TMI Blog2019 (12) TMI 1179X X X X Extracts X X X X X X X X Extracts X X X X ..... also relevant to mention that Ld. CIT (A) in one of the assessee company which is also impugned before us, i.e., M/s Acorus Unitech Wireless Pvt. Ltd.,that the benefit if at all in these transactions actually accrued to Unitech Ltd. and to favour Sri Ramesh Chandra and Sri Sanjay Chandra the actual beneficiaries and not to the assessee company. This itself goes to support the contention of the Ld. Counsel that no benefit or perquisite arose in the hands of the assessee companies. The judgments relied upon by the ld. DR which has also been referred in the impugned order in no manner will apply on the facts of the present case because most of them pertained to waiver of a loan or unclaimed credit balance returned back to the P L account taken during the course of business. Thus, these judgments do not help the case of the Revenue at all. Accordingly, the additions made by the Assessing Officer and sustained by the Ld. CIT (A) u/s. 28(iv) are directed to be deleted. - I.T.A. No.1953/DEL/2014, 101/DEL/2014, 2075/DEL/2017, 2989/DEL/2017 (Assessment Year: 2009-10) - - - Dated:- 8-11-2019 - SHRI AMIT SHUKLA, JUDICIAL MEMBER AND SHRI Dr. B.R.R. KUMAR, ACCOUNTANT MEMBER Appellan ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , the assessee company invested a sum of ₹ 34,58,62,500/- by way of investment in the shares of eight wholly subsidiary companies of M/s. Unitech Ltd. which were I.T.A. No.1953, 101/DEL/2014 2075 2989/DEL/2017 4 incorporated as real estate companies on August/September 2007 details of which are as under: Original name of Company Date of Incorporation Adonis Projects Pvt. Ltd. 28.08.2007 Aska Project Ltd. 16.08.2007 Azare Properties Ltd. 01.08.2007 Hudson Properties Ltd. 01.08.2007 Nahan Properties Pvt. Ltd. 16.08.2007 Unitech Builders and Estates Pvt. Ltd. 10.08.2007 Unitech Infrastructure Pvt. Ltd. 10.08.2007 Volga Properties Pvt. Ltd. 01.09.2007 4. The objects of clause of MOA of the above eight companies were altered to incorporate objects relating to telecom business. These eight companies had applied in the auction fo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e companies invited foreign telecom companies. Interest was expressed by the Telenor Group (acting through Telenor Asia Pte Ltd, Singapore and Telenor Mobile Communications AS, Norway) to make the investment in the fresh equity shares. However, Telenor Group insisted that the investment proposed to be made would be made in the equity of one or more companies where the share transfer restrictions are enforceable by law. (This concern was highlighted in view of the provisions of Section 3 of the Companies Act. 1956, under which the telecom companies were deemed to be public limited companies and their shares were freely transferrable). In order to meet the above concern of Telenor Group, the promoters of the appellant company i.e., Unitech Ltd. floated three Special Purpose Vehicle's (SPVs) Companies with the object of acquiring shareholding of above eight Telecom UW Companies from the and consequently cease to be deemed public companies. The details of said three Companies who are assessees before us are as under: Sr. No. Name of the Company Date of Incorporation Initial Paid-up share capital (in Rs.) ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... a subsidiary of Unitech Ltd. and in terms of the CCD Agreement, it was agreed that the lender would have the option to call upon the SPVs to issue fresh share capital to convert the amount representing the debentures, into equity share capital. On 28th October, 2008, the assessee entered into a Subscription Agreement with Telenor Group for acquisition of 60% stake in UW companies. Later on, the subscription agreement was modified by another agreement dated 16th March, 2009 whereby the telecom companies made fresh allotment of shares having face value of ₹ 10/- to Telenor Group at a premium of ₹ 169.73 per share resulting in equity shareholding of Telenor Group at ₹ 67.25% in such telecom companies. The details of share allotted by the telecom companies to the Telenor Group for the sake of ready reference are tabulated as under: Name of the telecom Companies No. of Shares allotted Allotment Price Face Value Premium Total price Unitech Wireless (North) Pvt. Ltd. 1,31,03,306 179.7312 10 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... #8377; 169/-. Thus, there was a huge gain of 159 per share which has been taxed u/s. 28(iv). He held that assessee company was incorporated with the objective of permeating and established companies in the telecom sector and to act also as a SPV to make investment in the telecom companies of its own group, therefore, it could be held that purchasing equity shares of telecom companies from M/s. Unitech Ltd. assessee had started its designated business activity. The transaction involving sale/purchase of share between assessee and M/s. Unitech Ltd. involving shares of a telecom companies is a business transaction because the business of the assessee was to make investment in telecom business. He also observed that both transactions between the telecom companies and M/s. Telenor happen simultaneously and they were marked similarities between the two transactions. He also took note of the following facts from two transactions: While assessee got the shares from M/s Unitech Limited, M/s Telenor purchased the shares from the telecom companies directly. Shares were purchased by the assessee from M/s Unitech Limited at a price of ₹ 10/- per share, i.e., Face Value, However, sh ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... (P) Ltd. 55,00,000 159 87,45,00,000 Total 548,55,00,000 After referring various decisions he made the addition of ₹ 548,55,00,000/- under Section 28(iv). 11. Ld. CIT (A) too has confirmed the said reasoning and findings of the Assessing Officer. He observed that all the conditions relevant to Section 28(iv) were clearly satisfied. His observation and conclusion in this regard reads as under: 8.1.14 The appellant has also submitted that the shares acquired by the appellant from M/s Unitech Ltd., inter alia, were encumbered property, as they had been mortgaged by M/s Unitech Ltd with banks to obtain loans from such companies. Moreover, the funds required to purchase the shares were also arranged by issuing debentures to M/s Unitech Holdings Ltd., a subsidiary of M/s Unitech Ltd., that shares were purchased from M/s Unitech Ltd and continued to be held under restrictive conditions with no economic benefit to the appellant company and that the entire economic benefit rests with M/s Unitech Ltd. However, as per Schedule 6(3) i.e 'Notes to Accounts' forming part of t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ttention to the facts and background of the case and sequence of events submitted that under the present facts and the nature of transaction involved, it could not be held that any benefit has been received or accrued to the assessee companies in terms of Section 28(iv). He submitted that shares were purchased by these companies from Unitech Ltd. and continued to be held under restrictive conditions with no economic benefit to the assessee, because the entire economic benefit still rests with Unitech Ltd. In order to clarify the nature of transaction from the material on record, he highlighted the following facts with the evidence placed on record before us. Sr. No. Particulars Evidence 1. 4(e) The seller and the purchaser shall have agreed to or entered into an arrangement/agreement pursuant to which the seller shall have an option to acquire, either directly and/or through its subsidiaries, the direct or indirect ownership/economic interest in the sale shares at any time in future. 2. CCD subscription agreement between Unitech Holdings Ltd ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Telenor got management control of 8 Unitech Wireless Companies from very first day of investment on 20.3.2009. Beneficiary 3 companies have no right in the shares of 8 Unitech Wireless Companies acquired by them and 100% economic interests therein is held by Unitech, through compulsory convertible debentures and put-call option on the shareholding of 3 companies. Telenor itself is holding 100% economic interest in the shares subscribed by it. Transfer Restriction Shares held by 3 companies cannot be transferred to any foreign party considering FDI restriction in the telecom sector. In fact, shares held by 3 companies can only be transferred to Unitech and that too, only at par value. There is no transfer restriction on the shares subscribed by Telenor. In fact. Telenor is free to transfer its shareholding even to a foreign party. Business Risk At the time of acquisition of shares by 3 companies, there was a significant business risk of nonfulfilment of roll-out obligations under the telecom licenses due to financial crisis, which c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Fresh issue/ allotment Shares by 8 Wireless Companies to Telenor Pledged shares Yes No, fresh allotment by 8 wireless companies to Telenor. Management and Control (Controlling stake) No Yes (67.25%) Purpose Shares were acquired by 3 companies to comply with precondition prescribed by Telenor for investment in 8 Unitech Wireless Companies (conversion to private limited companies from public limited companies), failing which no investment would have received from Telenor and there was a significant business risk as stated above. There was no business risk for Telenor when it subscribed the shares of 8 Unitech Wireless Companies. Dates 30.10.2009 under agreement dated 25.10.2008 Fresh allotment of shares by 8 wireless companies to telecom companies in 4 tranches i.e. on 20.03.2009, 19.05.2009, 07.01.2010 and 10.02.2010 under an agreement dated 28.10.2008 read with addendum dated 16.03.2009 and shareholders agreement dated Within the group ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ments were made in the course of business of the appellant company. Lastly, he submitted that, since appellant is holding investments and there is no business as such, therefore there cannot be any benefit or perquisite in the course of business. 15. Ld. Counsel also placed reliance upon the judgment of Hon ble Gujarat High Court in the case of Elscope Pvt. Ltd. vs. CIT, 313 ITR 293 wherein it has been held that the income from capital account transaction will not be hit by Section 28(iv). He further submitted that investment pursuant to object in MOA does not ipso facto lead to inference that there is a business activity otherwise. Also, Section 28(iv) will not apply where the transaction has been made in cash or money. Here in this case, assessee has acquired the shares of payment of money. In support, he strongly referred and relied upon the judgment of Hon ble Supreme Court in the case of CIT vs. Mahindra Mahindra Ltd. reported in 404 ITR 1 (SC) and following other decisions. i) CIT vs. Jindal Equipments Leasing Consultancy Services Ltd., reported in 325 ITR 87 (Del.), affirmed by the Hon ble Supreme Court in 404 ITR 1 (SC) ii) Mahindra and Mahindra Ltd., re ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rual of income u/s 28(iv) of the Act. It is submitted that any illusory, hypothetical and non-existing sum cannot be regarded as income. The benefit must be tangible and existing and must result from business. The fresh allotment of shares by telecom companies cannot be a basis to suggest any benefit accrued to the assessee company on purchase of shares from M/s Unitech Ltd. It is also well settled law. as held by the Apex Court in the case of Sir Kikabhai Premchand vs. CIT reported in 24 ITR 506 that, state has no power to tax any potential future advantage and as such, addition made of uncertain future benefit that the appellant company may obtain on the sale of shares is highly farfetched, misconceived and, untenable. 17. Lastly, he submitted that subsequently fair market value of share have been reduced to nil on the cancellation of licenses and stated that it may also be mentioned that the telecom licences which had been issued by the DOT in favour of telecom companies have since been cancelled by the judgment of Hon'ble Supreme Court and final order dated 02.02.2012 as a result of the aforesaid judgment, it has been held that the grant of the said licences was c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in the cases of M/s. Cestos Unitech Wireless Pvt. Ltd. (ITA No. 101 /Del/2014) and M/s. Acorus Unitech Wireless Pvt. Ltd. (ITA No. 2075/Del/2017 and 2989/Del/2017) are identical to the captioned appeal, thus, the aforesaid submissions may be made applicable to the appeals mentioned above. 18. Ld. DR on the other hand relied upon various observations and findings given in the order of ld. Assessing Officer and Ld. CIT (A). He pointed out that AO has noted that 8 licensee companies of Unitech Group raised fresh equity by issuing shares to M/s Telenor at a premium of ₹ 159 per share. However, the assessee company acquired same shares at face value of ₹ 10 per share. Hence, AO was justified in making addition u/s 28(iv) of IT Act. The objective of Assessee Company as reproduced at page 4 of the assessment order clearly states that it was to act as special purpose vehicle to make investment in Telecom companies of its own group. The AO held the transaction for sale/purchase of shares with M/s Unitech Ltd involving shares of Telecom Companies to be a business transaction as it was business of the assessee to make investments in Telecom Sector and by acquiring shares of Te ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... under Section 147/148 has been made. 21. Acorus advanced arguments as to the incorrectness of the AO's views. Here, various aspects of this transaction have been canvassed before the Court, i.e. the lack of comparability between the Unitech- Telenor transaction and the present case, the difference between the nature of the shares itself in the two cases, the inapplicability of Section 28 of the Act given that the purchase of shares was in the nature of an investment and not a business, the lack of accrual of any benefit to the petitioner etc. The Court, however, cannot enter the merits of the satisfaction recorded by the AO. These issues may indeed he raised, but before the AO in the first instance, and subsequently within the appellate regime provided by the Act itself as opposed to a disguised merits review under Article 226 at such an early stage of the proceedings. At the time of a Section 1476/148 notice, the inquiry is at a preliminary stage, and thus. conclusive legal or factual determinations are neither called for nor provided. As the Supreme Court noted in Sri Krishna (P.) Ltd. v. ITO [19961 221 ITR 53S ,S~ Taxman 315: 80...It is necessary to reiterate th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , the assessee could not be held liable for additional tax under section 104. The assessee has wrongly stated that it pertained to section 28(iv). The decision of CIT Vs Excel Industries Ltd. (358 ITR 295) also is not applicable to the above cases in view of the following reasons: (i) The above judgement was in context of advance licence and duty entitlement pass book. It was held that until imports are actually made by assessee, benefits under advance license or under duty entitlement pass book represent only hypothetical income which cannot be brought to tax by applying provisions of section 28(iv) (ii) The judgment decided upon which point of time the above income was to be assessed. 21. Lastly, he submitted that the following decisions may be considered with regard to applicability of Section 28 in the present case; i. CIT Vs Ramaniyam Homes (P.) Ltd f20161 68 taxmann.com 289 (Madras)/ (2016) 239 Taxman 486 (Madras) / (2016) 384 ITR 530 (Madras)/r20161 287 CTR 200 (Madras), where Hon'ble Madras High Court held that amount representing principal loan waived by bank under one time settlement scheme would constitute income falling under section 28(iv). ii. CI ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sions, perused the relevant findings given in the impugned order as well as material referred to before us. The facts and background of the case have been discussed in detail in the foregoing paragraphs; however, certain vital facts are reiterated in a succinct manner. M/s. Unitech Ltd. through its wholly owned 8 subsidiary companies were allotted spectrum by DOT under Unified Access Services Licenses for 2G License for various regions of the country. In order to meet the capital requirements and in accordance with Government Policy, foreign investor can also invest in telecom companies operating in India up to 74% stake, Telenor group came forward for making the investment. However Telenor insisted that the investment proposed would be made in the equity of one or more company where the share transfer is restricted are enforceable by law. With a view to meet the said concern of the Telenor, the promoters companies floated SPVs consisting 3 Companies namely, i) Cestos Unitech Pvt. Ltd.; ii) Simpson Unitech Wireless Pvt. Ltd.; and iii) Acorus Unitech Wireless Pvt. Ltd., who are the appellant-assessees before us. By way of share purchase agreement dated 25.10.2008, 75% shareholding i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... irdly, the share held by the three assessee companies could have been only transferred to Unitech and could be only at par value as per the agreement, whereas in the case of Telenor Group there was no transfer restriction on the shares subscribed and it was free to transfer even to a foreign party. Lastly, as pointed out by the ld. counsel, the business risk of the assessee was very high as compared to the Telenor Group, because the Telenor Group has not pledged any of the shares to the lenders. Thus, these two are independent transaction with distinct objectives. The first is sale of 75% shareholding in 8 wireless companies by M/s. Unitech Ltd. to 3 affiliated companies @ 10 per share; and the second transaction is allotment of fresh share by wireless company to Telenor @ 179.73 per share. 23. However on the facts and background of the case, we have to see whether the amount of premium paid by the Telenor Group for acquiring the shares of 8 UW companies can be held to be in the form of any benefit or perquisite arising from the business of assessee u/s 28(iv). The Department case is that, the shares which have been acquired by 3 assessee companies of 8 UW companies at ₹ 1 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the share of three joint ventures company at a cost price reflected in the books of holding company which as per the Department was lower than the book value of those shares calculated on the basis of net worth of the said company. The Hon ble Delhi High Court held that it would be difficult to accept that the sale of shares by Unitech Ltd. at its cost price which is lower than the book value of the shares would result in income. The Hon ble High Court held that acquisition of investment by the assessee could not lead to inference that the assessee had earned income u/s. 28(iv) of the Act. The relevant observation given in paragraph 25 reads as under: 25. Applying the aforesaid principles, in the facts of the present case, it is difficult to accept that the sale of shares by Unitech Limited at its cost price which is lower than the book value of the shares would result in income (equivalent to the difference between the book value of the shares and the cost price at which they were sold) in the hands of the Assessee. The shares of the three companies in question are held as investments by the Assessee and duly reflected by the Assessee as such. No objection has been raised by ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ost of them pertained to waiver of a loan or unclaimed credit balance returned back to the P L account taken during the course of business. Thus, these judgments do not help the case of the Revenue at all. Accordingly, the additions made by the Assessing Officer and sustained by the Ld. CIT (A) u/s. 28(iv) are directed to be deleted. 27. Since similar facts are permeating in the case of all the assessee s as discussed above and also accepted by both the parties, therefore, the findings given above will apply mutatis mutandis in the other appeals also. 28. In so far as the Revenue s appeal in ITA No.2075 is concerned, the Revenue has challenged the observation and the findings of the Ld. CIT (A) that the amount should be added on protective basis in the hands of the Assessee Company and substantive basis in the hands of Sanjay Chandra and Shri Ramesh Chandra. Since, we have already deleted the additions on merits; therefore, this ground had become infructuous. Accordingly, same is dismissed. 29. In the result, the appeals of the assessees are allowed and the appeal of the Revenue is dismissed. Order pronounced in the open Court on 8th November, 2019. - - TaxTMI - TMI ..... X X X X Extracts X X X X X X X X Extracts X X X X
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