ESSAR CAPITAL LTD,MUMBAI vs. PR CIT 6, MUMBAI

Per Rajesh Kumar, Accountant Member:

The present appeal has been preferred by the assessee against the order dated 24.03.2017 of the Principal Commissioner of Income Tax [hereinafter referred to as the PCIT] relevant to assessment year 2012-13.

2 ITA No.3759/M/2017 M/s. Vajresh Consultants Ltd. (Earlier known as Essar Capital Ltd.) erroneous and prejudicial to the interest of the revenue as the AO has failed to carry out enquiries into the facts and circumstances of the case which has resulted into assessment not being made of correct income. There have been a number of mergers and amalgamation before the assessee finally became the owners of equity shares of Vodafone Essar Ltd (hereinafter called as VEL).According to ld. PCIT M/S Essar Teleholdings Ltd (hereinafter called as ETHL) originally held shares in VEL since 2005. Other group companies which are referred to in the are order are ETHL Communications Holdings Ltd. (hereinafter called as ECHL), Essar Telecommunications Holdings Private Limited (hereinafter called as ETHPL), ETHL Telecom Holdings India Private Limited (hereinafter called as ETHIPL),India Securities Ltd (hereafter called as ISL). In view of the above, a notice u/s 263 of the Act dated 17.06.2015 was issued to the assessee as to why the above assessment order should not be set aside u/s. 263 of the Act, for the various reasons which are extracted below for the sake of convenience and ready reference: "If is observed from the perusal of the records that while passing the assessment order u/s 143(3) on 30.03.2015 [date is erroneously written us 30.03.2012 in the order], the Assessing Officer has failed to carry out enquiries as warranted by the facts and circumstances of the case and that the assessment has been completed without examining all the aspects which were required to be looked into for arriving at the correct taxable income earned by the assesses. It is found that even though there were clear indications that something was amiss yet the AO did not cause the necessary verification on inter se transfer of assets and liabilities of the group companies resulting In substantial losses and has failed to call for the, basic documentary evidence to examine the true nature and substance of the transaction. As discussed below in detail it would be apparent that the Assessing- Officer failed to carry out relevant and meaningful inquiries which were 'warranted by the facts of the case which has resulted in passing of an assessment order which is erroneous on facts and law and prejudicial to the interests of Revenue. 2. The assessee company, M/s. Essar Capital Ltd [ECL] was incorporated on 15.02.2007. The entire-issued and paid up capital of Rs.5,00,000 comprising of 50000 equity shares of Rs.10 each urns held by Essar Satvision Limited during the

3 ITA No.3759/M/2017 M/s. Vajresh Consultants Ltd. (Earlier known as Essar Capital Ltd.) relevant period. The assesses company, ECL was the holding company of India Securities Ltd [ISL] and Essar Securities Ltd [ESL], 3. For the AY.2012-13, the assessee company had returned business loss of Rs.57,01,325/- and Short Term Capital Loss (STCL) of 215,24 a. The assessee had also reported income from other sources at Rs.4S.4S cr. The STCL was mainly on account of the sale of Vodafone Essar Ltd [VEL] shares held by ETHL Communication Holdings Ltd [ECHL] and acquired by the assessee ECL after a series of mergers and amalgamations. There were four amalgamations involving group companies as a result of which the shares of VEL had come to be the property of ECL. They were - (i) Amalgamation of ETHL Telecom Holdings India Private Limited [ETHIPL] with Essar-Teleholdings Ltd [ETHL] w.e.f 01.01.2010 vide Court order dated 16.07.2010. (ii) Amalgamation of Essar Telecommunications Holdings Private Ltd [ETI- IPL] with India Securities Ltd [ISL] w.e.f 01.04.2010 vide Court order dated 21.04.2011. (iii) Amalgamation of ETHPL Communications Holdings Ltd IECHL] with the India Securities Ltd [ISL] w.e.f 01.04.2010 vide Court order dated 13.02.2012. (iv) Amalgamation of India Securities Ltd [ISL] with Essar Capital Lid [ECL] w.e.f. 01.04.2011 as per Court order dated 11.01.2013. 4. One of the rationales for the amalgamation of ETHPL with ISL was that the amalgamating aims at unlocking the value and market assessment of the telecom assets of the company. Similarly, the rationale put-forth for amalgamating ECHL with ISL was to facilitate direct control over assets of ECHL in the hands of ISL. It is seen that the only major telecom asset (excluding if we consider inter group OCDs and investments in shares of group concerns as major asset), was the 10.97% stake in Vodafone Essar Ltd [VSL] held by the group onshore. The background information on the amalgamating companies reveals the following. 5. The Essar group entities were holding 33% stake through offshore and onshore companies in Hutchison Essar Ltd [HEL] which later on became Vodafone Essar Ltd [VEL]. The onshore holding was through Essar Teleholdings Ltd [ETHL], which had 10.97% stake in Vodafone Essar Ltd [VEL], in the nature of equity shares numbering 4,54,25,323 with Book Value of Rs.1260,58,89,865 as on 31.03.2007. These, shares were acquired through swapping of 10(23C) companies' shares with Hutchison Max Telecom Ltd [HMTL] find others in the preceding years. During the relevant period, ETHL was a subsidiary of Kroner Investments Limited, another Essar Group entity. 6. There was an agreement [referred to as "Put Option Agreement"} entered into by Essar group with Vodafone Essar Limited. [VEL] on 15.03.2007, to sell the entire 33% stake for an agreed amount of $5 billion. According to the group, the onshore holding of 10.97% held by ETHL was to be sold to VEL or its nominees for $1200 million [Indian Rupee equivalent of Rs.6000 cr approximately] between May,2010 to May, 2011. 7. On 07.10.2007, ETHL incorporated a wholly owned subsidiary, ETHL Communications Holdings Private Ltd [/ECHL] with a nominal capital of Rs. lakh,

4 ITA No.3759/M/2017 M/s. Vajresh Consultants Ltd. (Earlier known as Essar Capital Ltd.) comprising of 10,000 equity shares of Rs.10 each. The shareholding was increased to 1,19,000 shares with a premium of Rs.98.10 lakh, [the total investment by ETHL in ECHL was Rs.1.01 cr. ETHL claimed Hint on 28.03.2008, it had transferred the stake of 10.97% in VEL, being the equity shares numbering 4,54,25,328 for Rs.1260,58,89,865 to ECHL, and claimed Long Term Capital Loss thereon after indexation. Though the "Put Option" was still subsisting as on the date of transfer, the consideration for which it was transferred to the subsidiary company was quite Inadequate ( assets worth Rs.6000 crores being transferred for Rs. 1260 crores, which was also shown as payment through issue of FCDs. Since EC! II did not have any source of funds to pay for this impugned transfer of VEL shares, in lieu of payment for the VEL shares, ECHL issued FCDs to ETHL for Rs.1260 cr.) 8. In the meanwhile, ETHL incorporated another subsidiary company under its fold (100%subsidiary), namely Essar Telecommunications Holdings P Ltd [ETHPL on 10.03.2003 with a nominal capital of Rs.1 lakh. ETHL further invested in 1,31,000 shares of ETHPL on 09.04.2008 a! a premium of'Rs.90 per share. The total investment by ETHL in ETHPL was Rs.l.32 cr. Thereafter, ETHL claimed to have transferred its shareholding in ECHL to ETHPL for a measly sum of Rs.1.19 cr, and thus had indirectly passed on the shares of VEL worth $1200 billion as per the Put. Option agreement for Rs. 1.19 crores. ETHL had also given loan of Rs.1262.95 cr on 30.04.2008 to ETHPL as OCDs. ETHPL in turn invested the funds as equity shares, in ECHL at a premium of Rs. 1407.82 cr. ECHL used these funds to repay the NCDs of ETHL for Rs.1260 cr. The illusory cycle ions complete. That is, the money for repaying OCDs of ETHL had come from ETHL. ECHL, thus, became the wholly owned subsidiary of ETHPL. 9. In the books of ECHL as on 31.03.2009, the value of put option on VEL was accounted for under "Loans and Advances" at its fair value, calculated at Rs.5915.32 cr by taking the net discounted present value based on LIBOR in the place of investment in VEL shares. The difference behve.cn the book value of VEL [Rs.1260 cr] and the fair value of put option on VEL [Rs.5915.32 cr] was taken to Capital Reserve [Rs.3599.99 cr] net of deferred tax liability of Rs.1054.76 cr. However, in the next year, the value of VEL shares was reflected in the Balance Sheet as investments of value Rs.5915.32 in the place of Put option recognized under Loans and advances earlier. The audit note states that the value of put option has been taken as nil. Thus, the book value of VEL shares were increased from Rs.1260 cr to Rs.5915.32 cr and the difference was credited to Capital Reserve and Deferred tax liability. 10. Another company, incorporated on 16.04.2008 as Bhargava Realties private Limited and later on renamed as ETHL Telecom Holdings India Private Limited [ETHIPL], was acquired by ETHL as on 31.03-2009 ns a 'wholly owned subsidiary. ETHL transferred the entire shares of ETHPL, numbering 141000 costing Rs.1.32 cr to ETHIPL for Rs.1.41 cr on 20.03.2009. It had also transferred the entire shares of ECHL, numbering 1119000 costing Rs.1,10 cr to ETHPL for a sum of Rs.l.19 cr. Thus, for a meager sums ofRs.2.60 cr,[ Rs. 1.41 cr+ Rs. 1.19 cr] both ETHPL and ECHL which was holding Vodafone shares also became the immediate and step down subsidiaries respectively of ETHIPL as on 31.03.2009. Assets worth at least Rs.6000cr (shares of VEL alone would have fetched Rs.6000 cr became property of 'ETHIPL’. It was noticed that ETHIPL invested n further sun: ofRs.14 cr in acquiring

5 ITA No.3759/M/2017 M/s. Vajresh Consultants Ltd. (Earlier known as Essar Capital Ltd.) further equity shares numbering 1400000 in ETHPL at n premium of Rs.90 pa-share. On 25.03.2009, OCDs of ETHPL earlier held by ETHL [Rs.1262 cr] and Essar Investments Ltd [Rs.300 cr] were also transferred to ETHIPL at cost, Funds were provided by Essar Holdings Ltd [EHL]and others to ETHIPL as OCDs for Rs.1566.49 cr to acquire the OCDs of ETHPL. ETHIPL was amalgamated with ETHL as per Court order dated 16.07.2010 w.e.f. 01.01.2010. 10.1 The resultant surplus of Rs 3198 cr, which was mainly on account of revaluing equity shares of ETHPL has been taken to Capital Reserve. Simply put, though equity shares were almost entirely transferred earlier by ETHL only at book value to ETHIPL, on amalgamation, the same assets were revalued and taken back in the books of ETHL at a higher value. ETHIPL survived as a company for exactly two years and there were no business activities and the only role it played was to increase the cost of investment in the books of ETHL by revaluation of the assets ofRs.3198 cr. by making additional investment of Rs.14 crores. 10.2 On merging of ETHIPL with ETHL, its erstwhile subsidiaries ETHPL and ECHL once again became its subsidiary and step down subsidiary respectively of ETHL. As stated above, the cost of investment for ETHL through this stratagem ions increased by Rs.3198 crores only when additional investment has been made of Rs.14 crores. 10.2.1. Though out of 15,41,000 shares of ETHPL now acquired by ETHL, 1,41,000 shares were the same that were transferred to ETHIPL, earlier on 20.03.2009, to ETHIPL for Rs.1.41 cr . The remaining shares numbering 14,00,000 were acquired by ETHIPL itself for Rs.14 cr in March, 2009 only. The shares (15,41,000 shares) have been revalued at such astronomical figures of Rs.323S.94 cr us on 01.01.2010. 10.3 Since there was no business activity or investment activity by ETHIPL other than transfers mentioned above, there is neither any basis nor any justification, for such unreasonable valuation adopted under the guise of accounting for amalgamation but for purposely jacking up the cost of investment in ETHPL in the books of ETHL. 11. It is in this back drop that the two amalgamations involving ETHPL and ECHL took place, with ISL, the subsidiary of the assessee company. Firstly, Essar Telecommunications Holdings Private Ltd [ETHPL], now the subsidiary of Essar Teleholdings Ltd I ETHL] was amalgamated with ISL w.e.f 01.04.2010 as per the court order dated 21.04.2011 and thus ECHL now became the direct subsidiary of ISL. As on the appointed date, 01.04.2010, ETHL did not have any other assets in its balance sheet except the investment of Rs.1565 cr in ECHL at a premium of Rs.1407.82 cr which was funded by the OCDs of ETHIPL since merged with ETHL. Thus in effect, the VEL shares held by ECHL was the only tangible asset which had been indirectly acquired by ISL through this amalgamation. Normally for the purposes of arriving at the consideration payable in lieu of net assets of the amalgamating company, the fair value of VEL shares held by ECHL ought to have been the bench mark. 12. Though it was stated that the amalgamation is accounted for under purchase method as per AS 14, the investment in ECHL in the books of ETHPL was not taken

6 ITA No.3759/M/2017 M/s. Vajresh Consultants Ltd. (Earlier known as Essar Capital Ltd.) at its fair value, resulting in a deficit of Rs.371.36 cr which was accounted as Goodwill in the books of ISL. 13. In lieu of shares held by ETHL in ETHPL, ISL issued 330 equity shares of Rs.1 each for every share of ETHPL and in addition to that one 0.01% Non Cumulative Preference Shares of Rs.2000 each was issued. Allotments were done on 3rdJune, 2011. ETHL had 15,41,000 equity shares of ETHPL as on 31.03.2010 and as per the formula it received 505,529,670 equity shares of ISL having a market value of Rs.3051,17,80,200 [508,529,670 x Rs.60] which it sold to ECL at almost the same rate. In addition to this, ETHL also received 15,41,000 preference shares of Rs.2000 each having a total value of Rs.30820,00,000/-. Thus, ETHL received shares worth Rs.3359 cr [Rs. 305 cr + Rs. 34 cr ] in lieu of the 10.97% stake in VEL held by it indirectly. It is also relevant to mention here that ETHPL had transferred the same (VEL Shares) earlier for Rs.1260 cr to ECHL and had also claimed artificial loss for this transaction.. As discussed above, ETHL had succeeded in increasing the cost of- investment in ETHPL in its books by Rs.3198 cr. Prior to the amalgamation Essar Capital Ltd [ECL] was the holding company of ISL with 74.2% holding, As a result of amalgamation, ECL's holding came down to 16.91% whereas ETHL became the holding company of ISL as on 30.06.2011 with58%. However, later on ETHL transferred the shares of ISL to ECL making it the holding company of ISL again. 14. {During FY.2009-10, the business of investment of ISL was demerged into Essar Securities Ltd [ESL] as on 31.03.2008, a 100% subsidiary of Essar Investments Ltd [EIL], which Inter on became the subsidiary of ECL}. It was noticed that ISL issued on 18,03.2010 , 200000 Nan Cumulative Compulsorily Convertible Preference Shares [CCPS] having Face Value of Rs.2000 each at a premium of Rs.16,000 per share to two Mauritius based Flls, namely, Prime India Investment Fund Limited and India Master Fund Limited. Total of Rs.360 cr [CCPS Face Value Rs.40 cr + Premium Rs.320 cr] was thus mined through issue of CCPS. The funds were stated to be raised for deploying in the debt securities of group companies. Each CCPS was to be automatically and compulsorily converted in to equity shares of Rs. 1 each, at the end of 18 months from dale of allotment. Holder of CCPS also had an option to convert the CCPS into equity shares at any time after 90 days from date of allotment by giving a written notice. The relevant date to ascertain the minimum price for allotment of equity shares before expiry of 18 months shall be a day 30 days prior to the date on which the holders of CCPS become entitled to apply for the equity shares, i.e. 30 days prior to the receipt of notice to exercise the option The allotment of equity shares upon conversion or exercise of option by the holder shall not be at a price less than Rs.5 per equity share of Rs.1 each. The lock in period in any case, even after exercising conversion option, is one year from the date of allotment of CCPS. As per assessee's submission, the option was exercised by the CCPS holders on June 17, 2010 and June 18, 2010 respectively and that the conversion was carried out simultaneously with the amalgamation of Essar Telecommunication Holdings Private Limited [ETHPL] with ISL w.e.f.01.04.2010 as per the order of the High Court dated 21.04.2011. The shares of ISL were split into Rs.1 per share w.e.f. 11.03.2010.

7 ITA No.3759/M/2017 M/s. Vajresh Consultants Ltd. (Earlier known as Essar Capital Ltd.) 15. On amalgamation of M/s. Essar Telecommunication Holdings Ltd [ETHPL]with ISL w.e.f.01.04.2010 vide the order of the Hon'ble High Court of Bombay dated 21.04.2011 the two FIIs (as part of the amalgamation scheme), were issued 16,77,00,000 equity shares of Rs.1 each of ISL. As mentioned earlier, the option was exercised on 17.06.2010 and 18.06.2010 respectively and hence the relevant date for rate of conversion is 17.05.2010 and 18.05.2010. The shares were being traded in BSE during the relevant dates and the average price works out to Rs.23.78 and Rs,22.28 only on the respective dates as seen from the data below.

17.05.2010 18.05.2010

Open Price 23.20 21.95

High Price 24.50 22.60

Low Price 23.05 22.95

Last Price 23.10 21.95

Volume 142127.00 262447.00 Average price 23.78 22.28

8 ITA No.3759/M/2017 M/s. Vajresh Consultants Ltd. (Earlier known as Essar Capital Ltd.) enquired into by the AO. It is pertinent to mention that the investment by these two FUs in ISL was also a subject matter of investigation by SEBI at the relevant period and was still pending final adjudication. The AO, without even raising the basic query as to the valuation method and determination of conversion rate has simply completed the assessment without any investigation on Ms part and also without ascertaining the outcome of SEBI investigation thus rendering the order not only erroneous but also clearly prejudicial to the interests of Revenue.

9 ITA No.3759/M/2017 M/s. Vajresh Consultants Ltd. (Earlier known as Essar Capital Ltd.) claimed that the merger of ISL with itself does not fall within the definition of amalgamation u/s.2(1B) since the stipulation that not less than 75% of the shareholders of the amalgamating company [other than the. amalgamated company, who is also a shareholder! should continue to be the shareholders of the resulting company post merger. It is seen that ECL was holding 74% of shares in ISL even as on 32.03.2012 by which time the entire stake shares of VEL had been sold by ECHL. Subsequent to the actual sale of shares, ECL started to acquire most of the remaining 25% shareholdings of ISL, including 20% held by the two FIIs. The court sanction itself came on "11.01.2013 almost a year after the shares of VEL were fully sold out by ECL on 03.02.2012. The company petition seeking amalgamation of ISL with ECL itself ions moved only in the year 2012, much after the sale of VEL shares by ECHL. Thus, it urns evident beyond any doubts that the entire process was a very conscious and calibrated attempt at evading taxes under the guise of court sanctioned scheme of amalgamation. Still the AO, knowing that ISL had already merged with ECL did not cause necessary investigations into the matter as warranted by the facts on record but simply concluded the assessment without application of mind.

Both these (Preference Shares &Debentures) liabilities were erroneously also sought to be included a$ part of the total cost of acquiring the company ISL as a going concern. This erroneous claim of ECL has not been examined by the AO and without any relevant enquiry on this aspect, the AO had simply accepted the contentions of the assesses and proceeded to conclude the assessment. This wrongful acceptance of accounting treatment claimed, by assesses as "cost of acquisition" of ISL has resulting In passing of the assessment order an erroneous order which is also prejudicial to the interest of the Revenue.

10 ITA No.3759/M/2017 M/s. Vajresh Consultants Ltd. (Earlier known as Essar Capital Ltd.)

11 ITA No.3759/M/2017 M/s. Vajresh Consultants Ltd. (Earlier known as Essar Capital Ltd.) (Uttarakhand), Bharat Overseas Bank Ltd v CIT [2012] 26 Taxman.com 330(Chennai), CIT v Harsh J. Punjabi 345 ITR 451(DeL), CIT v Infosis Techn. Ltd 17 Taxman.com 203 & Sripan Land Dev.(P) Ltd v CIT[2011] Taxman.com 429(Mum ITAT).

12 ITA No.3759/M/2017 M/s. Vajresh Consultants Ltd. (Earlier known as Essar Capital Ltd.) Hutchison group also rose to 67%. 'Thereafter, Hutchison Max Telecom Ltd [HMTL]was renamed as Hutchison Essar Ltd [HELJ. It is also pertinent to mention that the acquisition of BPL mobile by HFL and spectrum allocation to Loop Telecom during this period is a subject matter of investigation by other regulatory agencies.

13 ITA No.3759/M/2017 M/s. Vajresh Consultants Ltd. (Earlier known as Essar Capital Ltd.) and ETHL Telecom Holdings India Private Limited (ETHPL) through whom, the shares of VEL were ultimately vested with a listed company of the group, India Securities Ltd [ISL] by reverse merger. Ultimately, ISL itself was amalgamated with its holding company Essar Capital Ltd [ECL] with retrospective effect after ECL had acquired minority stakes through "Exit Offer". By sheer manipulative transactions devoid of any commercial motive or substance, the entire "Onshore holding" of VEL was liquidated for Rs.5820 cr without paying any taxes and. more intriguingly claiming losses in the hands of the entities along the chain as the detailed facts would show. The main player in the series of transactions is Essar Teleholdings Ltd [ETRL].

14 ITA No.3759/M/2017 M/s. Vajresh Consultants Ltd. (Earlier known as Essar Capital Ltd.) 10. Thereafter, ETHL brought another subsidiary company under its fold, namely Essar Telecommunications Holdings P Ltd [ETHPL] which was incorporated on 10.03,2008 with a nominal capital of Rs.l lakh. The total investment by ETHL in ETHPL was Rs.l.32 cr. ETHL then claimed to have transferred the shares of its first subsidiary ECHL to ETHPL, for Rs.1.19 cr, and offered a gain of Rs.9 lakh thereon. Thus, ECHL, which had been vested with the VEL shares covered by a put option of$ 1.26 billion, has been passed on to ETHPL for a measly sum of Rs.1.19 cr. As per section 155(78), when the conditions of a transaction covered u/s.47 are violated subsequently, then the transaction has to be treated as a taxable transfer. In this case, once ECHL ceased to be the subsidiary of ETHL, then the earlier transfer of VEL shares by ETHL to ECHL ought to have been considered as a taxable, event, And for the purposes of computation of capital gains thereon, the valuation of ECHL shares ought to have been done after duly considering the value of VEL since vested with it. Even if the impugned transfer of VEL shares to ECHL and subsequent sale of ECHL shares to ETHPL were to be considered as genuine commercial transactions, then also the taxable income ought to have been calculated as per Uno. Instead, by returning a meagre sum of Rs.9 lakh as capital gains, the shares of VEL were transferred So ECHL and the control over ECHL itself was transferred to ETHPL by ETHL -without paying the appropriate, capita! gains thereon.

15 ITA No.3759/M/2017 M/s. Vajresh Consultants Ltd. (Earlier known as Essar Capital Ltd.) been computed after duly considering the value of VEL put option had indirectly by ETHPL through ECHL. Instead, by returning a meagre sum of Rs.9 lakh as capital gains, the shares of VEL, along with the control over ECHL and its holding company ETHPL 'was also transferred to the third subsidiary ETHIPL, On 25,03.2009, OCDs of ETHPL held by ETHL [Rs.1262 cr] and Essar Investments Ltd [EIL] [Rs.300 cr] were also transferred to ETHIPL at cost. Funds were provided by Essar Holdings Ltd [EHL] and others to ETHIPL ns OCDs for Rs.1566.49 cr. ECHL and ETHPL ceased to be the subsidiaries of ETHL

16 ITA No.3759/M/2017 M/s. Vajresh Consultants Ltd. (Earlier known as Essar Capital Ltd.) ETHL and further sought an opportunity to raise its objections. The independent auditors appointed for the purpose of verifying the fair valuation and swap ratio also raised objections on the. basis and method of accounting as well as valuation adopted. Serious concerns about the transparency and adequacy of disclosure were also raised by them, However, it is seen from the order of the Hon'ble High Court approving the scheme that these objections were not considered relevant and the Revenue was also not granted any further opportunity to place its objections and. its earlier objection on grounds of recovery of tax demand in the hands of ETHL was also rejected as not maintainable. Though amalgamation of ETHPL with ISL was solely for the purposes of facilitating the swapping of VEL shares with that of ISL without payment of taxes, the issue was never raised before the Hon'ble High Court as a tax avoidance measure and the put option in force was also not taken ink) reckoning. The impugned amalgamation was not considered in the background of the earlier maneuvers carried out by the entities concerned. Moreover, there was also the issue of conversion of CCPS issued to two FIIs by ISL raised by the independent auditors but not considered. ETHPL was thus amalgamated with ISL w.e.f 01.04.2010 as per the court order dated 21.04.2011 and ECHL now became the direct subsidiary of ISL

17 ITA No.3759/M/2017 M/s. Vajresh Consultants Ltd. (Earlier known as Essar Capital Ltd.) 17. It is pertinent to note that by this time, ECHL had already transferred part of the VEL stake to Piramal Group, as nominees of Vodafone. As per Sale and Purchase agreement dated 10thAugust, 2011, ECHL had transferred 2,27,12,664 shares of VEL to Piramal Healthcare Ltd on 18.08.2011 for a consideration Rs.2855,52,49,000/-. The balance VEL shares numbering 2,27,12,664 were sold on 08.02.2012 for a consideration of Rs.3007,10,75,000/- as per the second Sale and Purchase agreement dated 03.02.2012 between ECHL and Piramal Healthcare Ltd. Thus, the entire 10.97% On-shore holding in VEL was sold to Piramal Group for Rs.5862.62 cr. But for the above stated tax avoidance transactions, the direct sale of VEL shares by ETHL or for that matter ECHL to Piramal would, have res-tilted in a substantial income which is taxable in the hands of ETHL or ECHL as the case may be. The actual sole of VEL shares was from ECHL to Piramal Group in FY.2011-12 which is clearly a taxable transaction. By resorting to the post facto amalgamation of ECHL with ISL and; in turn ISL with ECL, the tuxes payable thereon, have been successfully evaded as can be seen from the facts discussed in the foregoing and also in the following -paragraphs,

18 ITA No.3759/M/2017 M/s. Vajresh Consultants Ltd. (Earlier known as Essar Capital Ltd.) shares traded, the price movement is totally inexplicable. It is in this back drop that the investment by these two FIIs came under the scrutiny of SEBI.

19 As per information on file, the option was exercised by the two PUS for converting the CCPS into equity shares of ISL on June 17, 2010 and June 18, 2010 respectively. The shares of ISL were being traded in BSE during the relevant dates and the average price works out to Rs.23.78 and Rs.22.28 only per share of Rs.1 each on the respective dates as seen from the data. As per the terms of issue of CCPS, the number of equity shares to be issued on conversion even if the combined average price of Rs.23 per share [Rs.23.78+Rs.22.28/2] on relevant dates will be 1,73,91,304 only [Rs.40 cr divided by Rs.23].Though the issue of CCPS and their conversion was already over, still the conversion was sought to be included as part of the scheme of amalgamation of ETHPL with ISL which had no connection whatsoever. It was proposed that the CCPS shall be converted into 16,77,00,000 equity shares of ISL No basis of valuation was given nor any mention us to the terms and conditions of issue of CCPS or the FDI norms thereon. Though objections were raised by the independent auditors about this disparity and lack of transparency, the scheme was approved and as a result 16,77,00,000 equity shares of ISL were issued to the two FIIs on 03.06.2011. This excess allotment of 15,03,08,696 [16,77,00,000 - 1,73,91,3041 shares of ISL was done as part of the amalgamation of ETHL with ISL without revealing the fact that as per the terms of issue of CCPS, and -under the FDI norms, the conversion rate has to be as per the pre determined rate at the time of FDI itself and that it cannot be altered. The excess consideration passed on to the two FIIs by way of allotment of 15,03,08,696 shares ISL shares over and above the permissible numbers amounts lo Rs.345,71,00f008 [15,03,03,636 equity shares of Rs.1 each of ISL x Rs.23 per share]. These shares were subsequently purchased by Essar Capital Ltd [ECL] from the FIIs concerned during the period March 26-28, 2012 at the rate of Rs.61.68 per share through "Exit Offer". The total amount paid to the two FIIs ions Rs.1037,04,30,000/- for 16.77 cr equity shares of ISL. Had the conversion been rightly done as per the terms of issue of CCPS, the permissible payout from ECL to the two FIIs on Exit offer would have been Rs. 107,82,60,848/-11,73,91,304 x Rs.62] only, and the excess payout to the FIIs on their investment in CCPS of ISL, on conversion into equity shares, works out to Rs.929,21,69,152/- [Rs.1037,04,30,000 - Rs. 107,82,60,848]. This excess payment made to the FIIs was later on successfully claimed as cost of acquiring ISL as a going concern by ECL and hence the gains on sale of VEL shares to Piramal was reduced to a loss us a result.

19 ITA No.3759/M/2017 M/s. Vajresh Consultants Ltd. (Earlier known as Essar Capital Ltd.) raised b\j the auditors before the Hon'ble High Court on the anomalies in valuation and disclosure standards of scheme of amalgamation of ETHPL with ISL were not looked into.

20 ITA No.3759/M/2017 M/s. Vajresh Consultants Ltd. (Earlier known as Essar Capital Ltd.) is also engaged in the business of providing financial advisory services -including among other corporate finance services etc. 1.2 ECL had filed its return of income for A.Y. 2012-13 on 21.05.2013 reporting an income of Rs 47,95,19,021/-

1.3 The assessment proceedings of ECL for the year under consideration were initiated by the Deputy Commissioner of Income-tax. 5(2), Mumbai by issuing notice u/s 143(2) of the Act on 08.09.2014 pursuant to which the assessee appeared before the Assessing Officer CAO') and made detailed submissions in respect of information called, for. The following details were inter-cilia called for vide notices dated 19 February 2015 and 25 February 2015 (Copy enclosed as Annexure B) and submitted by the assessee during assessment proceedings vide replies dated: i) 18.10.2013 (Copy enclosed as Annex-tire C) • Acknowledgement of Income Tax Return of the assessee for the subject AY • Computation of Income of the assessee for the subject AY • Notes to return of income of the assessee for the subject A Y with annexures thereto • Audited Financial Statements of the assessee for the subject AY • Tax Audit Report us 44AB of the assessee for the subject AY

ii) 04.03.2015 (Copy enclosed as Annexure D) • Details of offices of the assessee • Nature of business of the assessee • Details of shareholding of the assessee • Details of interest & finance charges for the subject AY • Explanation as to why disallowance u/s 14A of the Act r.w. Rule SD ions not warranted • Details of trade payables for services for the subject AY • Details of loans & advances from related parties for the subject AY • Details of trade receivables for the subject A Y • Details of loans & advances to related parties for the subject AY • Details of ICDs given for the subject AY • Details of capital loss on sale of Vodafone. Essar Ltd ('VEL') shares • Details of capital loss on sale of 6!h floor of building (Laxmi Tower) • Details of consultancy income for the subject AY • Details of misc. expenses for the subject AY • Details of office expenses for the subject AY • Details of advertising expenses for the subject AY • Details of balances written off for the subject AY • Explanation why interest on delayed payment of taxes should be allowed as deduction

iii) 09.03.2015 (Copy enclosed as Annexure E)

21 ITA No.3759/M/2017 M/s. Vajresh Consultants Ltd. (Earlier known as Essar Capital Ltd.) • Memorandum of Understanding between Essar Teleholdings Ltd (ETHL) and ETHL Communications Holdings Ltd (ECHL)for purchase of VEL shares • Income tax Returns of Essar Telecommunications Holdings Pvt Ltd (ETHPL) and ECHL for AY 09-W and AY1Q-U • . Income tax Return of India Securities Ltd (ISL) for AY 09-10, AY 10-11 and AY11-12 • Explanation in relation to cost of acquisition of VEL shares for the assessee. iv) 14.03.2015 (Copy enclosed as Annexure F) • Details of long term borrowings by Issue of debentures • Details of trade payables • Details of purchase of lSL shares through stock exchange and related contract notes • Details of trade payables for investment in 1SL • Financial Statements of ETHPl and ECHL for FY 08-09 and FY 09-10 • Financial Statements & Tax Audit Reports of lSL for FY 08-09, FY 09-10 & FY 10-11 • Explanation as to why disallowance u/s 14A of the Act r.w. Rule 3D was not. Warranted

v) 19.03.2015 (Copy enclosed as Annexure G) • Explanation as to why disallowance u/s 14A of the Act r.w. Rule 8D ions not warranted, with Rule 8D working on a without prejudice, basis. • Confirmation for debentures issued • Details of payments made for investment in ISL • Detailed factual and legal submissions in relation to cost of acquisition of VEL shares

vi) 20.03.2015 (Copy enclosed as Annexure H) • Historical share price of lSL for FYs 2009-10 to 2011-12 • Shareholding patterns of ETHL, ECHL and ECL as on 01.04.2011 • Detailed submissions on nexus of interest expenditure and interest income • Bank statement evidencing proceeds from debentures and [CDs • Explanation as to how the amalgamation of ISL 'with ECL was as per • AS 14 - Account ing for Amalgamation • High Court order and approved scheme for amalgamation of ISL with ECL • Detailed factual and legal submissions on cost of acquisition of VEL shares

vii) 24.03.2015 (Copy enclosed as Annexure I)

• Copy of sale agreement of Laxmi Tower Property. Explanation that the sale was at a value higher than stamp duty value that Section 50C of the Act was not applicable

22 ITA No.3759/M/2017 M/s. Vajresh Consultants Ltd. (Earlier known as Essar Capital Ltd.) • Detailed note and documents in relation to cost of acquisition of investments (equity shares, preference shares and debentures) made by ECL in ISL

viii) 26.03.2015 (Copy enclosed as Annexure J) • Detailed factual and legal explanation as to how the cost of acquisition incurred by the assessee for acquiring ISL is relevant • Detailed explanation as to how the recording of VEL shares at fair value mid corresponding recording of reserve in ECHL/1SL is not relevant • Shareholding pattern of ISL and ETHL as on 01.04.2011 (upto the ultimate shareholder) • Details of legal & professional expenses for the subject, year • Details of cenvat credit, receivable written off

ix) 27.03.2015 (Copy enclosed as Annexure K) • Invoices of expenses incurred in relation to acquisition of ISL shares • Details of receipt of sale consideration for sale of VEL shares along with the relevant bank statement of ECHL • Details of cost of acquisition incurred by ECL to acquire ISL and evidence o thereof • Invoices of advertising expenses • Details of court approved appointed date of amalgamation of ISL with the assessee along with legal submissions in this regard. • Challan evidencing the payment of self assessment tax

1.4 The AO passed the assessment order dated 31.3.2015 (copy enclosed as Annexure L) whereby the total income of the assessee was assessed at Rs. 53,81,31,030/- by making the following adjustments:

a) Reduction of Capital loss of Rs. 220. 15 Crs. being the proportionate cost of acquisition disallowed for VEL shares sold. b) Reduction of Capital loss Rs. 0,56 Crs. being the proportionate cost of acquisition disallowed for sale of building at Mumbai. c) Addition of Rs. 21,82,733/ u/s 14 A r.w.r 8D of the. Act, d) Addition of Rs. 43,465/- being the interest on delayed payment of taxes. e) Adjustment in respect of Income from other sources

2.1 Your Honour has issued notice, under section 263 of the Act on 17 June 2015 proposing to set aside the assessment order passed by the AO under section 143(3) on 30 March 2015. At the outset, we object to the assumption of jurisdiction u/s. 263 as the order of the AO is neither erroneous nor prejudicial to the interest of the Revenue. In this regard, our objections to each of the grounds raised by your Honour in the impugned notice are as follows:

23 ITA No.3759/M/2017 M/s. Vajresh Consultants Ltd. (Earlier known as Essar Capital Ltd.) 2.2 Vide para-1 of your above captioned notice, i/our Honour has alleged that the Assessing Officer has failed to carry out enquiries as wan-anted and the assessment has been completed without examining ail the aspects which were required to be looked into for arriving at the correct taxable income carried by the assessee. It has been alleged that the Assessing Officer did. not cause the necessary verification on inter-se transfer of assets and liabilities of group companies resulting in substantial losses and failed to call for the basic document an/ evidence to examine the true nature and the substance of the transaction.

2.3 As regards the allegation of your Honours that the Assessing Officer has failed to make enquiring into the aspects required to be looked into for arriving at the correct taxable income earned by the assessee, your Honour's attention is invited to the questionnaires issued in/ the AO to the assessee company calling for details in relations of various aspects impacting the taxable income of the year under consideration. In this regard, detailed submissions were made by the assessee company from time to time as indicated at para 1 above. During the year under consideration, the assessee-company had claim loss of Rs. 214.44 crores on sale of 4,54,25,328 equity shares of VEL shares. The said shares were sold by ECHL and the accounting for sale was done in the hands of ECL post amalgamation. A note to this effect was also appended to return of income filed by the assessee-company. The Assessing Officer issued a questionnaire dated February 19, 2015 to examine the above transactions (enclosed as Annexure-B), wherein the assessee-company was asked to submit the details of capital gain/loss on sale of shares of VEL along with cost of acquisition etc with documentary evidences. Reference may be mode at this juncture to the submissions made by the assessee vide letter dated 04.03.2015 as stated above. The assessee submitted entire list of investments sold by it during the year under consideration. The copy of the said submission is attached herewith vide Annexure-D. The assessee had also submitted details of capital loss on sales of VEL shares along with cost of acquisition of VEL shares and note to the return of income, where it has explained the computation of capital loss in the hands of assessee-company. The same reproduced here under for ready reference:

Statement of Short Term Capital Loss on sale of VEL Shares

Particulars Rs. Crores

Sales Proceeds on Sale of 4,54,25,328 VEL shares 5862.63 Less: Cost of Acquisition of VEL Shares (Details of the cost were 6077.77 submitted to AO) Short Term Capital Loss on Sale of VEL shares (214.44)

It was also explained that VEL shares were sold by ECHL to Piramal Healthcare Limited ('Piramal') on August 18, 2011 and February 08,2012 for Rs. 5682.63 crores,

24 ITA No.3759/M/2017 M/s. Vajresh Consultants Ltd. (Earlier known as Essar Capital Ltd.) vide agreements dated August 10, 2011 and February 03, 2012 entered into by ECHL mid Piramal. The consideration on sale of VEL shares of Rs 5862.63 crores (which also includes additional consideration ofRs.235.47 crores) comprised of the following:  Rs. 2855.52 cr received on August. 18,2011 for 2,27,12,664 equity shares; and  Rs. 3007.11 cr received on February 08, 2012 for 2,27,12,664 equity shares

One of the allegations of your Honour is that the AO has failed to verify inter se transfer of assets between group companies resulting in substantial tosses and foiled to call basic documentary evidence required to examine, the true nature and substance of the transaction. In this regard, it is respectfully submitted that the following events took place in the subject year resulting in inter se transfer of assets and liabilities: • Investments in ISL by the assessee • Amalgamation of ISL with the assessee

The assessee-company also stated that. ECHL was merged with India Securities Ltd ('ISL') with effect from April 01, 2010 and further, ISL was merged, with assessee- company 'with effect from April 01, 2011. The effect to the said merger has been given in the financial statements of the assessee-company for the financial year ended March 31, 2012. The copies of orders passed by the Hon'ble High Court approving the aforesaid mergers were submitted bit assessee-company (a fact acknowledged by assessing Officer in his order). Accordingly, the assessee has included the capital loss on sale of VEL shares in its computation of taxable, income which has been stated, in the assessment order as well. Thus, tit the outset, it cannot be alleged that the AO has not made proper inciuiri.es in to the facts of the case, insofar as the computation of the capital gain and other pertinent transactions is concerned.

3.1 During the year under consideration, the assessee had acquired equity shares, preference sham; and. debentures of ISL inter aim from ETHL. ECL acquired shares of ISL from third party investors (Public) as also ETHL. Part of the ISL share acquisition from ETHL was through off market transaction and partly through bulk transfers on the stock market. White the gain on market transfers lucre claimed as exempt under section 10(38), gains in respect of off market sale were dull/ considered in. the computation of income by ETHL 3.2 The details of acquisition of the said investments were furnished during the course, of the assessment proceedings. Support m this regard may be made to the following submissions which were made to the Assessing Officer in this context: • Submission dated I8 October 2013, wherein the assessed company provided Notes to Return of Income and Financial Statements of company, wherein the investments are reflected.

25 ITA No.3759/M/2017 M/s. Vajresh Consultants Ltd. (Earlier known as Essar Capital Ltd.) • Submission dated 14 March 2015, wherein the assessee company furnished details of purchase of ISL shares through stock exchange and related contract notes. • Submission dated 19 March 2015, giving details of payments made to Public shareholders. • Submission dated 24 March 2015, giving detailed note and documents in relation to cost of acquisition of investments (equity shares, preference shares and debentures)made by ECL in ISL • Submission dated. 27 March 2015, giving details of payment/ discharge of consideration for acquisition of investments (equity shares, preference shares and debentures) made by ECL in ISL

3.3 Further, after several rounds of discussion during the hearings and upon scrutiny of the cost of acquisition of investments in ISL, the AO disallowed part of the cost of acquisition which demonstrates that the AO applied his mind while passing the assessment order.

3.4 On perusal of the above, your Honour would appreciate that the observation that the AO has failed to verify details of investments made by ECL which in turn resulted in inter se transfer of assets between group companies is misplaced.

4.1 During the year under consideration, ISL merged with the assessee- company vide a court approved merger order with appointed date of 1 April 2011. Pursuant to the said merger all the assets and liabilities of ISL became the assets and liabilities of the. assessee-company. Post-merger, equity, preference and debenture holding of ECL in ISL aggregating INR 6138 Cr stood extinguished.

4.2 It may be noted that the AO had called for various details in respect of the cap Honed merger and accordingly he was aware of the merger scheme, and had examined, various aspects related thereto and applied his mind to the same. Support in this regard may be made to the following submissions which were made to the Assessing Officer in the context of the proposed merger: • Submission dated 18 October 2013, wherein the assessee company provided return of income, Notes to Return of Income and Financial Statements of company, wherein the details of amalgamation of ISL with assessee are appropriately disclosed. • Submission dated 09 March 2015, wherein the assessee company has furnished the basis of cost of acquisition of VEL shares.

26 ITA No.3759/M/2017 M/s. Vajresh Consultants Ltd. (Earlier known as Essar Capital Ltd.) • Submission dated 19 March 2015, giving detailed factual and legal submissions in relation to cost of acquisition of VEL shares and details of payment made to shareholders of ISL • Submission dated 20 March 2015, wherein the assessee company has submitted explanation as to how the amalgamation of ISL with ECL was as per AS 14. - Accounting for Amalgamation, the High Court order and approved scheme for amalgamation of ISL with ECL and detailed factual and legal submissions on cost of acquisition of VEL shares.

• Submission dated 26 March 2015, giving detailed factual and legal explanation as to how the cost of acquisition incurred by the assessee for acquiring ISL is relevant and detailed explanation as to how the recording of VEL shares at fair value and corresponding recording of reserve in ECHL/ISL is not relevant

4.3 It may also be noted that the Assessing Officer had raised queries relating _to computation of basis of valuation of cost of acquisition arrived at Rs. 6077.07 crores (as against purchase price of Rs. 1260.59 crores by ECHL) A notice was also issued on February 25, 2015 asking for such details along with specific query as to why the cost of the acquisition of shares of VEL should not be Rs. 1260.59 cr as against Rs.6077.77 cr in light of provisions of section 49('l) (Hi) (e) of the. Act. The assessee vide its reply dated March 09, 2015 made detailed submission followed by letter dated March 19, 2015 and March 20, 2015, submitted that since the amalgamation did not fall within the meaning of amalgamation as defined under section 2(1B) of the Act, the provisions of section 49(l)(iii)(e) of the Act tire not applicable. The copy of notice dated February 25, 2015 and replies of dated March 09, 19 and 20, 2015 of the assessee-company is enclosed as Annexure B, E, G and H respectively.

4.4 It was stated to the Assessing Officer that, the merger of ISL with ECL was not amalgamation as defined under section 2(1B) of the Act. It was explained vide submission dated March '19, 2015, clause (Hi) of section 2(1B) of the Act required that the shareholders holding not less than three-fourth in the value of the shares of the amalgamating company (other than shares already held by the amalgamated company) becomes the shareholders of the amalgamated company by virtue, of the amalgamation.

It was explained that in the instant case, out of total value of shares (face value) of ISL of Rs. 87,57,96,310, the shares of value of Rs. 84,76,76,4937- were held by ECL (ie the amalgamated company) and the balance shares of value of Rs. 2,31,19,817/- were held by public shareholders. As required by section 2(1B) of the Act, in order to fall within the meaning of the term 'amalgamation' in the facts of the case, the public shareholders holding at least three-fourth of the value of shares [i.e. at least shares of face value Rs. 2,10,89,863/- being three-fourth of the face value of shares held by the public shareholders of Rs. 2,81,19,817/- ought to have become the shareholders of the amalgamated company by virtue by the amalgamation. In the instant case, public shareholders holding shares of face value of only Rs. 1,92,2.8,280 (i.e less than Rs. 2,10,89,863 being three-fourth) agreed to receive shares of the amalgamated company under the scheme of amalgamation and the balance shareholders, (being

27 ITA No.3759/M/2017 M/s. Vajresh Consultants Ltd. (Earlier known as Essar Capital Ltd.) shareholders holding 31.57% of the face value of public holding) opted for cash payment.

4.5 In light of the above, it urns explained that the amalgamation of ISL into ECL did not fulfill the condition specified in clause (Hi) of section 2(1B) of the Act and therefore does not fall within the meaning of 'amalgamation" as per section 2(1 B) of the Act, Consequently, the provision of section 47(vi) and section 49(l)(iii)(e) are not applicable in the present case.

4.6 Working of cost of acquisition of shares, details in respect of the shares sold was also filed during the course of assessment. Details of cost of acquisition of investment in equity share, optionally convertible debentures and preference shares of ISL amounted to Rs. 6138.02 crores and documentary evidences thereof, were filed vide reply dated March 24, 2015 and March 27, 2025 marked as Annexure-I and K. 4.7 Further, after considering the various submissions stated above, and after several rounds of discussion during the hearings, the AO post applying mind passed the assessment order. 4.8 On perusal of the above, your Honour would appreciate that the observation that the AO has failed to verify inter se transfer of assets between group companies is misplaced. 4.9 Further, in para 20 of the notice, your Honour has alleged that ECL has claimed short term capital loss on sale of VEL shares after claiming indexation. In this regard it is submitted that no indexation was claimed in respect of the cost, as can be seen from the computation of total income filed during the assessment proceedings.

4.10 Your Honour has also alleged that the petition and sanction for amalgamation of 1SL with ECL was subsequent to the sale of V'EL shares by ECHL, -which was accounted in the books of ECL post amalgamation. In this regard, it is submitted that the amalgamation was undertaken for the following reasons, as reproduced from the amalgamation scheme (provided to the AO vide submissions dated 18 October 2013):

"The Transferor Company is engaged in investment activities and providing forex advisory services mid business start up consultancy services. The transferee company is also engaged in investment activities and the business of providing financial advisory services including corporate financial services, merger and acquisition advisory services, investment advisory services, business services and other kinds of financial and business activities.

The Transferor Company is a subsidiary company of the Transferee Company, As on June. 25, 2012, the promoters of the Transferor Company have successfully completed n voluntary deli sting offer to delist the shares of the Transferor Company from the BSE Limited (hereinafter referred to as the 'BSE'). Consequently as on June 25, 2012, 95.95% of the equity share capital of the Transferor Company is held by the Transferee Company.

The focus and activities of both the Transferee Company and the Transferor Company complement each other and as such, the consolidation of their efforts and

28 ITA No.3759/M/2017 M/s. Vajresh Consultants Ltd. (Earlier known as Essar Capital Ltd.) resources would lead to a simplified corporate structure focused on capitalizing upon strategic investment opportunities and providing a concentrated management focus for the development of the business of the Transferor Company and. the Transferee Company.

4.11 As may be seen from the above, the rationale of the merger was consolidation of efforts and resources of the companies, simplifying the corporate structure and providing a concentrated management focus for the development of their businesses. Further, the merger was also undertaken to rationalize the holding structure and reduce compliance/ administrative costs. The sales of VEL shares to Piramal group was in August 2011 and February 2012, whereas the merger was sanctioned by the High Court as taking effect from 01.04.2011 and it was merely a consequence thereof that the sale was recorded by ECL.

5.1 Your Honour has alleged that the accounting treatment on amalgamation of ETHPL with ISL was as per "Purchase Method" but did not take over the investment in ECHL standing in books of ETHPL at its fair value.

5.2 It is submitted that since me, above accounting treatment was not made in the books of the assessee, it is not relevant for the computation of the assessee's total income.

5.3 Further, the up-pointed date, of the said merger was not during FY 2011-12, and hence, it is respectfully submitted, that the same would not be relevant to the assessment for the year under consideration (AY2012-13).

5.4 Without prejudice, in this regard we submit that the accounting treatment in the books of that assessee was in accordance with the court approved merger scheme, the relevant extract of' which is reproduced as under:

"9.1 The Transferee Company shall record all the assets and liabilities pertaining to the Undertaking transferred to and vested in the Transferee Company pursuant to this Scheme, at their respective book values i.e. at the same values as appearing in the books of Transferor Company on the close of business on one day prior to the Appointed Date.

9.2 The excess or deficit, if any, remaining after recording the aforesaid entries shall be credited by the Transferee Company to Capital Reserve Account or debited to Goodwill Account, as the case may be. Goodwill, if any, shall be dealt with in accordance with the Accounting Standard, AS-14."

5.5 On perusal of the above your Honour will appreciate that all the assets and liabilities were taken over by the assessee as per the scheme as approved by the High Court. Therefore, we respectfully submit that the accounting treatment in the books of assessee was as per the court approved merger scheme and as per valuation parameters as certified by an independent chartered accountant. It is a settled

29 ITA No.3759/M/2017 M/s. Vajresh Consultants Ltd. (Earlier known as Essar Capital Ltd.) position that the scheme of amalgamation approved by the High Court cannot be challenged except in higher judicial hierarchy. Further ns a matter of public policy once the scheme is approved/sanctioned no authority should be allowed to tinker with the scheme.

5.6 Also, it is submitted that in terms of Accounting Standard H in relation to accounting for amalgamations, the assets and liabilities may be recorded at book values under the purchase-method. The relevant extract from the standard is reproduced below for your Honour's ready reference:

"12. Under the purchase method, the transferee company accounts for the amalgamation either by incorporating the assets and liabilities at their existing earn/ing amounts or by allocating the consideration to individual identifiable assets and liabilities of the transferor company on the basis of their fair values at the date of amalgamation. The identifiable assets and liabilities may include assets and liabilities not recorded in the financial statements of the transferor company."

5.7 Therefore the allegation made by your good self that the accounting treatment of recording investment of ECHL in the books of ECL at its book value and not fair value is misplaced and misconceived.

6.1. Your Honour has alleged that ETHL has received shares worth Rs 3,359 crores (equity shares of Rs 3051 Crores and preference shares of Rs 308.2 Crores) in lieu of the 10.97% stake in VEL held by it indirectly though ETHL had transferred the same earlier for Rs 1,260 Crores to ECHK and claimed loss.

6.2. In this regard, we respectfully submit, that the appointed date of the amalgamation was not in the year under consideration (AY 2012-13). Further, the consideration was not received by the assessee and hence had no bearing on its taxable income.

Without prejudice, we respectfully submit that ETHL received the said shares in terms of the court approved merger scheme, which specified that 330 equity shares and 1 preference share of ISL to be allotted to the shareholder of ETHPL (i.e. the assesses) for each equity share held in ETHPL in consideration of the transfer of and vesting of the. undertaking of ETHPL in ISL

6.3. Further the shares were issued to ETHL in terms of the valuation report issued b\j a firm of Chartered Accountants which was provided to and duly verified by the AO. Accordingly, it is respectfully submitted that allegation of your Honour that shares were issued to ETHL in lieu of 10.97% stake in VEL is unwarranted.

6,4. Your Honour has also alleged that shares worth Rs 3,359 crores received by ETHL ions less than the discounted net present value of the VEL shares recognised at Rs 5,268 crores in the books of ECHL and that there was an undervaluation of ECHL shares by Rs 2,000 crores in this process.

30 ITA No.3759/M/2017 M/s. Vajresh Consultants Ltd. (Earlier known as Essar Capital Ltd.)

6.5 In this regard, we respectfully reiterate that the appointed date of the amalgamation was not in the year under consideration (AY 2012-13). Further, the consideration was not received by the assessee and hence, had no bearing on its taxable income.

6.6 Without prejudice to the. same and the fact that the sump ratio was as per valuation in/ an independent chartered accountant, it is submitted that the merger of ETHPL with ISL was a tax neutral merger and did not result in a taxable transfer by virtue of Section 47(vii) of the Act.

6.7 In view of the above, it is respectfully submitted that this allegation too is misconceived and not relevant.

7.1 Your Honour has also referred to the merger of ECHL with the ISL and made the following allegations:

a) That details of amalgamation, valuation of net worth, swap ratio, objections raised before High Court on anomalies in valuation and disclosure standards of scheme of amalgamation were not looked into by the Assessing Officer.

b) That the chain of events leading to transfer of shares of Vodafone Essar to ISL and eventually ECL vis-a-vis the put option claimed, was neither examined, nor considered by the Assessing Officer.

c) Sole purpose of the merger is to manipulate the accounting treatment and entity in whose hands capital gains arising of sale of shares is offered to tax.

7.2 The appointed date of the said merger was not during FY 2011-12, and hence it is respectfully submitted, that the same would not be relevant to the assessment for the year under consideration(AY 2012-13).

7.3 Without prejudice, at the very outset it may be noted that the above allegations leveled by your Honour in the context of the major are misplaced. The merger of ECHL with ISL being a tax neutral merger, the question of impacting taxable income itself does not arise.

7.4 Further, it is respectfully submitted that the assessee had filed copy of audited pre.-merger financial statements of ECHL during the course of assessment proceedings as also ISL's post-merger of mandate. ISL had revised its return of income in light of the fact that ECHL got merged with ISL w.e.f. P' April 2010. The High Court of Bombay approved the scheme, sanctioning the merger on 13;f?February 2012. Accordingly the return ions revised after the scheme -was sanctioned by the High Court. The financial statements of the company were finalized on 'Ist December 2011. Accordingly on the date of finalization of financial statements the merger scheme of ECHL with ISL was pending. In light of the above

31 ITA No.3759/M/2017 M/s. Vajresh Consultants Ltd. (Earlier known as Essar Capital Ltd.) facts the management had inserted the following notes to the Notes to Accounts forming part of Schedule-13 of the audited financial statements: " 6) During the year the Company has entered into Scheme of Arrangement in me nature of Amalgamation of ETHL Communications Holdings Limited with the company Pending approval from the Honourable High Court Juridicate at Madras and Mumbai the effect of the said scheme is not given in these accounts."

7.5 On perusal of the above notes to account it may be noted that the effect of amalgamation of ECHL with the assessee company could not be given in absence of approval of Hon'ble Bombay as well as Madras PIC., The Assessing Officer called for 'Pre merger financial statements of ISL and ECHL' to compare them with the post- merger financial statements. The assessee company had provided the details sought. The Assessing Officer had analyzed the financial statements of merged entity ns well as position of ECHL and the assessee on standalone basis i.e. pre-merger. Accordingly the allegation made that the Assessing Officer has not verified the facts pertaining to the above merger is incorrect.

7.6 Your Honour has also alleged that the assessee-company has not filed the details of amalgamation, valuation of net worth, swap ratio in respect of the merger of ECHL with ISL, It is humbly submitted that this allegation of your Honour is incorrect in the light of the fact that the assessee-company had vide letter dated 18 October 2013 filed before the Assessing Officer the court approved scheme of merger. Further, the merger being a merger of a wholly owned subsidiary of ISL i.e. ECHL with ISL, there ions no determination of consideration and/or issuance of shares. Accordingly, It is humbly submitted that the allegations of your Honours that valuation, swap ratio, justification for settlement of transferor account with multiple allotment of shares/ debentures is completely misplaced. This fact can also be noted by referring to clause No.6 of the aforesaid scheme, which refers to cancellation of equity shares of ECHL in the hands of ISL, which reads as under:

"6, CANCELLATION OF EQUITY SHARES

6.1 ECHL is a wholly owned subsidiary of ISL and ISL holds the entire paid-up share capital of ECHL.

6.2 As part of the Scheme, upon the Scheme coming into effect, all the shares of ECHL held by ISL along with its nominee(s), if any, on the Effective Date, shall be cancelled and extinguished without any further act or deed. No shares or consideration shall be issued f paid by the Transferee Company pursuant to the amalgamation of the Transferor Company, which is a wholly owned, subsidiary of the Transferee Company."

7.7 On perusal of the above High Court orders approving the scheme of amalgamation, it may also be noted that the allegation made by your Honour that objections raised before the High Court on anomalies in the valuation and disclosure standards of the scheme of amalgamation were not looked into is also completely erroneous and incorrect. No such anomalies I objections were raised before the High

32 ITA No.3759/M/2017 M/s. Vajresh Consultants Ltd. (Earlier known as Essar Capital Ltd.) Court by any authorities against the above merger. This is evident from the court orders placed on record before the Assessing Officer vide letter dated IS October 2013. Further, your good self has made reference that not providing any details justify settlement for transferors' account with multiple allotments of equity shares/debentures and other financial instruments. In this respect, it may kindly be noted that on account of the merger of wholly owned subsidiary of the assessee with the assessee, the only event took place is cancellation of shares of ECHL. Therefore, there was no such event which, resulted into settlement of transferors' (ECHL) account with multiple allotments of equity shares/debentures/other financial instruments.

7.8 Vide pai'n-16 of the above notice, your Honour has alleged that the shares of VEL were sold e.vrn before the amalgamation of ECHL with ISL was finally approved, by the Madras High Court on 13,2.2012 and that the sole purpose of the merger was to manipulate, the accounting treatment and the entity in whose hands the income would be offered to tax. In this respect, we respectfully submit that the scheme of merger was filed on 17 June 2011 with appointed date 1/04/2010. On the date of filing the scheme, ECHL was holding shares of VEL and the rational of the merger was to dispense with the layered structure, facilitate holding of VEL shares directly by ISL and discover the market value, of VEL shares through ISL, a listed entity. Since, the scheme was approved, on n Inter date, 13.2,2012, and during the intervening period the VEL shares were, sold, it cannot be said that the very purpose of amalgamation is nullified.

7.9 Further, the allegation of your Honour that the purpose of the merger of ECHL with the assessee was to manipulate the accounting treatment is misplaced. In this regard, it is humbly submitted that the merger of ECHL with the assessee was duly sanctioned by the High Court. It is respectfully submitted, that the Assessing Officer is not in error if he has correctly abided and followed the directions of an approved court scheme. The scheme once sanctioned by the. Court has statutory legal binding. Reliance in this regard, may be placed on the jurisdictional High Court ruling of Sadanand Varde v State of Maharashtra (247 ITR 609) and Apex court ruling of Marshall &Sons (223 ITR 809).

8.1 Vide, para 14 to 16 of the above captioned notice your Honour has alleged that excess shares of ISL were allotted to the FIIs. It has also been alleged that the allotment was made over and above the permissible limits ns stipulated under the FDI regulations without stating the basis and justification, for converting the CCPS into higher number of equity shares of ISL which was in clear violation of the terms of issue and also the FDI norms. It is also alleged that the AO has completed the assessment without raising the query as to valuation method and. determination of conversion rate and also without ascertaining the outcome of SEBI investigation.

8.2 In this regard, it is humbly submitted that infusion of CCPS and conversion of CCPS into equity shares does not result into any taxable income for ISL either in the

33 ITA No.3759/M/2017 M/s. Vajresh Consultants Ltd. (Earlier known as Essar Capital Ltd.) year in which CCPS were allotted or in the year in which they were converted into equity shares.

8.3 The issue of CCPS was in FY 2009-10 and the conversion options were exercised during FY 2010-11. Hence, it is respectfully submitted that the same would not be relevant to the assessment for the year under consideration (AY 2012-13).

8.4 Without prejudice, it is submitted that the allotment of 16,77,00,000 shares was as per Chapter VII, "Preferential Issue" of the SEEI (Issue of Capital and Disclosure Requirements) Regulations. The relevant extract which deals with pricing of equity shares is reproduced as-under:

"If the equity shares of the issuer have been listed on a recognized stock exchange for a period of six months or more us on the relevant date, the equity shares shall be allotted at a price not less than higher of the following:

(a) The average of the weekly high and low of the closing prices of the related equity shares quoted on the recognized stock exchange during the six months preceding the relevant

(b) The average of the weekly high and low of closing prices of the related equity shares quoted on recognized stock exchange during the two weeks preceding the relevant date,"

8.5 Asper the above guidelines, the prices computed are as follows

Name of Date of Averag Averag Conversio the holder exercis e Price e Price n Price, e of as per as per higher of option Clause Clause (1) or (2) (a) (b) (1) (2) (3) (4) (5) Passage to 17-06- 21.31/- 10.91 21.31 India 2010 Master Funds Limited Prime 18-06- 21.59/- 10.91 21.59 India 2010 Investmen t Fund Limited

34 ITA No.3759/M/2017 M/s. Vajresh Consultants Ltd. (Earlier known as Essar Capital Ltd.)

8.6 Therefore as per above, the number of shares to be allotted to CCPS holders is as follows:

Name No. Iss Conve No. Total of the of ue rsion of equity holder CCPS Pri Price equi shares held ce ty allotted shar (2) * (5) es to be allo tted per CCP S (1) (2) (3) (4) (5) (6) Passag 1,00, 18, 21.31 844 8,44,00, e to 000 00 000 India 0 Master Funds Limite d Prime 1,00, 18, 21.59 833 8,33,00, India 000 00 000 Invest 0 ment Fund Limite d 16,77,0 0,000

8.7 The conversion of CCPS into 16,77,00,000 equity shares was in accordance with the court approved scheme of amalgamation of ETHPL with ISL, which fact was stated in Schedule 1 mid note 4 of the audited financial statements for the year under consideration, furnished to the AO vide submissions dated 14 March 2015. A copy of the court approved scheme was also furnished to the AO vide submission dated 18 October 2013. In view of the allotment being in accordance with the court approved merger scheme, it is respectfully submitted that your Honour has erred in alleging that excess equity shares were allotted upon conversion. The AO has gone

35 ITA No.3759/M/2017 M/s. Vajresh Consultants Ltd. (Earlier known as Essar Capital Ltd.) by the court order and accordingly cannot be said to have committed any error in accepting the number of shares issued upon conversion of the CCPS.

8.8 As regards your Honour's allegation that the AO completed the assessment without ascertaining the outcome of SEBI investigation, it is respectfully submitted that the AO may not even have been aware of the investigation. Even if he was aware of the same, the same was not a proceeding pertaining to income-tax law and he would not have required ascertaining the outcome thereof, especially in light of the. matter already having been approved by the court.

8.9 The payment of FIIs by ECL on acquisition of equity shares from ETHL is as follows:

Name of Date of No. of Rate Amount Paid FII Payment equity ( in Rs) shares (1) (2) (3) (4) (5) Passage to 18-06- 8,44,00,000 61.68 5,20,58,30,000 India 2012 Master Funds Limited Prime 18-06- 8,33,00,000 62.00 5,16,46,00,000 India 2012 Investment Fund Limited 10,37,04,30,000

8.10In view of the above, it is submitted that ECL was the purchaser of shares actually held by the FIls and hence cannot be considered to have made any excess payment to them on account of excess number of shares acquired. In view of the allotment being in accordance with the court approved merger scheme and ECL merely purchasing the shares allotted, it is respectfully submitted that your Honour has erred in alleging that excess payout was made by ECL to the FIIs.

9 Case laws relied upon on non-applicability of Section 263 :-

9.1 It is submitted that the provisions of section 263 can be invoked only when the order of the Assessing officer is erroneous as well as prejudicial to the interest of the Revenue. As slated in the aforementioned paras, the assessee had claimed cost in accordance with legal provisions and that the same was allowed by the Assessing officer after application of mind and after making adequate enquiries.

36 ITA No.3759/M/2017 M/s. Vajresh Consultants Ltd. (Earlier known as Essar Capital Ltd.) In this regard, the assessee would like to rely on the following judicial precedents.

i) Malabar Industrial Co. Ltd. vs. CIT 243 ITR 83 (SC)

In this case, their Lordship of Hon’ble Apex Court held as under:

"A bare reading of section 263(1) makes it- clear that the pre-requisite to exercise of jurisdiction by the Commissioner suo motu under it, is that the order of the /TO is erroneous insofar as it is prejudicial to the interests of the revenue. The Commissioner has to be satisfied of twin conditions, namely, (i) the order of the Assessing Officer sought to be revised is erroneous; and (ii) it is prejudicial to the interests of the revenue. If one of them is absent - if the order of the 1TO is erroneous but is not prejudicial to the revenue or if it is not erroneous but is prejudicial to the revenue' - recourse cannot be had to section 263(1).

There can be no doubt that the provision cannot be invoked to correct each and every type of mistake or error committed by the Assessing Officer; it is only when an order is erroneous that the section 'will be attracted. An incorrect assumption of facts or an incorrect application of law will satisfy the requirement of the order being erroneous. In the same category fall orders passed without applying the principles of natural justice or without application of mind.

The phrase 'prejudicial to the interests of the revenue' has to be read in conjunction with an erroneous order passed by the Assessing Officer. Every loss of revenue as a consequence of an order of the Assessing Officer cannot be treated as prejudicial to the interests of the revenue, for example, when an /TO adopts one of the courses permissible in law and it has resulted in loss of revenue; or where two views are possible and the ITO has taken one view 'with which the Commissioner does not agree, it cannot be treated as an erroneous order prejudicial to the interests of the revenue unless the view taken by the ITO is unsustainable in law."

"...For an order of the Assessing Officer to be interfered with in exercise of revisional powers, the Commissioner has to the find in the first instance that the order is erroneous and, secondly, the order is prejudicial to the interests of the revenue. 'Hie twin conditions have to be fulfilled before the Commissioner can exercise jurisdiction under section 263. [Para 24]

In the instant case, the Assessing Officer, after making due inquiries, adopted one view and granted partial relief under section 80-1. The Commissioner took a different view of the matter, However, that would not have been sufficient to - permit the Commissioner to exercise powers under section 263, because when two views are possible and the Commissioner does not agree with the view taken, by the Assessing Officer, the assessment order cannot be treated as erroneous and prejudicial to the interests of the revenue, unless the view taken by the Assessing Officer is unsustainable in law. That was not the position in the instant case. In fact, even the partial denial of relief under section 80-1 had been found to be incorrect by the appellate authority. Therefore, existence of two views stood established. In the aforesaid circumstances, the Commissioner could not have exercised jurisdiction under section 263 as per settled legal position. [Para 25]

37 ITA No.3759/M/2017 M/s. Vajresh Consultants Ltd. (Earlier known as Essar Capital Ltd.)

The Tribunal had committed an error in upholding the exercise of powers under section 263 by the Commissioner to be valid in the facts and circumstances of the case, when not only there was a prohibition as stipulated by the Explanation (c) of section 263 but even the twin requirements, viz., pre-conditions for exercise of jurisdiction, under section 263 were not fulfilled.

(in) CIT vs. Sunbeam Auto Ltd., 332 ITR 167 (Del.). "The submission of the revenue was that while passing the assessment order, the Officer did not consider the aspect specifically whether the expenditure in question was revenue or capital expenditure. That argument predicated on the assessment order, which, apparently did not give any reason while allowing the entire expenditure as revenue expenditure. However, that, by itself, would not be indicative of the fact that the Assessing Officer had not applied his mind to the issue. There are judgments galore laying down the principle that the Assessing Officer in the assessment order is not required to give detailed reasons in. respect of each and every item of deduction, etc. Therefore, one has to see from the record as to whether there was application of mind before allowing the expenditure in question as revenue expenditure. One has to keep in mind the distinction between 'lack of inquiry' and 'inadequate inquiry'. If there was any inquiry, even inadequate, that would not, by itself, give occasion to the Commissioner to pass orders under section 263 merely because he has different opinion in the matter. It is only in cases of 'lack of inquiry' that such a course of action would be open. [Para 12]

In the instant case, the Assessing Officer had called for explanation on items in question from the assessee and the assessee had furnished his explanation. Said fact was even taken note of by the Commissioner himself in his order. [Para 13]

That clearly showed that the Assessing Officer had undertaken the exercise of examining as to whether the expenditure incurred by the assessee in the replacement of dyes and tools was to be treated as revenue expenditure or not. It appeared that since the Assessing Officer was satisfied with the assessee's explanation, he accepted the same. [Para 141

Even the Commissioner conceded, the position that the Assessing Officer made the inquiries, elicited replies and thereafter passed the assessment order. The grievance of the Commissioner was that the Assessing Officer should have made further inquiries rather than accepting the assessee's explanation. Therefore, it could not be said that it was a case of 'lack of inquiry'. [Para 15]

CIT vs. Gabrial India Ltd. [1993] 203 1TR 108 (Bom.). In this case, the jurisdictions! High Court held as under ;-

"............Two circumstances must exist to enable the Commissioner to exercise power of revision under this sub-section, viz., (i) the order is erroneous; (ii) by virtue of the order being erroneous prejudice has been caused to the interests of the Revenue. It has, therefore, to be considered firstly as to when an order can be said to be erroneous. We find that the expressions "erroneous", "erroneous assessment" and "erroneous judgment" have been defined in Black's Law

38 ITA No.3759/M/2017 M/s. Vajresh Consultants Ltd. (Earlier known as Essar Capital Ltd.) Dictionary. According to the definition, "erroneous" means "involving error; deviating from the law", "Erroneous assessment" refers to an assessment that deviates from the law and is a defect that is therefore invalid and is a defect that is jurisdictional in its nature, and does not refer to the judgment of the Assessing Officer in fixing the amount of valuation of the property. Similarly, “erroneous judgment” means “one rendered according to course and practice of court, but contrary to law, upon mistaken view of law, or upon erroneous application of legal principles.”

……..

"The ITO in this case had made enquiries in regard to the nature of the expenditure incurred by the assessee. The assessee had given a detailed explanation in that regard by a letter in writing. All these were part of the record of the case. Evidently, the claim ions allowed by the ITO on being satisfied with the explanation of the assessee. This decision of the ITO could not be held to be 'erroneous' simply because in his order he did not make an elaborate discussion in that regard. Moreover, in the instant case, the Commissioner himself, even after initiating proceedings for revision and hearing the assessee, could not say that the allowance of the claim of the assessee was erroneous and that the expenditure was not revenue expenditure but an expenditure of capital nature. He simply asked the ITO to re-examine the matter. That was not permissible. Hence, the provisions of section 263 -were not applicable to the instant case and, therefore, the Commissioner urns not justified in setting aside the assessment order."

39 ITA No.3759/M/2017 M/s. Vajresh Consultants Ltd. (Earlier known as Essar Capital Ltd.) (v) Rayon Silk Mills vs. CIT [1.9961 221 ITR 155 (Gui.)

"Section 263, read with section 2(47), of the Income-tax Act, 1961 - Revision - Of orders prejudicial to interest of revenue - Assessment year 1974-75 - Whether it is essential condition for exercise of power under section 263 that Commissioner must find that error which is found in order of ITO is prejudicial to interests of revenue and that conclusion of Commissioner that order is prejudicial to interests of revenue is not a matter of subjective satisfaction of Commissioner - Held, yes - Assessee-firm was dissolved on 23-2-1974 leaving private, limited company which was a partner infirm as sole proprietor thereof- Goodwill account was created by debiting goodwill account and crediting old partners, capital accounts - Assessment was completed under section 143(3) - Commissioner revised assessments by invoking provisions of section 263 on ground that ITO failed to tax goodwill so credited - Whether conversion of partnership assets into personal assets on dissolution did not result in transfer of capita! asset for consideration for purpose of levy of capital gains, and, therefore, order of ITO of not levying tax could not be said to be prejudicial to interest of revenue - Held, yes -- Whether, further, revenue authorities had fallen into error by not noticing relevant fact as to when business of firm became business of company and consequently, it failed to appreciate that even that had no bearing as far as relevant assessment year was concerned - Held, yes."

vi) CIT vs. Vikas Polymers 236 CTR 476 (Delhi High Court) ",....,If an Income-tax Officer acting in accordance with law makes a certain assessment, the same cannot be branded as "erroneous" by the Commissioner simply because, according to him, the order should have been written differently or more elaborately. The Section does not visualize the substitution of the judgment of the Commissioner for that of the Income-tax Officer, who passed the order unless the decision is not in accordance with law.....," vii) CITvs Anil Kumar Sharma (335 ITR 83)

The Delhi High Court held that where there was no "lack of enquiry" by AO even if it could he said to be inadequate, proceedings under section 263 of the Act was not valid since "the AO had applied his mind to complete details filed b\/ the assessee.

(viii) Ramakant Sinph vs CIT (140 T7Y41) The Patna Tribunal held, that enquiry was made by the AO on all the points raised by the Commissioner of Income-tax and even if such enquiry was inadequate in the opinion of the learned Commissioner of Income-tax, this does not give power to him to pass an order, under section 263 merely because he has different opinion in the matter.

ix) Vodafone Essar South Ltd. vs. CIT (141 TTJ 84) The Delhi Tribunal held that in cases where AO enquired on all the issues and assesses responded by giving the detailed replied, it cannot be said there was lack of enquiry on the part of the AO on the ground that assessment order does not give reason for allowing the expenditure and AO did not make further enquiry. Further, it was held that there is due enquiry by the Assessing Officer, though it has been

40 ITA No.3759/M/2017 M/s. Vajresh Consultants Ltd. (Earlier known as Essar Capital Ltd.) considered to be inadequate by the CIT, recourse under section 263 of the Act cannot be made.

9.2 On perusal of the above judicial pronouncements it is evident that before your Honour can exercise his jurisdiction u/s.263, he has to be satisfied with twin conditions, viz. (i) the order of the Assessing Officer sought to be revised is erroneous and (ii) it is -prejudicial to the interest, of the revenue. In case any one of them is absent no recourse to revision u/s.263 can be taken. In the present case, your Honour is proposing to hold the assessment order to be erroneous mainly on the ground that the Assessing Officer has failed to carry out enquiries as warranted by the facts and circumstances and has not looked into all the aspects which were required to be looked into for arriving at the correct taxable income. Since detailed inquiries were made by the Assessing Officer inter alia in respect of merger of ISL with ECL, capital loss claimed by ECL on sale of VEL shares and investments by ECL in ISL, In response to the same, detailed responses were also made by the assesses. Post consideration of the facts submitted to him, the Assessing Officer has passed the order after due application of mind and after making disallowances. Accordingly, the remarks made by your Honour that the Assessing Officer did not examine the entire issue is completely misconceived and misplaced.

9.3 Your Honour may also note that several facts referred in the notice as well as the back ground note are pertaining to altogether different assessees or in respect of a different, assessment year. Your Honour has further made reference to events occurring prior to the year under consideration or records which pertain to the subsequent years. Further the records relied upon pertain to the proceedings other some other person, which do not form parts of the records in relation to the. proceedings under the Act, in case of the assessee. Thus the assesses, with immense respect submits, that the notice, insofar as fails to deal with such, issues is vague and deserves to be quashed.

9.4 Without prejudice to the fact that many events referred in the back ground note as well as the main notice does not affect the computation of tax liability of the assessee in any manner, the assessee would like to raise objections on merits as well which are as follows:

10.1 Your Honour has stated that the VEL shares were transferred by ETHL for Rs.1260 Crores even though the "Put Option Agreement" was subsisting on the date of transfer, In this regard, we respectfully submit that above sale was not made by the assesses and hence was not relevant to the assessment in its case or its total income. Further, the above sole was made in F.Y. 2007-08.

10.2 Without prejudice to the above, we submit that the transfer of VEL shares was done between. ETHL and ECHL tit a negotiated price of Rs. 1260 Crores. The transfer ions made to ECHL, n then wholly owned subsidiary of ETHL with intent to raise, finance, as ETHL being highly leveraged was unable to raise the funds. On

41 ITA No.3759/M/2017 M/s. Vajresh Consultants Ltd. (Earlier known as Essar Capital Ltd.) transfer of VEL shares to ECHL, ECHL was successful in raising finance by way of debenture issue in market by pledging immovable and movable property of the company, including VEL shares. Further, ETHL has considered the entire sales consideration received by it on transfer of VEL shares while computing its capital loss which has been accepted in its assessment.

10.3 Further, your kind attention is invited to Section 48 of Act, which read as follows:

“Mode of computation - The income chargeable under the head "Capital Gains" shall be computed by deducting from the full value of consideration received or accruing as a result of the transfer of capital asset…..."

10.4 It is apparent from a plain reading of above, that the "full value of consideration" should be the amount which was actually accrued or was received by the seller as consideration for the sale of capital asset. Full value of consideration cannot include any amount which has never accrued or has never been received by the seller. The full value of consideration does not mean market value of that asset which is transferred. It is the price bargained for and agreed to between the parties to the arrangement (ie the actual price at which the shares were sold). In this regard, we place reliance, on following judgments which support the aforesaid transfer: • CIT v George Henderson & Co Ltd (66 ITR 622) (SC) • GIT v Gillanders Arbuthnot & Co (87 ITR 407) (SC) • K.P. Varghese v. /TO [19811131 ITR 597 (SC) • CIT v. Shivakami Company P. Ltd. [1986] 159 ITR 71 (SC) • CITv. P. Suryanaryana [1973] 88 ITR 321 (Mad) • CIT v.Smt. Nandini Nopany [1998] 230 ITR 679 (Cal) • CITv. G.C. Sen Gupta [1996] 220 ITR 254 (Gau)

10.5 Further, in this regard, your Honour’s attention is invited to the rectification order passed by the Assessing Officer for AY 2008-09, wherein the AO has recomputed the capital loss on sale of VEL shares. A copy of the rectification order u/s. 154 of the Act is attached at Annexure M.

10.6 Your Honour has further alleged that although the transfer was from a holding company to its WOS, exemption under section 47(iv) has not been claimed. In this regard, it is respectfully submitted that ETHL not remaining parent of ECHL for a period of 8 years post the date of transfer, the exemption was not available to ETHL and hence not claimed.

10.7 The allegation of your Honour that ECHL has no business / activity is misplaced. ECHL had issued listed debentures to unrelated parties to the tune of Rs 3707 Crores, and has made investments of around 4000 Crores in shares / debentures of group companies; freehold land and fixed deposits in respect of which the company has also earned income..

42 ITA No.3759/M/2017 M/s. Vajresh Consultants Ltd. (Earlier known as Essar Capital Ltd.) 11. Objection in respect of Transfer of ECHL shares for Rs. 1.19 Crores by ETHL to ETHPL

11.1 Your Honour has stated that ETHL has transferred its 100% stake in ECHL to ETHPL for n sum of Rs. 1.19 Crores on 30 April 2008, which was holding VEL shares worth USD 1200 million. In this regard, we respectfully submit that above transfer was not by the assessee and /s hence not relevant for the assessment of its total income. Further, the transfer was made in FY 2008-09. Hence, it is respectfully submitted that in our view the same would not be relevant to the assessment for the year under consideration. Additionally the computation of capital gains on transfer ions accepted by the tax authorities in the assessment of AY 2009-10. Further, we respectfully submit that the submissions made in relation to point no. 10 above would be applicable here as well.

12.1 Your Honour has stated that book value of VEL shares has increased from Rs. 1260 Crores to Rs. 5915.32 Crores by change in accounting treatment and the difference has been transferred to Capital Reserve and Deferred Tax Liability. In this connection, we respectfully submit that accounting treatment ions done by ECHL in accordance with Accounting Standard 30 issued bi/ the Institute of Chartered Accountants of India, In this regard, we respectfully submit that above accounting treatment was not made in the books of the assessee and hence was not relevant to the assessment in its case or its total income. Further, the same pertained to FYs 2008-09 and 2009-10 and hence, it is respectfully submitted that the same would not be relevant to the assessment for the year under consideration.

12.2 Without prejudice to above, we submit that the accounting was done in line with the accounting treatment provided under AS-30 at the time when options are written and at the time when the options are exercised. The accounting for put options written was done in year ended 31 March 2009 and accounting for put options exercised was done in year ended 31 March 2010. To justify the same, we invite your kind attention to the Note No. B(i) to accounts of Financial Statements for period ended 31March 2009, which reads as follows:

(a) The Company’s investment in Vodafone Essar Limited is covered by an Onshore Underwritten Put Option (“Put Option”), which is exercisable during May 2010 to May 2011for USD 1200 million.

(b) The Board of Directors of the Company as well as the ultimate holding company, Girishan Investments Ltd., have decided to opt for exercise the said put option in respect of the said investment and accordingly, the discounted value of the Put Option has been classified as "Advance recoverable in cash or kind for value to be received".

(c) In the absence of am/ specific guidance under the prevailing accounting standards on accounting of Option, the value of said put option has been arrived at

43 ITA No.3759/M/2017 M/s. Vajresh Consultants Ltd. (Earlier known as Essar Capital Ltd.) by taking reference from proposed Accounting Standard 30 "Financial Instruments - Recognition and measurement".

(d) The said Put Option has been accounted in books of accounts at its fair value (net discounted present value applying 1 year LIBOR) of Rs. 5,915.21 Crores. The resultant unrealized impact, net deferred tax, has been adjusted in capital, reserve.

Hence, for the year ended 31 March 2009, ECHL had accounted the said Put Options in accordance with AS-30, as a result of which investments in VEL shares was cancelled and the fair value of Put Options was shown under the head 'Loans and Advances' at its fair value. The difference arising on the same was credited to Capital Reserve, net of Deferred Tax Liability. However, for the year ending 31 March 2010, the same were treated as 'Available for Sale Financial Asset', as prescribed under AS-30, when the said Put Options were exercisable. Following note appears in the Balance Sheet for year ending 31 March 2010 on the treatment of the same:

(a) The Company's investment in 4,54,25,328 equity shares of Vodafone Essar Ltd is covered by an Onshore Underwritten Put Option ("Put Option"), which is exercisable during May, 2010 to May, 2011 for USD 1,200 million.

(b) The 'Available for Sale Financial Asset' under the head 'Investments' classified by early adoption of Accounting Standard 30 "Financial Instruments - Recognition and measurement" have been valued at their fair value (including investment in Vodafone Essar Limited at rupee equivalent to USD 1200 Million discounted 1 year UBOR of 1.9719% p.a.) and Put Option has been valued at its fair value of NIL based on its valuation from independent valuer.

12.4 Therefore, for the years ending 31 March 2009 and 31 March 2010, ECHL had accounted the Put Options as per the accounting treatment prescribed under AS-30. It is respectfully submitted that the said accounting treatment was to give true and fair view of its financial position, which was done by early adoption of AS- 30.

13.1 Your Honour has stated that ETHL has transferred its 100% stake in ETHPL to ETHIPL for a sum of Rs. 1.41 Crores.

13.2 In this regard, we respectfully submit that above transfer was not by the assessee and is hence not relevant to the assessment of its total income. Further, the transfer was made in FY 2008-09. Hence, it is respectfully submitted that the same would not be relevant to the assessment for the year under consideration. Additionally the computation of capital gains on transfer was accepted by the tax authorities in the assessment of AY 2009-10. Further, we respectfully submit that the submissions made in relation to point no. 10 above would be applicable here as well.

44 ITA No.3759/M/2017 M/s. Vajresh Consultants Ltd. (Earlier known as Essar Capital Ltd.)

14.1 Your Honour has stated that the accounting treatment on amalgamation of ETHIPL with ETHL was as per "Purchase Method", wherein all items in the balance sheet were taken over almost at book value, except equity shares of ETHPL of Rs. 15.41 Crores which was revalued at Rs. 3,238.94 Crores,

14.2 In this regard, we respectfully submit that above accounting treatment was not made, in the books of the assessee and is hence not relevant to the assessment of its total income. Further, the same pertained to FY 2009-10. Hence, it is respectfully submitted that in our view the same would not be relevant to the assessment for the year under consideration.

14.3 Without prejudice to above, we submit that the accounting treatment in the books of ETHL was in 'accordance with the court approved merger scheme, the relevant extract of which is reproduced as under:

"8.1The Transferee Company shall record all the assets and liabilities pertaining to the Undertaking transferred to and vested in the Transferee Company pursuant to this Scheme., at their respective fair market values i.e. on the dose of business on one day prior to the Appointed Date

8.2The Board shall ascertain the fair Market Value of all assets and liabilities of the Transferor Company, by obtaining a report from a Category I Merchant Banker and a Chartered Accountants’ having an experience of not less than 15 year.”

14.4 Also, as per the valuation report issued by an independent firm of chartered accountants, the fail-value of investments in ETHPL by ETHJPL was ascertained at Rs. 3,238.94 Crores, whereas the fair value of other items, which included inter alia, balance with bank, sundry creditors ions equal to their respective book values. Therefore, we respectfully submit, that the accounting treatment in the books of ETHL was as per the court approved merger scheme.

15.1 Your Honour has alleged that ETHIPL did not conduct any business activities and that the only role it played was to increase the cost of investment in the books of ETHL

15.2 In this regard, we respectfully submit that the business activities conducted by ETH1PL are not relevant for assessing the total income. Further, ETHIPL did not exist during AY 2010-11. Hence, it is respectfully submitted that in our view the same would not be relevant to the assessment for the year under consideration.

15.3 Without prejudice to the above, it is respectfully submitted that ETHIPL was incorporated to make strategic investments in telecom assets. As a part of its investment strategy, it had made investment to the tune of Rs 1567 Crores in shares and debentures of ETHPL.

45 ITA No.3759/M/2017 M/s. Vajresh Consultants Ltd. (Earlier known as Essar Capital Ltd.)

15.4 Therefore, it is wrongly alleged that there was no business activity in ETHIPL and the role ETHIPL played was to increase the cost of investment in ETHPL in books of ETHL.

16 Objection against the calculation of cost of acquisition of ISL shares:

16.1 Your Honour has alleged that while arriving at the cost of acquisition of Rs. 6,138.02 Crores, the assessee company has inflated the cost by including the cost of liabilities being preference shares and debentures of ISL. Further, your Honour has also alleged that this claim of ECL has not been examined by the AO and he accepted the same without any relevant enquiry on this aspect.

16.2 In this regard, it is submitted that your Honour has erred in considering that ECL included the value of liabilities while arriving at cost of acquisition. The value included by it was the cost that it incurred in acquiring investments in ISL, viz. equity shares, preference, shares and debentures therein. 'The said investments were assets (and not liabilities) from the perspective of ECL. Accordingly, it is respectfully submitted that your Honour's allegation is misconceived.

16.3 It may be noted that during the course of the assessment proceedings of ECL for the subject AY, the AO had raised specific queries related to the components of cost of Rs 6138.02 crores and. had applied his mind to the same. Support in this regard may be made to the following submissions which were made to the Assessing Officer in this context: • Submission dated 18 October 2023, wherein the assessee company provided its return of income, computation of total income, Notes to Return of Income and Financial Statements of company, wherein the details of cost were provided. • Submission dated 04 March 2015, wherein the assessee company has provided details of cost of acquisition and capital gain on sale of VEL shares. • Submission dated 09 March 2015, wherein the assessee company has furnished the basis of cost of acquisition of VEL shares. • Submission dated 14 March 2015, wherein the assessee company furnished details of purchase of ISL shares through stock exchange and related contract notes and dentils of amalgamations in the subject AY • Submission dated 19 March 2015, giving detailed factual and legal submissions in relation to cost of acquisition of VEL shares and details of payment made to shareholders of ISL • Submission dated 24 March 2015, giving detailed note and documents in relation to cost of acquisition of the investments

46 ITA No.3759/M/2017 M/s. Vajresh Consultants Ltd. (Earlier known as Essar Capital Ltd.) • Submission dated 27 March 2015, giving evidence of payment of cost of acquisition,

16.4 On perusal of the above, your goodself will be able to appreciate that the assessee had submitted all the necessary details to the Assessing Officer in order to verify the computation of STCL on transfer of shares of VEL to Piramal. The Assessing Officer even called the reasons that why the cost of the shares of VEL acquired by the assessee-company should not be taken as the cost of such shams in the hands of previous owner i.e. ECHL in light of section 49(1)(iii)(e). In response to such queries, detailed submissions were filed by the appellant-company -which are discussed in the foregoing paragraph of this submissions. The cost of acquisition of the assets of the company which merged into amalgamated company can either be cost of acquisition of previous owner in light of section 49(l)(iii)(e) or when the provisions of the said section do not apply, the actual cost incurred In/ the assessee. While examining various aspects related to the income of the assessee for the year under consideration, the Assessing Officer also examined this crucial facet thoroughly. The Assessing Officer satisfied himself that since the amalgamation of ISL, with ECL was not in the nature of amalgamation as defined under section 2(1B) of the Act, such cost as per the said section (i.e. cost to previous owner) cannot be the cost of acquisition in the hand of ECL.

16.5 In the present case, the value of assets given up by the ECL for the purpose of obtaining the assets of ISL shall constitute the value of the assets acquired from ISL in the. hands of the ECL For this purpose the value of the assets given up by the ECL for the purpose of acquiring the assets' of ISL shall be the cost of acquisition of the equity shares, preference shares and debentures which got extinguished as well the amounts paid by the ECL to the Public shareholders and cost of shares of the ECL Company allotted to outside shareholders as part of the scheme.

16.6 This ratio was applied by the Apex. Court in the case of Miss Dhun Dadabhoy Kapadia v C1T (63 ITR 651)(SC). The decision of the Rajasthan High Court in the case of CIT v Mahindra &Co Ltd (326 ITR 465) also supports the view of the assessee. Applying the ratio of the Court in these decisions, a concomitant of the assets acquired from ISL is the extinguishment of the equity shares, preference shares and Debentures in ISL, amounts paid by the ECL to the public shareholders and cost of shares allotted by ECL to outside shareholders as part of the scheme, which should also be taken into account. Thus the cost of acquisition of assets taken over from ISL should be the cost of the equity shares, preference shares and debentures held in ISL held in ECL as well as payment made to the Public shareholders and cost of shares allotted by ECL lo outside shareholders as part of the scheme as a result of which assets of ISL got vested with the ECL. This aggregate cost of acquisition of the assets of ISL has to be apportioned amongst the individual assets in an appropriate manner.

16.7 As regards cost of acquisition of VEL shares in the hands of ECL, as submitted earlier, the same has been calculated at Rs. 6,077.07 crs, being the proportionate actual cost incurred by ECL for acquiring the investments in ISL (Equity shares, preference shares and debentures) amounting to Rs 6138 crs which is ascertained as understood in ordinary commercial parlance and in accordance

47 ITA No.3759/M/2017 M/s. Vajresh Consultants Ltd. (Earlier known as Essar Capital Ltd.) with the principles of accountancy which is also supported by Apex court decision in the case Chellapalli Sugars Ltd.(98 ITR 167)

16.8 In view of the above, the cost incurred by ECL to acquire ISL shares (i.e. the consideration discharged to the public shareholders of ISL on amalgamation and the value of assets given up by ECL) has been considered for determining the cost of acquisition of VEL shares in the hands of the ECL

16.9 Thus this facet was also thoroughly examined by the Assessing Officer. Accordingly it can be easily concluded that the AO was aware of the all the aspects as to cost in the hands of the assessee company and after proper examination of the facts and laws, the AO adopted the legally valid view. The law is trite as discussed in foregoing paragraphs that if the AO takes one of the view possible under law, revision proceedings cannot be invoked to ask him to take tiny alternative view.

16.10 On perusal of the assessment order especially para 5 to 5.10 from page 11 to 25 of the impugned order, it may be noted that the Assessing Officer had during the course of assessment proceedings verified all the above issues before passing assessment order.

16.11After verification of the above facts the Assessing Officer has also made adjustments to the computation of loss made by the assessee in its return of income. The Assessing Officer has disallowed total cost of Rs. 221.73 crores with the observation that cost was unascertainable, till the end of the financial year relevant to assessment year under consideration, and the same being committed and incurred by the company in the subsequent year and hence not related to assessment year under consideration. The relevant part of the findings of the Assessing Officer is reproduced hereunder for the your Honour's ready reference:

"5.8 Further vide submission dated 24 March 2015 and 27 March 2015, the assessee submitted the details of cost of acquisition of investment of in equity shares, optionally convertible debentures and preference shares of India Securities Limited amounting to Rs. 6,138.02 crores and documentary evidence thereof and payment details, from the perusal of details and documentary evidence submitted by the assessee company, it is noticed that out of Rs. 6138.02 crores, cos! of acquisition claimed, by the assessee, Rs. 45.62 crores ions paid to shareholders of India Securities Limited under exit offer. During the relevant financial year, there was no certainty with regard to how many shareholders will opt for the exit offer, Similarly, Rs, 56.83 crores tons paid to shareholders of India Securities Limited who opted to receive cash, Rs. 0.11 crores was paid to fractional shareholders and Rs. 119.18 crores being consideration in the form of equity shares of the assessee company issued to shareholders of India Securities Ltd pursuant 'to merger of India Securities Ltd. with assessee company. Therefore, the total cost of Rs. 221.73 crores was unascertainable at the end of the financial year relevant to assessment year under consideration and the same committed and incurred by the company in the subsequent financial year and hence not related to assessment year under consideration.

48 ITA No.3759/M/2017 M/s. Vajresh Consultants Ltd. (Earlier known as Essar Capital Ltd.)

5.9 After going the various factual arid legal submissions made by the assessee company as is seen that the during the year under assessment the assesses company received the Immovable properties, shares of Vodafone Essar Ltd and Net Current assets pursuant to amalgamation of India Securities Ltd with it w.e.f 1/4/2011. Prior to this ETHL Communication Holdings Ltd was merged with India Securities Ltd w.e.f 1/4/2010. Pursuant Lo above Madras High Courts orders assessee company became the owner of the above assets. It was explained that amalgamation between ISL and assessee company did not satisfy the conditions of Section 2(1B)(iii) of the Income Tax Act 1961 and consequently the, provisions of section 47(vi) and section 49(1)(iii)e is not applicable in the case of assessee company. As per section 2(lB)(iii), shareholders holding three fourth in value in amalgamating company should become tin; shareholders of amalgamated company. In the case under consideration 68.43% in value became the shareholders of the assessee company and. remaining shareholders opted for cash payment pursuant to above merger scheme. In view of this, amalgamation between ISL and assessee company did not satisfy the conditions of section 2(1B)(iu) of the Income Tax Act 1961 and therefore provisions of section 47(vi) and section 49(l)(iii)e is not applicable to the assessee company.

5.10 I have also gone through various case laws and submissions made by the assessee us mentioned in the previous paragraphs and more particularly Supreme Court decision in the case of Challapalli Sugars Ltd (supra) where it was held that the cost of acquisition should be computed on the basis of commercial understanding and principles of accountancy and Rajasthan High court decision in case of Mahindra & Co. Ltd where in it was held that consideration paid, by the amalgamated company mould become the cost of acquisition for the assets received on merger, However, as discussed above out of total cost of acquisition of Rs. 6138,02 claimed by the assessee company, Rs. 221.73 crores in committed and incurred only subsequent to the relevant assessment year and therefore the same is disallowed and accordingly based on the facts and above case laws the proportionate cost of acquisition of Rs. 5856.92 crores for VEL shares sold and Rs. 14.99 crores for sale of building at Mumbai is hereby allowed and balance proportionate cost of acquisition of Rs. 220.15 crores for VEL shares sold and Rs. 0.56 crores for sale of building at Mumbai is disallowed "

16.12 Further, your goodself has observed that: AO knowing that ISL has already merged with ECL did not cause, necessary investigations into the matter is mid has simply concluded the matter. At the cost of repetition, it may be noted that entire details for verification of transfer of shares of VEL was verified by AO. He also sought explanations as to why the cost of previous owner should not be taken as cost of acquisition of VEL and after verifying all the documents and orders of Hon’ble High Courts sanctioning the mergers and amalgamations was satisfied, with the explanations provided by the assessee-company, except of the cost which was partially disallowed due to uncertainty of payment of such cost in the year under consideration.

49 ITA No.3759/M/2017 M/s. Vajresh Consultants Ltd. (Earlier known as Essar Capital Ltd.) 16.13 On perusal of the above, your Honour would appreciate that the allegations in regard to the cost of acquisition and examination thereof by the AO are misplaced.

17 Objection against sale of immovable property, Laxmi Tower:

17.1VidePara 22 of notice, Your goodself has alleged that in respect of transfer of immovable property (ie sale of building Laxmi towers), the AO neither called for nor did the assessee company voluntarily submit documentary evidence which provides guidance in respect of date of acquisition, cost of acquisition, copy of the sale deed, Accordingly, it is alleged that the Assessing Officer has accepted the contention of assessee without any enquiry and application of mind. Further, the AO has failed to examine the applicability of Section 50 C.

17.2 In this regard, it is respectfully submitted that the computation of capital gains on sale of Lax mi towers, which provided details of cost of acquisition and copy of the sale agreement of Laxmi Tower which indicated that the sale consideration of the property being Rs. 15 crores as also the stamp duty valuation of Rs, 9,31,44,1021- was submitted vide submission dated 4 March 2015. Since, the actual sales consideration is higher that the stamp duty valuation, Section 50 C is not attracted in the. above sale.

17.3 In light of the above, it is respectfully submitted that the Assessing Officer has verified at length all the details in respect of short term capital loss arising on sale of Laxmi Towers and on this ground the order of the Assessing Officer cannot be termed as erroneous much less prejudicial to the interest of the revenue.

18 Objection against allowance of interest expenditure incurred for earning interest income on ICD's:

18.1 Vide Para 22 of notice, Your goodself has alleged that the assessee company has claimed certain. expenditure which has been allowed by the AO without considering if such expenditure falls within purview of section 57 and which is not in accordance with decision of the Apex Court in case of Dr. V.P. Gopinath Vs CIT (248 ITR 449).

18.2 During the year under consideration, the assessee company had given inter corporate deposits of JNR 2,703 crores on which it had earned interest income amounting to r.s.2,118,358,285. The inter-corporate deposits were made out of proceeds from issuance of interest bearing debentures of INR 2,750 crores to-Yes Bank and Axis Bank in respect of which it has incurred interest expenses of Rs. 163,38,8S,762/-. Details of interest expenses were submitted vide sub-mission dated 4 March 2015. Details of interest income, source of funds placed in ICDs and corresponding interest expenses were submitted vide submission dated. 9 March 2015 Further, the flow of inter corporate deposits and copy of the bank statement evidencing the aforesaid receipt of debentures proceeds and inter-corporate deposit was also submitted vide submission dated 20 March 2015.

50 ITA No.3759/M/2017 M/s. Vajresh Consultants Ltd. (Earlier known as Essar Capital Ltd.) 18.3 As stated earlier, that the inter-corporate deposits were given from the proceeds from issuance, from issue of debentures and accordingly the interest paid on the same has been taken as deduction while computing interest income on inter-corporate deposits as per clause (in) of Section 57 of the Act-Further reliance placed by your Honour on the ruling of the Apex Court in Dr. V.P. Gopinath Vs CIT (supra) is not relevant as the question before the court was whether the assessee is to be assessed on the gross interest received on FDs or on the net interest post reduction of interest-paid on loans taken on the strength of the FDs.

18.4 It is pertinent to note that in the above judgment, the assessee had made the fixed deposit out of surplus money and no borrowings were made for the investment in fixed deposit. Further, in the said case, the assessee took the loan against the said fixed deposit and offered the net interest as taxable income (Interest income on FD less interest paid on loan taken against FD). It is respectfully submitted that in the said judgment the Issue before the Hon'ble Supreme Court was not the deduction u/s 57(iii) of the. Act and hence reliance on the ruling is misplaced,

18.5 The relevant excerpts of section 57 (Hi) are reproduced as under:-

"any expenditure (not being in the nature of capital expenditure) laid out or expended wholly and exclusively for the purpose of making or earning such income."

18.6 The assessee has incurred interest expenses wholly and exclusively for the purpose of earning interest income. In view of the plain reading of section 57(iii) of the Act, the assessee is entitled for deduction of interest expenses against the interest -income.

18.7 Further, we would like to draw kind attention of your goodself to the landmark judgement of Hon'ble Supreme Court in the case of Rajendra Prasad Moody (115 JTR 519). which provides that deduction should allowed if there is direct nexus of expenditure incurred for earning income.

In addition to the above, we reserve the right to furnish additional written submissions on other matters arising from the captioned notice and supplementary to notice.

51 ITA No.3759/M/2017 M/s. Vajresh Consultants Ltd. (Earlier known as Essar Capital Ltd.) erroneous as well as prejudicial to the interest of the revenue by observing and holding as under:- “4. I have duly considered the submissions made by the assessee. As per the background note to the notice u/s 263 of the Act and the submissions and details filed by the assessee, the basic facts of the case are as follows: (1) Essar group was holding 33% stake in Hutchison Essar Ltd. (HEL) which was later on renamed as Vodafone Essar Ltd. (VEL) through Essar Teleholding Ltd. (ETHL) an Indian entity. (2) On 17/01/2006, ETHL transferred 215.85% shares of HEL (presently known as 'VEL') for a sum of Rs. 1032.79 crs which was originally acquired for Rs. 1350.11 cr to Essar Telecom Investments Ltd. (ETIL), the Indian subsidiary of Essar Communication Ltd., Mauritius and 6.19% of shares through Essar Com Ltd. (E-com)- a Mauritius based company. Both ETIL and E-com were subsidiaries of Essar Communication Ltd. a Mauritius based company owned by the promoters' family, thereby incurring huge losses (Rs. 317.44 cr) which were claimed as carry forward losses in the hands of ETHL. Thus, 22.03% of ETHL holding of HEL (presently known as 'VEL') stake by the above Essar Group company was shifted to the off-shore entities based at Mauritius (22.03%) and the On-shore entity, ETHL had its stake scaled down to 10.97%. The Book Value of the said 10.97% of shares of VEL as on 31/03/2006 was Rs 1260 cr. (3) Vodafone agreed to buy entire stake of 33% held by the Essar group in VEL for the amount as under:- a. Onshore holding by Essar -10.97%-$ 1.26 billion b. Offshore holding by Essar-22.03%-$ 4.26 billion $ 5.46 billion (4) Later on, Essar Group entered into a 'Put Option' agreement with Vodafone on 15/03/2007, whereby 33% stake in VEL held by Essar group was to be acquired by Vodafone for a sum of $ 5.46 billion. As per this agreement ETHL, had the right to sell its 10.97% stake in VEL to Vodafone at the pre agreed consideration of $ 1.26 billion (equivalent to 1NR 5862 Cr.). This consideration for "On-shore holding of 1.0.97% was surprisingly much less considering the price agreed upon for 33%) stake sale since the proportionate sale consideration ought to have been taken at $ 1.82 billion instead of $ 1.26 billion. Neither any reason nor basis was adduced for arriving at such a reduced sale consideration for the "On-shore holding" by Essar Group. The difference in US $ 1.82 billion and US $ 1.26 billion was taken as consideration for transfer of off-shore holding in VEL which was not chargeable to tax in India in accordance with Indo-Mauritius DTAA. Thus, the consideration to the extent of US $ 0.56 billion went untaxed as a result of the scheme devised by the assessee. (5) After the signing of the "Put Option" agreement on 15/03/2007 and having firmed up the sale price and the period of executing the sale transaction as well, series of transactions were carried out within the Essar group solely with the object of evading payment of taxes thereon. Since the shares of VEL were not listed and any gains resulting from the 'stake sale' thereof ought to suffer taxes, ETHL Communication Holdings P Ltd. (ECHL),

52 ITA No.3759/M/2017 M/s. Vajresh Consultants Ltd. (Earlier known as Essar Capital Ltd.) Essar Telecommunication Holdings P Ltd. (ETHPL) and ETHL Telcom Holdings India Private Limited (ETHIPL) through whom the shares of VEL were ultimately vested with a listed company of the group, India Securities Ltd. (ISL) by way of 'reverse merger' was strategized by the Essar Group to evade taxes. Ultimately, ISL itself was amalgamated with its holding company Essar Capital Ltd. (ECL) with retrospective effect by virtue of Bombay High Court order after ECL had acquired minority stakes in ISL through "Exit Offer". By sheer manipulative transactions devoid of any commercial motive or substance, the entire "On-shore holding" of VEL was liquidated for Rs. 5862.62 cr without paying any taxes and more intriguingly claiming losses in the hands of the entities along the chain as the detailed facts would show. ETHL has incorporated series of companies to inflate the cost of shares of VEL and specifically to avoid long term capital gain, tax as well as MAT. After verification of Financial Report of the company as per Mumbai Chartered Accountants (MCA) data, it can be seen that these are merely shell companies and are created to inflate the cost of investment in VEL thereby to evade capital gain tax and MAT on the Put Option agreement entered. The financial report of the ETHPL and ETHIPL were not on the records before the AO.

53 ITA No.3759/M/2017 M/s. Vajresh Consultants Ltd. (Earlier known as Essar Capital Ltd.) the name of ECHL was included as the "On-shore entity" purportedly holding VEL shares. Then, ECHL was incorporated on 07/10/2007, as a wholly owned subsidiary of ETHL with a nominal capital of Rs. 1 lakh. Thus, even before ECHL was incorporated, an agreement was executed whereby the 'Put Option' was vested in a non-existent entity at the time when the agreement was entered into. The total investment of ETHL in ECHL was Rs. 1.10 cr. From perusal of assessee's submission it is understood that on 28/03/2008, ETHL transferred the stake of 10.97% in VEL, that is the equity shares of VEL numbering 4,54,25,328 to ECHL for Rs. 1260.58 cr. However, ETHL claimed indexed cost of acquisition of VEL shares at Rs. 1541 Cr. though the 'Book Cost' was Rs. 1260.58 Cr. only and after indexation of the inflated purchase cost, ETHL wrongly claimed further loss of Rs. 340 cr. in A.Y. 2008-09 also on this account because the said transfer being from the holding company to its wholly owned subsidiary, it was exempt u/s. 47(iv) of the Act. However, ETHL has treated the same as a taxable event and claimed the losses in the return which is inexplicable. Further, since ECHL did not have any source of funds to pay for this impugned transfer of VEL shares, in lieu of payment for the VEL shares, it issued FCDs to ETHL for Rs. 1260 cr. Thus, there was no transfer of funds on the purported transfer of shares from ETHL to its subsidiary. ECHL on its part did not have any other business activities and there were no other business assets either. The only purpose for which ECHL was brought into existence was undisputedly to hold 10.97% "On-shore" stake shares of VEL and inflate the cost of shares of VEL in ECHL with a view to evade capital gains tax and MAT as is evident from channel no. 2 devised by the Essar Group. 2.2 Channel No. 2:- Formation of Shell Company No. 2 - ETHPL: ETHL incorporated another wholly owned subsidiary company - ETHPL on 10/03/2008 with a nominal capital of Rs. 1 lakh. The total investment of ETHL in ETHPL was Rs. 1.32 cr. ETHL then transferred the shares of its first- subsidiary ECHL to ETHPL, for Rs. 1.19 cr. and offered a gain of Rs. 9 lakh thereon. Thus, ECHL, which had been vested with the VEL shares covered by a 'Put Option' of $ 1.26 billion (equivalent to 1NR 5862 Cr.), was passed onto ETHPL for a measly sum of Rs. 1.19 cr. As per section 155(7B) of the IT Act, when the conditions of a transaction covered u/s. 4.7 are subsequently violated, then the transaction has to be treated as a taxable transfer. In this case, once ECHL ceased to be the subsidiary of ETHL, the transfer of VEL shares earlier by ETHL to ECHL ought to have been considered as a taxable event and for the purpose of computation of capital gains thereon, the valuation of ECHL shares ought to have been done after duly considering the value of VEL since vested with it. Instead, by returning a meagre sum of Rs. 9 lakh as capital gains, the shares of VEL were transferred to ECHL and the control over ECHL itself was transferred to ETHPL by ETHL without paying the appropriate capital gains tax thereon. Thus, ECHL had already strategized that it was going to incorporate ETHPL and transfer shares of ECHPL to ETHPL, which will enable them to claim loss on sale of VEL shares. Thus, various steps taken by the Essar group demonstrate the tax evasion motive. 2.2.1. Further, entries were passed through the bank accounts of ETHL, ETHPL and ECHL on a single day to show as if ETHL had given loan of Rs.

54 ITA No.3759/M/2017 M/s. Vajresh Consultants Ltd. (Earlier known as Essar Capital Ltd.) 1262.95 crs and another company Essar Investments Ltd. (E1L) had given loan of Rs. 300 crs to ETHPL as Optional Convertible Debenture (OCD) on 30/04/2008 which in turn was invested by ETHPL in the share capital of ECHL at a premium of Rs. 1407.82 cr. This in turn was used by ECHL to redeem the Non Convertible Debenture (NCD) for Rs. 1260 Cr. issued by it earlier to ETHL in lieu of consideration for transfer of VEL shares worth Rs. 1260 crs. ECHL, thus, became the wholly owned subsidiary of ETHPL and NCD issued to ETHL stood substituted by share premium amount of Rs. 1260 crs in the balance sheet of ECHL. In short, the money for repaying NCDs of ETHL, that is Rs. 1260 crs has come from ETHL itself. 2.2.2. Also, as at 31/03/2009, in the balance sheet of ECHL, the value of 'Put Option" of VEL was accounted for under "Loans and Advances" at its fair value, calculated at Rs. 5915.32 cr. by taking the net discounted present value based on LIBOR in the place of investment in VEL shares earlier accounted for Rs. 1260 cr. In the next year, i.e. as at 31/03/2010, in place of "Loans and Advances - Put option" the value of VEL shares has been reflected once again in the Balance Sheet as "investments" showing the value at Rs. 5915.32 crs. The audit note states that the value of Tut Option' has been taken as "nil". Thus, the book value of VEL shares was increased from Rs. 1260 cr. to Rs. 5915.32 cr. by these accounting entries which is untenable and the difference was credited to Capital Reserve and Deferred tax liability. The transactions were thus routed to evade tax on account of MAT liability and capital gains tax set to arise on transfer of VEL shares by virtue of Tut Option' agreement dated 15/03/2007. 2.3 Channel No. 3: Formation of shell company No. 3 ETHIPL On 16/04/2008, Bhargava Realities Pvt Ltd was incorporated, later on renamed by Essar group as ETHL Telecom Holdings India Private Limited (ETHIPL) which became third subsidiary of ETHL. On 20/03/2009, ETHL transferred its investment in the shares of ETHPL, costing Rs. 1.32 cr. to ETHIPL for Rs. 1.41 cr., and offered a sum of Rs. 9 lakh as Capital Gains. However, neither any basis for this valuation was adduced nor reasons given for not considering the investment in VEL held by ECHL for the purpose of valuation. Thus, for a meager sum of Rs. 2.60 cr. (Rs. 1.19 cr. for ECHL and Rs,. 1.41 cr. for ETHPL), the "On-shore" holding of 10.97% in VEL held by ECHL with a Tut Option' of $ 1.26 billion (net discounted value of Rs. 5915.32 cr.) was placed at the disposal of ETHIPL through the immediate subsidiary ETHPL. On 25/03/2009, OCDs of ETHPL held by ETHL (Rs. 1262 cr.) and Essar Investments Ltd. (EIL) (Rs. 300 cr.) were also transferred to ETHIPL at cost. Funds were provided by Essar Holdings Ltd. (EHL) and others to ETHIPL as OCDs for Rs. 1566.49 cr. and ECHL and ETHPL ceased to be the subsidiaries of ETHL w.e.f 01.01.2010 vide Bombay High Court's Order 16.07.2010. ETHIPL invested further sum of Rs. 14 cr. in equity shares of ETHPL. However, no details in respect of the said amalgamation were called for by the AO during the assessment proceedings. There was no enquiry made by the AO in respect of the said amalgamation. If all the amalgamations as referred to in earlier paras of this order are considered in a holistic manner it can be derived that the said scheme was devised by the Essar group to evade payment of tax on sale of shares in VEL under normal computation as well as under MAT. Therefore, lack of any enquiry made in

55 ITA No.3759/M/2017 M/s. Vajresh Consultants Ltd. (Earlier known as Essar Capital Ltd.) respect of the amalgamation as referred to in the earlier part of the para makes the order erroneous as well as prejudicial to the interests of the revenue. 2.4 Channel No. 4: Amalgamation of ETHIPL with ETHL ETHIPL was amalgamated with ETHL as per court's order dated 16/07/2010 w.e.f. 01/01/2010, thus bringing the control over ETHPL and ECHL back to ETHL. Though the amalgamation was claimed to have been accounted for under the ''Purchase Method" as per AS 14 (recording the assets and liabilities at fair value), it is seen that the investment by ETHIPL in ETHPL, comprising of equity share capital of Rs. 15.41 cr. was revalued at Rs. 3238.94 cr. in the books of ETHL whereas, all other items in the balance sheet were taken at book value only with no significant changes. The resultant surplus of Rs. 3198 cr., which was mainly on account of revaluation of equity shares of ETHPL has been taken to capital reserve. Simply put, though equity shares of ETHPL were transferred earlier by ETHL to ETHIPL at book value, on amalgamation, the same assets were revalued and taken back in the books of ETHL at a higher value. There were no changes in the assets of ETHPL and the only asset that remained was the holding of shares of ECHL with VEL stake shares therein. Though out of 15,41,000 shares of ETHPL acquired by ETHL now, 1,41,000 shares were the same that were transferred earlier on 20/03/2009 to ETHIPL, for Rs. 1.41 cr. in March, 2009 only, these shares have been revalued at astronomical figures as on 01/01/2010. Thus, it is evident that ETHIPL was created for the specific purpose of revaluing the shares of ETHPL in the books of ETHL which survived as a company for exactly two years with no business activities and the only role it played was to increase the cost of investment of ETHPL shares in the books of ETHL. Once ETHIPL merged with ETHL, its erstwhile subsidiaries ETHPL and ECHL again became ETHL's subsidiary and step down subsidiary respectively whereas, the cost of investment for ETHL in them had been increased in the books. There is neither any basis nor any justification for such unreasonable valuation adopted under the guise of accounting for amalgamation except for the deliberate purpose of jacking up the cost of investment in ETHPL in the books of ETHL without suffering any tax. No details in respect of the said amalgamations were called for by the AO during the course of original assessment proceedings. There was also no enquiry made by the AO in respect of the said amalgamation. If all the amalgamations as are referred to in earlier paras of this order are considered in a holistic manner it can be derived that the above scheme was devised by the Essar group to evade payment of tax on sale of shares in VEL under normal computation as well as under MAT. Therefore, lack of enquiry conducted by the AO in respect of the amalgamation as referred to in earlier part of the para makes the order erroneous as well as prejudicial to the interest of the revenue. 2.5 Channel No. 5: Reverse Merger - Amalgamation of ETHPL with ISL vide High Court's Order dtd. 21/04/2011 After having brought back the holding of ETHPL and ECHL under its fold at a revalued figure, ETHL devised a strategy to transfer the control over them along with the stake holding of 10.97% in VEL to a listed entity of the group, India Securities Ltd. (ISL). Essar Capital Ltd. (ECL) being the holding company

56 ITA No.3759/M/2017 M/s. Vajresh Consultants Ltd. (Earlier known as Essar Capital Ltd.) of ISL, The shares of ISL being a listed company equity shares of which are thinly traded was already an Essar Group Company. Thereafter, a scheme of arrangement was placed before the Hon'ble High Court at Chennai seeking to amalgamate ETHPL with ISL. One of the rationales put-forth before the Hon'ble High Court was that the amalgamation of ETHPL with ISL aims at unlocking the value and market assessment of the telecom assets of the company. However, the only asset which ETHPL had was the shares of ECHL and the only telecom asset held if any was the stake of 10.97% in VEL held by its subsidiary ECHL. If at all the intention of this amalgamation was to unlock the telecom asset, then ECHL ought to have been merged directly with ISL instead of ETHPL. However, ISL got ETHPL amalgamated with itself first and then ECHL later on, both w.e.f. 01/04/2010. When the scheme of amalgamation of ETHPL with ISL was under consideration before the Hon'ble High Court, Vodafone sought to raise objections mainly on the issue of valuation of shares of ETHPL. Vodafone also raised the issue of unnatural price increase in the shares of ISL during the period suggesting insider trading and market manipulation. On 14.01.2010, the share price of ISL, as alleged by Vodafone in its written complaint before the SEBI was Rs.6.25 only. However, on 17.01.2011, the share price of ISL was increased by more than 11 times to Rs.69.05. Also enquiries were then pending before the SEBI. It is seen that the department also brought to the notice of the Hon'ble High Court the tax demand raised in the case of ETHL and further sought an opportunity to raise its objections. The independent auditors appointed for the purpose of verifying the fair valuation and swap ratio also raised objections on the basis and method of accounting as well as valuation adopted. Serious concerns about the transparency and adequacy of disclosure were also raised by them. However, it is seen from the order of the Hon'ble High Court approving the scheme that these objections were not considered relevant and the Revenue was also not granted any further opportunity to place its objections and its earlier objection on grounds of recovery of tax demand in the hands of ETHL was also rejected as not maintainable. Though amalgamation of ETHPL with ISL was solely for the purpose of facilitating swapping of VEL shares with that of ISL without payment of taxes, this issue was never raised before the Hon'ble High court as a tax evasion case and the 'Put Option' in force was also not reckoned. Thus, the earlier manoeuvres carried out by Essar Group through shell companies were not correctly placed by the Essar Group before the Hon'ble High Court. Moreover, there was also the issue of conversion of Compulsory Convertible Preference Shares (CCPS) issued to two FIIs by ISL raised by the independent auditors, but not considered as the same were not bought before the Court by Essar Group. ETHPL was thus amalgamated with ISL w.e.f. 01/04/2010 as per the Madras High Court's order dated 21/04/2011 and ECHL became the direct subsidiary of ISL which was the purpose of the Essar Group as later on sale of VEL shares as per the 'Put Option' agreement has taken place in ISL and LTCG claimed exempt u/s. 10(38) of the Act/ as discussed in the next channel. 2.6 Channel No. 6: Sale of 10.97% of VEL shares under Put Option' agreement through ISL and exemption of LTCG claimed u/s 10(38) of the Act

57 ITA No.3759/M/2017 M/s. Vajresh Consultants Ltd. (Earlier known as Essar Capital Ltd.) & evasion of MAT provisions by increasing cost of VEL shares in the books of ISL As on the appointed date, 01/04/2010, ETHPL did not have any other assets in its balance sheet except the investment of Rs. 1565 cr. in ECHL at a premium of Rs. 1407.82 cr. which was funded by ETHL. Thus, in effect, the VEL shares held by ECHL was the only tangible asset which had been indirectly acquired by ISL through this amalgamation. For the purpose of arriving at the consideration payable in lieu of net assets of the amalgamating company, the fair value of VEL shares held by ECHL ought to have been considered. Though it was stated that the amalgamation is accounted for under the purchase method as per AS 14, the investment in ECHL in the books of ETHPL was not taken at its fair value, resulting in a deficit of Rs. 371.36 cr., which was accounted as 'Goodwill' in the books of ISL. ETHL as the holding company of ETHPL, was issued 330 equity shares of Rs. 1 each of ISL and one 0.01% Non Cumulative Preference Shares of Rs. 2000 each for every share of ETHPL it held. Allotments were done on 3rt! June, 2011. ETHL had 15,41,000 equity shares of ETHPL as on 31/03/2010 and as per the formula it received 508529670 equity shares of ISL having a market value of Rs. 30511780200 (508529670 x Rs.60). In addition to this, ETHL also received 1541000 preference shares of Rs.2000 each having a total value of Rs. 3082000000/-. Thus, ETHL received shares of ISL (equity and preference) worth Rs. 3358.37 cr. on 03/06/2011 which was nothing but consideration for 10.97% stake in VEL held indirectly through ETHPL and ECHL. This consideration was much less than the discounted net present value of VEL stake recognized at Rs. 5268 cr. in the books of ECHL. Clearly, there was under valuation of ECHL shares by Rs. 2000 cr. in this process. Though such swapping is a taxable transfer had it been done directly from ETHL to ISL, the entire sequence of transactions including creation of three subsidiaries and the amalgamation of ETHPL with ISL has been carried out with the sole purpose of evasion of tax and nowhere in the whole sequence of events any commercial substance is found present. Immediately after the allotment of ISL shares, ETHL has sold 12,71,32,500 shares of ISL to ECL through off market transaction and has returned a taxable gain of Rs. 723.12 cr but set it off against brought forward long term capital losses created earlier. The remaining of the equity shares of ISL was sold to ECL by bulk transfers during the period 25th August 2011 to 3rd October 2011. The resultant gain calculated at Rs. 2283.91 cr. has been claimed as exempt u/s. 10(38) of the Act. For the purposes of computing capital gains, cost and period of holding were taken as that of acquiring ETHPL shares, i.e. at Rs.14.41 cr. only. Since the shares of ISL are listed, long term capital gain on its sale by ETHL to ECL was claimed exempt u/s. 10(38) of the Act. The capital gains on off-market transfer was sought to be set off against brought forward losses. In effect, to the extent of Long Term Capital Loss available, EGHL transferred the shares of ISL off market and claimed set off of available losses and the rest of the shares were transferred through market, by virtue of which the entire gain was claimed as exempt u/s. 10(38) of the Act. Thus, effectively, no tax has been paid by ETHL which originally held the shares of VEL, though it eventually transferred the entire holding with a 'Put Option' Of $1.26 billion to ISL.

58 ITA No.3759/M/2017 M/s. Vajresh Consultants Ltd. (Earlier known as Essar Capital Ltd.) 2.6.1. After having got ETHPL amalgamated with itself, ISL sought to amalgamate ECHL also with itself and succeeded in getting the scheme approved by the Hon'ble High Court at Chennai w.e.f. 01/04/2010 vide Court's Order dated 13/02/2012. By this time, the entire stake in VEL had been sold by ECHL directly to Piramal Health Care Ltd. The rationale put forth for amalgamating ECHL with ISL was to facilitate direct control over assets of ECHL in the hands of ISL. As the only major telecom asset held by the ISL other than inter group OCDs and investments in shares of group concerns, was 10.97% stake in Vodafone Essar Ltd. (VSL) held by the group onshore already sold to Piramal Group by ECHL, it is quite evident that the stated purpose for which the amalgamation of ECHL with ISL was sought to be carried out had already been nullified since after the sale of VEL shares by ECHL, there were no other telecom assets except the OCDs and FCDs of the group concerns. The only real purpose that these amalgamations had served post facto VEL stake sale is to manipulate the accounting treatments so as to evade payment of taxes thereon by any of the entities concerned. It is evident that the sanction of the Hon'ble High Courts has been obtained without disclosing truly and fully al] material facts relevant to the stated purpose of amalgamation and details of amalgamation, valuation of net worth, swap ratio, justification for settlement of shareholders' account with multiple allotments of equity shares, debentures etc., objections raised by the auditors before the Hon'ble High Court on the anomalies in valuation and disclosure standards of scheme of amalgamation of ETHPL with- ISL which were never looked into. 2.7 Channel No. 7: Merger of ISL with ECL and the cost of VEL taken at Rs. 6000cr as against cost of Rs. 1260 cr being the cost of acquisition ECL had already acquired the shares of ISL allotted to ETHL on amalgamation of ETHPL with ISL and declared in the return of income filed by ETHL. The shares of ISL issued on excess of the permissible conversion rate to the two FIIs have also been purchased by ECL by way of Exit Offer in March, 2012, thus acquiring 97% of shares in ISL. ISL also merged with ECL w.e.f. 01/04/2011 as per court order dated 11/01/2013 by which time there was neither any shares of VEL with the group nor was there any other business assets of the like. Though it was ECHL that actually sold the shares, the accounting for of the actual sale was done only in the hands of ECL post amalgamation. The assessee in its submission dated 06/03/2017hascontended that amalgamation of ISL with ECL was not falling within the definition of the term "Amalgamation" as given u/s. 2(1B) of the Income tax Act, 1961. Therefore, it is argued that provision of section 47(vi) and section 49 would not apply to the facts of the case. Accordingly, the assessee did not consider the cost of acquisition of the shares in the hands of ECHL as well as ISL as the cost of acquisition while calculating the capital gain on sale of shares of VEL. The assessee has, thus, contended that cost of Rs. 6077.07Cr. is justified in the light of provisions of Section 49(1)(iii)(e) of the Act. The above contention was also raised before the AO during the course of original assessment proceedings. Therefore, it has been argued by the assessee that the AO has already applied his mind to the aspect of cost of acquisition of shares of VEL. However, in the above submission, the assessee has agreed that provision of section 47(vi) is not applicable. If this

59 ITA No.3759/M/2017 M/s. Vajresh Consultants Ltd. (Earlier known as Essar Capital Ltd.) is the case then the transfer of assets in the scheme of amalgamation would be taxable in the hands of the amalgamating company. If it is not taxed, the difference between the original cost of acquisition, i.e. Rs. 1260 cr. and the revised cost of acquisition that is Rs. 6000 Cr. would go untaxed which is not permissible. The said difference would be taxable in the hands of the amalgamated company, i.e. ECL in accordance with the provision of section 170 of the Act. This aspect of the matter has not been considered by the AO in the assessment proceedings. Thus, capital gains in the hands of amalgamating company as a result in transfer of assets during the course of amalgamation, was something which was not enquired into or gone into by the AO during the course of assessment proceedings. This makes the order erroneous and prejudicial to the interest of the revenue. This also demonstrates that the above tax evasion scheme was devised so that the ultimate cost of acquisition of VEL shares could be taken at Rs. 6000 Cr. instead of the actual cost of Rs. 1260 cr. This planning of the assessee is nothing but, for the purpose of tax which is impermissible in the light of judgement of Hon'ble Supreme Court in the case of Mc'Dowells. (1985) 154 ITR 148 (SC). 3. The assessment order is also found erroneous and prejudicial to the interests of the revenue for the reason that as seen from the events, on 23.03.2015 the AO made a request for information under the provision 'Exchange of Information' Article of Indo-Mauritius DTAA in the case of ISL for foreign entity ETHL Communications (Mauritius) Ltd, Mauritius to the JS (FT&TR) CBDT, New Delhi in the prescribed proforma. In turn, JS (FT & TR) - II, CBDT wrote to the Mauritian Competent Authority on 26.03.2015 requesting for the information under the prescribed proforma. The information about making this request was received by the Pr. CIT on 26.03.2015 which was conveyed to the Addl. C1T and DCIT, Mumbai. In this regard, clause (vii) of Explanation 1 to Section 153 of the IT Act/ 1961 provides as follows: "the period commencing from the date on which a reference or first of the references for exchange of information is made by an authority competent under the agreement referred to in section 90 or section 90A and ending with the date on which the information requested is last received by the Principal Commissioner or Commissioner or a period of one year ... shall be excluded" in computation of the limitation period. 3.1 The first proviso to the above clause, therefore, mentions that where immediately after the exclusion of the aforesaid time or period, the period of limitation available to the Assessing Officer for making an order of assessment is less than sixty days, the period of limitation shall be extended to sixty days. However, in spite of receiving the communication that the Indian Competent Authority has made a reference for exchange of information to the Mauritian Competent Authority under the India Mauritius DTAA, the AO did not avail of the benefit of exclusion of time period and extension of period of limitation for completing of the assessment order as provided under Clause (viii) of Explanation 1 to section 153 and made the assessment order on 30.03.2015 itself and did not wait for the information also.

60 ITA No.3759/M/2017 M/s. Vajresh Consultants Ltd. (Earlier known as Essar Capital Ltd.) 4. In so tar the various case laws and decisions relied upon by the assessee in its submissions reproduced above are concerned/ reliance is placed on decisions given below to support the contention that revision u/s 263 of the Act ought to be made as order passed is erroneous and prejudicial to the interests of the revenue. 4.1 Killick Nixon Ltd v. DCIT (Bom HC) (ITA No. 5518 of 2010) Para 14 - We find that the Tribunal has considered the evidence of purchase and sale of shares to book long term and short term losses and taking all the evidence together including the surrounding circumstances reached a finding that the purchase and sale of shares is not genuine. So far as tire decision of the Supreme Court in Vodafone International (dated 20 January 2012) is concerned/ the Court considered its decisions in the matters of McDowell reported in (1985) 3 SCC 230, Azadi Bachao reported in (2004) 10 SCC 1 and the Mathuram Agarwal reported in (1999) 8 SCC 667 and concluded that where the transaction is not genuine but a colourable device there could be no question of tax planning. The Supreme Court in the aforesaid case after considering the aforesaid two decisions concluded as follows: "The majority judgment in McDowell held that "tax planning may be legitimate provided it is within the framework of law" (para-45). In the latter part of para 45, it held that "colourable device cannot be a part of tax planning and it is wrong to encourage the belief that it is honourable to avoid payment of tax by resorting to dubious methods". It is the obligation of every citizen to pay the taxes without resorting to subterfuges. The above observations should be read with para 46 where the majority holds "on this aspect one of us Chinappa Reddy J. has proposed a separate opinion with which we agree". The words "this aspect" express the majority's agreement with the judgment of Reddy, J. only in relation to tax evasion through the use of colourable devices and by resorting to dubious methods and subterfuges. Thus, it cannot be said that all tax planning is illegal/ illegitimate/ impermissible. Moreover, Reddy. J himself says that he agrees with the majority. In the judgment of Reddy. J there are repeated references to schemes and devices in contradistinction to "legitimate avoidance of tax liability (Paras 7-10, 17 and 18). In our view, although Chinnappa Reddy, J. makes a number of observations regarding the need to depart from the "Westminster" and tax avoidance- these are clearly only in the context of artificial and colourable devices. Reading McDowell, in the manner indicated hereinabove, in cases of treaty shopping and/or tax avoidance/ there is no conflict between McDowell and Azadi Bachao or between Mcdowell and Mathuram Agarwal." Para 15- The aforesaid observations of the Supreme Court makes it very clear that a colourable device cannot be a part of tax planning. Therefore where a transaction is sham and not genuine as in the present case then it cannot be considered to be a part of tax planning or legitimate avoidance of tax liability. The Supreme Court in fact concluded that there is no conflict between its decisions in the matter of McDowell (supra), Azadi Bachao (supra) and Mathuram Agarwal (supra). In the present case the purchase and sale of shares/ so as to take long term and short term capital loss was found as a matter of fact by all the three authorities to be a sham. Therefore

61 ITA No.3759/M/2017 M/s. Vajresh Consultants Ltd. (Earlier known as Essar Capital Ltd.) authorities came to a finding that the same was not genuine. So far as the question Nos.(ii), (iii) (iv) and (v) are concerned, we hold that these are pure questions of facts and as there are concurrent finding of the authorities below, no question of law arises for this Court to interfere. The Hon'ble Bombay High Court in the above case was dealing with a similar situation and, therefore, the said judgement is clearly applicable to the facts of the case of the assessee. The facts of the present case as elaborated in the above paragraphs also demonstrate the colourable devices adopted by the Essar group which aspect of the matter was completely not enquired into by the Assessing Officer in the manner as stated above during the course of assessment proceedings. This clearly makes the order erroneous as well as prejudicial to the interests of the Revenue. 4.2 CIT v. Amitabh Bachchan (2016) 384 ITR 200 (SO Para 19, 20 - The CIT took the view that notwithstanding the withdrawal of the claim by the assessee, in view of the earlier stand taken that the said expenses were incurred for security purposes of the assessee, the Assessing Officer ought to have proceeded with the matter as the assessee was following the cash system of accounting and the filing of the re-revised return, prima facie, indicated that the additional expenses claimed had been incurred. Withdrawal of claim by assessee can be for variety of reasons and this does not mean that Assessing Officer should abandon enquiries regarding sources for incurring expenses, Assessee follows cash system of accounting and the claim regarding additional expenses was made through duly verified revised return. The claim was pressed during assessment proceedings carried on by A.O. after filing revised return and it was specially stated in letter dated 13.02.2004 that expenses were for security purposes and that payments have been made out of cash balances available etc. Under the circumstances, the Assessing Officer was expected to examine the matter further to arrive at a definite finding whether assessee incurred expenses or not and in case, actually incurred, then what were sources for incurring these expenses. Assessing Officer was satisfied on withdrawal of the claim and in my view, his failure to decide the matter regarding actual incurring of additional expenses and sources thereof resulted into erroneous order which is prejudicial to the interest of revenue." Para 21 - There can be no doubt that so long as the view taken by the Assessing Officer is a possible view the same ought not to be interfered with by the Commissioner under Section 263 of the Act merely on the ground that there is another possible view of the matter. Permitting exercise of revisional power in a situation where two views are possible would really amount to conferring some kind of an appellate power in the revisional authority. This is a course of action that must be desisted from. However, the above is not the situation in the present case in view of the reasons stated by the learned C.I.T. on the basis of which the said authority felt that the matter needed further investigation, a view with which we wholly agree. Making a claim which would prima facie disclose that the expenses in respect of which deduction has been claimed has been incurred and thereafter abandoning/withdrawing the same gives rise to the necessity of further enquiry in the interest of the Revenue. The notice issued under Section 69-Cof the Act could not have been simply dropped on the ground

62 ITA No.3759/M/2017 M/s. Vajresh Consultants Ltd. (Earlier known as Essar Capital Ltd.) that the claim has been withdrawn. We, therefore, are of the opinion that the learned C.I.T. was perfectly justified in coming to his conclusions insofar as the issue No.(iii) is concerned and in passing the impugned order on that basis. The learned Tribunal as well as the High Court, therefore, ought not to have interfered with the said conclusion. 4.3 It is pointed out in McDowell & Co, Ltd. V. Commercial Tax Officer (1985) 154 ITR 148, the Supreme Court held that it is up to the Court to take stock to determine the nature of the new and sophisticated legal devices to avoid tax and consider the situation created b the devices could be related to the existing legislation with the aid of 'emerging' techniques of interpretation and where it was held the technique was colorable and dubious that a the Court is entitled to lift the mask of corporate entity, if the concept is used for tax evasion, or to circumvent tax obligation, or to perpetuate of fraud. However, if tax planning may be legitimate provided it is within the framework of the law. Colorable devices cannot be part of tax planning. 4.4 The judgement of the Bombay High Court in Aditya Birla Nuvo vs. DDIT (2011-TII-26-HC-MUM-INTL) must have sent a chill down the spine of foreign investors hoping to escape tax in India by routing their investments through Mauritius. AT&T USA set up a 100% subsidiary in Mauritius, funded it with enough capital and got it to invest in the shares of Idea Cellular. So what if AT&T Mauritius was a dummy company with no operations worth its name. It had the 'precious' Tax Residency Certificate from the Mauritius tax authorities and that is all that was required to wish away all tax headaches as per the CBDT's Circular Nos 682 & 789 dated 30.3.1994 and 30.4.2000 and the judgement of the Supreme Court in UOI vs. Azadi Bachao Andolan 263 ITR 706. Aditya Birla Nuvo obtained certificate from the Assessing Officer regarding the remittance could be made without deduction of tax at source. However, later it was found that original agreement between Aditya Birla Nuvo and the AT&T USA and it is provided that AT&T USA would "nominate" AT&T Mauritius as its "permitted transferee'' to hold the shares of Idea Cellular. It is clear that AT&T Mauritius is not beneficial owner and it is evident that the payments made "by AT&T Mauritiusto the JVC was obviously for and on behalf of AT&T USA, because, under the JVA, the obligation to subscribe and own the shares of the JVC was on AT&T USA. Further, the court observed "it could not claim to be an innocent purchaser unaware of the circumstances in which the shares were issued in the name of AT&T Mauritius". Aditya Birla Nuvo also suffered the ignominy of being told that it had "knowingly made incorrect representations" to the AC) to obtain the s. 195(2) certificate. The Court thundered that Aditya Birla Nuvo had not only "failed to disclose the 'material facts" but had also "wrongly represented the facts" to the AO. "Having wrongly represented to the AO, it is not open to Indian Rayon to contend that the AO is precluded from taking corrective steps as is permissible in law" the Court added. 4.5 In CIT v. Sri Meenakshi Mills Ltd. [1967] 63 ITR 609 (SC), the judicial approach to such problems was stated as follows (p. 616): "It is true that from the juristic point of view, the company is a legal personality entirely distinct from its members and the company is capable of enjoying rights and being subjected to duties which are not the same as

63 ITA No.3759/M/2017 M/s. Vajresh Consultants Ltd. (Earlier known as Essar Capital Ltd.) those enjoyed or borne by its members. But in certain exceptional cases the court is entitled to lift the veil of corporate entity and to pay regard to the economic realities behind the legal facade." 4.6 Fire stone Tyre and Rubber Co. v. Llewellin (1957) 1 W.L.R. 464 It is the duty of the court, in every case where ingenuity is expended to avoid taxing and welfare legislations, to get behind the smoke-screen and discover the true state of affairs. The court is not to be satisfied with form and leave well alone the substance of a transaction.”

64 ITA No.3759/M/2017 M/s. Vajresh Consultants Ltd. (Earlier known as Essar Capital Ltd.) the Act dated 30.03.2015 is neither erroneous nor prejudicial to the interest of the revenue and therefore the exercise of revisional jurisdiction u/s 263 of the Act by the PCIT has wrongly and invalidly assumed. The ld AR submitted that the taxability of capital gains of sale of shares of VEL in the hands of the assessee ECL (now known as Vajresh Consultants Ltd.) has been done correctly and accepted by the AO in the assessment proceedings. The ld AR submitted that while taxing the gains in the hands of assessee, the AO had allowed cost of Rs. 5,857 crores from the sales consideration received for the transfer of shares of VEL. The ld. PCIT has invoked revisionary powers under section 263 of the Act to set-aside the order of the AO by holding that the AO has not enquired into certain intervening events and circumstances. According to ld. AR, ETHL originally held shares in VEL since 2005. ETHL, owing to its inability to monetise VEL shares on account of several reasons such as it being highly leveraged etc., decided to undertake certain corporate re-organisational steps whereby it would transfer the VEL shares to its subsidiary at cost and thereafter distance itself from the subsidiaries by at least two layers so that lenders would lend against the value of VEL shares, unfettered by the defects in ETHL's creditworthiness. Accordingly, ETHL transferred VEL shares to ECHL at book cost of Rs. 1,260 crores in AY 2008-09. ETHL thereafter incorporated a subsidiary ETHPL and acquired ETHIPL and placed them between itself and ECHL. Owing to the above re-organisation, in AY 2010-11, ECHL was finally able to raise funds of Rs. 3,707/- crores by issue of debentures which were subscribed by the Public and were listed. In the meanwhile, ECHL had executed a put-option agreement

65 ITA No.3759/M/2017 M/s. Vajresh Consultants Ltd. (Earlier known as Essar Capital Ltd.) where under it acquired the option to sell the VEL shares at USD 1.2 bn or at market value. Since ISL was a listed company, it was decided to merge ECHL with ISL so that the market worth of VEL's shares got reflected in the share price of ISL's shares. Since ECHL had issued public debentures, merging of ECHL with ISL would have been a cumbersome process in terms of obtaining approvals and sanctions. It was therefore decided to merge ETHPL with ISL, thereby effectively moving VEL's shares (through ECHL under ISL and to ascertain the market value of VEL shares. Upon the sanction of the Hon'ble Madras and Bombay High Courts, ECHL was merged with ISL w.e.f. 1 April 2010, i.e. with effect from AY 2011-12. VEL shares accordingly became the property of ISL from 1st April 2010, i.e. from AY 2011-12.

7.1. In AY 2012-13 VEL shares were sold to Piramal Healthcare Ltd for Rs.5,863/- crores. Since after sale of VEL shares, the remainder business of ISL only comprised that of its parent ECL, it was decided to merge ISL with ECL in AY 2012- 13.Accordingly, upon the sanction of the Hon'ble Madras High Court, ISL was merged with ECL w.e.f. 1 April 2011, i.e. with effect from AY 2012-13. In view of the decision of the Hon'ble Supreme Court in the case of Marshall Sons &Co. India Ltd. Vs. ITO (223 ITR 809) wherein it has been held that amalgamation takes effect from the date of specified in the scheme of amalgamation and all the acts of the subsidiary shall be done on behalf of the holding company. Accordingly, (i) VEL shares became the property of ECL from 1st April 2011, (ii) hence, though VEL shares were sold by ECHL first on behalf of ISL,

66 ITA No.3759/M/2017 M/s. Vajresh Consultants Ltd. (Earlier known as Essar Capital Ltd.) they finally came to be regarded as being sold on behalf of ECL owing to the mergers sanctioned by the Hon'ble Madras and Bombay High Courts of ECHL with ISL and thereafter the Hon'ble Madras Court of ISL with ECL and (iii) the consideration on sale of VEL shares was regarded as having been earned/accrued in the hands of ECL and the gains thereof became taxable in the hands of ECL. Since ECL became entitled to the consideration on sale of VEL's shares owing to its holding in ISL, the cost of investment in ISL Rs.6,077/- crores was claimed as a proportionate cost of the VEL shares. This was in line with the decisions of Challapalli Sugars Ltd vs CIT (98 ITR 167} (SC) and CIT vs Mahindra & Co (326 ITR 465)(Raj).

7.2. The ld AR submitted that the AO after enquiring into the entire sequence of events as to how assessee came to hold VEL's shares, in principle, accepted the submission of the assessee as to its claim of cost however denied so much of the cost to the tune of Rs. 220 crores that was incurred after 31 March 2012. The ld AR submitted that after the passing of the assessment order by the AO, the PCIT invoked powers and jurisdiction under section 263 of the Act for the reasons which are summarized below under three broad categories: i. The AO failed to enquire into the true purpose of incorporation and amalgamation of various companies in the chain of holding. ii. The AO failed to consider taxability of the transfer of assets of amalgamating company (viz. ISL) in the hands of assessee under section 170 and particularly since section 47(vi) did not protect the transfer owing to the non-tax compliant nature of the amalgamation of ISL with ECL. iii. The AO failed to await the outcome of the enquiries made in the case of ISL under the exchange of information provisions of the Double Tax Avoidance Agreement.

7.3. The ld AR submitted that first reason for exercising the jurisdiction by the Ld. PCIT is that the AO failed to enquire into

67 ITA No.3759/M/2017 M/s. Vajresh Consultants Ltd. (Earlier known as Essar Capital Ltd.) the true purpose of incorporation and amalgamation of various companies in the chain of holding is factually incorrect . The observations of the PCIT are that the AO has not enquired into the incorporation and amalgamations are against the facts on records as the AO has conducted detailed enquiry as is evident from the following facts: a) Soon after filing of the return of income, ECL filed notes to the return of income vide letter dated 18 October 2013 alongwith the various Amalgamation Orders of respective Hon'ble High Court (P951 @ 124). b) Vide notice dated 25 February 2015 (P94) the AO called upon ECL to explain and substantiate its claim of cost on sale of VEL's shares and to understand the holding structure called for the balance sheets of ETHPL, ECHL and ISL. c) ECL vide letter dated 14 March 2015 (P372) and 19 March 2015 (P616) filed all details called for, such as the Financials etc. of the various companies and explained the basis of its claim of cost d) ECL thereafter vide letter dated 24 March 2015 (P655 @ 658) submitted the following: i. Details of the original acquisition of VEL shares by ETHL ii. Explained how ECHL came to acquire VEL shares from ETHL iii. Explanation as to how ECHL revalued VEL's shares in its books iv. ETHPL was the parent of ECHL v. ETHPL merged with ISL, thereby migrating ECHL under ISL vi. Merger of ECHL with ISL vii. Merger of ISL with ECL viii. How therefore ECL arrived at the cost of VEL shares ix. Evidence of incurrence of cost for purchase of ISL shares and debentures was also filed.

The Ld. A.R., therefore, submitted that the Assessing Officer is fully aware of all events surrounding the holding of VEL shares and the basis of claim of cost claimed against said sale of VEL’s shares by the assessee.

7.4. The ld AR strongly refuted and quashed the allegation by Ld. PCIT that the AO should have enquired into the formations and amalgamations of the various companies in the chain of holding to investigate them for impermissible tax avoidance as all of them having been undertaken with the sole motive to

68 ITA No.3759/M/2017 M/s. Vajresh Consultants Ltd. (Earlier known as Essar Capital Ltd.) obtain a tax advantage. The Ld. A.R. submitted that the allegations of the PCIT that the formations and amalgamations of the various companies have been undertaken with the sole motive to obtain a tax advantage, is wholly incorrect and entirely based on loose imagination. Each of the allegation against each of the steps undertaken have been explained in detail in the Chart handed over during the hearing. It is submitted that none of the steps set out in the chart undertaken were for achieving a tax advantage. As explained, it is evident from the Chart that none of the steps from 1 to 19 have any bearing on the tax cost of VEL's shares as the tax cost of VEL's shares remained unaltered and unchanged at Rs.1,260/- crores. It is only on account of the non-tax neutral merger of ISL with ECL (step 20) that ECL, as per law, is required to take the cost it has suffered for acquisition of its holding in ISL, which holding is what has entitled assessee to the consideration of Rs. 5,863/- crores on sale of VEL's shares. Apart from the fact that the amalgamation of ISL with assessee has been approved by the Hon'ble Court and hence cannot be doubted, the PCIT, unlike with respect to other steps, has not even doubted {albeit impermissibly) the genuineness of the non-tax neutral nature of merger of ISL with ECL. This is primarily so because the non-tax neutrality of the merger is not owing to any act on part of assessee, but because of a choice exercised by outside shareholders of ISL in opting to get cash rather than shares in the assessee company upon amalgamation. The ld. A.R., therefore, submitted that the finding of the Ld. PCIT that the amalgamations and formations of the various companies is for securing tax advantage is incorrect. The Ld. A.R. also submitted that each of the

69 ITA No.3759/M/2017 M/s. Vajresh Consultants Ltd. (Earlier known as Essar Capital Ltd.) amalgamations have been court approved and therefore neither the Ld. PCIT nor the AO have any jurisdiction to question them, and more so, in proceedings under section 263 of the Act. The ld AR placed reliance on the following decisions in support of his arguments : i. Reliance Money Inf Ltd vs PCIT (2017) 88 taxmann.com 871 {Mumbai Trib) ii. Electrocast Sales India Ltd vs DOT (2018) 170 ITD0507 (KolkataTrib) iii. DCITvs Indus Fila Ltd (2013}32taxmann.com 382 (Bangalore Trib) 7.5 In other words, it was submitted that once the AO ascertained that all the amalgamations were court approved which he undisputedly did, there is no requirement in law to make any further enquiries in the matter by the tax authorities but to apply the ratio of the binding decisions in the cases of Marshall Sons & Co. India Ltd. Vs. ITO (223 ITR 8091(50, Challapalli Sugars Ltd vs CIT (98 ITR 167) (SO and CIT vs Mahindra & Co (326 ITR 465)(.Raj). It was therefore impermissible for the Ld. PCIT to invoke jurisdiction under section 263 of the Act for an enquiry which in law the AO was not supposed and required to make. Reliance was placed on the decisions of Sociedade De Fomento Industrial Pvt. Ltd, vs CIT (ITA No. 96 to 98/PNJ/2009).

7.6. Hence, it was submitted that the Ld. PCIT was therefore wrong in holding that the assessment order was erroneous and prejudicial to the interest of revenue for the reasons that the AO not having enquired into whether the amalgamations suffered from the vice of impermissible tax avoidance.

7.7. The ld AR further contended that without prejudice to the foregoing and in any view of the matter, assuming without

70 ITA No.3759/M/2017 M/s. Vajresh Consultants Ltd. (Earlier known as Essar Capital Ltd.) accepting, that the AO did not enquire into certain aspects as alleged by the Ld. PCIT, it could, at the highest amount to insufficient/inadequate enquiry on part of the AO. It is settled law that power under section 263 of the Act can be invoked only in the case of a "lack of enquiry" and not to remedy a case of "insufficient enquiry". The ld AR relied on the following decisions in defense of his arguments: ClT vs Sunbeam Auto Ltd. (332 ITR 167) (Del HC) CIT vs Shreepati Holdings (ITA No,1879 of 2013) (Bom HC) CIT vs Nirav Modi (390 ITR 292) (Bom HC) {SLP dismissed in 77 taxmann.com15) 7.8. The ld AR argued that after ascertaining that all amalgamations were Court approved, the AO in not being any further influenced by the amalgamations of the various companies in the chain of holding, for the purposes of deciding and allowing the claim of cost of Rs.5,857/- crores against the sale consideration of Rs.5,863/- crores to ECL [as supported by the decisions of Challapalli SugarsLtd vs. CIT (supra) and CIT vs Mahindra & Co. (supra)], has formed considered view. Such a view is clearly a "possible view" and cannot be disturbed under section 263 of the Act. Reliance is placed on the following decisions to support the submission that a "possible view" cannot be revised under section 263 of the Act: i. Malabar Industrial Co Ltd vs. CIT (243 ITR 83) (SC) ii. CIT vs. Gabriel India Ltd (203 ITR 108) (Bom)

In view of the above, it was submitted that the Assessing Officer has taken a possible view in allowing the cost of Rs.5,857/- crores and therefore, the assessment order cannot be termed as erroneous.

71 ITA No.3759/M/2017 M/s. Vajresh Consultants Ltd. (Earlier known as Essar Capital Ltd.) 7.9. On the second reason given by PCIT for invoking the provisions of section 263 of the Act that the AO failed to consider taxability of the transfer of assets of amalgamating company (viz. ISL) in the hands of ECL under section 170 and particularly since section 47(vi) did not protect the transfer owing to the non-tax compliant nature of the amalgamation of ISL with assessee, the ld AR submitted that non-consideration by AO of taxability on transfer of assets of ISL in the hands of ECL, can never be a reason to hold that the assessment order, in so far as it allows the cost of Rs.5,857/- crores against the sale consideration of VEL shares in the hands of ECL, is erroneous and prejudicial to the interest of the revenue. Strictly without prejudice to the foregoing, and only for the sake of argument, it was submitted that even if it is assumed that there could arise a tax liability in the hands of ISL on transfer of its assets to assessee on ISL's amalgamation with ECL, and hence the AO ought to have been looked into the same, the highest that the PCIT could have ordered the AO to do in exercise of his powers under section 263 of the Act, was to direct the AO to adjudicate on it; but in no view of the matter could the PCIT in exercise of powers under section 263 of the Act, for this reason, set-aside the finding of the AO in allowing the cost of Rs.5,857/- crores against the sale consideration of VEL shares in the hands of ECL. In view of the above, it was argued that the finding of the Ld. PCIT that the assessment order in so far as it allows cost of Rs.5,857/- crores against sale consideration of VEL shares, is erroneous and prejudicial to the interest of the Revenue, is unlawful.

72 ITA No.3759/M/2017 M/s. Vajresh Consultants Ltd. (Earlier known as Essar Capital Ltd.) 7.10. Without prejudice to the forgoing, the Ld. A.R. also argued that the reason is contrary to settled law and elementary principles of taxation, that an amalgamating company upon amalgamation cannot be subjected to any tax since it receives no consideration on amalgamation, whether or not the exemption under section 47(vi) of the Act was available. Reliance is placed on the following in this regard: • Kanga &Palkhivala's The Law and Practice of Income Tax (10th Edition Vol.1Pg 1207) • Sampath lyengar's Law of Income Tax (11th Edition Vol. 3 Pg-5254) • CIT v. B. C. Srinivasa Shetty (128ITR 294) (SC) In the case of CIT v. B. C. Srinivasa Shetty it has been held that where the machinery provision of section 48 break, consequently so does the charge under section 45. Accordingly, since the amalgamating company received no-consideration, on the transfer of its assets, the charge under section 45 fails.

In view of the above, considering ISL received no consideration for the transfer of its assets to ECL, therefore the machinery provision of section 48 of the Act breaks and consequently so does the charge under section 45 of the Act. Thus the ld AR argued that reasoning of the PCIT that the assessment order is erroneous and prejudicial to the interest of the revenue since the applicability of section 170 and section 47(vi) of the Act with respect to the taxability of transfer of assets of ISL to ECL on amalgamation of ISL with ECL has not been considered by the Assessing Officer, is ex facie contrary to law.

7.11. It was also submitted that in any view of the matter, in not bringing to tax any gains on the amalgamation of ISL with ECL,

73 ITA No.3759/M/2017 M/s. Vajresh Consultants Ltd. (Earlier known as Essar Capital Ltd.) the AO has adopted a possible view which is supported by the aforesaid decisions. Such a view is clearly a "possible view" and cannot disturbed under section 263 of the Act and is supported by the decision of Apex Court in Malabar Industries Co Ltd Vs CIT (supra) and CIT Vs Gabriel India Ltd (supra).

7.12. The applicability of section 170 despite non-availability of section 47(vi) is clearly a possible view and cannot be interfered with by invoking provisions of S.263 of the Act.

7.13. Arguing on the third reason cited by the PCIT for invoking provisions of section 263 of the Act wherein he concluded that the AO has failed to await the outcome of the enquiries made in the case of ISL under the exchange of information provisions of the Double Tax Avoidance Agreement.

7.14. The counsel of the assessee submitted that the Ld. PCIT himself recorded the finding of fact that enquiries by Foreign Tax and Tax Research Division (FT&TR) of the Central Board of Direct Taxes were made in the assessment proceedings of ISL and not in the assessment of assessee and therefore the assessment in question can not be said to be erroneous. Secondly, the reference in any case did not pertain to the year under consideration as the same were made in proceedings for AY 2011-12. Lastly, it is submitted that the PCIT had not raised this issue in the show cause notices dated 17 June 2015 and 26 June 2015 issued under section 263 of the Act nor was it put to the Appellant during the course of the hearings, therefore, the Appellant was not given an opportunity of being heard on this issue and hence this issue cannot be considered for the purpose

74 ITA No.3759/M/2017 M/s. Vajresh Consultants Ltd. (Earlier known as Essar Capital Ltd.) of deciding the validity of order passed under section 263 of the Act. In this regard, the Appellant relied on the decision “Damodar Valley Corporation vs. DCIT (160 ITD 78). The ld AR argued that this reason is therefore factually incorrect and also for the same having not been put to the assessee during the course of revision proceedings, it can not be countenanced in deciding the validity of jurisdiction under section 263.

7.15. The ld AR also presented before the bench the general propositions on invalidity and illegality of exercise of jurisdiction u/s 263 of the Act. The ld counsel of the assessee submitted that the PCIT in the order passed under section 263 of the Act has remanded the matter back to the AO for making de novo assessment. This itself shows that the PCIT has not concluded the order of the AO allowing cost of Rs.5,857/- crores is erroneous. Because, if the PCIT was of the opinion that the AO was incorrect, then a finding ought to have been given in the order under section 263 of the Act to this effect. However, the PCIT has simply remanded the matter back to the AO for considering the matter afresh. Therefore, it is submitted that the order passed by the PCIT under section 263 of the Act remanding the matter back is without jurisdiction and incorrect. In this regard the Appellant relies on the following judicial pronouncement: b. IIO vs. DG Housing Projects (343 ITR 329) c. Vardhaman industries Ltd. vs. DCIT (82 taxmann.com 118) affirmed by P&H High Court in CIT vs.Vardhman Industries (396 ITR 34)

In view of the above, it was submitted that the order passed by the Assessing Officer cannot be termed as erroneous as the PCIT

75 ITA No.3759/M/2017 M/s. Vajresh Consultants Ltd. (Earlier known as Essar Capital Ltd.) himself has not found the cost of Rs.5,857 to be incorrect. The ld AR finally prayed that in view of present facts and circumstances and the ratio laid down by various judicial forums, the exercise of jurisdiction by the Ld. PCIT is invalid and the proceedings u/s 263 of the Act and consequent order passed under section 263 of the Act may kindly be quashed.

8.1. The ld DR submitted that the AO has failed to inquire into true and real purpose of incorporation of web and layers of companies just to secure undue tax advantages by claiming huge costs of share of VEL without proper justifications. He also overlooked provisions of section 170 and 47[vi] of the Act. The AO also failed to make proper inquiry which was required to be made in respect of ISL vis a vis assessee, so far as DTAA is concerned. Lack of inquiry is now also coupled with insufficiency of inquiry after amended section 263 w e f 1-6-15, which the AO

76 ITA No.3759/M/2017 M/s. Vajresh Consultants Ltd. (Earlier known as Essar Capital Ltd.) ought to have undertaken as mentioned in the order u/s 263 of the Act.

8.2. The Ld. D.R. argued that mere approval of courts to amalgamation schemes by itself does not satisfy the test that the AO had verified all other facts in those schemes or that once the scheme of merger is approved by the High Court, the AO is absolved of the duty to enquire and investigate the tax evasion angle. The approval of merger by the Court is a broadly a scheme in which the various stake holders are informed and their objections are considered by the court before approving the scheme. The High court does not go into the issue of tax implications which may be there owing to the amalgamation and merger. Moreover, after 1-6-2015, the powers u/s 263 of the Act have been largely enhanced and this case squarely falls under the same. Hence, the case laws pertaining pre-amendment era have no binding force now.

8.3. The ld Dr. submitted that once, notice u/s 263 of the Act is issued, it is not necessary that all the contentions must be made therein so long as the issue under notice remains same. It is submitted that mere "opinion" of the Commissioner is sufficient in itself to render an order fit for revision. The expression "opinion" has been defined by the Supreme Court in the case of Dolagovinda Parica Vs. NimaiCharan Mishra in AIR 1959 SC 914 (relied upon by the Delhi High Court in VLS Finance Vs. CIT in 246 ITR 707), to mean - judgment of belief, that is, a belief or a conviction resulting from what one thinks on a particular question.

77 ITA No.3759/M/2017 M/s. Vajresh Consultants Ltd. (Earlier known as Essar Capital Ltd.) 8.4. It is further submitted that since the Assessing Officer had not made inquiry regarding the cost of shares attributable of VEL in the assessment proceeding, the exercise of revisionary jurisdiction by the Ld. Pr.CIT was justified. Moreover, reliance is also placed on the following case laws to support the contentions that the action of the Ld. Pr.CIT in invoking the provisions of section 263 of the Act was justified;- a] Malabar Industrial Co. Ltd. vs. CIT Supreme Court 2000, 109 Taxman 66 b] CIT vs. Ashok Logani, Delhi High Court, 2011, 11 taxmann.com 208 c] Surya Jyoti Software Pvt. Ltd. vs. PCIT, ITAT Delhi, 2017, ITA No. 2158/Del/2017 d] Surya Financial Services Ltd. vs. PCIT, ITAT Delhi 2018, 2018-TIOL-74-ITAT-DEL

8.5. While distinguishing the case laws referred by the assessee, the ld DR submitted that many case laws which are basically related to the merits of the case rather than revision u/s 263 of the Act. Hence they are inapplicable and need to be rejected.

8.6. The ld DR referred to the decision of the ITAT Mumbai Bench in the case of M/s Indus Best Hospitality & Realtors Pvt Ltd. in ITA No. 3125/Mum/2017 vide order dated 19.01.2018 wherein it has been held that Explanation 2 to Section 263 of the Act introduced by Finance Act, 2015 is retrospective in nature.

8.7. On the aspect of show cause notice that a particular reasons cited by the PCIT was not mentioned in the show cause notice and not confronted to the assessee during the revisional proceedings , the ld DR submitted that the ruling in CIT vs. Amitabh Bachchan (2016 SCC Online SC 484) is decisive and

78 ITA No.3759/M/2017 M/s. Vajresh Consultants Ltd. (Earlier known as Essar Capital Ltd.) fully covers the case in favor of the revenue as it upholds the power of the Commissioner to consider all aspects which were the subject matter of the AO's order, if in his opinion, they are erroneous. The Supreme Court held that: "Reverting to the specific provisions of Section 263 of the Act what has to be seen is that a satisfaction that an order passed by the Authority under the Act is erroneous and prejudicial to the interest of the Revenue is the basic pre-condition for exercise of jurisdiction under Section 263 of the Act. Both are twin conditions that have to be conjointly present. Once such satisfaction is reached, jurisdiction to exercise the power would be available subject to observance of the principles of natural justice which is implicit in the requirement cast by the Section to give the assessee an opportunity of being heard."

8.8. There are certain decisions, which are in favour of the Revenue and one such decision is Arvee International vs Addl. CIT (2006) 8 SOT 452 (Mum. Trib.), wherein, the assessment was framed without application of mind. It was held that mere allegation that Assessing Officer has taken a view in the matter will not put the matter beyond the purview of section 263 of the Act unless the view so taken by the Assessing Officer is a judicial view based on proper enquiry considering all legal aspects. The ld Dr submitted that in the case of Horizon Investment Company Ltd. vs CIT (ITA No. 1593/Mum/2013), it was clear that if there was a lack/absence of enquiry by the Assessing Officer the jurisdiction was held to be validly assumed.

79 ITA No.3759/M/2017 M/s. Vajresh Consultants Ltd. (Earlier known as Essar Capital Ltd.) 8.9. The Hon'ble Calcutta High Court in Rajmandir Estate Pvt. Ltd. vs Pr. CIT (2016) 70 taxman.com 124 (Calc.) order dated 13/05/2016 laid a ratio which supports the case of the Revenue. The Hon'ble Apex Court in Rajmandir Estates Pvt. Ltd. (2017) 77 taxman.com 285 (SC), has held that where there was lack of requisite enquiry into increase of share capital and non- application of mind, the Commissioner was justified in invoking the revisional jurisdiction. Whether special leave petition filed against impugned order was to be dismissed - Held, yes [Para 2] [In favour of revenue]"

8.10. The Mumbai Bench of the ITAT through an elaborate order in the case of Madhurima International (P.) Ltd. v. Pr. CIT [2017] 49 CCH 0217 (Mum. -Trib.) held that where the assessment order is passed by the Assessing Order without making inquiries or verification which should have been made, then it is hit by the Explanation 2 to section 263 of the Act which deems the order to be erroneous, insofar as it is prejudicial to the interest of Revenue and, therefore, "the Principal Commissioner of Income-tax has rightly invoked the provisions of section 263 of the Act."

8.11. The Ld. D.R. submitted admittedly that while allowing cost of shares while compiling LTCG, an incorrect assumption of fact or an incorrect application of law would satisfy the requirement of order being erroneous u/s, 263 of the Act. The object of the provision is to raise revenue for the state and section 263 is enabling provision conferring jurisdiction upon the Commissioner to revise the order which is erroneous and prejudicial. The provision is intended to plug the leakage of the

80 ITA No.3759/M/2017 M/s. Vajresh Consultants Ltd. (Earlier known as Essar Capital Ltd.) revenue by the erroneous and prejudicial order. The Id. Assessing Officer while framing the assessment made no discussion with the claim of the assessee and simply framed the assessment in a slip shot manner. Such an approach of the Ld. Assessing Officer cannot be appreciated. Thus, it is clear that the assessment order was passed without verification, application of mind, consequently, it is erroneous as well as prejudicial to the interest of the Revenue. Therefore, the revisional jurisdiction was rightly invoked. The view is also fortified by the decision in Indian Textile vs CIT (157 ITR 112) (Mad.), Gee Vee Enterprises vs Addl. CIT (99 ITR 375)(DeL), Thalibai F Jain vs ITO 101 ITR 1 (Karn.) and CIT vs HPFC 186 Taxman 105 (HP), CIT vs Pushpa Devi 164 ITR 639 (Patna).

8.12. The Hon'ble Gujarat High Court in CIT vs M. M.Khambatbala 198 ITR 144 (Guj.) even went to the extent that revisional powers can be exercised even if the issue is debatable.

8.13. The support is also derived from the ratio laid down in Bhargwa Engineering Corporation vs CIT (1996) 134 taxation 493, 494 (AIL), CIT vs Digvijay Traders (1997) 137 CTR (MP) 224, CIT vs Regional Agro Industrial Development Cooperative Society Ltd. (1998) 143 taxation 293 (Kerala), CIT vs Aganval Enterprises (1998) 100 taxman 360 (All.) and CIT vs Kailash Apartment Pvt. Ltd. (200) 243 ITR 795 (Del.). Totality of facts, clearly indicates that the assessment order has been framed without full enquiries, therefore, the Id. Commissioner justifiably invoked revisional jurisdiction.

81 ITA No.3759/M/2017 M/s. Vajresh Consultants Ltd. (Earlier known as Essar Capital Ltd.) 8.14. The ld DR submitted that the Hon'ble Apex Court in CIT Vs Amitabh Bacchan [384 ITR 200(SC)] held that , "As by the order passed today in the Civil Appeal arising out of Special Leave Petition (Civil) No. 11621 of 2009 we have restored the suo motto revisional order dated 20th March, 2006 passed by the learned C.I.T., we allow this appeal filed by the Revenue and set aside the order dated 11thJanuary, 2010 passed by the learned Tribunal and the order dated 29th February, 2012 passed by the High Court referred to above. However, we have to add that as the re-assessment order dated 29th December, 2006 had not been tested on merits, the assessee would be free to do so, if he is so inclined and so advised. Similar view is also held in the case of Anil Kapoor Film Co. Pvt Ltd. Vs Pr. CIT (ITAT Mumbai) 5015/Mum/2018. Reliance is also placed on the following case laws:- (a) Arvee International vs. Addl CIT (2006)(101 ITD 495)(Mum) (b) Adani Agro (P) Ltd vs. DCIT (2013)(32 taxmann.com 356)(Guj) (c) Rajmandir Estates (P) Ltd vs. Pr. CIT (386 ITR 162)(Cal) (d) Rajmandir Estates (P) Ltd vs, Pr. CIT (77 taxmann.com 285)(SC)

8.15. The Ld. D.R also submitted that the Explanation 2 to sec. 263 of the Act also deems the assessment order as erroneous and prejudicial to the interests of revenue, if the same is passed without making necessary enquiries.

82 ITA No.3759/M/2017 M/s. Vajresh Consultants Ltd. (Earlier known as Essar Capital Ltd.) issued show cause notice dated 25 February 2015 (Pg. 29 of Compilation) requiring the assessee to justify the cost of 6077.07 crore and furnish documentary evidence with regard to structure, cost incurred, etc (ii)the assessee vide letter dated 14 March 2015 {Pg.372,373 of Paperbook) gave the details relating to ECHL, ETHPL and ISL i.e. details of the group structure and vide letter dated 24 March 2015 (Pg.30-36 of Compilation) gave explanation regarding the various amalgamations by virtue of which the shares of VEL moved from ECHL to ISL and finally to the assessee, (iii) the assessee vide letter dated 19 March 2015 (Pg. 616-622 of Paperbook) explained why the provisions of section 49(l)(iii)(e), which prescribes the cost of acquisition in the hands of ISL to be taken as cost of acquisition of the assessee, does not apply in the instant case and (iv) the assessee vide letter dated 24 March 2015 (Pg.30-36 of Compilation) and 26 March 2015 (Pg.37-42 of Compilation) explained the of cost of acquisition in the hands of the assessee, since the cost of the previous owner is not to be taken, and also furnished the detailed working of how the cost of VEL shares was arrived at Rs. 6,077.07 crore by the assessee. The above was specifically pointed out by the appellant assessee during the course of its oral arguments and has been set out in paragraphs 1 to 3 in its Written Submission dated 13 March 2020 (pages 5 to 7 of the Compilation). None of these submissions have been controverted by the DR. Therefore, the contention of the learned DR that AO has not enquired into the incorporations and amalgamations is incorrect and contrary to evidence on record.

83 ITA No.3759/M/2017 M/s. Vajresh Consultants Ltd. (Earlier known as Essar Capital Ltd.) 9.1. In Para 2 of the Written Reply, the learned DR has argued that "mere approval of courts" to amalgamations by itself does not absolve the AO from making further enquiries as to the existence of some tax avoidance scheme. As explained in the submission dated 13 March 2020 {Para 2.b. on Pg. 6 of Compilation), the argument is contrary to the settled position of law laid down by the tribunal. Particular reference is made to the decision in Reliance Money Inf Ltd. vs CIT (183 TTJ 636) (Para 20 Pg. 58 of Compilation) that once the amalgamation has been approved by the High Court the powers of under section 263 cannot be invoked by CIT for questioning the effect of orders of Courts sanctioning amalgamations on alleged grounds of tax avoidance. Without prejudice to above, neither the CIT nor the DR have spelt out what is the tax advantage received by the Assessee on account of the incorporations and amalgamations. The tax cost of VEL's shares of Rs.1,260 crores has remained Rs. 1,260 crores i.e. the price at which the shares were acquired. That tax cost of the shares has never changed. The CIT has himself in his order under challenge at Para 7 Pg. 60 (6 lines above Para 8) observed and admitted that the tax-cost in the hands of ISL is shown at Rs.1,260 crores. In other words, if ISL were to sell the shares of VEL it would have been allowed a cost of Rs. 1,260 crores. Therefore, until the merger of ISL with the Appellant Assessee, there has been no change in the tax-cost and therefore the prior incorporations/amalgamations have, admittedly, had no impact on the tax cost. As explained during the course of the hearing and as set-out hereinafter, it is only on account of the non-tax compliant amalgamation of ISL with the Assessee that in view of the non-applicability of section

84 ITA No.3759/M/2017 M/s. Vajresh Consultants Ltd. (Earlier known as Essar Capital Ltd.) 49{l)(iii}(e), the cost of ISL shares to the Appellant Assessee was not required to be considered as cost of acquisition under section 48, for the purposes of computing capital gains arising from the sale of VEL shares which were subjected to tax in the hands of the Appellant Assessee. The non-tax compliant nature of amalgamation of ISL with the Appellant Assessee has not and indeed could not have been questioned by the Ld. PCIT or by the DR, inter alia for one obvious reason - it is only because of the amalgamation that the gains are being taxed in the hands of the Assessee. On the one hand taxing the gains in the hands of the Assessee and on the other to deny cost of the gains to the assessee is wholly unlawful.

9.2. The Judgments relied on by the learned DR in Para 16 of his Written Reply are in inapplicable to the facts of the instant case and are separately dealt with as under: i. In the case of Digvijay Traders vs. CIT (92 Taxman6)(MP}Para -16 of DR's submission Pg.258 of compilation, the revision jurisdiction exercised by the CIT under section 263 of the Act was rejected on the ground that the Assessing officer had considered the material seized under section 132(5) of the Act for the purpose of making assessment under section 147 of the Act and after making further enquiry into the matter in fact assessed a higher amount than the one disclosed by the assessee. Therefore, the High Court held that since the Assessing officer had considered seized material and examined the same during the course of the assessment, the exercise power under section 263 was bad in law (Para 11).

85 ITA No.3759/M/2017 M/s. Vajresh Consultants Ltd. (Earlier known as Essar Capital Ltd.)

The ratio laid down in this Judgment is squarely applicable to the facts of the case as in the instant case also the Assessing officer had enquired into the cost of VEL shares and after applying his mind had disallowed the part of the cost. Therefore, the CIT cannot invoke jurisdiction under section 263 of the Act. In the case of CIT vs. Regional Agro Industrial Development Co- op. Society Ltd. (112Taxmanl93)(Ker.)Para -16 of DR's submission Pg.258 of compilation, it was submitted that this Judgment does not deal with the provisions of section 263 of the Act and the question raised before the High Court was regarding the deduction under section 80P of the Act.

ii. In the case of CIT vs. Agrawal Enterprise (100 Taxman 360) (All.)Para -16 of DR's submission Pg.258 of compilation, it was submitted that this Judgment does not deal with the provisions of section 263 of the Act and High Court has dealt with the issue of the deduction regarding liabilities under section 37(1) of the Act.

iii. In the case of CIT vs. Kailash Apartment (243 ITR795)(Del.) Para -16 of DR's submission Pg.258 of compilation, it was submitted that this Judgment does not deal with the provisions of section 263 of the Act and the High Court has considered the allowability of expenses under section 37(1) of the Act.

It was, therefore, submitted by the Ld. A.R. that the Ld. PCIT was wrong in holding that the Assessing officer has not enquired into the amalgamations and incorporations of various

86 ITA No.3759/M/2017 M/s. Vajresh Consultants Ltd. (Earlier known as Essar Capital Ltd.) companies. The Ld. PCIT and DR have failed to appreciate that the Assessing Officer had no jurisdiction to challenge the amalgamation approved by High Court therefore, the amalgamation is binding on the revenue. In any case, the various amalgamations had no role to play in so far as the cost of VEL shares in the hands of the assessee is concerned as the cost has increased only on account of non-tax compliant amalgamation of ISL with the assessee as accepted by the Ld. PCIT himself in its order.

9.3. On the inadequate/insufficient enquiries to invoke powers S.263 and insertion of Explanation 2 to S.263 of the Act, the ld AR submitted that the PCIT has not, and rightly so, in his order under challenge place any reliance on Explanation 2 inserted by the Finance Act, 2015. It is therefore not open to the DR to travel beyond the order of the Ld. PCIT. Without prejudice to the foregoing, the ld AR of the appellant assessee submitted that the argument of the learned DR is incorrect as the various tribunal decisions have taken a view that the insertion of Explanation - 2 does not expand the scope of jurisdiction under section 263 of the Act and the power revision cannot be invoked when the AO has enquired into the matter. In this regard, the appellant relies on the following decision of the Tribunal: i. Torrent Pharmaceutical v. DCIT (Para 9 Pg.285) (173 ITD 130) (Ahd.) ii. Narayan Tatu v. ITO {Para 19 Pg.297} (70 taxmann.com 277) (Mum.) iii. Rallis India Ltd. v. DCIT (Para 9 Pg.312) (1TA No. 3564/M/16) (Mum.)

87 ITA No.3759/M/2017 M/s. Vajresh Consultants Ltd. (Earlier known as Essar Capital Ltd.) 9.4. Without prejudice to the foregoing, it was submitted that Explanation -2 to Section 263 of the Act having been inserted w.e.f. 1.6.2015 has no application to assessment year 2012-13. In this regard the following decisions are relied upon wherein the Tribunal has held that the provisions of Explanation - 2 are prospective in nature and does not apply to A.Y. 2012-13: i. Indus Best Hospitality & Realtors Pvt. Ltd. v. CIT (Para 23 Pg. 329) (ITA No.3125/M/17) ii. Reliance Money Infrastructure Ltd. v. CIT (Para 2 Pg. 384) (ITA No.3259/M/17) 9.5. The Judgments relied on by the learned DR in Para 5, 8,10,11,12,13,18,19 and 20 are distinguishable on facts as under: i. DolgobindaParicha vs. NimaiCharanMisra {AIR 1959 SC 914); VLS Finance Ltd. vs. CIT (246 ITR 707) (Del.) Para - 5 of DR's submission Pg.255 of compilation. DolgobindaParicha (Supra) does not deal with the provisions of section 263 of the Act and was concerned with the provisions of Indian Evidence Act, 1872 therefore, this Judgments is not relevant decide the issue at hand.

ii.VLS Finance (supra) do not deal with the provisions of section 263 of the Act and was concerned with the interpretation of provisions of section 281B of the Act which empowers the Assessing officer to attach properties of an assessee to protect the interest of the revenue.

In that context the meaning of the word "opinion" was considered by the High Court since the provisions of section 263

88 ITA No.3759/M/2017 M/s. Vajresh Consultants Ltd. (Earlier known as Essar Capital Ltd.) are materially different from the provisions of section 281B. This case law is not relevant to decide the issue.

Secondly, the word "opinion" is used in Explanation - 2 to section 263 which as submitted by the Appellant in Para - 2 of the rejoinder does not apply to A.Y. 2012-13. Therefore, this judgment is not relevant to adjudicate the instant case.

iii. Indus Best Hospitality & Relators Pvt. Ltd. (ITA No. 3125/M/17); Para - 8 of DR's submission Pg.256 of compilation In this case, the revision order passed by the CIT was reversed since the Assessing officer had enquired into the deduction of Rs. 50.6 lakh claimed by the assessee for supply of material and after applying his mind the AO had allowed the same. Therefore, the Tribunal held that the CIT cannot revise the assessment order when the AO had allowed the payment after enquiring into the matter.

It is submitted that the ratio laid down by this order is squarely applicable to facts of the case since, in the instant case also, the AO had enquired into the matter and after applying his mind had allowed the cost of Rs. 5,857 crore towards VEL shares and disallowed the cost of Rs. 220 crore. Therefore, the CIT cannot invoke revision jurisdiction under section 263 of the Act.

Further, the learned DR has wrongly stated that this order of the Tribunal holds Explanation -2 to section 263 as retrospective in nature. On the contrary, the Tribunal in this case was concerned with A.Y. 2012-13 and in Para 23 has held that the

89 ITA No.3759/M/2017 M/s. Vajresh Consultants Ltd. (Earlier known as Essar Capital Ltd.) provisions of Explanation - 2 are prospective in nature and does not apply to A.Y. 2012-13.

iv. Arvee International vs. Addl. CIT (8 SOT452) (Mum.) Para -10 of DR's submission Pg.256 of compilation. In this case, the revision order passed by the CIT was upheld since the Assessing officer had allowed the loss of Rs. 13,90,096 on transfer of import entitlements in A.Y.1998-99 without making any enquiry as, on allotment of the same import entitlements in A.Y. 1996-97 the assessee had claimed deduction of Rs. 73.01 lakhs under section 80HHC of the Act The assessment order was held as erroneous as the loss was allowed without making any enquiry in the matter (Para 17).

Since, in the instant case, the AO has held enquiry on the issue of cost of acquisition of VEL shares and after applying his mind had disallowed part of the cost, the ratio laid down by this order is not applicable to the facts of the case.

v. Horizon Investment Company Ltd. vs. CIT (ITA No. 1593/M/13) Para -11 of DR's submission Pg.257 of compilation

In this case, the jurisdiction exercised under section 263 was upheld on the ground that the Assessing officer had allowed the expenses on account of repairs to the lessee assessee without enquiring into the matter, as the agreement between the parties provided that the repair expenses were to be borne by the lessor.

90 ITA No.3759/M/2017 M/s. Vajresh Consultants Ltd. (Earlier known as Essar Capital Ltd.) Since the repair expenses were allowed without any enquiry and without any application of mind the order passed under section 263 was upheld by the Tribunal (Para 3.4).

Since, in the instant case, the AO has held enquiry on the issue of cost of acquisition of VEL shares, and after applying his mind had disallowed part of the cost the ratio laid down by this order is not applicable to the instant case.

vi. Rajmandir Estate Pvt. Ltd. vs. CIT (386 ITR 162)Para - 12 of DR's submission Pg.257 of compilation. In this case, the jurisdiction invoked under section 263 was upheld by the High Court as the assessee was alleged to be involved in the money laundering of funds and during the year had received share capital at huge premium of Rs. 390/share; The Assessing officer without enquiring into the genuineness of the share capital received by the assessee at a huge premium and without applying his mind completed the assessment. As the assessment was completed without making any investigation and there was complete non-application of mind, the High Court upheld the order passed under section 263 of the Act (Para 28).

Since, in the instant case, the AO has held enquiry on the issue of cost of acquisition of VEL shares and after applying his mind has disallowed part of the cost, the ratio laid down by this order is not applicable to the facts of the instant case.

91 ITA No.3759/M/2017 M/s. Vajresh Consultants Ltd. (Earlier known as Essar Capital Ltd.) vii. Madhurima International (P.) Ltd. vs. CIT (ITA No. 421/M/17) In this case, the revision under section 263 of the Act was upheld by the Tribunal as the Assessing officer had hot enquired into valuation report prepared for the purpose of section 56(2)(viib) of the Act and had also ignored theprovisions of Explanation to section 56 and Rule 11UA related to computation of fair market value, therefore, the assessment order was held as erroneous (Pg.27,28,29). Since, in the instant case, the AO has held enquiry on the issue of cost of acquisition of VEL shares and after applying his mind has disallowed part of the cost, and in fact the view taken by the AO is supported by the SC in Challapalli Sugars (supra), Dhun Dadabhoy (supra) and Mahindra and Co. (Supra) therefore, the assessment order in the instant case cannot be termed as erroneous.

viii. Anil Kapoor Film Co. Pvt. Ltd. vs. CIT(ITANo.5015/M/18) Para -18 of DR's submission Pg.259 of compilation. In this case, the revision exercised under section 263 was upheld as the Assessing officer had not enquired into the loan received of Rs. 2 crore from Mr. Anubhav Vinimay, the Assessing officer did not examine the genuineness of the transaction or credit worthiness of the lender therefore, the assessment order passed by the Assessing officer was erroneous and prejudicial to the interest of justice.

92 ITA No.3759/M/2017 M/s. Vajresh Consultants Ltd. (Earlier known as Essar Capital Ltd.) Since, in the instant case, the AO has held enquiry on the issue of cost of acquisition of VEL shares, and after applying his mind had disallowed part of the cost the ratio laid down by this order is not applicable to the facts of the instant case.

ix. Tata Consultancy Services Ltd. vs. CIT (ITANo. 2794/M/18) Para -19 of DR's submission Pg.259 of compilation. In this case, the revision exercised under section 263 was upheld as the accounting policy followed by the assessee was contrary to the Accounting Standard - 11 issued by ICAI and also contrary to the Judgment of the Supreme Court in Woodward Governor India Pvt. Ltd. (312 ITR 254) and therefore, the assessment order passed by the Assessing officer was erroneous being contrary to the accounting standard and the Judgment of Supreme Court (Pg.22and23).

Since, in the instant case, the view taken by the Assessing officer is a possible view supported by the Judgments of SC in Challapalli Sugars (supra), DhunDadatahoy (supra) and Mahindra and Co. (Supra). The ratio laid down in the aforesaid order relied upon by the ld DR is not applicable to the instant case.

9.6. Therefore, it was submitted that the position in law, with respect to an assessment order for AY 2012-13, even after insertion of Explanation – 2 is that revision jurisdiction under section 263 of the Act cannot be invoked for inadequate inquiry i.e. when the Assessing officer has enquired into the matter and

93 ITA No.3759/M/2017 M/s. Vajresh Consultants Ltd. (Earlier known as Essar Capital Ltd.) Ld. PCIT is of the opinion that further enquiries should have been made. In this regard, reliance was placed on following judgments of the High Court: i. CIT vs. Nirav Modi (390 ITR 292) (Bom.) (Para 9 Pg.166), SLP dismissed reported in 77 taxmann.com 15 (SC) ii. CIT v. Shreepati Holding & Finance Pvt. Ltd. (ITXA No. 1879 of 2013) (Para 7Pg. 158) iii. CIT v. Sunbeam Auto Ltd. (332 ITR 167} (Del.) (Para 17 Pg. 150)

It is therefore submitted that Explanation 2 has no application to the assessment year under consideration and in any case Explanation 2 does not alter the scope of the powers under section 263 as alleged. Hence, the law as declared by the Bombay and Delhi High Court continues to be good law and that powers under section 263 cannot be invoked for inadequate enquiry.

9.7. On the AO not making any enquiry regarding cost of shares, the ld DR in Para 6, 14 and 15 of the Written Reply (Pg. 255 and 257 of Compilation) has argued that the jurisdiction invoked by PCIT under section 263 is correct as the Assessing officer had not enquired into the cost of acquisition of VEL shares claimed by the assessee and had framed the assessment in a slipshod manner without verification "and application of mind. Therefore, the order passed by the Assessing officer was erroneous and prejudicial to the interest of the revenue. In the rejoinder, the ld AR submitted that the AO has failed to enquire into the cost allowable against sale proceeds of VEL shares is factually incorrect as demonstrated in the Appellant Assessee's Written Submissions dated 19 March 2020 (Pg. 616-622 of the Paper book) explained why the provisions of section 49(l)(iii)(e), the

94 ITA No.3759/M/2017 M/s. Vajresh Consultants Ltd. (Earlier known as Essar Capital Ltd.) reason why the cost of acquisition of ISL shares in the hands of the Appellant Assessee be taken as cost for the purposes of computing capital gains on sale of VEL's shares. The assessee vide letter dated 24 March 2015 (Pg. 30-36 of Compilation) and 26 March 2015 (Pg. 37-42 of compilation) explained the of cost of acquisition in the hands of the Appellant Assessee, furnishing the detailed working (with evidence) of how the cost of VEL shares was arrived at Rs. 6,077.07 crore by the assessee. The AO after applying his mind disallowed the cost of Rs. 220.15 crore claimed by the assessee being cost incurred by the Assessee in paying shareholders of ISL after the close of the previous year i.e. after 31 March 2012 (Item 3,4 5 and 6 on Pg. 34,35 of Compilation).The Ld. A.R. submitted that the view taken by the Assessing Officer to take the cost of investments made by assessee in ISL for the purpose of computing cost of acquisition of VEL shares was supported by the following decisions and were explained by the Ld A.R. as under: i. Challapalli Sugars Ltd, vs. CIT (98 ITR167):

In this case, the Appellant was carrying on the business of manufacture and sale of sugar. The company commenced the production on 22 January 1958. The company had borrowed money for installation of machinery and plant. Before the commencement of production, the company had paid interest of Rs. 2,38,614 on borrowed funds. The company claimed that the interest should be considered as part of the cost and claimed depreciation on the same. The Supreme Court upheld the claim of the assessee observing as under: It would appear from the above that the accepted accountancy rule for determining the cost affixed assets is to include all expenditure necessary to bring such assets

95 ITA No.3759/M/2017 M/s. Vajresh Consultants Ltd. (Earlier known as Essar Capital Ltd.) into existence and to put them in working condition. In case money is borrowed by a newly started company which is in the process of constructing and erecting its plant, the interest incurred before the commencement of production on such borrowed money can be capitalised and added to the cost of the fixed assets which have been created as a result of such expenditure. The above rule of accountancy should, in our view, be adopted for determining the actual cost of the assets in the absence of any statutory definition or other indication to the contrary.

ii. Dhun Dadabhoy Kapadia vs. CIT (63 ITR 651) (Pg.391- Pg.394 of Compilation): In this case, the Appellant was holding 710 equity shares in Tata Iron & Steel Company Ltd. And became entitled to subscribe right shares of 710. However, the assessee did not subscribe to the right shares and sold the entitlement in the open market at Rs. 45,262 and claimed the deduction of Rs. 37,630 which was fall in the market value of existing 710 shares immediately after allotment of right shares, as cost of acquisition of the entitlement sold by her. In this regard, Supreme Court held in favour of the assessee observing as under: (Pg. 394)

"The High Court, in dealing with this question, had expressed the view that principles of accountancy applicable to valuation of such right to receive new shares issued by a company are not applicable when computation has to be made for purposes of taxation; but we are unable to accept this proposition. In working out capital gain or loss, the principles that have to be applied are those which are a part of the commercial practice or which an ordinary man of business will resort to when making computation for his business purposes. The principles of accounting indicated by us above are clearly the principle that must be applied in order to find out the net capital gain or loss arising out of a transaction of the nature with which we are concerned......"

9.8. The Ld. A.R. also submitted that the view taken by the Assessing Officer to take proportionate cost, i.e. divide the cost of ISL shares between the value of VEL shares and other assets of ISL which became the property of the Appellant Assessee on amalgamation was supported by the decision in the case of CIT

96 ITA No.3759/M/2017 M/s. Vajresh Consultants Ltd. (Earlier known as Essar Capital Ltd.) vs. Mahindra & Co. Ltd. (326 ITR 465) (Raj.) (Pg.20-28 of Compilation) and was explained as under:

“In this case, the Appellant received the shares of Barangore Jute Factory on account of amalgamation. The Appellant had paid consideration of Rs. 33,333 to the shareholders of amalgamating company for assets worth Rs. 1,39,330 received on account of amalgamation of which shares was one of the assets. Later on, the shares were sold by the assessee for an amount of Rs. 21,000 and since the cost of shares in the hands of amalgamating company was Rs. 54,450, the assessee claimed loss of Rs. 33,010. The Assessing officer held that since the assessee had paid an amount of Rs. 33,333 the proportionate cost of shares (54,450/1,39,330 * 33,333} comes to Rs. 13,026 therefore, the assessee had earned a profit of Rs. 7,974. The Rajasthan High Court approved the principle of apportionment to arrive at the cost of shares observing as under: {Pg. 28 of Compilation)

"In the present case also, we find that value of 300 shares of M/s. Baranagore Jute Factory and Equitable Coal Co. before amalgamation was indicated as Rs. 54,550 and its entire assets were taken over for Rs. 1,39,330. The assessee-company at the time of amalgamation of the said company, paid sale consideration ofRs. 33,333 towards value of the shares. Thus, as per the indicated parameters, proportionate value of 300 shares worked out to only Rs. 13,076 which shares at later point of time were sold by the assessee-company in the market for Rs. 21,000. There was thus indeed earned profit of Rs. 7,974......"

9.9. It was submitted that it is not the case of the CIT/DR that the reasoning given by the AO in his order to arrive at the cost for computing LTCG on sale of VEL shares in incorrect. The only reason given by the Ld. PCIT and that which is articulated by the DR, is that the AO has not applied his mind to the computation of cost. This, as demonstrated above, is factually incorrect.

9.10. Strictly without prejudice to the foregoing and without prejudice to the submission of the Appellant Assessee that the computation made by the AO is correct in law, the Ld. A.R. submitted that the view expressed by the AO in accepting the submissions of the Appellant Assessee in computing the cost for

97 ITA No.3759/M/2017 M/s. Vajresh Consultants Ltd. (Earlier known as Essar Capital Ltd.) the purposes of arriving at the LTCG on sale of VEL shares to be taxed in the hands of the Appellant Assessee is possible view, to say the very least. It was therefore submitted that the on this count alone, the invocation of powers by the Ld. PCIT under section 263, for this reason is unsustainable. Reliance was placed on the decision in the case of CIT vs. Max India Ltd. (295 ITR 282) wherein the Hon'ble Apex Court has observed as under:

"In our view at the relevant time two views were possible on the word 'profits' in the proviso to section 80HHC(3). It is true that vide 2005 amendment the law has been clarified with retrospective effect by insertion of the word 'loss’ in the new proviso. We express no opinion on the scope of the said amendment of 2005. Suffice it to state that in this particular case when the order of the Commissioner was passed under section 263 of the Income-tax Act two views on the said word 'profits' existed. In our view the matter is squarely covered by the judgment of this Court in the case of Malabar Industrial Co. Ltd. v. CIT [2000] 243 ITR 83 as also by the judgment of the Calcutta High Court in the case of Russell Properties (P.) Ltd. v. A. Chowdhury, Addl. CIT[1977] 109 ITR 229 at 243."

9.11. The Judgments relied on by the learned DR in Para 6,14 and 15 of the Written Reply are distinguishable and are separately dealt with. It is therefore wrong for the Ld. PCIT and the DR to urge that the Assessing Officer has not enquired into the cost of VEL shares and has not applied his mind to the cost claimed by the assessee. The case laws relied upon by the Ld. D.R. are distinguished as under:

• In the case of Malabar Industrial Co. Ltd. vs. CIT (243ITR83)(SC) Para - 6 of DR's submission, the exercise of Jurisdiction under section 263 was upheld by the SC as the Assessing officer had passed the assessment order without any application of mind and with conducting any enquiry regarding the taxability of compensation of Rs.3,66,649/-. Since the AO in the instant case has enquired into the

98 ITA No.3759/M/2017 M/s. Vajresh Consultants Ltd. (Earlier known as Essar Capital Ltd.) matter and applied his mind to the amount of cost allowable, the ratio laid down by this Judgment is not applicable to the facts of the case. This Judgment, in fact, supports the case of the Appellant as Supreme Court has held that is the Assessing officer has taken a possible view in the matter then the provisions of section 263 cannot be invoked by CIT.

• CIT vs. Ashok Logani (347 iTR 22) (Del.). In this case, the exercise of Jurisdiction was upheld by the High Court on the ground that the assessee at the time of search had made a statement that cash of Rs. 61.30 lakhs found was his undisclosed income. Later on, the statement was retracted and income of only Rs. 21 lakhs was offered to tax. The Assessing officer accepted income of Rs. 21 lakhs without going into the difference in the income offered by the assessee. Secondly, the High Court also came to the conclusion that the explanation offered by the assessee for offering income of Rs. 21 lakhs before Assessing officer was different than the one furnished before the Tribunal which showed that the explanation of the assessee was an afterthought (Para 10).

Since the AO in the instant case has enquired into the matter and in fact disallowed part of the cost, the ratio laid down by this Judgment is not applicable to the facts of the case.

• Surya Jyoti Software Pvt. Ltd. vs. CIT (ITA No. 2158/Del/2017). In this case, the exercise of jurisdiction was upheld by the Tribunal on the ground that the

99 ITA No.3759/M/2017 M/s. Vajresh Consultants Ltd. (Earlier known as Essar Capital Ltd.) Assessing officer reopened the assessment under section 147 on the basis that the assessee had received accommodation entry of Rs. 1 crore however, after reopening the assessment, did not carry out any enquiry or verification and passed the reassessment order without making any addition in this regard. Since, in the instant case, the AO has held enquiry on the issue of cost of acquisition of VEL shares and disallowed part of the cost, the ratio laid down by this order isjiot applicable to the facts of the case.

• Indian Textiles vs. CIT (157 ITR 112} (Mad.)Para -14 of DR's submission Pg.258 of compilation. In this case, the order passed under section 263 was upheld by the High Court as the Assessing officer had not conducted any enquiry regarding the deduction claimed by the assessee under section 35B with respect to Air freight insurance, carriage of goods and commission. Since the no verification was carried out by the Assessing officer, the High Court upheld the invocation of jurisdiction under section 263 of the Act (Pg.2). Since, in the instant case, the AO has held enquiry on the issue of cost of acquisition of VEL shares and disallowed part of the cost, the ratio laid down by this Judgment is not applicable to the facts of the case.

• Gee Vee Enterprises vs. CIT (99 ITR 375} (Del.)Para - 14 of DR's submission Pg.258 of compilation. In this case, the exercise of revision jurisdiction was upheld by the High Court as the Assessing officer granted registration under

100 ITA No.3759/M/2017 M/s. Vajresh Consultants Ltd. (Earlier known as Essar Capital Ltd.) section 185 of the Act as a partnership firm, which resulted into substantial tax benefits to the assessee, without enquiring into the genuineness of the partnership firm formed by the assessee and other members. Since, the registration was without enquiring into the matter, the High Court upheld the revision under section 263 of the Act (Pg.6). Since, in the instant case, the AO has held enquiry on the issue of cost of acquisition of VEL shares and disallowed part of the cost, the ratio .laid down by this Judgment is not applicable to the facts of the case.

• Thalibai F. Jain vs. ITO (101 ITR 1) (Kar.)Para -14 of DR's submission Pg.258 of compilation. In this case, the revision exercised by CIT under section 263 was upheld as the Assessing officer accepted the undisclosed income of Rs. 31,500 offered by the assessee for A.Y. 1969-70 to 1972-73 purported to have been earned from the business of money lending. The Assessing officer did not carry out any enquiry regarding the genuineness of the claim made by the assessee and blindly accepted the return of income. Since the income offered by the assessee was accepted without conducting any enquiry, the High Court upheld the revision order passed under section 263 of the Act (Pg.3).

Since, in the instant case, the AO has held enquiry on the issue of cost of acquisition of VEL shares and in fact disallowed part of the cost, the ratio laid down by this order is not applicable to the facts of the case.

101 ITA No.3759/M/2017 M/s. Vajresh Consultants Ltd. (Earlier known as Essar Capital Ltd.)

• CIT vs. Himachal Pradesh Finance Corporation (186 Taxman 105) (HP)Para -14 of DR's submission Pg.258 of compilation. In this case, the revision exercised under section 263 was upheld by the High Court as the Assessing officer had allowed the relief to the assessee regarding interest on sticky loan without any material on record and he had also not considered Circular dated 6.10,1952 issued by CBDT and therefore, the assessment order was held as passed without any application of mind.

Since, in the instant case, the AO has held enquiry on the issue of cost of acquisition of VEL shares and after applying his mind has disallowed part of the cost claimed by the assessee, the ratio laid down by this Judgment is not applicable to the facts of the case.

• CIT vs. Pushpa Devi 164 ITR 639 (164 ITR 639} (Patna)Para -14 of DR's submission Pg.258 of compilation. In this case, the revision under section 263 was upheld by the High Court as the Assessing officer accepted the undisclosed income offered by the assessee as purported to have been earned from money lending and oil trading business however, he did not conduct any enquiry regarding initial capital invested, real extent of income and its true ownership. Therefore, the assessment order was held as amenable to provisions of section 263 (Para 10).

Since, in the instant case, the AO has held enquiry on the issue of cost of acquisition of VEL shares and after applying his

102 ITA No.3759/M/2017 M/s. Vajresh Consultants Ltd. (Earlier known as Essar Capital Ltd.) mind has disallowed part of the cost claimed by the assessee, the ratio laid down by this order is not applicable to the facts of the case.

• CIT vs. MM.Khambatwala (198 ITR 144) (Guj.) Para -15 of DR's submission Pg.258 of compilation. The Gujarat High Court reversed the order of the Tribunal which had held that two views were possible on merits of the matter therefore, the CIT could not invoke the provisions of section of 263 of the Act. The relevant portion of the Judgment is extracted as under: "So far as the second question is concerned, as pointed out above, the Tribunal took the view that the Commissioner could not have invoked the provisions of section 263 of the Act since two views arepossible on the question whether the assessee was entitled to weighted deduction under section 35B of the Act This is a strange view taken by the Tribunal and it is conceded that this view takeinbytheTribunal is not supported by any provision of the Actor any_decision.The Commissioner would be entitled to revise the order of the Income-tax Officer if he is of the view that the order of the Income-tax Officer is erroneous and prejudicial to the interests of the Revenue. The Commissioner can exercise the power under section 263 even in a case where the issue is debatable......"

As can be observed from above, the High Court rejected the argument that provisions of section 263 cannot be applied when two views are possible in the matter, ft is submitted that the Supreme Court in CIT vs. Max India Ltd. 295 ITR 282 (SC) has held that the provisions- of section 263 are not applicable when there are two views possible therefore, the Judgment of Gujarat High Court in M.M. Khambatwala is not a good law and cannot be relied upon. The relevant portion of Max India (supra) is extracted as under: "In our view at the relevant time two views were possible onthe word 'profits' in the proviso to section 80HHC(3). It is true that vide 2005 amendment the law has been clarified with retrospective effect by insertion of the word ‘loss’ in the new

103 ITA No.3759/M/2017 M/s. Vajresh Consultants Ltd. (Earlier known as Essar Capital Ltd.) proviso. We express no opinion on the scope of the said amendment of 2005. Suffice it to state that in this particular case when the order of the Commissioner was passed under section 263 of the Income-tax Act, two views on the said word ‘profits’ existed. In our view the matter is squarely covered by the judgment of this Court in the case of Malabar Industrial Co. Ltd. v. CIT [2000] 243 ITR 83 as also by the judgment of the Calcutta High Court in the case of Russeell Properties (P) Ltd. v. A. Chowdhury, Addl. CIT [1977] 109 ITR 229 at 243.”

9.12. The learned DR in Para 1 of the Written Reply has argued that the Assessing officer had not examined the provisions of section 170 r.w. section 47(vi) of the Act in the hands of the assessee when the ISL amalgamated with the assessee w.e.f. 1 April 2011. In the rejoinder the ld AR submitted that it is relevant to note that the AO is fully conscious of and has considered the implications of section 47(vi) in his order - see Pg. 18 of assessment order under section 143(3) and therefore it is factually incorrect for the PCIT/DR to submit that the implications of section 47(vi) r.w.s.170 have not been considered by the AO. Without prejudice to the above, the Appellant Assessee has in the Written submission dated 13 March 2020 in detail set out why the allegation that the AO has failed to consider applicability of section 170 r.w. section 47(vi) is wholly baseless. The Ld. A.R. submitted that the transfer of assets by ISL to the assessee under amalgamation is not taxable as the amalgamating company i.e. ISL does not receive any consideration on account of amalgamation and hence there is no question of any tax in the hands of ISL under section 47(vi) read with section 170 to be invoked. This position in law is so clearly set out by the commentary of Kanga & Palkhivaia's, The Law and Practice of Income Tax (10th Edition Vol. I Pg.1209) and Commentary of Sampath Iyengar's Law of Income Tax (11th Edition Vol.3 Pg. 5254). This position at law is further supported

104 ITA No.3759/M/2017 M/s. Vajresh Consultants Ltd. (Earlier known as Essar Capital Ltd.) by the Judgment of Supreme Court in CIT vs. B.C. Srinivasa Setty (128 ITR 294), i.e. It was also submitted that where the machinery provision of section 48 breaks down consequently, the charge under section 45 also fails. In the instant case, since the amalgamating company received no consideration on the transfer of its assets, the charge under section 45 fails. Without prejudice to above, it was submitted that, in any case, the AO has taken a possible view regarding the applicability of section 170 read with section 47(vi) of the Act which is supported by the aforesaid Judgments and Expert commentary. It was therefore submitted that on this count alone, the invocation of powers by the CIT under section 263, for this reason is unsustainable. Reliance was placed on the decision in the case of CIT vs. Max India Ltd. (295ITR 282) where in the Hon'ble Apex Court has observed as under:

"In our view at the relevant time two views were possible on the word 'profits' in the proviso to section 80HHC(3). It is true that vide 2005 amendment the law has been clarified with retrospective effect by insertion of the word 'loss' in the new proviso. We express no opinion on the scope of the said amendment of 2005. Suffice it to state that in this particular case when the order of the Commissioner was passed underseetion 263 of the Income-tax Act two views on the said word 'profits' existed. In our view the matter is squarely covered by the judgment of this Court in the case of Malobar Industrial Co. Ltd. v. CIT [2000] 243 ITR 83 as also by the judgment of the Calcutta High Court in the case of Russell Properties (P.) Ltd. v. A. Chowdhury, Addl. CIT[1977] 109 ITR 229 at 243."

Therefore, it was submitted that the CIT is wrong in holding that the Assessing Officer has not considered the provisions of section 47(vi) of the Act. The provisions of section 47(vi) were irrelevant as there was no capital gain arising in the hands of ISL in the absence of any consideration received by ISL on amalgamation. In any case, the Assessing Officer has taken a

105 ITA No.3759/M/2017 M/s. Vajresh Consultants Ltd. (Earlier known as Essar Capital Ltd.) possible view regarding the applicability of section 47(vi) r.w.s. 170 of the Act.

9.13 The Ld. A.R. submitted that the Ld. PCIT can not travel beyond the grounds/reasons set out in the notice. The Ld. A.R. pointed out that the Ld. DR has in Paras 4, 9 and 17 of the Written Reply (Pg. 255, 256, 258 of compilation) has argued that reason given by the CIT in Para 3-3.1 Pg.54,55 of his order under challenge viz. that the AO ought to have awaited the response of FT&TR before concluding the assessment, although not mentioned in the notice, can validly form the basis for the CIT to invoker powers under section 263 of the Act. This argument was not raised during the course of the oral hearing and therefore its context was not fully clear. It is being presumed that the submission of the DR is in response to the argument of the Appellant Assessee in his Written Submissions in Para 4,9 and 17 at Page 255, 256 and 258 of compilation. The DR seeks to support his aforementioned submission by placing reliance on the decision of the Apex Court in the case of the CIT vs. Amitabh Bachchan (384 ITR 200) (SC).

9.13.1 In the rejoinder, the Ld. A.R. submitted as under: • This argument and the reading of the decision of the Apex Court in case of Amitabh Bachchan (supra) is incorrect. The Hon'ble Supreme Court in the case of Amitabh Bachchan (supra) found on facts that though the reason cited by the CIT in the order was not found in the notice, however, the CIT had, during the course of the proceedings under section 263 given full opportunity to the assessee in respect of the issues which were not raised in the SCN. The

106 ITA No.3759/M/2017 M/s. Vajresh Consultants Ltd. (Earlier known as Essar Capital Ltd.) Hon'ble Supreme Court therefore held that there was no violation of principles of natural justice and therefore reversed the order of the Hon'ble High Court on that count (Para 14 Pg. 403 of Compilation). • However, in the instant case, the issue regarding the reference made by FT&TR in the case of ISL for A.Y. 2011- 12 was not raised in the SCN nor was it raised during the course of the proceeding by the CIT for the appellant to respond to it. This was specifically averred by the Appellant Assessee in its Written Submissions dated 13 March 2020 at Pg. 9 of the compilation. The DR has not disputed this factual position and has therefore accepted the same. It must therefore follow that the Appellant Assessee was not given an opportunity of being heard on this reason issue and hence, this reason given by the CIT in the order under section 263 of the Act cannot be considered for deciding the validity of proceedings under section 263. • Apart from the above, the DR has also not disputed, and therefore admitted, that the enquiry through FT&TR was with respect to another assessee (viz. ISL) and for another assessment year, viz. AY 2011-12 (as specifically averred by the Appellant Assessee in submission dated 13 March 2020 Pg. 9 of compilation). Therefore, on that count alone, this reason cannot form the basis of invoking powers under section 263 of the Act. Therefore it was submitted that the reason given by CIT regarding reference made through FT and TR in the case of ISL cannot be considered for the purpose of deciding the validity of

107 ITA No.3759/M/2017 M/s. Vajresh Consultants Ltd. (Earlier known as Essar Capital Ltd.) the order under section 263 as the appellant assessee was not given an opportunity of being heard in this regard.

9.14. At the end of the hearing, the learned DR had referred to the Judgment of Delhi High Court in case of Experion Developers (P.) Ltd. vs. DCIT (115 taxmann.com 338). It was submitted that the above Judgment does not deal with the provisions of section 263 of the Act and the High Court was concerned with the validity of the reassessment under section 147 of the Act. Therefore, this Judgment was not relevant to decide the issue at hand.

108 ITA No.3759/M/2017 M/s. Vajresh Consultants Ltd. (Earlier known as Essar Capital Ltd.) whatever was due as per law has been fully paid. The shares sold by the assessee as has been stated earlier have come into the hands of the assessee through a series of amalgamations which were duly approved by the jurisdictional high courts. Initially these shares of Vodafone Essar Ltd were held by group company known as M/S Essar Teleholdings Ltd. (ETHL) since 2005 .According to the assessee the said company was highly leveraged and could not monetise these shares. Therefore a series of amalgamations were undertaken to distance the original holder of Shares so that money could be raised against value of these shares. These shares were transferred to another group subsidiary company M/S ETHL Communication Holding Ltd(ECHL) at book cost of Rs. 1,260/- Cr in AY 2008-09. ETHL thereafter incorporated a subsidiary company M/S Essar Telecommunications Holdings Private Limited (ETHPL) and acquired ETHL Telecom Holdings India Private Limited (ETHIPL) and placed them between itself and ECHL. Owing to the above re-organisation, in AY 2010-11, ECHL was finally able to raise funds of Rs.3,707/- crores by issue of debentures which were subscribed by the Public and were listed. ECHL had a put- option agreement where under it acquired the option to sell the VEL shares at USD 1.2 bn or at market value. Since ISL was a listed company, it was decided to merge ECHL with India Securities Ltd. (ISL) so that the market worth of VEL's shares got reflected in the share price of ISL's shares. Since ECHL had issued public debentures, merging of ECHL with ISL would have been a cumbersome process in terms of obtaining approvals and sanctions. It was therefore decided to merge ETHPL with ISL, thereby effectively moving VEL's shares (through ECHL) under

109 ITA No.3759/M/2017 M/s. Vajresh Consultants Ltd. (Earlier known as Essar Capital Ltd.) ISL and to ascertain the market value of VEL shares. Upon the sanction of the Hon'ble Madras and Bombay High Courts, ECHL was merged with ISL w.e.f. 1 April 2010, i.e. with effect from AY 2011-12. VEL shares accordingly became the property of ISL from 1st April 2010, i.e. from AY 2011-12.In AY 2012-13 VEL shares were sold to Piramal Healthcare Ltd for Rs. 5,863/- crores. Since after sale of VEL shares, the remainder business of ISL only complemented that of its parent ECL, it was decided to merge ISL with ECL in AY 2012-13.Accordingly, upon the sanction of the Hon'ble Madras High Court, ISL was merged with ECL w.e.f. 1 April 2011, i.e. with effect from AY 2012-13. We have perused the decision of the Hon'ble Supreme Court in the case of Marshall Sons &Co. India Ltd. Vs. ITO (supra) wherein it has been held that upon merger the assets of the merging company would vest in the merged company and consequently the VEL shares became the property of ECL from 1st April 2011.Thus the VEL shares sold by ECHL first on behalf of ISL, finally came to be regarded as being sold on behalf of ECL owing to the mergers sanctioned by the Hon'ble Madras and Bombay High Courts of ECHL with ISL and thereafter the Hon'ble Madras Court of ISL with ECL. The consideration on sale of VEL shares was regarded as having been earned/accrued in the hands of assessee and the gains thereof became taxable in the hands of assessee. Since ECL became entitled to the consideration on sale of VEL's shares owing to its holding in ISL, the cost of investment in ISL Rs. 6077 crores was claimed as a proportionate cost of the VEL shares in line with the decisions of Challapalli Sugars Ltd vs CIT (supra) and CIT vs Mahindra & Co (Raj) (Supra). These facts are very much before the AO at the

110 ITA No.3759/M/2017 M/s. Vajresh Consultants Ltd. (Earlier known as Essar Capital Ltd.) time of assessment proceedings. In fact, the AO had verified shareholding structure and complex of mergers before allowing the cost of acquisition of shares which is evident from the fact that while allowing cost of acquisition he had disallowed part of cost of acquisition of shares of Rs. 220 crores.

111 ITA No.3759/M/2017 M/s. Vajresh Consultants Ltd. (Earlier known as Essar Capital Ltd.) There must be some prima facie material on record to show that tax which was lawfully exigible has not been imposed or that by the application of the relevant statute on an incorrect or incomplete interpretation a lesser tax than what was just has been imposed.

112 ITA No.3759/M/2017 M/s. Vajresh Consultants Ltd. (Earlier known as Essar Capital Ltd.) the AO cannot be held to be erroneous simply because in his order he did not make an elaborate discussion in that regard.

113 ITA No.3759/M/2017 M/s. Vajresh Consultants Ltd. (Earlier known as Essar Capital Ltd.) 18 October 2013 alongwith the various Amalgamation Orders of respective Hon'ble High Court as is evident from the following: e) Vide notice dated 25 February 2015 (P94) the AO called upon ECL to explain and substantiate its claim of cost on sale of VEL's shares and to understand the holding structure called for the balance sheets of ETHPL, ECHL and ISL. f) ECL vide letter dated 14 March 2015 (P372) and 19 March 2015 (P616) filed all details called for, such as the Financials etc. of the various companies and explained the basis of its claim of cost g) ECL thereafter vide letter dated 24 March 2015 (P655 to 658) submitted the following: x. Details of the original acquisition of VEL shares by ETHL xi. Explained how ECHL came to acquire VEL shares from ETHL xii. Explanation as to how ECHL revalued VEL's shares in its books xiii. ETHPL was the parent of ECHL xiv. ETHPL merged with ISL, thereby migrating ECHL under ISL xv. Merger of ECHL with ISL xvi. Merger of ISL with ECL xvii. How therefore ECL arrived at the cost of VEL shares xviii. Evidence of incurrence of cost for purchase of ISL shares and debentures was also filed.

Thereafter, in para No.5.8 to 5.10 the AO has given his findings on all events surrounding the holding of VEL shares after proper appreciation of facts qua the cost claimed against sale of VEL shares and has disallowed part of the cost of acquisition of VEL shares.

114 ITA No.3759/M/2017 M/s. Vajresh Consultants Ltd. (Earlier known as Essar Capital Ltd.) VEL's shares as the tax cost of VEL's shares remained unaltered at Rs.1,260/- crores. It is only on account of the non-tax neutral merger of ISL with ECL that ECL, as per law, is required to take the cost it has suffered for acquisition of its holding in ISL, which holding is what has entitled ECL to the consideration of Rs. 5,863 crores on sale of VEL's shares. Besides that the amalgamation of ISL with ECL has been approved by the Hon'ble Court and hence cannot be doubted and has not even been doubted by the Ld. PCIT. This is primarily so because the non- tax neutrality of the merger is not owing to any act on part of ECL, but because of a choice exercised by outside shareholders of ISL in opting to get cash rather than shares of ECL upon amalgamation. The findings of the PCIT that the amalgamations and formation of the various companies is for securing tax advantage is incorrect.

115 ITA No.3759/M/2017 M/s. Vajresh Consultants Ltd. (Earlier known as Essar Capital Ltd.) Supreme Court in the case of Konark Investments Ltd. & Ors. vs. Union of India (1999) 97 CompCas 52 SC.

116 ITA No.3759/M/2017 M/s. Vajresh Consultants Ltd. (Earlier known as Essar Capital Ltd.) "insufficient enquiry". The case of the assessee is supported by a series of decisions.

• In the case of CIT vs. Sunbeam Auto Ltd. (supra), the Hon’ble Delhi High Court “has held dismissing the appeal, (i) that the Assessing officer allowed the claim on being satisfied with the explanation of the assessee. Such decision of the Assessing officer could not be held to be erroneous simply because in his order he did not make an elaborate discussion in that regard. The Assessing Officer had called for explanation on the very item from the assessee and the assessee had furnished its explanation. This fact was conceded by the Commissioner himself in his order. This showed that the Assessing Officer had undertaken the exercise of examining as to whether the expenditure incurred by the assessee in the replacement of dies and tools was to be treated as revenue expenditure or not. Therefore, it could not be said that it was a case of lack of inquiry. The accounting practice followed for a number of years had the approval of the income-tax authorities. Even for future assessment years, the very same accounting practice was accepted. (ii) That the dies were components of the machines. They needed constant replacement, as their life was not more than a year. The assessee also explained that since the parts were manufactured for the automobile industry, which had to work on complete accuracy at high speed for a longer period, replacement of the parts at short intervals becomes imperative to retain the accuracy. With the replacement of tools and dies no new asset comes into existence nor was their benefit of enduring nature. They did not even enhance the life of the existing machine of which the tools and dies were only parts. Therefore, the view taken by the Assessing Officer was one of the possible views and the assessment order passed by him could not be held to be prejudicial to the interest of the revenue. The opinion of the Assessing Officer in treating the expenditure as revenue expenditure was plausible and thus there was no material before the Commissioner to vary that opinion and as for fresh inquiry.

• In the case of CIT vs Shreepati Holdings (supra), the Hon’ble Bombay High Court has held that the revisionary jurisdiction under section 263 of the Act can not be invoked by the PCIT in case of the inadequate inquiry by the AO but in case where there is a lack of enquiry. The operative part is reproduced as under: “6. We find that there is no prescribed formula under Section 88E of the Act to determine the quantum of the rebate thereunder. Therefore the same has to be computed on a reasonable and scientific manner by the Assessing Officer. Further the impugned order has placed reliance upon the

117 ITA No.3759/M/2017 M/s. Vajresh Consultants Ltd. (Earlier known as Essar Capital Ltd.) decision of this Court in CIT Vs. Gabriel India Ltd. wherein this Court held that the order cannot be held to be erroneous merely because according to the CIT, the order should have been written more elaborately or for substituting the view of the Assessing Officer with that of the CIT. The Court held that merely because the CIT had a different view from that reached by the Assessing Officer would not by itself make the view of the Assessing Officer erroneous. To be an erroneous order it must be in breach of law. It is axiomatic that jurisdiction under Section 263 of the Act can only be exercised on cumulative satisfaction of the twin conditions viz. of the order being erroneous in law and the order being prejudicial to the interest of the revenue. Thus in this case, one of the two conditions precedent to exercise jurisdiction under Section 263 of the Act viz. Order being erroneous in law is not satisfied.

Similar ratio has been laid down in the case of CIT vs Nirav Modi (supra), by the Hon’ble Bombay High Court against which the SLP stood dismissed by the Hon’ble Apex court as reported in 77 taxmann.com 15. On this count also the revisionary jurisdiction u/s 263 of the Act can not be sustained.

118 ITA No.3759/M/2017 M/s. Vajresh Consultants Ltd. (Earlier known as Essar Capital Ltd.) Sugars Ltd vs. CIT (supra) and CIT vs Mahindra & Co. (supra)and has formed a considered view. Such a view is clearly a "possible view". It is also seen from the paper book filed by the assessee that the Assessing Officer had raised queries relating to computation of basis of arriving at the cost of acquisition at Rs.6077.07 crores (as against purchase price of Rs.1260.50 crores by ECHL). A notice was also issued on February 25, 2015 asking for such details along with specific query as to why the cost of the acquisition of shares of VEL should not be Rs.1260.59 cr as against Rs.6077.77 cr in the light of provisions of section 49(1)(iii)(e) of the Act. The assessee vide its reply dated March 09, 2015, submitted that since the amalgamation did not fall within the meaning of ‘amalgamation’ as defined under section 2(1B) of the Act, the provisions of section 49(1)(iii)(e) of the Act are not applicable. It was explained to the AO that in the instant case, out of total value of shares (face value) of ISL of Rs.87,57,96,310, the shares of value of Rs.84,76,493/- were held by ECL (i.e. the amalgamated company) and the balance shares of value of Rs.2,81,19,817/- were held by public shareholders. As required by section 2(1B) of the Act, in order to fall within the meaning of the term amalgamation, the public shareholders holding at least three- fourth of the value of shares ought to have become the shareholders of the amalgamated company by virtue by the amalgamation. In the instant case, public shareholders holding shares of face value of only Rs.1,92,28,280 (i.e. less than Rs.2,10,89,863 being three-fourth) exercised the option to receive shares of the amalgamated company under the scheme of amalgamation and the balance shareholders, (being

119 ITA No.3759/M/2017 M/s. Vajresh Consultants Ltd. (Earlier known as Essar Capital Ltd.) shareholders holding 31.57% of the face value of public holding) opted for cash payment. In light of the above, it was explained that the amalgamation of ISL into ECL did not fulfill the conditions specified in clause (iii) of section 2(1B) of the Act and therefore does not fall within the meaning of ‘amalgamation’ as per section 2(1B) of the Act. Consequently, the provision of section 47(vi) and section 49(1)(iii)(e) are not applicable in the present case. Thus, the assessee submitted that since the provision of section 47(vi) and section 49(1)(iii)(e) are not applicable in the present case, the cost of the assets (equity shares, preference shares and debentures which got extinguished) given up by the ECL for the purpose of acquiring the assets of ISL as well the amounts paid by the ECL to the public shareholders and cost of shares of the ECL Company allotted to public shareholders as part of the scheme shall be the cost of acquisition of assets of ISL vested with ECL on merger. Accordingly, the assessee claimed Rs.6077.07 as Cost of acquisition of VEL shares while calculating short term capital gains/loss. Thus the case of the assessee finds support from the decisions of Challapalli Sugars Ltd. vs. CIT (supra) and CIT vs. Mahindra & Co. (supra) and hence, the assessment framed by the AO cannot be disturbed under section 263 of the Act. In our considered view, the AO was aware of all the aspects as to cost in the hands of the assessee and after proper examination of the facts and laws, the AO adopted the legally plausible view supported by legal dicta laid by various courts and accepted the submissions of ECL as to its claim of cost however denied so much of the cost that was incurred after 31 March 2012 viz. INR 221 crores. Thus in our considered view, the assessment order

120 ITA No.3759/M/2017 M/s. Vajresh Consultants Ltd. (Earlier known as Essar Capital Ltd.) cannot be held to be erroneous and prejudicial to the interest of the Revenue and revision proceedings can not be invoked to ask him to take any alternative view. The assessee’s case is supported by the decision of Apex Court in the case of Malabar Industrial Co Ltd. Vs CIT (supra) and decision of the jurisdictional High Court in the case of CIT vs. Gabriel India Ltd (supra) wherein a ratio has been laid that a possible view by the AO can not be disturbed by the AO by resorting to the revisionary jurisdiction u/s 263 of the Act by PCIT. In view of this fact of allowing the cost of Rs 5,857 crore also the assessment order can not be termed as erroneous.

121 ITA No.3759/M/2017 M/s. Vajresh Consultants Ltd. (Earlier known as Essar Capital Ltd.) 21. We also find merit in the without prejudice contention of the counsel of the assessee that reason cited by the PCIT is contrary to settled law and elementary principles of taxation, that an amalgamating company upon amalgamation cannot be subjected to any tax since it receives no consideration on amalgamation, whether or not the exemption under section 47(vi) was available. The view is supported by the decision in the case of CIT v. B. C. Srinivasa Shetty (supra) wherein he Hon’ble Apex Court has held that where the machinery provisions of section 48 break, consequently so does the charge under section 45. Accordingly, since the amalgamating company receives no-consideration, on the transfer of its assets the charge under section 45 fails. In view of the above, considering ISL receives no consideration for the transfer of its assets to ECL, therefore the machinery provision of section 48 breaks and consequently so does the charge under section 45 of the Act. Therefore, reasoning of the PCIT that the assessment order is erroneous and prejudicial to the interest of the revenue since the applicability of section 170 and section 47(vi) with respect to the taxability of transfer of assets of ISL to ECL on amalgamation of ISL with ECL has not been considered by the Assessing Officer, is ex facie contrary to law. The AO has adopted a possible view which is supported by the aforesaid decisions. Such a view is clearly a "possible view" and cannot be disturbed under section 263 of the Act as held in the case of Malabar Industries Co. Ltd Vs CIT and CIT Vs Gabriel Inida Ltd. (Supra). Thus applicability of section 170 despite non-availability of section 47(vi) is clearly a possible view and cannot be interfered with by invoking provisions of S.263 of the Act.

122 ITA No.3759/M/2017 M/s. Vajresh Consultants Ltd. (Earlier known as Essar Capital Ltd.) 22. On the third reasons cited by the PCIT for invoking provisions of section 263 of the Act wherein he concluded that the AO failed to await the outcome of the enquiries made in the case of ISL under the exchange of information provisions of the Double Tax Avoidance Agreement, we observe that the PCIT himself records that enquiries by Foreign Tax and Tax Research Division (FT&TR) of the Central Board of Direct Taxes were made in the assessment proceedings of ISL and not in the assessment of ECL and therefore cannot be said to make the assessment in question as erroneous. Secondly, the reference in any case did not pertain to the year under consideration as the same were made in proceedings for AY 2011-12. We also note that the PCIT had not raised this issue in the show cause notices dated 17 June 2015 and 26 June 2015 issued under section 263 of the Act nor was it put to the Appellant during the course of the hearings, therefore, the Appellant was not given an opportunity of being heard on this issue and hence this issue cannot be considered for the purpose of deciding the validity of order passed under section 263 of the Act. In this regard, the reliance is placed on the decision of Damodar Valley Corporation vs. DCIT (160 ITD 78). This reason is therefore factually incorrect and also for the same having not been put to the assessee during the course of revision proceedings, cannot be countenanced in deciding the validity of jurisdiction under section 263 of the Act. Therefore, in view of present facts and circumstances and the ratio laid down by various judicial forums, the exercise of jurisdiction by the PCIT is invalid and the proceedings u/s 263

123 ITA No.3759/M/2017 M/s. Vajresh Consultants Ltd. (Earlier known as Essar Capital Ltd.) and consequent order cannot be sustained and has to be quashed.

124 ITA No.3759/M/2017 M/s. Vajresh Consultants Ltd. (Earlier known as Essar Capital Ltd.) 263 of the Act. In that context the court held that once the issue is confronted to the assessee during the proceedings u/s 263 of the Act, then it is necessary that the same need not to be mentioned in the notice u/s 263. But in the present case the PCIT has not raised the issue of failure of the AO to await the outcome of the enquiries made in the case of ISL Ltd under exchange of information provisions of Double Tax Avoidance Agreement in the notice dated 17th June 2015 and 26th June, 2015 issued u/s 263 of the Act and also the issue was not confronted to the assessee during proceedings u/s 263 of the Act. So the above decision does not cover the point raised by the Ld. D.R. but is favourable to the assessee on the issue of possible view taken by the AO as discussed above.

125 ITA No.3759/M/2017 M/s. Vajresh Consultants Ltd. (Earlier known as Essar Capital Ltd.) 25. In view of the foregoing facts and circumstances and the ratio laid in the various decisions as discussed above we of the considered view that the revisionary jurisdiction was invalid and can not be sustained. Accordingly we quash the proceedings u/s 263 of the Act.

Order pronounced in the open court on 08.01.2021.

Sd/- Sd/- (Ram Lal Negi) (Rajesh Kumar) JUDICIAL MEMBER ACCOUNTANT MEMBER

Mumbai, Dated: 08.01.2021. * Kishore, Sr. P.S.

Copy to: The Appellant The Respondent The CIT, Concerned, Mumbai The CIT (A) Concerned, Mumbai The DR Concerned Bench //True Copy// [ By Order

Dy/Asstt. Registrar, ITAT, Mumbai.