M/S. ACORUS UNITECH WIRELESS PVT. LTD.,NEW DELHI vs. DCIT, NEW DELHI

Thus, in terms of provision to Section 3 of the Companies Act, 1956, these wholly owned subsidiary companies were deemed to be a Public Limited Company of M/s. Unitech Wireless Pvt. Ltd. which was the listed Public Ltd. Company. Somewhere in January/February 2008 all UW Companies applied to the Department of Telecommunication (DOT), Ministry of Communication and Information Technology, Government of India for grant of United Access Services Licenses (UASL). The DOT issued Letter of Intent (LOI) stating certain conditions on January 10, 2008 and post compliance of which UASL Agreement would be assigned. After complying with the conditions of LOI, all UW Companies executed UASL Agreement with DOT on 28 and 29 February, 2008 for different service areas. Thus, these eight companies got allotted spectrum by DOT under UASL of 2G Licenses.

Considering the scale of the proposed operation of the telecom business and also the capital intensive nature of the said business, these telecom companies proposed infusion of fresh funds through fresh issue of share capital. In order to meet subsequent capital requirements of telecom operations in accordance with the Government Policy, i.e., a foreign investor could hold up to 74% stake in Telecom Companies operation in India these companies invited foreign telecom companies. Interest was expressed by the Telenor Group (acting through Telenor Asia Pte Ltd, Singapore and Telenor Mobile Communications AS, Norway) to make the investment in the fresh equity shares. However, Telenor Group insisted that the investment proposed to be made would be made in the equity of one or more companies where the share transfer restrictions are enforceable by law. (This concern was highlighted in view of the provisions of Section 3 of the Companies Act. 1956, under which the telecom companies were deemed to be public limited companies and their shares were freely transferrable). In order to meet the above concern of Telenor Group, the promoters of the appellant company i.e., Unitech Ltd. floated three Special Purpose Vehicle's (SPVs) Companies with the object of acquiring shareholding of above eight Telecom UW Companies from the and consequently cease to be deemed public companies. The details of said three Companies who are assessees before us are as under:

Thereafter, a Share Purchase Agreement was entered into whereby 75% shareholding in the eight wireless companies was transferred to SPVs (Telecom Companies) at face value on 25th October, 2008. The details of the transaction of acquisition of shares of the telecom companies by the SPV by M/s. Unitech Ltd. were as under:

Ltd. 17,00,000 25,00,000 33,00,000 5. Unitech Wireless (East) Pvt. 37,40,000 55,00,000 72,60,000 Ltd. Unitech Wireless (Tamil Nadu) 17,00,000 25,00,000 33.00.000 6. Pvt. Ltd. 7. Unitech Wireless (Mumbai) Pvt. 17,00,000 25,00,000 33,00,000 Ltd. Unitech Wireless (West) Pvt. 8. Ltd. 42,50,000 62,50,000 82,50,000

On 30.01.2009, the said SPVs raised a secured loan in the form of compulsory convertible debentures (CCD) from a subsidiary of Unitech Ltd. and in terms of the CCD Agreement, it was agreed that the lender would have the option to call upon the SPVs to issue fresh share capital to convert the amount representing the debentures, into equity share capital. On 28th October, 2008, the assessee entered into a Subscription Agreement with Telenor Group for acquisition of 60% stake in UW companies. Later on, the subscription agreement was modified by another agreement dated 16th March, 2009 whereby the telecom companies made fresh allotment of shares having face value of Rs.10/- to Telenor Group at a premium of Rs.169.73 per share resulting in equity shareholding of Telenor Group at Rs.67.25% in such telecom companies. The details of share allotted by the telecom companies to the Telenor Group for the sake of ready reference are tabulated as under:

Subsequently, Telenor Asia Pte Ltd. subscribed to fresh equity shares of 8 UW companies in four trenches starting from 20.03.2009 to 10.2.2010 at a price of Rs.179.73 per share. It was thus stated that the purpose of said transaction to acquire investments from M/s. Unitech Ltd. was to facilitate investment by Telenor Asia Pte Ltd. in 8 wireless companies without transferring the economic interest in M/s. Unitech Ltd.

Ld. Assessing Officer observed that investment made by the assessee in the shares of 8 UW companies and transfer of stake of three of its group companies which was incorporated and floated for the specific purpose of allotting the shares of M/s. Telenor Asia Pvt. Ltd. and the eight telecom companies entering into an agreement with M/s. Telenor Asia P. Ltd., Singapore for raising equity by charging a premium of Rs.159/- per share, happened almost simultaneously. He concluded that assessee company had made a huge gain by acquiring the shareholding in the companies at face value at Rs.10 which otherwise acquired by the Telenor at Rs.169/-. Thus, there was a huge gain of 159 per share which has been taxed u/s. 28(iv). He held that assessee company was incorporated with the objective of permeating and established companies in the telecom sector and to act also as a SPV to make investment in the telecom companies of its own group, therefore, it could be held that purchasing equity shares of telecom companies from M/s. Unitech Ltd. assessee had started its designated business activity. The transaction involving sale/purchase of share between assessee and M/s. Unitech Ltd. involving shares of a telecom companies is a business transaction because the business of the assessee was to make investment in telecom business. He also observed that both transactions between the telecom companies and M/s. Telenor happen simultaneously and they were marked similarities between the two transactions. He also took note of the following facts from two transactions:

Ld. CIT (A) too has confirmed the said reasoning and findings of the Assessing Officer. He observed that all the conditions relevant to Section 28(iv) were clearly satisfied. His observation and conclusion in this regard reads as under:

Before us, ld. counsel for the assessee after drawing our attention to the facts and background of the case and sequence of events submitted that under the present facts and the nature of transaction involved, it could not be held that any benefit has been received or accrued to the assessee companies in terms of Section 28(iv). He submitted that shares were purchased by these companies from Unitech Ltd. and continued to be held under restrictive conditions with no economic benefit to the assessee, because the entire economic benefit still rests with Unitech Ltd. In order to clarify the nature of transaction from the material on record, he highlighted the following facts with the evidence placed on record before us.

CCD subscription Schedule 1 agreement between 1.4) At the time of conversion of Unitech Holdings Ltd. CCDs. Unitech shall at its sole and Cestos Unitech option have a right to purchase Holdings Limited and the entire issued and paid up Cestos Unitech share capital of the company from Wireless Pvt. Ltd. its existing shareholders at par dated 30.01.2009 value. (pages 239 to 274 of the Paper Book-I) 3. Annual Report of In January 2009, the company Unitech Limited for transferred 7% of its stake in the F.Y. 2008-09 Unitech Wireless to three (pages 14 to 24 of the associate companies, namely Paper Book-I) Cestos Unitech Wireless Pvt. Ltd., Simpson Untiech Wireless Pvt. Ltd. and Acorus Unitech Wireless Pvt. Ltd.. to fulfil the conditions precedent for investment under the subscription agreement. However the com pan \ continues to hold economic interest in Unitech Wireless through compulsory convertible debentures and options in the three associate companies

Thus, he pointed out that these are two independent transactions with distinct objectives. First transaction is the sale of 75% shareholding in 8 Wireless Companies by M/s. Unitech Ltd. to three affiliated Companies @ Rs.10 per shares, i.e., the assessee-companies and the second transaction is allotment of fresh shares by wireless companies to the Telenor @ 179.73 per shares. He said that even though the two transactions pertained to transfer of shares of wireless companies but otherwise distinctions are quite apparent which could be classified in the following manner:

Thus, he submitted that despite the above factual position, both Assessing Officer and Ld. CIT (A) have erroneously held that actual consideration should be adopted @169 per share and thereby making the addition u/s. 28(iv) on purchase of shares by 3 assessee companies of 8 wireless companies which were held as investment of these affiliate companies and instead of actual consideration paid at face value, wrongly making addition of Rs.159/- per share in the hands all 3 assessee-companies on notional basis. He further submitted that the conclusion drawn by the Assessing Officer and Ld. CIT (A) that the assessee was carried on business of investment in the telecom companies is not correct. He submitted that provision of Section 28(iv) will not be applicable on the facts of the case for the following reasons:-  The investments were made by the appellant company with an intention to invest in telecom companies as an investor. It does not and cannot mean that, the assessee is carrying on any business even as a business of investing in companies. Any gain on investment or disinvestment may result into income and, it is only when it is found that, such investment are being made on a regular basis, having the traits of business, it could be stated that it is engaged in the business or carries on a business. It is only when it is found and established that, assessee is making investments not as an investor but in the course of business and it holds investments as stock-in-trade, only then it can be stated that, such an assessee is carrying on any business. There is a conceptual difference between business of holding of investments and, carrying on of business. The profits and, gains, must arise or accrue in the course of business and, not in the business of holding of investments. Mere having acquired the shares as an investment when it purchased shares from a public limited company at face value, it cannot be alleged that, there arose any benefit or perquisite to the appe1lant company.

Ld. Counsel also placed reliance upon the judgment of Hon’ble Gujarat High Court in the case of Elscope Pvt. Ltd. vs. CIT, 313 ITR 293 wherein it has been held that the income from capital account transaction will not be hit by Section 28(iv). He further submitted that investment pursuant to object in MOA does not ipso facto lead to inference that there is a business activity otherwise. Also, Section 28(iv) will not apply where the transaction has been made in cash or money. Here in this case, assessee has acquired the shares of payment of money. In support, he strongly referred and relied upon the judgment of Hon’ble Supreme Court in the case of CIT vs. Mahindra & Mahindra Ltd. reported in 404 ITR 1 (SC) and following other decisions.

Further, the decision of the Assessing Officer and CIT (A) is contrary to the decision of Hon’ble Apex Court in the case of Excel Industries, 358 ITR 259 and made following submissions. i) It is submitted that the three Judges Bench of the Hon’ble Supreme Court of India in its recent judgment delivered on 08.10.2013 in the case of CIT vs. Excel Industries Ltd. reported in 358 ITR 295 has held in the context of section 28(iv) of the Act that “advance license benefit and DEPB benefits are not taxable in the year of receipt.” It held in para 21 that, “the benefits represents at the best, a hypothetical income which may or may not materialize and its money value is therefore not the income of the assessee.” In arriving the aforesaid conclusion, their Lordships relied on the following judgments of the Hon’ble Supreme Court: ii) 46 ITR 144 (SC) CIT vs. Shoorji Vallabhdas and Company

Lastly, he submitted that subsequently fair market value of share have been reduced to ‘nil’ on the cancellation of licenses and stated that it may also be mentioned that the telecom licences which had been issued by the DOT in favour of telecom companies have since been cancelled by the judgment of Hon'ble Supreme Court and final order dated 02.02.2012 as a result of the aforesaid judgment, it has been held that the grant of the said licences was contrary to law and consequently the licences so granted were null and void. Inasmuch as the intrinsic worth of the telecom companies, which was ultimately based on the telecom licence(s), itself were held to be null and void, the net asset value got, in any case, eroded. As per the Ld. AO, since the telecom companies had allotted shares at a higher rate, the shares sold by assessee had a higher value per share as a result of licenses allotted to telecom companies. By the same logic, it is submitted, when the rate became zero on account of cancellation of licenses, the reduced value of shares on account of cancellation of licenses should be equally weigh with you as no real income had accrued and, nor was received. The shares purchased at fair market value under section 56(2)(viia) of the Act. In addition to the above it will be important to mention here that there is a specific provision in the Act has been introduced i.e. Section 56(2)(viia) to tax transactions after June 1, 2010 which is less than fair market value. It is evidently clear that this provision is not applicable in the present case as the instant transaction happened prior to June 2010 and even otherwise as per this provision the tax can only be levied in the hands of recipient company. Accordingly it is submitted that the Ld. AO has completely erred in replacing the actual consideration received by the company with the notional value which according to the Ld. AO ought to be received. Both the AO and CIT (A) have not rebutted any of the basic and fundamental submissions duly supported by case laws. He thus submitted that no benefit arose to the appellant company by purchasing the shares, what to say of any benefit or perquisite under section 28(iv) of the Act. It is submitted that the appellant company had purchased 3.45 crores shares at Rs. 10 per share from M/s Unitech Ltd. of 8 telecom companies for an aggregate consideration of Rs. 34.50 crores under share purchase agreement dated 25.10.2008 and therefore, both logically and legally, any subsequent allotment by such 8 telecom companies independently to M/s Telenor Asia Pte Ltd. at Rs. 169 per share under share subscription agreement dated 28.10.2008 cannot be a basis to allege, assume or conclude that there is any benefit or perquisite arising from business carried on by the appellant company. That further, since the additions in the cases of M/s. Cestos Unitech Wireless Pvt. Ltd. (ITA No. 101 /Del/2014) and M/s. Acorus Unitech Wireless Pvt. Ltd. (ITA No. 2075/Del/2017 and 2989/Del/2017) are identical to the captioned appeal, thus, the aforesaid submissions may be made applicable to the appeals mentioned above.

Ld. DR on the other hand relied upon various observations and findings given in the order of ld. Assessing Officer and Ld. CIT (A). He pointed out that AO has noted that 8 licensee companies of Unitech Group raised fresh equity by issuing shares to M/s Telenor at a premium of Rs. 159 per share. However, the assessee company acquired same shares at face value of Rs 10 per share. Hence, AO was justified in making addition u/s 28(iv) of IT Act. The objective of Assessee Company as reproduced at page 4 of the assessment order clearly states that it was to act as special purpose vehicle to make investment in Telecom companies of its own group. The AO held the transaction for sale/purchase of shares with M/s Unitech Ltd involving shares of Telecom Companies to be a business transaction as it was business of the assessee to make investments in Telecom Sector and by acquiring shares of Telecom Companies; assessee had proceeded with its business agenda. The assessee had made a “killing” by getting a chance to purchase shares of telecom companies at just the face value even when owing to the fact that telecom companies already had USAL, made their shares worth much more Due to this very fact the shares commanded a premium in the market. The AO has held that the assessee had claimed expenses of Rs. 21,180 which Shows that business of the assessee had commenced. It would be incorrect to state that since assessee was holding investments, there could not be any Business. The assessee has claimed that income is not taxable on the ground that subsequently fair market value of shares has been reduced to zero. This is a subsequent event which cannot affect taxability of the year under consideration. As held by Ld CIT(A) in para 8.1.14, owing to the fact that M/s Unitech Ltd, a related party with common management, held majority stake in the telecom companies and therefore, being in the privileged position, the assessee company was sold such shares by M/s Unitech Ltd at just the face value, the benefit is in the shape of difference in value of two prices, i.e., price by the assessee for acquisition of shares and the price including premium by M/s Telenor, Singapore has accrued to the assessee in the process of assessee company’s stated business of making investment in telecom companies of its own group. Hence, provisions of section 28(iv) are applicable in this case. M/s Acorus Unitech Wireless (P.) Ltd. filed writ petition W.P. (C) No. 1954 of 2013 challenging reopening u/s 147 of I.T.Act. Hon’ble Delhi High Court held as follows:

Acorus advanced arguments as to the incorrectness of the AO's views. Here, various aspects of this transaction have been canvassed before the Court, i.e. the lack of comparability between the Unitech- Telenor transaction and the present case, the difference between the nature of the shares itself in the two cases, the inapplicability of Section 28 of the Act given that the purchase of shares was in the nature of an investment and not a business, the lack of accrual of any benefit to the petitioner etc. The Court, however, cannot enter the merits of the satisfaction recorded by the AO. These issues may indeed he raised, but before the AO in the first instance, and subsequently within the appellate regime provided by the Act itself as opposed to a disguised merits review under Article 226 at such an early stage of the proceedings. At the time of a Section 1476/148 notice, the inquiry is at a preliminary stage, and thus. conclusive legal or factual determinations are neither called for nor provided. As the Supreme Court noted in Sri Krishna (P.) Ltd. v. ITO [19961 221 ITR 53S ,S~ Taxman 315:

Further in his written submissions, Ld DR submitted that the decision of CIT Vs Mahindra And Mahindra Ltd., (404 ITR 1) is not applicable to the above cases in view of the following reasons:

He further submitted that in the case of assessees, benefit has been received in form other than money. Moreover, it is not a case of cessation of liability. The decision in CIT Vs Elscope (Pvt.) Ltd. (313 ITR 293) is not applicable to the above cases in view of the following reasons: (i) The above judgment was in context of Additional Income Tax on Undistributed Profit of Certain Companies which is not the issue in appeal. It was held that where on reference in quantum proceedings High Cour had held that there was no distributable income, the assessee could not be held liable for additional tax under section 104. The assessee has wrongly stated that it pertained to section 28(iv).

We have heard the rival submissions, perused the relevant findings given in the impugned order as well as material referred to before us. The facts and background of the case have been discussed in detail in the foregoing paragraphs; however, certain vital facts are reiterated in a succinct manner. M/s. Unitech Ltd. through its wholly owned 8 subsidiary companies were allotted spectrum by DOT under Unified Access Services Licenses for 2G License for various regions of the country. In order to meet the capital requirements and in accordance with Government Policy, foreign investor can also invest in telecom companies operating in India up to 74% stake, Telenor group came forward for making the investment. However Telenor insisted that the investment proposed would be made in the equity of one or more company where the share transfer is restricted are enforceable by law. With a view to meet the said concern of the Telenor, the promoters companies floated SPVs consisting 3 Companies namely, i) Cestos Unitech Pvt. Ltd.; ii) Simpson Unitech Wireless Pvt. Ltd.; and iii) Acorus Unitech Wireless Pvt. Ltd., who are the appellant-assessees before us. By way of share purchase agreement dated 25.10.2008, 75% shareholding in the eight UW Telecom companies were transferred to the SPVs (three assessee companies) at a face value of Rs.10/- each. Thereafter, SPVs have raised a secured loan in form of CCD from subsidiary of the assessee company wherein it was agreed that lender would have the option to call upon the SPVs to issue fresh capital so as to convert the amount representing the debentures, into equity share capital. Telenor Group entered into a share subscription agreement to acquire 60% stake in 8 UW companies whereby the telecom companies made fresh allotment of shares having face value of Rs.10 and a premium on share at Rs.169.73 per share resulting into equity shareholding of Telenor group at 67.25 % in the eight telecom companies. Further Telenor subscribed for fresh equity shares of the wireless companies in four tranches starting from 20.03.2009 to 10.02.2010 at a price of Rs.179.73 per share. The entire transaction to acquire investments in 8 UW Companies from M/s. Unitech Ltd. was to facilitate the investment by Telenor Group in the eight companies without transferring the economic interest in M/s. Unitech Ltd. The allegation of the Assessing Officer was that there is a similarity of transaction between the acquisition of shares by the assessee companies under SPVs of 8 Unitech Wireless Companies; and the shares acquired by Telenor of the same 8 wireless companies. However, despite the fact that there was time gap between the acquisition of share by three companies and subscription of share by the Telenor, but the major difference as culled out from the fact are that, firstly, the shares which were acquired by the three assessee companies were pledged with the lenders at the time of acquisition for securing the credit facility availed by M/s. Unitech Wireless Companies; whereas share issued to Telenor were not pledged and were free from encumbrance. Secondly, the Telenor had acquired control and management of all the 8 Unitech Wireless Companies which was not the case in the case of 3 assessee companies as they did not have any right in the shares of any of 8 UW companies and 100% economic interest was held by the Unitech Ltd. through CCD and put call options on the shareholdings of three companies; whereas the Telenor was holding 100% economic interest with the shares subscribed by it. Thirdly, the share held by the three assessee companies could have been only transferred to Unitech and could be only at par value as per the agreement, whereas in the case of Telenor Group there was no transfer restriction on the shares subscribed and it was free to transfer even to a foreign party. Lastly, as pointed out by the ld. counsel, the business risk of the assessee was very high as compared to the Telenor Group, because the Telenor Group has not pledged any of the shares to the lenders. Thus, these two are independent transaction with distinct objectives. The first is sale of 75% shareholding in 8 wireless companies by M/s. Unitech Ltd. to 3 affiliated companies @ 10 per share; and the second transaction is allotment of fresh share by wireless company to Telenor @ 179.73 per share.

However on the facts and background of the case, we have to see whether the amount of premium paid by the Telenor Group for acquiring the shares of 8 UW companies can be held to be in the form of any benefit or perquisite arising from the business of assessee u/s 28(iv). The Department case is that, the shares which have been acquired by 3 assessee companies of 8 UW companies at Rs.10 which the actual consideration paid should be adopted @ 179 (wrongly taken by Assessing Officer as Rs. 169) per shares, because Telenor Group has paid the said amount per share for acquiring same shares of UW companies. First of all, it is unfathomable that the shares of 8 UW companies which were held as investment by the three SPVs could lead to an inference that three companies had earned income arising from the business to be taxed u/s. 28(iv). It is sine-qua-non that income which is to be taxed u/s. 28(iv), firstly, should arise from business or profession; and secondly, the benefit which is received has to be in some form other than any shape of money. Hon’ble Supreme Court in the case of CIT vs. Mahindra & Mahindra (supra) has reiterated the principle that Section 28(iv) will not apply where the receipts are in the nature of cash or money. Here, the assessee company was formed not either for carrying on any telecom business or business for investing in companies. It has held the shares of 8 UW companies as an investment in order to facilitate the Telenor Group to acquire majority stakes in the 8 UW Companies. It is not a case here that investment has been made on regular basis having the trait of business, albeit the shares were held as investment. If the assessee has acquired the shares as an investment from a public limited company at a face value, then it cannot be held that there arose any benefit or perquisite to the assessee company in terms of Section 28(iv). If at all, the Revenue was of the opinion that the value of the shares held by the assessee- company of the 8 telecom companies were are less than the market value, then the only provision in which it could have been scrutinized or examined was under a deeming provision of Section 56(2)(vii)(a), which provision has brought in the statute w.e.f. 01.04.2013. Apart from that, assessee has not acquired the share in lieu of some benefit or perquisite albeit has made the actual payment in money for acquiring the shares, and therefore, the principle laid down by the Hon’ble Supreme Court in the case of CIT vs. Mahindra & Mahindra (supra) will also apply here.

During the course of hearing, our attention was drawn towards the judgment of Hon’ble Delhi High Court in the case of Unitech Holdings Ltd. vs. DCIT, reported in (2016) 240 Taxman 70, wherein Unitech Holding Ltd. had acquired the share of three joint ventures company at a cost price reflected in the books of holding company which as per the Department was lower than the book value of those shares calculated on the basis of net worth of the said company. The Hon’ble Delhi High Court held that it would be difficult to accept that the sale of shares by Unitech Ltd. at its cost price which is lower than the book value of the shares would result in income. The Hon’ble High Court held that acquisition of investment by the assessee could not lead to inference that the assessee had earned income u/s. 28(iv) of the Act. The relevant observation given in paragraph 25 reads as under:

The judgments relied upon by the ld. DR which has also been referred in the impugned order in no manner will apply on the facts of the present case because most of them pertained to waiver of a loan or unclaimed credit balance returned back to the P&L account taken during the course of business. Thus, these judgments do not help the case of the Revenue at all. Accordingly, the additions made by the Assessing Officer and sustained by the Ld. CIT (A) u/s. 28(iv) are directed to be deleted.

Since similar facts are permeating in the case of all the assessee’s as discussed above and also accepted by both the parties, therefore, the findings given above will apply mutatis mutandis in the other appeals also.

In so far as the Revenue’s appeal in is concerned, the Revenue has challenged the observation and the findings of the Ld. CIT (A) that the amount should be added on protective basis in the hands of the Assessee Company and substantive basis in the hands of Sanjay Chandra and Shri Ramesh Chandra. Since, we have already deleted the additions on merits; therefore, this ground had become infructuous. Accordingly, same is dismissed.

In the result, the appeals of the assessees are allowed and the appeal of the Revenue is dismissed.