TMI Blog2017 (12) TMI 306X X X X Extracts X X X X X X X X Extracts X X X X ..... alue 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 transferor under the deeming fiction of Section 50CA or Section 56(2)(x), then same are not applicable for the year under consideration 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. Rationalisation of capital gain arising from transfer of right shares 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 p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... asset', the period of holding was 36 months and not 12 months as per the first proviso to section 2(42A) (as applicable during the year under consideration), read with section 2(29A) of the Act. 1.2 That the CIT(A) erred on facts and in law in holding that the shorter period of 12 months to qualify as 'long term 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 of ₹ 2233,42,850,070, determined by adopting price per share of ₹ 142.70. 2.1 That the CIT(A) erred on facts and in law in confirming the action of the assessing officer in substituting actual sale price with notional/alleged consideration, determined as per alleged fair price of ₹ 142. 70 per share, invoking section 50D of the Act. 3 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 interest in Vodafone India Pvt. Ltd. * HEL: Hutchison Essar Ltd. * VIHL: Vodafone International Holdings Pvt. Ltd. * VIL: Vodafone India Pvt. Limited. * Kotak: Kotak Mahindra Capital Ltd. (Valuer) * DCF: Discounted Cash Free Flow Method: * NAV: Net Asset Value Method * FMV: Fair Market Value. 4. Since the major issue relates to the addition made on account of computation of capital gain by enhancing the fair market value of SBPL shares as raised vide ground no. 2, therefore, we are taking up this issue 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 erstwhi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Mahindra. First of all, he noted the valuation of Vodafone India Pvt. Ltd. (in short VIL) which was valued at ₹ 56448.03 crores. However as far as this valuation of entire equity shares of VIL is concerned, the AO has not ultimately disputed this figure which was worked out on the 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 crores, he thus, came to a conclusion thatthe valuation adopted by the assessee for the SBPL shares is not based on the fair market price. He has also noted that SBPL s holding in VIL was 9.65%, which though has been strongly objected/contested by the assessee before us that the same has wrongly been taken at 9.65%, but instead it is 8.90%. 6. The AO, thereafter, traces the background of transaction of acqui ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 then the valuation of the SBPL shares would be determined accordingly. Thus, it was submitted that the transfer price of the entire SBPL shares was $ 266.250, that is, ₹ 1088 crores as per the then exchange rate. When 49% of the shares were sold on the basis of same transfer price at ₹ 533 crores, i.e. 49% of 1088 crores, then the balance share value was ₹ 555 crores alongwith the value of right shares at ₹ 300 crores shares, aggregating to ₹ 855 crores. Hence, what 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 accor ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... aid petition, the Revenue has sought for admission of following as additional evidence:- a) Framework Agreement dated 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., MV Healthcare Services Pvt. Ltd., Telecom Investments India Pvt. Ltd. ( TIL ) and Jaykay Finholding (India) Pvt. Ltd. The financial statements have been downloaded from the website of MCA, as filed by the respective companies. 10. Ld. Spl. Counsel, Shri G.C. Srivastava, vehemently submitted that these documents are quite relevant and has a vital bearing on the issues involved as it not only gives the background of the nature of agreements and transactions entered between the parties but also provides the basis for determination of valuation of shares wh ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ( iii) The document also explains how some part of shareholding of HEL got vested in TIL which is a step down subsidiary of the appellant. The holding of TIL in HEL forms the basis of the transfer price. ( iv) Thiswrite up would help the Hon ble Bench in having a comprehensive understanding of the background of the issues involved. C) Financial Statements of Subsidiaries:- ( i) This paper book contains financial statements of Scorpio Beverages Pvt. Ltd. and its step down subsidiaries including Jaykay Finholding India Pvt. Ltd. ( ii) One of the issues involved in the ground of appeal no. 2 is the mechanism to work out 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 correctness or otherwise of such liabilities can only e ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the consideration accruing to the assessee from the various Framework Agreements. 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 document was filed before the Tribunal before the commencing of the arguments of the Revenue and after completion of the arguments of the Ld. Counsel for the assessee. Thus, in the light of the judgment of Special bench which was rendered on similar set of facts and circumstances, these additional evidences should be admitted as it would only bring factual clarity to the issues involved and there is no attempt whatsoever on the part of the Revenue to set up any new case for the revenueby filing these documents. Lastly, he prayed that when the question of substantial justice involved, all procedural and technical aspects m ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ellant seeks to place on record its specific objection against admission of each of the aforesaid additional evidences for the following reasons: ( a) Re:Framework Agreement dated 01.03.2006 The aforesaid agreement was executed in 2006 between the appellant along with companies in which the appellant held direct and indirect interest, with 3 Global Services Private Limited ( GSPL ) providing certain options to GSPL to acquire shareholding in the aforesaid companies belonging to the appellant. (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 alleged that the aforesaid agreement goes to the root of the matter involved in ground of appeal no.2 and was never brought to the notice of the lower authorities by the appellant. It is submitted ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y 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 therein could have been exercised, the entire stake of Hutchison Group in the Indian telecom company, i.e., HEL was acquired by Vodafone International in May, 2007. As a result of the aforesaid acquisition, the existing option agreements entered by various Indian partners, including the appellant, with Hutchison Group were rescinded and superseded by new agreements entered into with the Vodafone Group on fresh terms and conditions. It was under the aforesaid circumstances that the aforesaid agreement 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 condition ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and pursuant to right issue in terms of the amended agreement dated 7.8.2012); and iii) option fee received and offered to tax by the appellant in terms of the agreement dated 5.7.2007 read with the amendments thereto. The agreement dated 1.03.2006 sought to be placed on record as additional evidence not having been considered by the AO and not being relevant to 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 aforesaid write up categorically provides that the same has been prepared on the basis of public record and other information available in the public domain, which reads as under:- i. As far as the information relating to the structure of Hutchison Group (as defined below), and its acquisition of interests pertaining t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 Supreme Court, does not, in our respectful submission, constitute evidence which can be taken on record for adjudicating the present appeal of the appellant, considering that - (i) the appellant was not even a party in the litigation before the Supreme Court; (ii) the pleadings of Vodafone do not bind the appellant; and (iii) as per the preamble to the aforesaid write up, the same was prepared on the basis of documents/information available in public domain and certain general enquiries. Reliance, in 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... off the objection regarding information obtained in the other proceedings very summarily by saying that the counsel who appeared in the proceedings was fully briefed with the proceedings in the other cases toy so that it cannot be said that the 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-examine Harihara Iyer the original proceedings. Apart from the fact that the statements of Harihara Iyer relied upon by the Tribunal are not legal evidence in these proceedings the reference to Choodamani Iyer can relate only to Choodaniani Iyer as representing the N.S.V. family and not in his individual capacity Further, the statement of Harihara Iyer is absolutely valueless inasmuch as Choodamani Iyer never got an opportunity to cross-examine Harihara ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rigid to burden the assessee with an extra amount of tax on vagueinformation given to him without himself verifying its truthfulness or reliability. Inthe preset case, the Income-tax Officer made no independent enquiries and merelyrelied on the copy supplied by the sales tax department. XXX The sales tax department also did not notify to the Income-tax Officer that on the basis of that Bahi they had made enquiries from other parties with whom M/s. Goel Iron Stores had dealings and which were mentioned in that Bahi. If only the transactions relating to the assessee were mentioned in that Bahi, then on the face of it was unreliable. The Income-tax 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 Appellate Assistant Commissioner took the cor ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nished by the Revenue of Scorpio and other intermediate companies for the said years are 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 METHODOLOGY AND ASSUMPTIONS We have computed the equity valuation of SBP, and the value of each company in the HoldCo Chain, based on the value of the downstream investments of SBP, or the respective company in the HoldCo Chain, as the case may be (which, in each such case, is linked to the value of VIL), and adjusting the same for the net value of other assets and liabilities of such company based on the books of accounts of such company as on31 December. 2013. except that in case of any outstanding preference shares, the same is been valued as on 28 February. 2014 as per its contractual terms. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sion, is completely irrelevant and extraneous to the issue under consideration. The relevance of the same has not been pointed out in the impugned application for admission of additional evidence. The utilisation of funds procured by Scorpio on rights issue has, in our respectful submission, no bearing on the valuation of shares of Scorpio or any of the intermediate companies. In that view of the matter, the Revenue cannot, in our respectful submission, be permitted at this belated stage to refer to the balance sheet 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 time before the Tribunal deserve to be rejected and not admitted /taken into consideration while adjudicating ground of appeal No.2 raised by the appellant. C. Dec ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... erstanding 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 and the percentage of shareholding in HEL which has been taken over by the Vodafone in May 2007. Though nothing much turns around on this write-up of the structure and has no direct bearing on the adjudication of the issues involved but it merely gives the background to understand how various entities were involved in the share holding pattern by different entities including the assessee in HEL and later on VIL after take over post May 2007. Thus, it is not in the form of additional evidence, therefore, 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 ev ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sar Limited (HEL) which was subsequently renamed as Vodafone India Limited ( VIL ). It would be pertinent to point out that HEL, a company engaged in the business of providing telecom services across different circles in India, was originally held by Hutchison Group, Hong Kong with certain other Indian partners, including AS through SBPL. On 08.05.2007, Hutchison Group 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. ( Vodafone International); and * 3 Global Services Private Limited (now known as Vodafone India Services Private Limited), which was an indirect subsidiary of Vodafone International [hereinafter referred as GSPL ]. 17. The above referred Framework Agreement provided that as and when permitted by applicable law ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ion, 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 5.7.2007 is reproduced hereunder for ready reference: Schedule 1 Determination of the Transfer Price a) For the purposes of determining the Transfer Price in accordance with Clause. 4.6, the following formula shall be applied:- ( i) The Transfer Price shall be an amount equal to the aggregate ofIndian Rupees equivalent of US$266,250,000 (United States Dollars Two Hundred arid Sixty Six Million Two Hundred and Fifty Thousand only), converted into Rupees at the prevailing US$:Rs. exchange rate published in the London edition of the Financial Times on the business day immediately prior to the Completion Date 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 Financi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... se value of HEL exceeded USD 25 billion. In the aforesaid illustrative working, the value of NDC, which was 100% held by SBL, was worked out at USD 266.25 million, which, it appears, was adopted by the parties as consideration payable under clause (a)(i) of Schedule-1 of the Agreement. Accordingly, 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 change in FDI regulations relating to sectoral cap, which enabled GSPL to acquire some shares in Scorpio and thereby increase its indirect shareholding in VIL. Accordingly, on 07.04.2009, CGP and a person nominated by GSPL and AS entered into an agreement relating to transfer of 4900 shares of SBPL, constituting 49% stake, by assessee to CGP in accordance with the terms and conditions agreed vide Framework A ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nted 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 16.12.2009) * For Rights Shares: Rs. 300 crores * Total: Rs. 855 crores In the year 2013, there was further relaxation in FDI regulations, which permitted 100% FDI in the telecom sector. As a result, CGP decided to acquire the remaining entire 51% stake in Scorpio held by AS, at re-negotiated lumpsum consideration of ₹ 1241.32 crores, as against lumpsum consideration of ₹ 855 crores originally payable as per the Framework Agreement dated 05.07.2007 read with the Fourth Supplement deed dated 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ubmitted that in terms of section 48 what is chargeable under the head capital gains u/s 45(1) of the Act has to be computed by deducting from the 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 support, he relied upon the following judgments, compilation of which has been filed separately before us:- CIT V. George Henderson and Co. Ltd. 66 ITR 622 (SC) (heavy reliance was placed on this decision) CIT V. Gillanders Arbuthnot Co.: 87 ITR 407 (SC) K. P. Varghese v. ITO: 131 ITR 597 (SC) CIT v. Shivakami Co. P. Ltd. 159 ITR 71 (SC) CIT v. NandiniNopany: 230 ITR 679 (Cal.) CIT v. Ms. Sushila Mittal Others: 250 ITR 531 (Del.) CIT V. Kami Singh 256 ITR 165 (Del) ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... i Vallabhdas and Co. [CIT v. Shoorji Vallabhdas and Co., (1962) 46 ITR 144 (SC)] it was held as follows: (ITR p. 148) ... Income tax is a levy on income. No doubt, the Income Tax Act takes into accounttwo points of time at which the liability to tax is attracted, viz., the accrual of the income or its receipt; but the substance of the matter is the income. If income does not result at all, there cannot be a tax, even though in bookkeeping, an entry is made about a hypothetical income , which does not materialise. Where income has, in fact, been received and is subsequently given up in such circumstances 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 which this Court also considered the dictionary meaning of the word accrue and held tha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to attract Sections 45 and 48 of the Income 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 subject of transfer. The difference, if any, between the fair market value of the asset and the actual consideration received was taxed as deemed gift under section 4(1)(a) of the Gift Tax Act, 1958 in the hands of transferor, until repeal of the said Act with effect from 01.10.1998. Accordingly, after abolition of the Gift Tax Act, the difference between the fair market value and actual consideration received on transfer of the capital asset was not subject to taxation in the hands of either the 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nce between the fair market value of such shares and the declared consideration. The aforesaid insertion would further go to show that prior to assessment year 2018-19, there was no provision in the Act to bring to tax the difference, if any, between the fair market value of the shares of an unquoted company, subject of transfer, and the actual consideration received, in the hands of the transferor, although such difference was subject matter of 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 consideration received amounting to ₹ 997.92 crores and if the Revenue alleges that the assessee received in amount in excess of the declared consideration, then onus was on the revenue to demonstrate with tangible evidence that excess considerat ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ts 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 05.07.2007, during the AY 2010-11 which was offered to tax under the head Long Term Capital Gains which was been accepted by the Revenue as such.In absence of any change in facts more particularly qua the agreement dated 05.07.2007 and mode of computation of transfer price contained in Schedule 1 thereof, the Revenue now cannot be permitted to change its stand and argue that actual consideration received by the assessee on transfer of share needs to be substituted with alleged market fair value. In support 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 (D ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ady on the statute prior to the former section being incorporated in the Act. If section 50D of the Act was sufficient to capture the situation as in the present case, then there was no necessity to insert provision of Section 50CA of the Act in the statute by the Finance Act, 2017 w.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 authority of law and, therefore, cannot be upheld and same should be deleted. 27. After having made his detailed submissions that the addition made by the AO by enhancing the sale consideration for the purpose of computing the capital gain, Mr. Vohra by way of alternative argument and without prejudice to his earlier submission, submitted that,if FMV of the capital assets can be substituted by actual/full value of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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. On that basis, indirect stake of the appellant in VIL on pass through basis was 3.6512% (being 41% of 8.9055% and not 3.95% as considered by the assessing officer in paragraph 7.14 on page 26 of the assessment order passed. The aforesaid revised percentage of economic interest cannot be disputed by the Special Counsel of the Revenue also. (iii) Ignoring value of intermediary companies, while computing FMV of Scorpio adopting enterprise value of VIL determined by Kotak: In the assessment order, the 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 pric ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f clauses a (i) and a (ii) of Schedule 1 of the Framework Agreement dated 05.07.2007. The said report also demonstrates that 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 Capital Company Ltd. ( KMCC ) to carry out an equity valuation of SBP as of February 28, 2014 ( Valuation Date ) and provide the price per share of SBP, in relation to the proposed acquisition of shares of SBP that CGP does not already own from the Sellers. SBP, through a series of companies in the HoldCo Chain, is an indirect shareholder of VIL. We have carried out the equity valuation of VIL using a Sum of the Parts Approach, which involves valuation of VIL Group (which is involved in providing telecom services across all telecom circles in India) and the val ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... outstanding preference shares, such as, premium payable on redemption or cumulative amount of dividend payable on such shares etc., as per the contractual terms of issue thereof, on a rational and scientific basis, which were not reflect in the financial statements.On the basis of the aforesaid method, Kotak arrived at the fair value of Scorpio at ₹ 2065 crores, which resulted in price per share of ₹ 5.40. C. Valuation methodology adopted by Kotak justified: Mr. Vohra drew our attention to the structure chart on page 6 of Kotak s 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 value of holding companies including SBPL. Accordingly, since SBPL had no direct shareholding in VIL, which was held through several intermediate c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eement 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 reliance on agreement dated 1.03.2006 is completely misplaced for the reason that the Framework Agreement dated 01.03.2006 was entered amongst the assessee, SBPL [a company wholly owned by the assessee]; MVH [a wholly owned subsidiary of SBPL]; NDC [a wholly owned subsidiary of MVH] GSPL (a company belonging to the Hutchison Group at the relevant time]. The aforesaid agreement has no relevance with the transaction under consideration as HEL is no longer the party and, therefore, it is neither required 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 Vodaf ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ch would result in GSP or its nominee holding more than 50% of the issued share capital of NDC. acquisition of TII shares, AS granted GSPL an option to purchase equity shares of SBP. ii Clause (h): In consideration of AS granting call option, GSPL granted put option to AS to require GSPL to purchase equity shares of SBP. Clause 4.2: Deleted Clause 4.3: AS shall have the right to require GSPL or its nominee to purchase any or all of the SBP shares as and when permitted tinder the applicable Indian laws and regulations. 3. Transfer price agreed Clause 4.6: Shall be determined as follows:- i. Such FMV as may agreed between the parties, 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in the fresh agreement dated 05.07.2007. It is pertinent to point out that the assessing officer has also accepted that the disinvestment of shareholding in SBPL was in terms of the binding and governing agreement 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 to tax by the appellant in terms of the agreement dated 5.7.2007 read with the amendments thereto. 30. In view of the above and on the principles of consistency, he submitted that the respondent Revenue cannot be heard to contend that the terms of the agreement dated 05.07.2007 need to be ignored and seek to draw reference to the terms of the old agreement dated 01.03.2006, sought to be placed on record as additional evidence, to canvass an altogether new case for the first ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 of the Agreement provided that the price payable by GSPL to AS on transfer of shares pursuant to exercise of option by GSPL shall be determined in accordance with the formula set out in Schedule 1 of the agreement. In view of the above, the price for transfer of shares was to be determined in accordance with Schedule 1 of the Framework Agreement dated 05.07.2007, which has been reproduced supra. As per the said clause; the shares were to be transferred by AS at a minimum transfer price of USD 266.25 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 08.05.2007 amounted to ₹ 40.88 per dollar (which has not been disput ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ties as also the consideration payable 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 contract need not be performed. He submitted that it is not open to the Revenue to question the conduct of the parties in revising /novating an already executed agreement, which is a matter of contract/agreement between the parties. The Share Purchase Agreement dated 12.3.2014 was entered into to document exercise of call option by GSPL to purchase the shares held by AS in Scorpio and to record the revised consideration payable for such transfer. While it is true that the essence of the Framework Agreement dated 5.7.2007, viz., vesting of put/ call option and transfer of shares pursuant thereto was retained in the Share Purchase Agreement dated ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e SBPL. The issue of any receiving additional consideration is always a matter of mutual understanding or contract between the parties and it does not open to the Revenue to question unless the Revenue can demonstrate with tangible evidence placed on record that arrangements lacks bonafide or has been entered into for extraneous consideration. He referred to the judgment of Hon ble Supreme Court in the case of CIT vs. Daulat Ram Rawatmul (87 ITR 349), wherein Hon ble Apex 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 exceeded USD 25 billion as per clause (a) (ii) of Schedule 1 of the Framework Agreement dated 05.07.2007, considering that the additional acquisition of shares of VIL by the intermediary companies resulted in corresponding in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 the balance 25% out of the total stake of 67% was held through the companies owned and controlled by the appellant, Aseem Ghosh, IDFC etc. The holding structure stands recorded and discussed elaborately in the decision of the Hon ble SC in the case of Vodafone vs. UOI in CA No. 733/2012. The ownership structure was placed before the Hon ble Bench at the time of oral hearing. c) With the view to beat the equity cap of 49%, an arrangement was entered into between the appellant and the Hutchison Group 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... a third party market based mechanism, then the transfer price formula shall be suitably adjusted. If the beneficial interest of the appellant in HEL suffers any change during the period, a fair and reasonable adjustment in the price would be made. (f) On 8th May, 2007, Hutchison group sold its entire stake to Vodafone 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 arrangements. Thus, while the appellant facilitated Hutch to hold a certain economic interest in the Indian company, HEL, he continued to extend similar facilities to Vodafone with similar call/put options etc. A new framework agreement was entered into on 5th of July, 2007, withthesame parties in place and Vodafone Pic acting only as a confirming party. (g) Mr. Srivastava emphasi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ion 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 further amounts of ₹ 2,76,00,000 as a onetime payment and ₹ 5,00,00,000 as fee p.a. for holding these shares. It was also agreed that the transfer price of the right shares would be ₹ 300 crores. (o) A share purchase agreement (SPA), dated 12th March, 2014 was entered into which followed the lifting of the foreign equity cap. CGP purchased entire 51 % stake held by the appellant in HELNIL for a total consideration of ₹ 12,41,32,06,200. The details of the basis for arriving 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d taxes, and all other cash flow items relevant for valuation. We clarify that in respect of VIL and Indus, we have not been provided with financial projections below earnings 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. Indus, companies in the HoldCo chain and SBP. . Thus he submitted that the aforesaid disclaimer of Kotak explicitly brings out material weaknesses in the assumptions and the final value arrived at by them. 38. After narrating the entire facts in the aforesaid manner, he filed a chart showing changes in the interests and the percentage of the holding of the assessee in HEL and later on in VIL at different points of time and also a chart showing accrued sale consideration of call option under different agreement which ha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 18.08.2010 Sh. Analjit Singh sold 4,900 shares out of 9,000 shares of M/s SBPL to M/s CGP on 17.12.2009. 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 received as the minimum price of shares. (Presuming the value of HEL/VIL shares has not crossed 25 billion threshold). Therefore the total consideration at this rate is 135,787,500 X 40.88 which comes to ₹ 555,09,93000/- + If market value of issued share capital of HEL exceeds US$ 25,00,00,00,000 the SBP Ltd. value will include proportionate amount of such excess amount converted into Rupees at prevailing US$ + 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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. Supplemen -tary Agreement dated 07.08.2012 09.08.2012 Issue of right shares On 9 th August 2012 right Issue was made and right Shares were allotted at Par i.e. ₹ 10 per shares as under:- Name of shareholder No of original share held No. of rights issue shares held Sh. Analjit Singh 4,100 15,67,64,689 Smt. NeeluAnaljit Singh 1,000 3,82,35,290 CGP 4,900 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... It is not clear how the agreed price was arrived at by both the parties to transaction. For original shares, the price works out to be ₹ 18,45,726/- (9,41,32,06,200 / 5100) per share. It is worth noticing that on the same day i.e. on 12.03.2014 as per the Sale purchase agreement dated 12.03.2014 the value of shares of 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 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s 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. Valuation by Hybrid method. Therefore,it arrived the share price of SBP Ltd. by following a Hybrid method which is not a prescribed method as per the Income Tax Act / Rules, nor by any yardstick, a recognizable /correct method of valuation. 39. Apart from that, he also filed a chart showing working of the liabilities of the subsidiary companies for computing the share value of SBPL. 40. After explaining the factual backdrop and referring to the various relevant clauses of the Framework Agreements specifically 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 appel ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... deration in terms of section 48 is wholly misplaced. 41. So far as the heavy reliance was placed by the Ld. Sr. Counsel on the judgment of Hon ble Supreme Court in the case of George Hunderson Company 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. There could be no debate on such a proposition as laid down by the Hon ble Supreme Court. But the language of section 48 is entirely different from section 12B of the old Act, because now the expression used is the full value of consideration received or accruing as a result of transfer of the capital assets . 42. The word accruing would mean the right to receive. Here in this case, the assessee had a right to receive the proportionate fair market value of HEL shares and this right had flo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... between the parties, any departure therefrom has to have some rational basis and an arbitrary figure in the Sale Purchase Agreements (SPA) cannot be the basis to suggest that the amount mentioned in the SPA alone represented the rights of the parties or to suggest that once the SPA was signed all other earlier arrangements became a nullity. It is submitted that the options were exercised in full including the right shares. When the right shares are issued, these are subscribed on the basis of the entitlement of the existing shareholder but after these are subscribed, these get merged into the total equity 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 of sale there can be no such distinction as the right share or the original share. Secondl ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... that the 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 substituting any price for the declared price. This plea is wholly misplaced. Once the agreement between the parties sets out the transfer price, the onus is not on the Revenue to establish the mode and the manner in which the obligations have been mutually discharged/settled particularly in cases of such close association. Revenue has only to demonstrate that the right to receive a certain consideration accrued to the appellant.The manner of discharge of the right is in the exclusive knowledge of the 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 dep ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r, Mr. Srivastva submitted that Kotak Mahindra is not an independent valuer. As pointed out earlier by him while narrating the historical background, Kotak Mahindra invested in the shares of the Indian company, HEL and was closely associated with the group. The Framework Agreement of 2006 as also of 2007 clearly stipulated that the valuation of shares would be done by agencies of international repute and their 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 violation of the terms of the Framework Agreement of 2006 as also of 2007.The AO has not disputed the valuation of shares of HEL/VIL as done by Kotak. He has not gone into the question whether the enterprise value of HEL had exceeded USD 25 billion. He has only adopted the value of HEL shares ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e 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 the said section provided that fair market value of the asset may be taken as the full value of consideration if the consideration received or accruing as a result of the transfer is not ascertainable or cannot be determined. In the facts of the present case, the consideration accruing as a result of transfer of right shares cannot be determined independent of the original shares and to that extent the provisions of section 50D would also get attracted. The contention of the assessee that under 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 c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ive which needs to be briefly illustrated. In the year 1992, the Hutchison Group based in Hong Kong acquired interests in the mobile telecommunication in India through joint venture vehicle, named as Hutchison Max Telecom Ltd . (in short HMTL ). Max group virtually 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 stood, the foreign equity participation in the telecommunication industry could not exceed 49% of the total capital. The Hutchison Group held direct interest in the Indian company called as Hutchison Essar Ltd. (in short HEL ) to the extent of nearly 42%; and 10% of the interests were held through indirect holdings. The balance out of the total stake of 67% was held through the companies owned and controlled by the AS and other entities ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 shares held by the AS in HEL through chain of subsidiary for a transfer price set out therein. Clause 4.6 of the said agreement, gave the stipulation of transfer price which was payable in pursuance to put/call option which was to be determined in the following manner:- ( a) Such fair market value as may be agreed between the Parties; and if the Parties fail to reach agreement within 30 days of the date of the Transfer Notice, then; ( b) Such fair market value as may be determined in accordance with the 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 inte ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is that, nowhere in the said Schedule -1, it has been mentioned as to how the sum of US $ 266.25 million has been arrived at to determine the transfer price of SBPL shares. Another 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 market value calculation as given in Schedule-2, it is seen that an illustrative working has been given to calculate the equity fair market value of SBPL/NDC/MVH. The said illustration for the sake of ready-reference is reproduced hereunder:- (in US $ millions) Item As per Illustrative example in Schedule 2 Market enterprise value of HEL 26,327 Less: Net debt of HEL (1,327) Equi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... been agreed by the parties to the agreement. Another important fact permeating all through the subsequent agreements is that, this amount of US $ 266.25 million as taken in agreement of 2007 has been adopted as the transfer price by the parties and the entire case of the assessee before us is that, this transfer price is the value of SBPL which is to be adopted 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 all the future call/put option when exercised? Answer is bit elusive as how the transfer price ofUS $ 266.25 million which is based on FMV of HEL shares in 2007 and too was on the equity capital valuation at US$ 25 billion can be the price for all future reference. Be it that as may be, one thing is fairly evident that the transfer price ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r 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 subscription of such shares was approximately 19.50 crores. Coupled with this oddity, the entire right issue shares of 19.50 crores have been fixed at a price of ₹ 300 crores. This again is without any working or basis. How a company with 10,000 equity shares can issue a rights share of 38.5 crores of shares as there has to be some proportion and value which has to be derived from the existing equity shares. However AO has not raked up this aspect and since, this is not the subject matter of 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 1 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 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 parties. From the perusal of the aforesaid agreement it is seen that, the framework agreement as referred in the sale purchase agreement is the Framework Agreement dated 05.07.2007 and it is in pursuant of the same framework agreement thatput option has been exercised by the AS and the entire share in SBPL has been sold to CGP. So far as the consideration of ₹ 1241.32 crores is concerned, no working of the determination of sale price of the shares has been mentioned. Clause 3.2 as reproduced above though indicate that Kotak Mahindra has been requested to prepare ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nt dated 05.07.2007; nor it is in accordance with the valuation report of Kotak. Nowhere in the said agreement, there is any clause that all the earlier framework agreements or the agreements entered between the parties have been superseded or rescinded. Albeit in the sale purchase agreement there is reference that, it is in pursuance of Framework Agreement of 2007. In the earlier framework agreement, it was agreed amongst the parties that once the option is exercised, then the shares would get transferred under the procedure 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 head capital gain is the full value of the consideration received or accruing as a result of the transfer. He specifically drew our attention to section 48 of the A ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ecipient, 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. Apart from that, a specific provisions have been introduced in the Statute by inserting of new provisions i.e. section 50CA by the Finance Act, 2017 w.e.f. 01.04.2017 to bring the tax in the case of the transferor, the difference between the fair market value of the unquoted/unlisted shares. Thus, so far as this proposition as canvassed by Mr. Ajay Vohra is concerned we are in complete agreement with him that, firstly, the term full value consideration cannot be reckoned as a fair market value; 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 abov ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... April, 2013 and will accordingly apply to assessment year 2013-14 and subsequent assessment years. From the aforesaid explanation given in the Memorandum to the Finance Bill, it can be gauged that the said provision has been introduced when the consideration received or accruing as a result of the transfer of a capital asset cannot be ascertained or cannot be determined and in that case, the fair market 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 ascertainable and determinable. The Revenue s case is that the said consideration as determined in the agreement has to be reckoned as fair market value. This section has no application in the present situation, otherwise also, if section 50D could have applied for substituting the actual con ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as 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 not a simple case of sale and purchase of shares emanating from Sale and Purchase Agreement dated 12.03.2014.The rights and obligations of the parties for this particular transaction goes way back tothe year 2006 and more particularly the year 2007,when the parties have entered into the Framework Agreement on 05.07.2007. The AS had held the shares of the Indian company HEL and then later on in VIL for the benefit of Hutch/Vodafone solely with the aim to beat the foreign equity cap for which the 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 co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ent, then it cannot be held that such a binding contractual obligation amongst the parties has simply witheredaway without any agreed clause of rescinding or abrogating the earlier obligation. In fact there is unanimity 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. Accordingly, we hold that in terms of section 48, what is accrued to the assessee on the transfer of the unquoted shares of SBPL, is that,which is determinable on the basis of the fair market value of VIL.On this reasoning, the arguments put forth by the Ld. Sr. Counsel that the consideration accrued to the assessee is only as per the share purchase agreement dated 12.03.2014 is not acceptable. 60. Once we have held that the accrued sale consideration of SBPL shares is linked wit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 responsibility and make no representations with respect to the accuracy or completeness of any such information provided by VIL or CGP. We have assumed that VIL and CGP have furnished all information concerning the financial statement and assets and liabilities of VIL group, Indus, till earnings before interest and taxes, and all other cash flow items relevant for valuation. We clarify that in respect of VIL and Indus, we have not been provided with financial projections below earnings 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 operat ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e balance-sheet; PV = the paid up value of such equity shares. 62. Section 11UA(2) also envisages that the fair market value of the unquoted shares can be determined as per discounted cash free flow method, i.e., DCF but here the valuer seems to have adopted NAV method and he has reduced even those liabilities which are not permissible under 11UA. Accordingly, we hold that the valuation done by the Kotak Mahindra Capital and the value of 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. Only liability which can be excluded while examining the book value is the liability shown in the balance sheet. 63. When at the time of hearing, Ld. Sr. Counsel, Mr. Ajay Vohra pointed out that while taking the percentage of shares of the holdi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 29,352 29,335 SMMS 61.60% Value of 61.60% equity stake in Omega 18,081 18,071 Add: Value of Net Assets (Liabilities) excluding in Omega -23,318 4,559 Assets - Liabilities - Market Value of Investment in Omega + Income Tax + Provisions 131.62 Investme nt Activities Equity value of SMMS -5,237 22,630 UMT 6.07% Value of 6.0672% equity stake in VIL 34,248 34,248 Add: Value of Net Assets (Liabilities) excluding in VIL -3,725 -3,265 Assets - Liabilities - Market Value of Investmen ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ue of Investment in AGM TII 258.3 Equity value of 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 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 transferor under the deeming fiction of Section 50CA or Section 56(2)(x), then same are not applicable for the year under consideration 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 t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... a) Accounting Standard-13 relating to Accounting for Investments and Accounting Standard 16 relating to Borrowing Costs issued by the Institute of Chartered Accountants of India (ICAI) to hold that borrowing cost incurred in relation to a qualifying asset shall not be capitalized when substantially 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. CIT(Appeal)has confirmed the said action of the AO, in his detailed order. Arguments on behalf of the appellant/assessee: 68. Before us, Mr. Ajay Vohra, Ld. Sr. Counsel for the assessee drew out attention to the loan agreement of 08.08.2012 entered between the assessee and the lender, CHSPL and pointed out that the preamble itself goes to show that the loan was granted ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ri (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.) CIT v. K. Raja Gopala Rao: 252 ITR 459 (Madras) CIT v. Sri Hariram Hotels (P.) Ltd: 188 Taxman 170 (Kar.) Praveen Gupta v. ACIT: 20 Taxmann.com 308 (Del.) S. Balan alia Shanmugam v. DCIT: 120 ITD 469 (Pune) Gayatri Maheshwari vs. ITO: 187 TTJ 33 (Jodhpur) 69. Regarding applicability of AS-13 AS-16, he had submitted that, insofar as the applicability of AS-13 relating to Accounting for Investments is concerned, the said Accounting Standard only provides that an 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 th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... placed reliance on the following decisions: Kedarnath Jute Mfg. Co. Ltd. v. CIT: 82 ITR 363 (SC); Sutlej Cotton Mills Ltd. v. CIT: 116 ITR 1 (SC); and 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, he submitted that it is not in dispute that the funds wereborrowed for specific purpose of making subscription to the right shares issued by the company and such interest accrued after the event of acquisition of shares. The claim of interest is in respect of interest accruing till date of transfer of right shares . He submitted that it is a settled position of law that income under different heads are computed having regard to the provisions governing such computation as contained in various provisions appearing in that head of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the case of the latter the cost shall be taken to be nil . The use of the expression means in the said clause renders the definition of the cost of acquisition as exhaustive and not inclusive.The argument of the appellant that it only defines the base price and not the additional burden of interest is devoid of any merit in view of the exhaustive definition of the expression cost of acquisition given in the enactment.In view of the specific statutory provision governing the scope and ambit of cost of acquisition , there is no room for any debate that cost can include 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(92 ITR 9) which have been relied upon in number of subsequent decisions, he pointed out that the said case was rendered ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... unsel deal with the cost 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 reported in 222 ITR 508 relied upon by the appellant refers to cost of acquisition of bonus shares under the preamended provisions of the Act. Reference to Miss Dhun Dadabhoi Kapadia (63 ITR 651) refers to renunciation of rights in shares and now in wake of the amendment in section 55(2) negates the effect of this decision. The case of Naveen Jindal (320 ITR 708) deals with the issue of debentures granted on the right basis but the matter relates AY 1992- 93, which again is prior to the amendment made 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... onsidered while computing the capital gains. The AO has rightly rejected the claim and the action of the CIT(A) in upholding the said finding deserves to be sustained. Rejoinder by Assessee 73. By way of re-joinder, Mr. Ajay Vohra, submitted that in so far as the first contention of the Ld. Special Counsel that the interest expenditure is inherently revenue in nature and can, therefore, be allowed as deduction only against 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)(iii) of the Act relating to allowability of interest expenditure incurred on acquisition of capital asset used for purpose of business. In view of the aforesaid undisputable position with regard to capitalization of interest expenditure upto the date of acquisition ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 of the judgment of Hon ble Supreme Court in the case of Rajendra Prasad Moody (115 ITR 519) by the revenue during the course of argument to canvass that shares borrowed from loan amount cannot be allowed, is also misplaced as in the said decision, the finding of fact was that the assessee was invested in shares using interest bearing borrowed funds for the purpose of earning dividend income therefrom and the question before the Hon ble Supreme Court was, whether the interest expenditure would be 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 p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e aforesaid insertion, in the absence of any specific provision dealing with the mode of computation of cost of acquisition of bonus/rights shares dispute had arisen as to whether the cost of aforesaid shares needs to be computed as per 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) Miss Dhun Dadabhoy Kapadia v. CIT: (supra); iii) Navin Jindal v. ACIT: 320 ITR 708 (SC); andiv) ACIT v. Raj Kumari Bangur: 154 ITR 868 (Raj). 76. It was in the aforesaid background that clause (aa) was inserted in section 55(2) by the Finance Act, 1994 w.e.f. 01.04.1995 to provide certainty by stipulating that the cost of acquisition of bonus/right shares shall be considered as NIL/ actual price paid for acquisition therefor, respectively. He also invite ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 while computing the capital gain in accordance with section 45(1) r.w.s 48. His entire arguments revolved on the proposition that under the scheme of the Act,there is distinction between different class of assets and how the capitalization of interest for cost of acquisition of assetor allowbility of interest has been recognized under the various provisions of the Act, like for stock-in-trade; assets used for the purpose of business; and capital assets held as investment and not used for the purpose 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 Counsel for the Revenue has vehemently contended that i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... payment and on the basis of holding of any other financial asset, shall be taken to be nil in the case of such assessee. ( b) xxxxxxxxxxxxxxxxxx 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 such asset; and in second case, the cost of acquisition would be nil. Since, here the assessee had subscribed the right shares on the basis of said entitlement (i.e., by virtue of holding the capital asset in the form of shares in SBPL), therefore, the assessee s case fall in first category, thatis, the amount actually paid by him for acquiring such assets. In other words the actual amount paid for acquiring the right shares. In case the financial assets is allotted to the assessee without any payment then it has to be reckoned as NIL. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the background on which the said provision was brought in the statute. For the sake of ready-reference the said Memorandum is reproduced hereunder:- Rationalisation of capital gain arising from transfer of right shares and rights renouncements The Income Tax Act prescribes broad provisions on computation of income under the head Capital gains . Specific methods of computing the cost of the asset have been provided only in respect of certain types of assets. There is no specific provision dealing with determination of the cost of financial instruments such as 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 rights shares. The Bill proposes to deem the cost o f rights entitlement in the hands o f the original shar ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sessee in favour of any other person, 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 aggregate of the amount of the purchase, price paid by such person for purchasing such right and the amount paid by him to the company, or institution, as the case may be, for acquiring such financial assets..... ' This amendment will take effect from 1st April, 1995, and will, accordingly, apply in relation to assessment year 1995-96 and subsequent years. The aforesaid notes and clauses spells out the purpose of intention of the legislature for defining the cost of acquisition in the case of additional financial assets like right issues etc. Thus, the reliance placed by the Sr. Counsel on the aforesaid memorandum and notes and c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... gs, such an argument was not taken and the same has been raised only during the course of rejoinder submissions. This alternate plea has been taken on the premise that the Revenue has contended that the interest paid for acquisition of right shares incurred for the purpose of earning option fee therefrom should be deducted while computing the income under head income from other sources . The plea was again based on the condition that if this Bench is pleased to uphold the 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 side of the Revenue, as it was never the case of the Revenue (even in their exhaustive written submissions filed before us), that interest expenditure can be allowed while computing the income from income from oth ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... na Lifestyles Pvt. Ltd. 13.07.2012 16.12,2013 17 months (9,190) Vana Resorts and Hotels Pvt. Ltd. 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 capital gain. In response, the assessee submitted that the assessee had acquired the shares of SBPL on 23.02.2006 (4100 original equity shares and right shares of 15,67,64,689 on 09.08.2012) and these shares have ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 determining period of holding for the listed or unlisted shares. The condition of listing on a recognized stock exchange is applicable only to the category of security other than shares of a company . If the intention of the legislature was to provide the benefit of shorter period of 12 months only on listed shares then considering the meaning of the word security as defined in section 2(h) of the Securities Contract Act, 1956, includes shares in a company and there was no necessity to carve out separate 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ment itself goes to prove that the benefit of shorter period of 12 months was available to unlisted shares prior to the said amendment and if the contention of the AO is to be accepted then there was no necessity for the legislature to introduce the aforesaid amendment. He again made reference to explanatory notes to the amendments and the CBDT Circular 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(42A), submitted that capital assets shall be regarded as short term capital assets if it is held for a period of not more than 36 months immediately preceding the date of transfer. The proviso to the said section carves out exception of the rules set out in the main provision which provides that in the case of; * a share held in a compan ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed, 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 intention of the lawmakers would necessarily have to be stated in express terms and cannot be inferred more so when the definition of the Security stands imported by virtue of the aforesaid Explanation.The entire thrust of the argument of the Ld. Sr. Counsel is that in earlier years, shares (listed or unlisted) enjoyed a lower holding period to fall in the exception and the law as introduced w.e.f. 01.04.1995 cannot be read otherwise. He submitted that any reference to earlier enactments or the subsequent 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... a short term capital assets. The expression short term capital asset has been defined in sub-section (42A) of section 2 which at the relevant time, i.e. upto A.Y. 2014-15 read as under:- ( 42A) short-term capital asset means a capital 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 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 had been substituted. From the plain reading of the aforesaid section, it is clear that short term capital asset has been defined to mean a capital asset held by the assessee for not more than 36 months immediately preceding the date of its transfer. The proviso thereto carves out an exception of such period of holding;firstly,in the case of a share held in a company; or secondly, in other securities li ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ill 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-term capital assets as those assets which are not short-term. Short-term capital assets are those capital assets which are held for a period of up to 36 months. However, the Finance Act, 1987, through an amendment to the provisions of section 2 (4 2A), reduced the maximum period of holding in respect of company shares from 36 months to 12 months for being treated as short-term capital assets. There are many financial instruments, other than company shares, through which the investors are entering 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nlisted shares from the benefit of shorter period, because in the 1st Proviso, the benefit of period is now only limited to security listed in recognized stock exchange in India and to other financial instruments. 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 manner:- 5.2. The shorter period of holding of not more than twelve months for consideration as short-term capital asset was introduced for encouraging investment on stock market where prices of the securities are market determined.However, all shares whether listed or unlisted have enjoyed the benefit of short period of holding and even any investment in shares of private limited companies enjoyed long-term capital gains on its transfer after twelve months. Accordingly, clause (42A) of sec ..... X X X X Extracts X X X X X X X X Extracts X X X X
|
