of the Indian Contract Act, 1872 which permits alteration and substitution of old contract by parties with a new contract which reads as under: 62. Effect of novation, rescission, and alteration of contract. -If the parties to contract agree to substitute a new contract for it, or to rescind or alter it, the original contr .....

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eement dated 5.7.2007, viz., vesting of put/ call option and transfer of shares pursuant thereto was retained in the Share Purchase Agreement dated 12.3.2014, the execution of such an agreement was necessary in order to document the factum of transfer of shares consequent upon exercise of call option by GSPL and revision in the sale consideration payable by GSPL. It cannot, therefore, be said that the Share Purchase Agreement dated 12.3.2014 was superfluous.Without prejudice to the above, if the .....

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of Scorpio, to the detriment of the Revenue. 34. During the course of the hearing, it was noticed from the arguments made by the parties that post Framework Agreement dated 05.07.2007, there were further Supplementary Agreements dated 07.04.2009; 10.05.2010; and 07.08.2012, through which shares of other Indian partners of Vodafone, viz., Aseem Ghosh, IDFC etc. who indirectly held the shares in VIL were acquired and added in the chain of intermediary companies between SBPL & VIL. As per the .....

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d by intermediaries companies) 35. Mr. Ajay Vohra, submitted that even from the terms of these agreements and the supplement agreements entered between the assessee and other related parties, nowhere it is borne out that additional consideration other than that the stipulated framework agreement dated 05.07.2007 read with 4th supplement thereto was agreed to between the parties and rightly so, because no additional amount for such acquisition made by the intermediary companies was invested eithe .....

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ex Court held that the apparent is real unless contrary is proved and onus to prove the contrary is on the question who alleges that apparent is not real. The assessee was adequately compensated for the aforesaid additional acquisition of shares in the form of payment of additional option fee of USD 26,57,000 per annum, which has been offered to tax as revenue receipt by AS, and would have earned higher consideration from transfer thereof, in the event the enterprise value / FMV of shares of VIL .....

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ment dated 12.3.2014, with corresponding liability fastened on CGP to pay such an amount, albeit in violation .of the approval granted by the FIPB, by leading tangible evidence in that regard. The Revenue has miserably failed to discharge such burden and has purely on surmises, suspicions and conjectures averred that for computing capital gains on sale of shares of SBPL some higher consideration needs to be substituted in place of the declared consideration, without making an attempt to quantify .....

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und and certain events as a prelude to understand the factual matrix and the culmination of the controversy involved in the present case.The facts and the background as submitted by him in sum and substance are as under:- a) In 1992, the Hutchison group of Hong Kong acquired interest in the mobile telecommunications business in India through a joint venture vehicle, Hutchison Max Telecom Ltd. It was a joint venture between the Hutchinson Group and the Max Group where the assessee had substantial .....

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s of consolidation and reorganization, Hutchison Essar Ltd. became the primary company where 67% direct and indirect interest was held by Hutchison group and 33% interest was held by Essar Group. b) Under the regulations of the Government of India as it then stood, foreign equity participation could not exceed 49% of the total capital. Thus, Hutchison group held direct interest in the Indian company (HEL) to the extent of nearly 42%; 10% interest was held through indirect holding companies and t .....

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up under which it was agreed that the appellant would be provided the necessary finances under the guarantee of the Hutchison Group and the monies would be invested by the appellant in the equity of the Indian company, HEL, with a further stipulation that the shares so owned by the appellant would be subject to call/put option. It was contemplated that as and when the foreign equity cap is relaxed, Hutchison group would exercise the option and the shares would be acquired from the appellant at a .....

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framework agreement, it was agreed that in consideration of 3GSPL providing financial assistance for ND Callus to subscribe to 38.78% shares in TIL (which holds directly and indirectly 19.54% in HEL), Scorpio granted 3GSPL a right to subscribe to equity in ND Callus and/or to purchase equity of MV Healthcare. A call/ put option was granted to the parties whereby 3GSPL or its nominee got the right to exercise the option of acquiring the shares held by the appellant in HEL through a chain of subsi .....

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other liabilities in MVH or any other company in which MVH has an interestand irrespective of the fact that SBP is not a direct shareholder in HEL. The Schedule also goes on to explain that the above transfer price is agreed on the assumption that HEL has on issue 414,086,049 paid up and issued ordinary shares and the TII has or will have after completion of the restructuring currently being undertaken a direct and indirect 19.54% beneficial interest in HEL. The Schedule further goes on to state .....

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ne Pic and as observed by the Hon'ble SC in their judgment referred to above, Vodafone stepped into the shoes of Hutch in all its entirety. All the arrangements with different parties to beat the foreign equity cap were kept intact as it were with the only change that Hutch was released from its obligationsarisingfromthe agreements with different parties like the appellant, Aseem Ghosh, IDFC etc. and Vodafone entered into similar agreements with these parties to continue the existing arrange .....

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nt in the Indian company. Hence, it may be appreciated that Vodafone had acquired the interest in HEL held through the appellant directly from Hutch. The new Framework Agreement was necessary fallout of the transaction already entered into between Vodafone and Hutch and the new Framework Agreement of July 2007 was entered only to transfer the economic interest hitherto held by Hutch to Vodafone with the entire arrangements in spirit remaining unchanged. (h) Under 'the Framework Agreement dat .....

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manner provided in Schedule 2. The assessee was also to receive USD 10.2 million per annum for holding these shares in HEL on behalf of VEL till the option is exercised. (i) CGP, a company in the chain of holding companies of VEL (earlier HEL), acquired 49% in SBP (and a similar stake in the companies held through Aseem Ghosh) in November, 2009 and the price paid was in terms of Framework Agreement dated 5th July, 2007. The appellant received ₹ 533 crores which worked out to 10.88 lacs pe .....

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0% stake in SMMS to TII and HTIL sold 7.39% in Omega to SMMS so that SMMS held 61.6% in Omega. The effect of this transaction was that TII now held 22.69% in VIL and SBPL held 8.91 % in VIL. (m) The appellant was further given additional call option fee of USD 2,657,000 per annum for holding these additional shares. (n) SBPL issued Right Shares and the appellant subscribed to 19,49,99,979 right shares. However, the appellant's holding in SBP remained 51%. It was agreed that 3GSPL would pay f .....

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at this figure have not provided except that in his submissions, the appellant stated that ₹ 300 crores represents the value of rights shares and the balance amount of ₹ 941.32 crores represents that of original shares. (p) While it was stipulated under the Framework Agreement of 2006 as also under the Framework Agreement of2007 that the valuation of HEL shares at the time of exercise of option and the transfer would be done by Valuers of international repute specifically named unde .....

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s, taking the total value of HEL shares at USD 25billion, the other part of the agreement of revaluing the shares of HEL when the value exceeds 25 billion was never carried out. It is interesting to note that the Enterprise Value of HEL was determined at 18 billion in February, 2007 and at 25 billion in July, 2007 after the consolidation and the company having been taken over by Vodafone. There has been a phenomenal growth in telecom sector in India in these years and accordingly the customer ba .....

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financials of the companies in the HoldCo chain and SBP, and further, COP has confirmed that since the companies in the HoldCo chain and SBP do not have any business operations, there are no projections/ forecasts available for the companies in the HoldCo chain and SBP. It is clarified that we have assumed and relied upon, without independent verification, the accuracy and completeness of the information/ projections/ forecasts provided to us, whether in oral or written form, or used by us and w .....

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gs before interest and taxes or the balance sheet. Further, we have not been provided with financial projections for the companies in the Holdco chain and SBP. We have assumed that there is no material information or material change in the business and operations of VIL group, Indus, companies in the HoldCo chain and SBP post February 28, 2014 that would impact the valuation in this Report, and we assume no risk of any material adverse change having any impact on the businesses of VIL group. Ind .....

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nt agreement which has quite a relevant bearing on the said issue therefore, for the sake of readyreference same is reproduced hereunder:- Accrued Sale Consideration of Call Options Sale consideration as per different agreements: A. Agreements entered by parties:- S. No . Agreement s Date Value of consideration Value of shares Remarks 1. Framework Agreement 2006 01.03.2006 Fair market value (FMV) of issued share capital of HEL 0.23% of value of shares of HEL The liability of intermediary compani .....

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er share (Rs.10,88,43,00,000 / 10000 =Rs.10,88,430as per exchange rate @ 40.88 as per the agreement) + Possible markup as a result of higher value of VIL + Annual call option fee from GSPL US$ 10.2 mil/annum At this stage AS holds through NDC 38.78% of TII shares which in turn, holds 19.54% in VIL. Basis of base price of 26,62,50,000 is not given. For delivering FMV of VIL shares to work out the additional price (in case the value of HEL share exceeded 25 billion USD), the valuation was to be do .....

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2009. As per the Framework agreement 2007 the amount for sale of whole amount of 10,000 shares is US$ 266,250,000 (with forex rate at ₹ 40.88 per US $ the amount is ₹ 1088.43 Cr.). As Sh. Analjit Singh sold only 4,900 he received 49% of ₹ 1088 Cr. i.e. ₹ 533.33 Cr. (US$ 130,462,500) which is ₹ 10.88 lacs per share as on 17.12.2009. Sh. Analjit Singh has already received US$ 130,462,500. For balance sale of shares, the balance amount of US$ 135,787,500 was to be rece .....

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daily basis as per framework agreement 2007. + Call option fee from M/s VISPL (formerly GSPL) of an amount of US$ 3.2million per annum accruing on a daily basis The value per share is ₹ 555,09,93000/ 5100 = ₹ 10,88,430/- (5,55,09,93,000 / 5100 =Rs.10,88,430 as per exchange rate @ 40.88 as per the agreement) + Possible markup + Annual call option fee from GSPL as per framework agreement 2007 -10.2 mil US$ + Additional annual call option fee from VISPL as per amended framework agreemen .....

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y 4,900 he received 49% of ₹ 1088 Cr. i.e. ₹ 533.33 Cr. (US$ 130,462,500) which is ₹ 10.88 lacs per share as on 17.12.2009. Sh. Analjit Singh has already received US$ 130,462,500. For balance sale of shares, the balance amount of US$ 135,787,500 was to be received on sale of 5100 shares + Call option fee from GSPL of an amount of US$ 10.2 million per annum accruing on a daily basis as per framework agreement 2007. + Call option fee from M/s VISPL (formerly GSPL) of an amount of .....

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dditional annual call option fee from VISPL as per amended framework agreement 2010 + further annual call option fee from VISPL as per amended framework agreement 2011 No valuation was done when the framework agreement amended in 2011 SBP further acquired 60 lac shares in SMMS (75% of SMMS) which holds 61.6 % of Omega, which in turn, holds 5.11 % VIL. Only additional call option fee was provided for No additional transfer fee was provided for Amended Framework Agreement not made available 5. Sup .....

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share allotted ) (ii) Rs.15.3 8 per share As per thesupplementary agreement it is already decided that Sh. Analjit Singh will receive ₹ 300 crores (irrespective of the value right shares. Sale price of rights shares of future date is fixed in August, 2012 itself. Even as per this agreement no valuation was done to arrive at an amount of Rs. S. No . Agreement s Date Value of consideration Value of shares Remarks against the original share of 4,100. 300 Crores for rights shares. The amount o .....

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rked out as under:- 12,41,32,06,200 / 19,50,05,079 = ₹ 63.65 The assessee has not provided any valuation as to how the assessee has reached the figure of ₹ 1241.32 Cr. Rs.1241.32 cr. (300 Cr. + 941.32 Cr.) As per the submission dated 30.12.2016 the total consideration received is ₹ 12,41,32,06,200/-. The breakup of this amount is :- Rights share - 300 Cr. (@15.38 per share) Original share - 941.32 Cr. Rs.18,45,726/- per share As per the submission dated 30.12.2016 of the assess .....

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shares Remarks M/s SBP Ltd. was valued at two different prices i.e. @ ₹ 15.38 per share for right issue & @ ₹ 18,45,726 for original shares S. No . Agreement s Date Value of consideration Value of shares Remarks M/s SBP Ltd. was valued at two different prices i.e. @ ₹ 15.38 per share for right issue & @ ₹ 18,45,726 for original shares B. Sale Consideration disclosed:- S. No Year Actual receipt Price per share Remarks 1 17.12.2009 Rs.533 Cr. Rs.10.88 lacs Sh. Anal .....

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eived by Sh. Analjit Singh and total consideration received was ₹ 1,241.32 cr. which is total consideration of Sh. Analjit Singh and Smt. Neelu Analjit Singh. Rs.63.65 Total consideration received by Sh. Analjit Singh and Smt. Neelu Analjit Singh isRs.12,41,32,06,200/-. The total shares sold including right share and original share is 19,50,05,079. Therefore, the value per share is worked out as under:- 12,41,32,06,200 / 19,50,05,079 = ₹ 63.65 per share However, the aforesaid working .....

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77; 5.4/- per share by aHybrid methodwhich is not the prescribed method as per Income Tax Act/ Rules. It valued VIL by following DCF method. However thereafter, to arrive the valuation of M/s SBP Ltd. NAV method was adopted for all the companies in the holding chain after taking the value of VIL as per DCF method. By this method the valuation was done at a lower price such as only to claim that the agreed price of actual transaction was higher than the valuation done by a merchant banker. Valuat .....

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ifically that of 2006 and 2007, Mr. Srivastava vehemently argued that the addition made by the AO is not only justified on facts but also in law. He submitted that it is not simple case of purchase and sale of a capital asset. In the present case, the appellant held the shares in the Indian company, HEL/VIL, for the benefit of Hutch/Vodafone primarily to beat the foreign equity cap for which the appellant was paid call option fee for holding the shares and with a stipulation that the shares woul .....

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alue of shares of HEL/VIL. This was not a hypothetical price or notional value which the AO took into account but the price which was originally agreed to in 2006 and the same basis continued in 2007 agreement with some modification in the mode of working in as much as upto the date of the agreement a fixed amount was set out which represented the proportionate value of shares held by SBP inHEL/VIL by taking the enterprise value at USD 25 billion and any increase in the value of HEL/VIL beyond 2 .....

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arket value of shares of HEL. The AO was, therefore, fully justified in adopting the fair market value of HEL shares as the full value of consideration agreed between the parties. It is not the case of Revenue that full value of consideration necessarily means and represents the fair market value of the capital asset. However, the given case, the agreements do provide for the rights of the parties and the amount of consideration the appellant is entitled to once the options are exercised. It is .....

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ny Ltd. (66 ITR 622), he submitted that the issues was examined in the context of section 12B of the 1922 Act, where the language used was full value of consideration for which the sale or transfer of assets is made . It is in this context, the Hon ble Apex Court held that in case of sale, the full value of consideration is full sale price actually paid. Further the expression full value of consideration cannot be constituted as market price but as the price bargain by the parties for sale. Ther .....

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in 2006 when the loan financing was made available to him and under that special arrangement, he subscribed to the equity of HEL to facilitate Hutch to hold their interest to that extent without trespassing the foreign equity cap. The same arrangement continued after Vodafone acquired the interest of Hutch in HEL in its entirety including the arrangements with the appellant. In fact, Vodafone paid the full market value of HEL shares falling to the share of the AS to Hutch and only thereafter it .....

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er share. Their Lordships are further quoted from the order of the Tribunal at the right of the ITO to determine the full value of the assets is always there especially in the case where the assessee refused to keep all the information to the ITO and the value of the assets is given by him is so suspiciously flow. Based on these findings of the Tribunal, the Hon ble Supreme Court reached to the conclusion that the question referred to the Hon ble High Court cannot be answered as the contract was .....

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hich puts an arbitrary figure of ₹ 300 crores for right shares and ₹ 941 crores for original shares without specifying any basis whatsoever how these figures have been arrived at or what was the reason for the deviation from the prices agreed to in the framework agreement of 2006 and that of 2007. If the market value of HEL shares was the basis of the transfer price agreed to between the parties, any departure therefrom has to have some rational basis and an arbitrary figure in the S .....

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ity of the company. There is no separate market price of right shares as distinct from original shares. The market price of right shares will always be the same per share as that of the original shares. Under the SPA, the value of original shares comes to ₹ 18,45,726 per share but the value of right shares comes to only ₹ 15.38 per share which is absurd on the face of it.In the first place, the value of right shares cannot be different from the original shares. In fact, at the point .....

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Agreement and there is absolutely no explanation of such a major departure. The document (SPA) is a superfluous one for the reason that the rights of the parties had already been determined under the Framework Agreements. It was clearly provided in those agreements that once the option is exercised, the shares would get transferred under a procedure set out thereinand the appellant would be entitled to receive the price as agreed earlier.If the entire process of transfer and the consideration is .....

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ive agreements have to be the basis for arriving at the full value of consideration accruing to the appellant. It is submitted that contrary to the assertions of the assessee, the transaction is not at arm s length. In the first place,the transaction is not between unrelated parties.As pointed out earlier, the appellant has been associated with the Hutch group since 1992 and also with Vodafone from the day Vodafone took over the business from Hutch. The assessee remained the director of the Indi .....

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reference to consultancy agreement in the framework agreement or its amendment letter was really baffling. The close association of the appellant with Hutch/Vodafone in holding the shares and in the operation of the company in India is a matter of record and the transaction cannot be regarded as having been entered into independent third parties. The assessee had contended at the time of hearing that the Revenue ought to establish that the parties have duly acknowledged their rights before subst .....

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e assessee. Revenue has no onus to demonstrate beyond the accrual of the right to the amount of consideration. The onus would be on the assessee to justify the transfer price which is in departure of the price actually agreed for under the Framework Agreement. The case of CIT v Balbir Singh Maini in CA no.15619/2017 relied upon by the appellant, in fact, goes to support the case of Revenue because in the present case the consideration for the call/put option was very well recognized by both the .....

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ed when he had the clear mandate/ right to receive proportionate market value of HEL shares under the Framework Agreement. Besides, when the shares were sold in 2009, the appellant received the price as per the framework agreement atleast to the extent of the first part which goes on the presumption that the total value of HEL shares has not exceeded USD 25 billion but the amount of consideration indicated in the SPA is a complete departure and is wholly arbitrary. It is an admitted factthat the .....

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he value of SBP shares as clearly agreed to between the parties. The transfer price agreed between the parties is a vested right of the appellant and cannot be given a complete go by only on the basis of SPA entered into a few days before the transfer particularly when the appellant has no explanation whatsoever for the departure from the existing agreement which had already created such rights in his favour. 43. Coming to the alternate plea of the Mr. Ajay Vohra on valuation of shares that the .....

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names were also agreed to between the parties. It is difficult to believe that such an exercise was not done despite a clear stipulation under the Framework Agreement. This is not a normal course of things. Either the valuation exercise has been done as contemplated in the Framework Agreements and the results of such valuation are not being made available to the Revenue or the exercise of carrying out a valuation has been left to a closely associated party like Kotak Mahindra in complete violat .....

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is not raised by the Revenue under the given circumstances. Thus, there is no dispute as regards the value of HEL shares is concerned. However, the subsequent process of determining the value of shares of SBPL was not the act of an independent valuer. An independent valuer would have valued the shares of a holding company depending upon the internationally accepted rules of valuation. It would then not go by the parameters set out in one agreement or the other. It is in this context that Revenu .....

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f the appellant, Revenue has filed a chart showing the actual liabilities appearing in the accounts of these intermediary companies and this table shows that the value of consideration adopted by the AO is in tune with the value as may be finally determined after accounting for such liabilities. This contention is without prejudice to the primary contention that the liabilities of intermediary companies have not to be taken into account. Mr. Srivastava has filed separately a chart providing a wo .....

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le works out to ₹ 136 per share and the AO has taken the value of ₹ 132 per share only (initially it was ₹ 142.70, which was arrived at after taking the appellant s stake in VIL at 3.9% instead of the correct stake at 3.65%. Thus, the valuation adopted by the AO is in conformity with the Framework Agreements, value of HEL shares as determined by Kotak and rules of valuation provided for under Rule 11UA. 44. Lastly, on the issue of applicability of section 50D, he submitted that .....

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the present regime of taxation, the difference between the fair market value of the asset and the consideration received is subject to tax in the hands of the purchaser of the asset under section 56(2)(x) or (viia) is misplaced. These are not alternate basis of taxation. For the difference between the arm s length value of consideration and the actual consideration, the buyer is charged to tax under section 56 irrespective of the consequences that may flow in the hands of the seller. In view of .....

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having any basis whatsoever for a significant departure therefrom is completely misplaced, particularly in view of the fact of there being a close relationship between the parties to the transaction. Decision 45. From the facts and submissions of the parties qua Ground No.2, following issues can be culled out which requires our adjudication: * Firstly,whether the Assessing Officer or theLd. CIT(Appeals) were justified in enhancing the sale consideration of SBPL shares from ₹ 1241.32 crores .....

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as adopted by the AO and by the Ld.CIT(A) at ₹ 142.70 per share is justified; * Fourthly, whether the provisions of section 50D can be invoked on the facts of the present case to justify the adoption of fair market value of unquoted/unlisted shares of SBPL; and * Lastly, what should be the value of sale consideration of SBPL on the facts and circumstances of the case? 46. We have discussed at length, the facts and background of the case as submitted by the parties before us, however for th .....

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ally belonged to the assessee. It was a joint venture between the Hutchison Group and Max Group. 50% of the shares in HMTL were held by Max telecom Venture and 49% by Hutchison Telecom (India) Ltd., a Mauritius based company. Between the years 1994 to 2004, several acquisition and expansions took place, whereby various groups like Essar, Hinduja and Kotak Group through various companies held substantial stake at different points of time. Under the regulation of Government of India as it then sto .....

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Ltd. through various subsidiaries and TIL in turn was majorly held by CGP India Investment Ltd. which was subsidiary of Hutchison Group. With view to beat the equity cap of 49%, an arrangement was entered between the AS and the Hutch Group in which it was agreed amongst the parties that the assessee would be provided necessary finances under the guarantee of the Hutch Group and the money would be invested in the equity of Indian company HEL . With a further stipulation that shares so owned by th .....

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01.03.2006 which has been placed before us by the Revenue at the time of hearing. This Framework Agreement of 2006 was entered into amongst the; i) AS; ii) SBPL (a company owned by AS; iii) MVH (100% subsidiary of SBPL); iv) NDS (a 100% subsidiary of MVH); v) 3 Global Services Pvt. Ltd (a Mauritius based company held by Hutchison Group). This was precursor to all the agreements and first of such agreement whereby the parties have mutually entered into contractual obligation for call option and .....

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TIL holding direct and indirect interest in HEL. 47. Under the framework agreement of 01.03.2006, it was agreed that in consideration of 3 GSPL providing financial assistance for NDC to subscribe to 38.78% of shares in TIL (which holds directly and indirectly 19.54% shares in HEL), SBPL granted 3 GSPL, right to subscribe equity in NDS and or purchase equity in MVH. A call/put option was granted to the parties, whereby 3 GSPL or its nominee got the right to exercise option of acquiring the share .....

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e formula set out in Schedule 2. Schedule 2 of the said agreement defined the transfer price in the following manner:- (a) The transfer price shall be equal to the fair market value of 0.23% of the issued share capital of HEL. (b) The Schedule also provided in very clear terms as under: For the avoidance of doubt, the above formula will apply to the transfer price regardless of the amount of third party debt or other liabilities in MVH or any other company in which MVH has an interest and irresp .....

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parties:- I. MR ANALJIT SINGH and MRS NEELU ANALJIT SINGH and II. SCORPIOS BEVERAGES PRIVATE LIMITED and III. MV HEALTHCARE SERVICES PRIVATE LIMITED and IV. 3 GLOBAL SERVICES PRIVATE LIMITED and V. ND CALLUS INFO SERVICES PRIVATE LIMITED and VI. VODAFONE INTERNATIONAL HOLDINGS B.V. Under this agreement also, the AS was given an option to sell the shares of SBPL in any part thereof (put option); or the option to GSPL either directly or through any person nominated by GSPL to buy the shares of SB .....

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le-1(the relevant portion of which has been reproduced above).Under the said schedule, the transfer price was determined,firstly, at US $ 26,62,50,000 converted into INR at the prevailing exchange rate at the completion date on 08.05.2007; andsecondly, it was provided that if the fair market value of the entire issued share capital of HEL exceeds US $ 25 billion, then proportionate shares held by SBPL in HEL would be determined by the manner provided in Schedule-2. Thus, the working of transfer .....

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fact which is borne out from the said Schedule is that, fair market value of the entire share capital issue of HEL was taken at US $ 25 billion, which if converted into INR with the then prevailing exchange rate,it would have exceeded ₹ 1 lakh crores. Since, the second stipulation never came into picture or parties have not revisited this clause, then in that case,US $ 266.25 million was recognized as the transfer price of entire SBPL shares. However, on a hind sight perusal of the fair m .....

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Enterprise value of TIL (19.54%) 2,931 Less: Investment cost of TIL (419.75) Profit on disposal 2,511.25 Less: long term capital gains tax on profit (22.7%) (569.05) Post tax enterprise value of TIL 2,361.95 Less: net debt of TIL (160.45) Less: book value of preference shares (570.29) Indicative equity fair market value of TIL 1,631.21 NDC enterprise value 38.78% 632.58 Less: liquidity discount on local shares (27%) (170.51) Enterprise value post liquidity discount 462.07 Less: net debt (178.07) .....

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g, there are adhoc discounts,like 40% discount on account of holding companies for which again no basis has been provided.At the end, somehow the fair market value of SBPL/NDC/MVH shares has been worked out at US $ 266.25 million, which incidentally happens to be the same figure which has been adopted as a transfer price of the SBPL shares in Schedule-1 as discussed above. If the working of US $ 266.25 million as given in Schedule-1 is to be reckoned from the aforesaid illustrative working, then .....

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ted as a true value. We are finding it bit difficult to fathom this proposition, firstly, how this US $ 266.25 million has been arrived as transfer price in Schedule-1; and secondly, if this is the transfer price, then it is seen that it has been arrived at by taking the fair market value of HEL shares as on May 2007 which has been taken at US $ 25 billion after reducing the net debt.Now, whether this price of US $ 266.25 million is to be reckoned as the final price for value of SBPL shares, for .....

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50. In view of the facts as narrated above, following points can be deduced:- * The Framework Agreement dated 01.03.2006 envisaged fair market value of issued share capital of HEL for determining the value of SBPL shares. * Even if we agree with the contention of the Ld. Sr. Counsel, Mr. Ajay Vohra that the agreement of 05.07.2007 alone is to be reckoned, then we find that in Framework Agreement of 2007 also, not only the similar clause of call/put option has been enshrined but also the determin .....

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there was a change in FDI regulation relating to sectoral cap which enabledthe GSPL acquire some shares in SBPL and thereby increase its indirect share holding in VIL and accordingly, on 07.04.2009, CGP and person nominated by GSPL entered into an agreement relating to transfer of shares of 4900 of SBPL which constitute 49% stake by the AS to CGP. The value of 49% shares of SBPL was worked out at ₹ 533 crores, i.e., 49% of ₹ 1088 crores for which necessary approval from FIPB was soug .....

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in the existing ratio of 51:49. In pursuance of such acquisition, 4th Supplement to the Framework Agreement was entered between the AS, SBPL, GSPL and various other companies to provide similar call/put option for the sale of newly issued right shares by the AS to GSPL at pre-agreed lump sum consideration of ₹ 300 crores. 53. Now here again, it is quite perplexing to note that a company having 10,000 equity shares had issued right shares of approximately 38.24 crores and the assessee s sub .....

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the issue or dispute before us, i.e., how the right share has been subscribed in such a disproportionate ratio and how the value has been pegged at ₹ 300 crores, we are not entering into the semantics of deciding the same, which though has vehemently argued by the Ld. Spl. Counsel for the Revenue before us. 54. In the year 2013, there was a change in FDI regulation, whereby 100% FDI was allowed in telecom sector and accordingly, application dated 24.10.2013 & 19.11.2013 were filed by t .....

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e as under:- (A) The company is engaged in the business of investing (but not trading) in securities of telecommunications companies in India. (B) Presently, AS holds 51% of the issued equity share capital of the company and CGP holds 49% of the issued equity share capital of the company. (C) Pursuant to the Framework Agreement (as defined below). As is entitled to exercise options, subject to certain terms and conditions set cut in the Framework Agreement to put any or all the shares (as define .....

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ssued and paid up equity share capital of the company on the terms and conditions contained herein. By way of a letter dated 20 February 2014, the Foreign Investment Promotion Board has issued a letter, inter alia, granting approval to the transactions contemplated under this Agreement. (E) This Agreement sets out the terms and conditions on which the sale shares will been purchased by CGP from AS. The relevant clause for sale and purchase are as under:- ……………& .....

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lve Billion Four Hundred and Thirteen Million Two Hundred and Six Thousand and Two Hundred only) (The Transfer Price ). 3. …………………………. 3.2. The parties acknowledge that Kotak Mahindra Capital Company Ltd. has been requested to prepare a valuation report relating to the fair market value of the entire issued share capital of VIL pursuant to schedule 1 to the Framework Agreement to confirm the Transfer Price determined by the pa .....

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above though indicate that Kotak Mahindra has been requested to prepare a valuation report relating to the fair market value of the entire issued share capital of VIL pursuant to Schedule-1 to the framework agreement (i.e. dated05.07.2007) to confirm the transfer price determination by the parties. As discussed in detail herein above, the transfer price in Framework Agreement dated 05.07.2007 in Schedule-1, the value of the HEL has been stated to be US $ 25 billion and this is borne out from th .....

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ity as to whether this illustrative working is the basison which transfer price of US $ 266.25 million have been worked out, but, since this transfer price determined at that time was clearly linked with the fair market value of the entire issued share capital of HEL, therefore, it has to be reckoned that FMV of HEL and later on VIL was always construed to be the basis of determination of SBPL shares. In the Sale Purchase Agreement though there is an acknowledgement of the fact that the fair mar .....

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at ₹ 56,448 crores and SBPL s shares have been valued at far lower price, i.e., per share of SBPL has been valued at ₹ 5.40. Now, whether this valuation report and the value of SBPL is correct or not would be a subject matter of discussion in our later part of the order, however, what we find from the perusal of the Sale Purchase Agreement is that,the sale price consideration of the entire SBPL shares is neither in accordance with the Framework Agreement dated 05.07.2007; nor it is i .....

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set out therein and the assessee would be entitled to receive the price accordingly. The entire process of transfer under consideration was agreed as per the formula/procedure as laid down therein, which has discussed above, was based/linked with fair market value of HEL and now VIL. Based on this fair market value of VIL, the value of SBPL shares should have been worked out. 56. Before us, Mr. Ajay Vohra, Ld. Sr. Advocate had vehemently argued that u/s 45(1) r.w.s 48, what is chargeable under h .....

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curred wholly and exclusively in connection with such transfer; (ii) the cost of acquisition of the asset and the cost of any improvement thereto. What has been envisaged here in this section is the full value of consideration received or accruing as a result of the transfer of capital asset. Mr. Vohra had strongly contented that the full value of consideration does not refer to or can be said to mean fair market value. In support strong reliance was placed on the judgment of Hon ble Delhi High .....

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intended to substitute the actual/full value consideration with the fair market value, specific deeming provisions have inserted in the statute, for example, section 50CA, 50D etc. Earlier, when there was a difference, if any, between the fair market value of the assets and the actual consideration received, then the same was taxed as a deemed gift u/s 4(i)(a) of the Gift Tax Act, 1958 in the hands of the transferor till the repeal of the said Act, w.e.f 01.10.1998. Otherwise in the Income tax .....

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ther sources in the hands of recipient, i.e., the transferee. Later on, when the legislature wanted to tax, such difference in the fair market value of the capital assets in the hands of transferor, section 56(x) has been brought in the statute by the Finance Act, 2017, w.e.f., 01.04.2017. Now, as per the new provision, the earlier provisions of section 56(2)(vii) & (viia) had been made inoperative w.e.f 01.04.2017, that is, now difference is to be added in the hands of the transferor only. .....

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and secondly, such deeming fiction of taxing the difference on the basis of fair market value on the transfer of the capital assets in the hands of the transferee/transferor have been brought by specific provisions as discussed above. Ostensibly for the A.Y. 2014-15, neither the provisions of section 50CA nor section 56(2)(x) are applicable in this case, therefore, by invoking these provisions, addition cannot be made in the hands of the transferors, i.e., the assessee. 57. Before we deal with t .....

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ere the consideration received or accruing as a result of the transfer of a capital asset by an assessee is not ascertainable or cannot be determined, then, for the purpose of computing income chargeable to tax as capital gains, the fair market value of the said asset on the date of transfer shall be deemed to be the full value of the consideration received or accruing as a result of such transfer. The Finance Bill 2012 and the Memorandum explaining the insertion of section 50D clarifies the pur .....

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osed that where in the case of a transfer, consideration for the transfer of a capital asset(s) is not attributable or determinable then for purpose of computing income chargeable to tax as gains, the fair market value of the asset shall be taken to be the full market value of consideration. Accordingly, it is proposed to insert a new provision (section 50D) in the Income-tax Act to provide that fair market value of the asset shall be deemed to be the full value of consideration if actual consid .....

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value of the said asset is deem to be the full value of consideration received or accruing as a result of such transfer. For invoking this provision, the situation should be that the consideration in respect of transfer of an asset is not determinable or ascertainable case and in absence of such determination, the machinery provision for computing of the capital gain gets failed. Here in this case, it is not a situation because the consideration has been received which as per the parties is asce .....

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.Y. 2017-18. This section as discussed in detail has been specifically brought in the statue to tax the FMV of unlisted shares in the hands of the transferor. However being a substantial provision thedeeming provision envisaged therein cannot be applied retrospectively. On this aspect, without going into much detail analysis, the arguments of Mr. Ajay Vohra as noted above are upheld as such and we hold that, invoking of the provision of section 50D to justify the fair market value by the Ld.CIT( .....

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aid to have been accrued if the assessee acquires the right to receive the income from the contractual obligation or as per any other legal obligation. It is sine-qua-non that the assessee must have acquired the right to receive the income and there is corresponding debt owed to him by somebody. The concept of accrual of income have been well-settled by the Hon ble Supreme Court in the case of E.D. Sasoon & Co. Ltd. vs. CIT (supra) and CIT vs. Shoorjee Vallabhdas & Co. [1962] 46 ITR 144. .....

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ing liability of the other party from whom the income becomes due to pay that amount. Thus, one party has the right and the other party has liability to pay, but such right and liability has to originate from the understanding of all the terms and conditions of the contracting parties and the contractual obligation qua the transactions for which income can be said to be accrued to one party with the corresponding liability to pay on the other. 59. Here in this case, as discussed in detail, it is .....

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assessee was paid call option fee for holding the shares with stipulation that shares would be ultimately transferred to Hutch/Vodafone through their step down subsidiaries and put option would be exercised as when the cap is lifted at a pre-agreed price.The Framework Agreement of 2006 which is the precursor to the framework agreement of 2007, the stipulation for the value of consideration/transfer price was based on fair market value of issued share capital of HEL and such value of shares was .....

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transfer price of the SBPL s shares, has fixed the transfer price in the year 2007 at US $ 266.25 million which converted into INR was ₹ 1088.43 crores. This transfer price of US $ 266.25 million was based on some illustrative working given in Schedule-2 which was though was to come into operation when the condition of the 2nd clause was to be fulfilled, i.e., the fair market value of issued share capital of HEL exceeds US $ 25 billion and then the SBPL value was again to be re-valued. Th .....

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g into account the fair market price/ value of equity capital of HEL, later on substituted with VIL.In all the subsequent Framework Agreements and Supplement Agreement, including the Share Purchase Agreement, the parties unequivocally have agreed that the transfer price has to be determined in accordance with the Framework Agreement and that to be of 05.07.2007. Nowhere the parties have rescinded or given go-by to said framework agreement. Albeit the parties have time and again have reiterated t .....

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permeating through all the agreements on such transfer price which is to be determined on the basis of fair market value of VIL and, therefore, it is binding on the parties. Thus, as per the binding agreement, the accrued price consideration for the transfer of the SBPL shares has to be determined on the basis of fair market value of VIL which here in this case has been pegged at ₹ 56,448 crores as determined by the Kotak Mahindra by adopting DCF method and also accepted by the AO. Accord .....

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e of VIL, then we have to see as to what should be the valuation of SBPL shares. The assessee before the Revenue authorities and also before us, has strongly contended that the independent valuer Kotak who has valued the shares of SBPL at ₹ 5.40 per share is the key to benchmark the price on which assessee has sold the shares under put option clause. First of all, on the bare perusal of the said Valuation Report which has been placed in the Paper Book before us by the Ld. Sr. Counsel at pa .....

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of VIL has not been disturbed by the AO even though in the year 2007, the value of HEL was indicated at US $ 25 billion which was at then more than ₹ 1 lakh crores. Since, the AO has accepted this valuation, therefore, we are not opining anything on this point. In the valuation report while determining the share value of SBPL, the valuer has adopted hybrid method, i.e., DCF method for VIL and net asset value method (NAV) for intermediary companies which does not finds any support under the .....

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of the companies in the HoldCo chain and SBP, and further, CGP has confirmed that since the companies in the HoldCo chain and SBP do not have any business operations, there are no projections/ forecasts available for the companies in the HoldCo chain and SBP. It is clarified that we have assumed and relied upon, without independent verification, the accuracy and completeness of the information/projections/forecasts provided to us, whether in oral or written form, or used by us and we assume no r .....

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erest and taxes or the balance sheet. Further, we have not been provided with financial projections for the companies in the Holdco chain and SBP. We have assumed that there is no material information or material change in the business and operations of VIL group, Indus, companies in the HoldCo chain and SBP post February 28, 2014 that would impact the valuation in this Report, and we assume no risk of any material adverse change having any impact on the businesses of VIL group. Indus, companies .....

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) where, A =book value of the assets in the balance-sheet as reduced by any amount of tax paid as deduction or collection at source or as advance tax payment as reduced by the amount of tax claimed as refund under the Income-tax Act and any amount shown in the balance-sheet as asset including the un-amortised amount of deferred expenditure which does not represent the value of any asset; L = book value of liabilities shown in the balance-sheet, but not including the following amounts, namely:- ( .....

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ollection at source or as advance tax payment as reduced by the amount of tax claimed as refund under the Income-tax Act, to the extent of the excess over the tax payable with reference to the book profits in accordance with the law applicable thereto; (v) any amount representing provisions made for meeting liabilities, other than ascertained liabilities; (vi) any amount representing contingent liabilities other than arrears of dividends payable in respect of cumulative preference shares; PE = t .....

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SBPL s shares is not in accordance with Rules as given in Rule 11UA which is specific for valuing the unquoted shares. The reason for not following the value of Kotak for SBPL shares is that, the Valuer has adopted NAV for valuing the intermediary companies; and if NAV method is to be adopted, then he can reduced liabilities as envisaged under Rule 11UA and not any other liabilities suggested by the companies without being authenticated by the companies or independently examined by the Valuer. O .....

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pass through basis is taken, then it will come to 3.6512% being 41% of 8.905% and not 3.95% as considered by the AO. Based on this clarification of exact percentage of shareholding at the time of hearing, we directed the concerned AO and the Addl. CITwho were present at the time of hearing to give a proper working of the value of SBPL s share,firstly, by taking the fair market value equity of VIL at ₹ 56,448.30 crores; secondly, to consider the actual liabilities as shown in the balance sh .....

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wn subsidiary in the chain Details Value as per Kotak Mahindra(in INR million) VIL valuation as per Kotak DCF valuation of VIL and takingbalan ce sheets of intermedia ry companies (in INR million) Description of Basis of Calculation Profit/ (Loss) Nature of Revenue VIL 564,483 564,483 Omega 5.11% Value of 5.1108% equity stake in VIL 28,850 28,850 Add: Value of Net Assets (Liabilities) excluding in VIL 502 486 Assets - Liabilities - Market Value of Investment in VIL + Income Tax 28.07 Investme nt .....

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of Investment in VIL + Income Tax + Provisions -166.53 Investme nt Activities Equity value of UMT 30,523 30,983 UMTI 100% Value of 100% equity stake in UMT 30,523 30,983 Add: Value of Net Assets -4,470 -4,463 Assets - Liabilities -32.16 NBFC Add: Value of Net Assets (Liabilities) excluding in Nadal -3,014 10 Assets - Liabilities - Market Value of Investment in NADAL + Income Tax -17.1 Investme nt Activities Equity value of Plustech 3,231 26,333 AGM 100% Value of 100% equity stake in Plustech 3, .....

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NDC 5,696 51,442 MVH 100% Value of 100% equity stake in NDC 5,696 51,442 Add: Value of Net Assets (Liabilities) excluding in NDC -3,634 847 Assets - Liabilities - Market Value of Investment in NDC -12.99 Investme nt Activities Equity value of MVH 2,062 52,289 SBP 100% Value of 100% equity stake in MVH 2,062 52,289 Add: Value of Net Assets (Liabilities) excluding in MVH 3 4 Assets - Liabilities - Market Value of Investment in MVH -1.45 Investme nt Activities Equity value of SBP 2,065 52,293 Tota .....

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is figure, albeit he has challenged the entire valuation set out herein on the ground that the actual consideration received has to be accepted, which we have discussed in detail that is not tenable. Accordingly, we hold that the value of shares for which the sale consideration said to have been accrued to the assessee has to be worked out at ₹ 131.86 per share. Thus, the AO is directed to compute the capital gain by taking the sale consideration by adopting the per share value of SBPL at .....

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enhanced accordingly. * Secondly, the sale consideration received by the assessee as per the Sale Purchase agreement of 12.03.2014 cannot be reckoned as accrued to the assessee in terms of section 48 of the Act, because herein this case it is not a case of simple sale and purchase transaction, albeit rights and obligation of the parties as per the agreements for transfer of shares was in exercise ofcall/put option, for which transfer price of the shares was determinable on FMV of the share valu .....

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sideration as these provisions are applicable from the A.Y. 2017-18. * Lastly, the value of the SBPL shares as per FMV of VIL would be ₹ 131.86 per share as determined above; and accordingly, AO is directed to compute the capital gain taking the sale value of SBPL at ₹ 131.86 per share. D. Whether the interest cost on loan taken for purchase of rights shares is to be allowed from the cost of acquisition u/s 48 while computing the capital gains. 66. Now we will come to the issue raise .....

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res. As discussed in the earlier part of the order, the assessee has subscribed to ₹ 15,67,64,689/- right shares of SBPL on 09.08.2012 which was financed directly out of the loan borrowed from Capricon Health Services Pvt. Ltd. on which interests aggregating to ₹ 39,95,01,050/- (Rs.13,88,26,342 in FY 2012-13 & ₹ 26,06,74,708/- in FY 2013-14) was paid from the date of acquisition till the date of transfer of such shares. The assessee s claim has been that, since the interest .....

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he decision of the Delhi High Court in the case of Mithlesh Kumari (92 ITR 9) relied upon by the assessee on the ground that it was under the old Act and now there is change in the provision. Finally, he has denied the said capitalization of interests on the following grounds:- i. There was no direct nexus between the funds borrowed and investment made in the shares ofSBPL. ii. Interest expenditure incurred after the date of acquisition of shares could not be considered as part of cost of acquis .....

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ally all the activities necessary to prepare such asset for its intended use or sale are complete. (b) Decisions of Courts, rendered in the context of allowability of interest under section 36(l)(iii), wherein it has been held that interest expenditure incurred in connection with construction/purchase of plant is to be capitalized as part of cost of fixed assets only upto the date of construction and interest expenditure incurred after the asset is put to use is allowable revenue, deduction. Ld. .....

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aforesaid loan was borrowed were placed before the AO and Ld. CIT(A), which will go to show that there was a clear nexus of borrowing with the investment in shares of SBPL. From the perusal of the said statement, he pointed out that it can be seen that the amount of ₹ 156.76 crores which was borrowed on 11.08.2012 has been immediately utilized for payments towards investment in shares of SBPL on the same date. Thus, it has been submitted that there was a direct nexus between the fund borro .....

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nt provision for computation of interest of each asset and also provide different treatment qua the liability of interest expenditure incurred on borrowed funds utilized for acquiring such assets. Since, in the present case, the shares of SBPL was held as capital assets which had no nexus with the business of the assessee, the cost of acquisition for the purpose of computing the capital gains on transfer thereof is to be determined in terms of section 48. He submitted that u/s 48 of the Act, wha .....

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ure incurred in respect of funds borrowed which are directly utilized for the utilization of assets has to be allowed as cost of acquisition. In support of this contention, he strongly relied upon the judgments of Hon ble Delhi High Court in the case of CIT vs. Mithilesh Kumari (92 ITR 9) & catena of other decisions which are as under:- • Trishul Investments Ltd vs. CIT: 305 ITR 434 (Mad.) • ACIT v: K S Gupta: 119-ITR372 (Andh.) • CIT v, MaithreyiPai: 152 ITR 247 (Kar.) • .....

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investment, be it current investment or long term investment, is to be recorded at its cost. The aforesaid Accounting Standard does not deal with inclusion/exclusion of interest expenditure incurred on borrowed funds from the cost of investments and,therefore, the assessing officer has erred in referring to the said accounting standard.As regards AS-16, the same is also not applicable to the facts of the present case and has been wrongly applied by the assessing officer. He submitted that AS-16 .....

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which provides that other, investmentsand those inventories that are routinely manufactured or otherwise produced in large quantities on a repetitive basis over a short period of time, are not qualifying assets. Assets that are ready for their intended use or sale when acquired also are not qualifying assets. The aforesaid clause of the Accounting Standard clearly excludes assets like shares which are ready for intended use as soon as the same are acquired, from the meaning of qualifying assets .....

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dard dealing with the treatment of borrowing costs incurred in relation to acquisition of shares, the cost of such shares has to be determined on the basis of normal commercial principles do not prohibit an assessee to capitalize the interest expenditure incurred after acquisition of shares as part of cost thereof. He further submitted that, be that as it may, even assuming without admitting that AS-16 is applicable and the same prohibits capitalization of interest expenditure post acquisition o .....

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nd Taparia Tools Ltd. V.JCIT: 372 ITR 605 (SC). Arguments on behalf of the respondent/ Revenue 70. On the other hand, Special Counsel of the Revenue, Mr. G.C. Srivastava submitted that the assessee had borrowed the funds for subscribing to the right issue and claim the interest payable on such borrowings, which has been sought to be adjusted at cost of acquisition for computing the capital gains on transfer of such shares in terms of section 48 which has been denied by the AO. Here in this case, .....

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rovisions appearing in that head of income. Thus, expenses for earning income from salary or property or from business or profession are allowable only if and to the extent these are deductible under the specific provisions governing such heads of income. If a certain expense is not deductible by a specific provision, it would not be taken into computation of income.In this backdrop, he submitted that it needs to be appreciated that the provisions of section 48 contemplate only the following ded .....

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submitted that under the normal meaning of the expression cost of acquisition , the cost can only include the price paid for acquiring the asset and it cannot include any other expense incurred by the appellant post the acquisition of the asset. It is obvious that the interest accrued after the acquisition of the asset and the period of such interest extends till the date of transfer. The amount of interest that the assessee may have to pay cannot, thus, represent the cost of acquisition. The c .....

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precise and exhaustive definition was considered necessary. A bare reading of the aforesaid provision brings out in unambiguous terms that where an assessee becomes entitled to subscribe to any additional financial assets like right shares or is allotted any additional financial asset without any payment like bonus shares, the cost in the case of the former means the amount actually paid by him for acquiring such asset and in the case of the latter the cost shall be taken to be nil . The use of .....

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ude anything over and above the amount actually paid by him for acquiring such asset . These amendments to section 55(2) were introduced w.e.f. 01.04.1995. The amendments were carried out with the specific object of settling the issue of determination of cost of acquisition of right shares or bonus shares. 71. As regards, reliance placed by the assessee on certain judicial precedents, he submitted that in so far as the judgment of Hon ble Delhi High Court in the case of CIT vs. Mithilesh Kumari( .....

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ital asset is made, (i) Expenditure incurred solely in connection with such sale, exchange, relinquishment or transfer; (ii) the actual cost to the assessee of the capital asset,including any expenditure of a capital nature incurred and borne by him in making any additions or alterations thereto, but excluding any expenditure in respect of which any allowance is admissible under any provision of sections 8,9,10 and 12 It is seen that under the said section 12B of the 1922 Act, there was a provis .....

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view of the change in law, the decision is wholly inapplicable.Regarding reliance placed on further decisions like KS Gupta (119 ITR 372), Maithreyi Pai (152 ITR 247), Trishul Investments (305 ITR 434), Raja Gopal Rao (252 TTJ 449)etc., He submitted that in none of these cases, the issue was the determination of the cost of acquisition of right shares of bonus.These were cases mostly relating to house property, or other kinds of immovable properties and in nowhere the amended provisions have be .....

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t of the assets for which cost of acquisition is not statutorily defined in the Act.These cases thus, lose their relevance in view of the specific nature of assets under dispute in the present case. The cost in the present case has to be governed by the specific provisions of the Act. Regarding reliance placed on the judgment in the case of Saharanpur Electric Supply Co. (194 ITR 294),it deals with the actual cost for the purposes of section 43(1) of the Act, whereas the case of Escort Farms rep .....

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ade in section 55(2) of the Act.In this case, the narrow issue which arose for consideration of the Court was whether the loss suffered by the appellant was a short term capital loss or a long term one. The question of cost of acquisition was neither an issue nor was the subject matter of the decision. There was no issue of deduction of any amount of interest as the cost of acquisition. In the case of Rajkumari Bangar (154 ITR 868) referred to by the Ld. Counsel, the issue was whether in computi .....

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dgments relied upon by the assessee, Mr. Srivastava also placed reliance upon certain decisions like in the case of L.N. Dalmia reported in 207 ITR 89, where the question of deduction of interest while computing capital gains was examined.It was held that the assessee was not entitled to claim the amount paid/payable as interest while computing the amount of capital gains. Reference was also made by him to the decision in the case of Octavious Steel & Co. Ltd. reported in 82 taxman 79, where .....

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cquiring the asset. Lastly, he placed reliance on coordinate bench decisions in the cases of Macintosh Finance Estates Ltd. (12 SOT 324); Vikram Sadanand Hoskote (18 SOT 130); and Aban Offshore Ltd. (76 taxmann 47) to rely on the proposition that interest cannot form part of the cost of acquisition. Thus, he submitted that the cost of acquisition can include only the amount actually paid by the appellant for acquiring the asset in terms of specific mandate of section 55(2) of the Act. No deducti .....

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inst therevenue receipts and not capital receipts is, against the scheme of the Act. In this regard, he submitted that, it would be appreciated that there is no quarrel with the proposition that interest expenditure incurred on borrowed funds utilized for acquisition of a capital asset used for purpose of business shall be capitalized to the cost of capital asset, upto the date of its acquisition / putting to use of the asset. Reference in this regard can be made to the proviso to section 36(l)( .....

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not be capitalized to the cost of capital assets.The Revenue sought to distinguish the binding judgment of the jurisdictional High court in the case of Mithlesh Kumari (supra) on the ground that the same was rendered in the context of acquisition of land and had thus, no relevance to a case of payment of interest for acquisition of shares. He submitted that the ratio laid down in the aforesaid judgment applies to computation of cost of acquisition of a capital asset, be it land, shares or any ot .....

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h in stands answered in favour of the assessee by the decisions of the various Courts relied upon by the assessee supra, wherein it has been held that interest expenditure incurred even after the date of acquisition of the capital asset shall be liable to be added to the cost of such asset for purpose of the aforesaid section. The Revenue was unable to controvert the proposition of law laid down in the said decisions by pointing out any decisions to the contrary. Further, the other consequential .....

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upply Company Ltd. vs CIT and referred to judgment of Hon ble Allahabad High Court in the case of CIT vs. Jindal Polyster Ltd. 248 Taxmann 321 and submitted that in view of the legal proposition as laid down in these judgments, the arguments of the Revenue and the interest borrowed fund after the date of acquisition of assets cannot be capitalized or added to the cost of assets is contrary to the settled legal position and, therefore, needs to be rejected. He further submitted that the reference .....

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e allowable as deduction u/s 57, and no dividend was earned by the assessee during the relevant year. It was in this context, the Hon ble Supreme Court held that since section 57 only requires that expenditure must be wholly and exclusively incurred for earning income, without any further condition of income to be actually owned by the assessee and the interest paid on money borrowed for investment in shares to own dividend income was allowable deduction under the said section, notwithstandingth .....

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d. (supra), and submitted that they are clearly distinguishable on facts. Likewise the reliance placed on the decision of Kolkata High Court in the case of L.N. Dalmia (supra) & CIT vs. Octavious Steel & Co. Ltd. are again distinguishable on facts. For making distinction, he has made his detailed submissions in his written submissions filed before us. 74. Without prejudice, Mr. Ajay Vohra submitted that if the Hon ble Bench is pleased to uphold the contention of the revenue that interest .....

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to canvass that the Tribunal has the power to issue direction for allowance for interest expenditure incurred during the AY 2013-14 against the option fee earned in that year and discussed under the head other sources :- JCIT v. HMA Udyog Limited: ITA No.2230/Del/1999 (Del); and Perfect Equipments v. DCIT: 85 ITD 50 (Ahm.) 75. Lastly, with regard to the reliance placed on the provisions of section 55(2)(aa)(iii), he submitted that it would be necessary to appreciate the legislative intent behin .....

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the actual price paid or on the basis of the average cost of the original shares, since the allotment of the' aforesaid shares, i.e., bonus/rightswas derived from the original shareholding. Reference in this regard may be made to the following decisions wherein it was held that the cost of acquisition of bonus/right shares would be adopted as average cost of original shares and price paid, if any, for acquiring such shares, viz.,:- i) Escorts Farms (Ramgarh) Ltd. v. CIT: 222 ITR 508 (SC); ii .....

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emorandum explaining provisions of Finance Bill 1994 through which section 55(2) proposed and submitted that it was brought in the Statute to avoid computation of the bonus of the right shares as per different methods and the purpose of Inserting the said section was to prescribe uniform method for computing basic cost of acquisition thereof. The aforesaid provision does not provide that amount mentioned therein would be regarded as sacrosanct in all and every situation. In other words, section .....

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submitted that the interest capitalized upto the date of transfer has to be allowed as cost of acquisition. DECISION 77. We have heard the rival submissions and considered the entire gamut of facts placed before us and the provision of lawand decisions referred to at the time of hearing. As discussed in our earlier part of the order, the assessee had subscribed to 15,67,64,689 right shares of SBPL on 09.08.2012, i.e., inthe F.Y. 2012-13, in terms of 4th Supplement Agreement.The said right shares .....

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e of computing capital gain arising on transfer of such shares.The Assessing Officer first of all denied the cost of acquisition in view of the provisions contained in section 55(2) and held that meaning of cost of acquisition and cost of improvement as appearing in section 48 & 49 has been restricted by the scope of section 55(2)(b). One of the major limb of the arguments of Mr. Ajay Vohra was that interest incurred for acquisition of right shares has to be allowed as cost of acquisition wh .....

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se of business. Here in this case, it cannot be doubted that interest expenditure incurred in respect of the funds borrowed were directly utilized and had a proximate nexus to the acquisition of right shares andalso the principalloan amountis liable to be included as part of cost of acquisition of such assets. The submissions made by the parties in this regard and reliance placed on catena of decisions has already been discussed in detail herein above. Before us, Mr. Srivastava, Ld. Special Coun .....

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specific contention, we will first examine, whether within the scope of section 55(2), interest can be allowed as cost of acquisition of right shares or not. 78. U/s 45, the capital gains rising on transfer of a capital assets has to be computed as per section 48 by reducing from full value of consideration received on transfer, aggregate of the following amounts;firstly, the expenditure incurred wholly and exclusively in connection with such transfer; and secondly, the cost of acquisition of th .....

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ions 48 and 49, cost of acquisition ,- (a) xxxxxxxxxxxxxxxxxx (aa) in a case where, by virtue of holding a capital asset, being a share or any other security, within the meaning of clause (h) of section 2 of the Securities Contracts (Regulation) Act, 1956 (42 of 1956) (hereafter in this clause referred to as the financial asset), the assessee- (A) becomes entitled to subscribe to any additional financial asset; or (B) is allotted any additional financial asset without any payment, then, subject .....

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x From a plain reading of the aforesaid provision, it can be seen that the cost of acquisition inthe case of additional financial assets like bonus shares, right shares, etc., firstly, where the assessee becomes entitled to subscribe any such additional financial assets; or secondly, is allotted any additional financial asset without any payment; then,in the first case,the cost of acquisition of such financial assets (herein this case right shares) would be the amount actually paid for acquiring .....

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payment then it has to be reckoned as NIL. Here as stated above,the assessee was entitled to subscribe to right shares for a payment of ₹ 300 crores and such an amount has actually been paid by the assessee. In the present case, ostensibly, sub-clause (iii) would be applicable, because the financial assets has not been allotted to the assessee without any payment in which case the cost of acquisition would have to be taken as NIL. The said clause makes it evidently clear that cost of acqui .....

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Whence the cost of acquisition with regard to the additional financial assets, i.e., right shares has been strictly circumscribed to the amount actually paid for acquiring such shares,then it is not open to include any other costs like interest expenditure incurred or accrued on loan taken for acquiring the right shares. Had there been the intention of the legislature to allow any additional cost to such kind of additional financial assets, then there was no requirement to insert part A in clau .....

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Mr. Vohra afterreferring to the Memorandum explaining the provision of Finance Bill, 1994 through which section 55(2) was proposed to be inserted, had submitted that the intention of the legislature was only to prescribe uniform method for computing the basic cost of acquisition of bonus/right shares and not to restrict to only the actual cost paid. We are unable to agree with such an argument, because the said Memorandum explains the background on which the said provision was brought in the sta .....

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right shares, right entitlement, etc. In the absence of any such provisions, courts have laid down certain methods for determining the cost which are not strictly in accordance with commercial principles. For the purpose of avoiding complicated calculations, the Finance Bill proposes to introduce a simple and unambiguous set of provisions for computation of the cost of acquisition of financial assets, including shares, where there is an entitlement to subscribe to additional financial assets on .....

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the rights share. The amount realized by the original shareholder by selling his rights entitlement will be short term- capital gains in his hands (as the cost is taken as nil). The period of holding of the rights entitlement will be reckoned from the date of offer made by the company to the date of renouncement. The said memorandum merely clarifies that earlier there was no specific provision dealing with the determination of the cost of the financial instrument such as right shares, right enti .....

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rified also by the notes and clauses of the Finance Bill and also by the CBDT Circular No.684 dated 10.06.1994. The relevant clause18 of the Notes and clauses on sub-section (2) of section 55 of the income Tax Act, 1961 is reproduced hereunder:- It is also proposed to insert a new clause (aa) for the purpose of defining the cost of acquisition of a share or any other security (referred to as financial asset in the section), and of the right to renounce the entitlement, in those cases where the a .....

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erson, the cost of acquisition shall be taken to be nil in the case of such assessee; (iii) in the case of financial asset subscribed to by the assessee on the basis of his entitlement, i.e., rights issue, the cost of acquisition shall be the amount actually paid by him for acquiring such asset ; (iv) in the case of additional financial asset purchased by the person in whose favour the right to subscribe to such additional financial asset has been renounced, the cost of acquisition shall be the .....

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f additional financial assets like right issues etc. Thus, the reliance placed by the Sr. Counsel on the aforesaid memorandum and notes and clauses are of no avail and does not support the case of assessee. 80. Thus, in our opinion in case of the assessee who has subscribed to right shares by paying the actual amount of ₹ 300 crores, then by virtue of specific provision contained in section 55(2), only amount to be allowed as cost of acquisition would be ₹ 300 crores; and no other co .....

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rties as to whether the cost of interest can be capitalized for the purpose of cost of acquisition while computing the transfer of shares or not, we are not entering into semantics of such arguments, because here in the present case, the cost of acquisition is purely on acquisition of right shares and as discussed in the foregoing paragraphs, only amount actually paid would be allowed and no such interest can be allowed as cost of acquisition in the case of rights shares in terms of section 55(2 .....

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uld be allowed while computing the income shown under the head income from other sources ; and he also pleaded that direction should be given that such interest should be allowed against income from other sources in the earlier year, i.e., AY 2013-14, for which he has relied upon certain decision as noted above. First of all, it is noticed that, neither this issue was raised before the AO,nor before the Ld.CIT(A), nor any such ground or additional ground has been taken before us. Secondly, even .....

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contention of the Revenue that the interest paid on acquisition right shares is to be allowed as deduction while computing the income under the head income from other sources , then the interest incurred for the relevant previous year may be allowed as deduction under the head other source and resultant loss should be set off under the head capital gains in terms of section 71. Such a premise on which such plea has been raised, first of all, is not arising out of the arguments put forth from the .....

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head income from other sources neither in the AY 2013-14 nor in the AY 2014-15, but no such claim was made that such an interest could be allowed alternatively from income from other sources. Nowhere, the AO had mentioned that such interest can only be claimed or is allowable under the head income from other sources . At this stage, it would be very difficult to entertain such a plea, when it is neither emanating from the order of the AO nor from the order of the Ld.CIT(A), nor any ground or ad .....

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ent,would be difficult to entertain especially when the facts regarding to admissibility of such claim is not arising from the impugned order. Accordingly, we reject such plea taken by the Ld. Sr. Counsel for the assessee at the re-joinder stage without complying with the necessary requirement of Rules or giving the opportunity to the other party to rebut or place its objections. Thus, Ground No.3 & 3.1 are dismissed. E. Issue relating to gain arising from sale of unlisted shares to be taxed .....

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d. 13.07.2012 16.12.2013 17 months (9,190) Vana Retreats Pvt. Ltd. 13.07.2012 16.12.2013 17 months (9,190) - Scorpio Beverages Pvt. Ltd. 01.04.2012 21.03.2014 23 months 8251,259,702 Capital Gain 825,12,22,942 The AO, required the assessee to explain as to why the sale of shares of SBPL should not be taxed as short term capital gain in view of the provision of section 2(42A), as the period of holding is less than 36 months and being unlisted shares why it should not be treated as short term capit .....

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d will be treated as long term capital asset if the period held is more than 12 months.The exception was only curved out for unlisted shares sold on or after 1.07.2014, from where the period for holding for unlisted shares to qualify as long term was increased to 36 months by the Finance (No.2) Act, 2014, which again later on was reduced to 24 months by the Finance Act, 2016. However, the AO held that the proviso of sub-section 42A of section (2) clearly specifies that for the purpose of conside .....

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an 36 months and not 12 months; and only period of holding for listed companies can be considered as 12 months instead of 36 months, if the particular share is transferred during the period beginning on 01.04.2014 and ending on 10.07.2014. After referring to these provisions, he re-characterized the long term capital gain and short term capital gain. 84. Ld.CIT(A) too upheld the action of the AO, observing that shorter period of holding of 12 months qua the unlisted shares instead of 36 months w .....

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A) was not available to the assessee. Arguments on behalf of the Assessee: 85. Before us, Ld. Sr. Counsel, Mr. Vohra after inviting our attention to the provisions of section 2(42A) as was applicable to the year under appeal, i.e., in the AY 2014-15, submitted that it is an unambiguous from the plain reading of the section that the shorter period of holding of 12 months is applicable to the shares either listed or unlisted held in a company. There was no such distinction under the Statute for de .....

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eparate category share held in a company . To clarify this legal position, he took us to the legislative history of the amendments carried out from time to time in section 2(42A). First of all, we drew our attention to the amendment by the Finance Act, 1987 , wherein shorter period of holding of 12 months in certain exception cases was inserted in section 2(42A) of the Act, whereby a proviso was added clearly specifying that in the case of share held in a company, 36 months was substituted with .....

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ties listed in a recognized stock exchange in India which was applicable to the AY 2014-15, including the assessment year under consideration. The aforesaid inclusion was to the extent of benefit of shorter holding period for a new category of financial instrument, i.e., in security other than shares in a company. The condition of listed in a recognized stock exchange was applicable only to the new category and not to the earlier category to the share held in a company. To clarify the purpose in .....

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n shares of a company whether listed or unlisted. Coming to the amendment brought by the Finance (No.2) Act, 2014, whereby the provisions of section 2(42A) were further amended and the words shares held in a company were removed from first proviso w.e.f. 01.04.2015, thereby taking away the benefit of shorter period of holding of 12 months available to unlisted shares to qualify as long term capital assets.Simultaneously, 2ndproviso was inserted to provide that unlisted shares sold during the per .....

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ular No.1/2015 dated 21.01.2015, wherein the purpose of bringing the said provisions brought w.e.f. 01.04.2015 has been clearly spelt out. Thus, he submitted that considering the facts that all unlisted shares sold during the year were held by the assessee for the period of 12 months, then surplus arising from sale thereof were taxable as long term capital gains. Arguments on behalf of the Revenue: 86. On the other hand, Special Counsel, Mr. G.C.Srivastava referring to the provision of section 2 .....

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t, 1963; or * (iii) a zero coupon bond; The capital asset would be regarded as a short term capital asset, if it is held for a period of not more than12 months. He then drew our attention to the meaning of the section 2(H) of the securities as defined securities, contracts (regulations) Act, 1956 which reads as under:- (h) securities include- (i) shares, scrips, stocks, bonds, debentures, debenture stock or other marketable securities of a like nature in or of any incorporated company or other b .....

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on (in effect a lower holding period) contained in the proviso. The use of the expression or any other security necessarily puts the shares and other securities as a class and these have got to be listed to enjoy the benefit of the proviso. The words any other put the two-shares and other securitiesin the same basket. One cannot be read independent of the other. The contention put forth by the assessee cannot flow from the language employed in the proviso. If the legislative intent were to treat .....

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would have been drafted had the legislative intent been the same as the appellant is seeking to canvass.This contention becomes significant in view of the fact that the law as enacted, imports the definition of securities as contained in the Securities Contracts Regulation Act by virtue of Explanation 2 to the provision. It would really be a wholly untenable proposition to suggest that the qualification of being listed in a stock exchange will apply to all securities other than shares.Such an i .....

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ubsequent amendments is irrelevant and wholly out of context for the reason that: a. there is no ambiguity in the language employed in the proviso; b. the listing requirement for being entitled to the exception contained in the proviso was introduced for the first time w.e.f. 01.04.1995 and once this condition was brought in, it was applicable to all kinds of securities of a company as defined in Securities Contracts Regulation Act unless stated otherwise in express terms; c. it would be absurd .....

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able statute, such reliance is unnecessary and uncalled for; c. such a Memorandum cannot assign a meaning to a statutory provision which does not expressly flow from the said provision. (In this case, it runs contrary to the provision) He submitted that, it is a well-accepted rule of interpretation that the use of a comma or the absence of it cannot alter an otherwise clear and unambiguous meaning flowing from the provision. He further submitted that both kinds of securities, shares of a company .....

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al submissions, perused the relevant finding given in the impugned order as well as the relevant provisions as referred to by the parties. From the facts as narrated above, it is not in dispute that the period of holding of unlisted shares, i.e., rights shares of SBPL is more than 12 months and less than 36 months (23 months). The assessee had offered the gains arising from sale of such shares as long term capital gain which has been re-characterized/reclassified as short term capital gains by t .....

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than thirty-six months immediately preceding the date of its transfer: Provided that in the case of a share held in a company or any other security listed in a recognised stock exchange in India or a unit of the Unit Trust of India established under the Unit Trust of India Act, 1963 (52 of 1963) or unit of a Mutual Fund specified under clause (23D) of section 10 or a zero coupon bond, the provisions of this clause shall have effect as if for the words thirty-six months , the words twelve months .....

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the Unit Trust of India Act, 1963; or fourthly, unit of mutual fund specified under clause (23D) of section (10); or lastly, Zero Coupon Bond; andonly for these categories of capital assets, the period of holding of 36 months have been substituted for 12 months. In other words, the capital assets enlisted in proviso shall be reckoned as short term capital assets if such asset are held by an assessee for not more than 12 months. So far as the term used shares held in a company are concerned, ther .....

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.This is clear from the following provision as then existed post amendment w.e.f. 01.04.1988:- (42A) short-term capital asset means a capital asset held by an assessee for not more than thirty-six months immediately preceding the date of its transfer: Provided that in the case of a share held in a company, the provisions of this clause shall have effect as if for the words thirtysix months , the words twelve months had been substituted. Here no such condition was placed in the aforesaid proviso .....

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shares in a company. Under this provision, the condition of listed in a recognized stock exchange was applicable only to the new category and not to the earlier category of shares held in a company . This has been clarified by Memorandum explaining the provision in the Finance Bill which read as under:- Period of holding in the case of securities and units of Mutual Funds Long-term capital assets enjoy certain tax concessions vis-a-vis short-term capital assets. The Income-tax Act defines long-t .....

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the capital market. The units of the Unit Trust of India and Mutual Funds specified under section 10(23D) of the Income-tax Act are the instruments through which the small investors are increasingly getting the benefit of investment in the capital market. In order to provide such units and all the securities traded in the recognised stock exchanges a level playing field with company shares, it is proposed to amend the provisions of section 2(42A) so that the maximum holding period for which suc .....

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-96 and sub-sequent years. [Emphasis added is ours] The aforesaid memorandum clearly makes a distinction that there are many financial instruments other than the company shares through which the investor are entering the capital market. In order to provide such units and all the securities traded in recognized stock exchange; a level playing field with the company s share is proposed to be amended. Thus, the said memorandum clearly makes a distinction between the company shares and other than co .....

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an-equity oriented fund or a zero coupon bond], the provisions of this clause shall have effect as if for the words thirty-six months , the words twelve months had been substituted: Provided further that in case of a share of a company (not being a share listed in a recognised stock exchange) or a unit of a Mutual Fund specified under clause (23D) of section 10, which is-transferred during the period beginning on the 1st day of April, 2014 and ending on the 10th day of July, 2014, the provision .....

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struments. In this manner the Legislature has clearly withdrawn the benefit of shorter period of less than 36 months for the unlisted shares. But, the 2nd proviso makes it very clear that the unlisted shares of a company or unit of mutual fund will enjoy the benefit of shorter period only when the shares are transferred during the period between 01.04.2014 to 10.07.2014.The CBDT Circular while providing the explanatory notes to the amendments has clarified the said amendment in the following man .....

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f the Income-tax Act has been amended so as to provide that an unlisted security and a unit of a mutual fund (other than an equity oriented mutual fund) shall be a short-term capital asset if it is held for not more than thirty-six months. However, in the case of share of an unlisted company or a unit of a Mutual Fund specified under clause (23D) of section 10 of the Income-tax Act, which is transferred during the period beginning on 1st April, 2014 and ending on 10th July, 2014, the period of h .....

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