ANALJIT SINGH,DELHI vs. DCIT, CIRCLE- 16(2), DELHI

PER AMIT SHUKLA, JM

The aforesaid appeal has been filed by the assessee against the impugned order dated 07.07.2017 passed by Ld.CIT(Appeals)-6, Delhi for the quantum of assessment passed u/s 143(3) of the Income Tax Act, 1961 (in short “Act”) for the AY 2014-15.

In the grounds of appeal, the assessee has raised the following grounds:- 1. “That the CIT(A) erred on facts and in law in upholding the action of the assessing officer in treating the gain arising from sale of unlisted shares as 'short term capital gain', instead of long term capital gains returned by the appellant.

I.T.A .No.-4737/Del/2017

1.1 That the CIT(A) erred on facts and in law in observing that for unlisted shares to qualify as a 'long term capital asset', the period of holding was 36 months and not 12 months as per the first proviso to section 2(42A) (as applicable during the year under consideration), read with section 2(29A) of the Act. 1.2 That the CIT(A) erred on facts and in law in holding that the shorter period of 12 months to qualify as 'long term capital asset' was only applicable to unlisted shares sold during the period 01.04.2014 to 10.07.2014, in terms of second proviso to Section 2(42A), which was inserted by the Finance (No.2) Act, 2014 with effect from 01.04.2015. 2.That the CIT(A) erred on facts and in law in re-computing the amount of capital gain arising from sale of shares of M/s Scorpio Beverages Pvt. Ltd. ('SBPL') by substituting actual sales consideration of Rs. 9,97,92,44,200 with alleged fair market value of Rs. 2233,42,850,070, determined by adopting price per share of Rs. 142.70. 2.1 That the CIT(A) erred on facts and in law in confirming the action of the assessing officer in substituting actual sale price with notional/alleged consideration, determined as per alleged fair price of Rs.142. 70 per share, invoking section 50D of the Act. 3. That the CIT(A) erred on facts and in law in upholding the action of the assessing officer in denying capitalization of interest expenditure aggregating to Rs. 39,95,01,050, as part of the cost of acquisition/cost of improvement while calculating capital gains on sale of shares of SBPL. 3.1. That the CIT(A) erred on facts and in law in observing that there was no direct nexus between the interest bearing borrowed funds and investment in shares of SBPL.

2 | P a g e

I.T.A .No.-4737/Del/2017

3 | P a g e

I.T.A .No.-4737/Del/2017

� SBPL: Scorpio Beverages Pvt. Ltd., a company owned by assessee and his wife and later on by other entities. � MVH: MV Health Care Services Pvt.Ltd., a subsidiary of SBPL. � NDS: ND Callus Info Services Pvt.Ltd., a subsidiary of MVH. � CGP: CGP Investment Ltd.,a Mauritius based company and subsidiary /an affiliate of earlier Hutchison Group and later on Vodafone International; � 3GSPL: 3 Global Services Pvt. Ltd., affiliate of Vodafone Group � TIL: Telecom Investments India Pvt. Ltd., in which Vodafone had direct and indirect interest in Vodafone India Pvt. Ltd. � HEL: Hutchison Essar Ltd. � VIHL: Vodafone International Holdings Pvt. Ltd. � VIL: Vodafone India Pvt. Limited. � Kotak: Kotak Mahindra Capital Ltd. (Valuer) � DCF: Discounted Cash Free Flow Method: � NAV: Net Asset Value Method � FMV: Fair Market Value.

4 | P a g e

I.T.A .No.-4737/Del/2017

A. Issue relating to enhancement of sale consideration of Shares (Ground no. 2 & 2.1):

5 | P a g e

I.T.A .No.-4737/Del/2017

Pvt. Ltd. (in short VIL) which was valued at Rs.56448.03 crores. However as far as this valuation of entire equity shares of VIL is concerned, the AO has not ultimately disputed this figure which was worked out on the basis of ‘Discounted Cash Free Flow Method’ (DCF).Thereafter, he noticed that, while determining the share value of SBPL, the Valuer first adopted the DCF method in determining the value of VIL but later on switched to Net Asset Value method (NAV) while arriving the value of SBPL. He thus, held that the NAV method cannot be the correct basis of valuation of SBPL shares, because the value of SBPL shares have been arrived at Rs.5.40 per share, while the valuation of VIL was Rs.56,448.30 crores, he thus, came to a conclusion that the valuation adopted by the assessee for the SBPL shares is not based on the fair market price. He has also noted that SBPL’s holding in VIL was 9.65%, which though has been strongly objected/contested by the assessee before us that the same has wrongly been taken at 9.65%, but instead it is 8.90%.

6 | P a g e

I.T.A .No.-4737/Del/2017

VIL. As per the framework agreement, as and when permitted by Government of India on the limits imposed on foreign investment in the telecommunication sector, the GSPL shall have the option to acquire the shares of SBPL from the assessee for which the assessee was entitled to call option fee in lieu of assurance to VIL and Vodafone International Holdings Pvt. Ltd. and the share of SBPL would be sold only on the consent of VIL. In the year 2009, 49% of the SBPL holding were sold to CGP India Investment Ltd., a Mauritius based company and subsidiary of Vodafone Group for sum of Rs.533 crores in the FY 2009-10. In the F.Y. 2012-13, SBPL offered ‘right shares’ which was subscribed by the assessee as well as CGP being existing shareholders in ratio of their existing shareholding. The right shares subscribed by the assessee were agreed for sum of Rs.300 crores. This right shares alongwith the original shares of 5100 shares have been sold in the A.Y. 2014-15 as per the Sale Purchase Agreement dated 12.03.2014, wherein the aggregate consideration was agreed at Rs.1241.32 crores, whereby CGP had purchased entire 51% stake of the assessee in SBPL.

7 | P a g e

I.T.A .No.-4737/Del/2017

crores alongwith the value of right shares at Rs.300 crores shares, aggregating to Rs.855 crores. Hence, what the assessee had sold at Rs.1241.32 crores was more than Rs.855 crores payable as per the framework agreement. The AO, however after detailed discussion held that the assessee had indirectly held shareholding in VIL at 3.95% through chain of intermediaries from SBPL to VIL and the valuation adopted by the valuer of VIL comes out to Rs.56448.30 crores and if the value of 3.95 % share held by the assessee is to be worked out, then the same comes to Rs.2233.73 crores and accordingly, the share value comes to Rs.142.70 per share. Thereafter, he discusses how there has been extreme movement of share price in SBPL from the years 2006-2014, that is, it was originally at Rs.10 in the year 2006 and when the assessee sold 4,900 shares for a sum of Rs.533.33 crores, it worked out @ 10.88 per share. Now in the year 2014, the assessee has sold the entire shares including right shares @ 63.65 which is not correct and even the value adopted by Kotak Mahindra Ltd. determining the value of shares at Rs.5.40 per share is also not correct. Thus, he worked out the capital given by taking the consideration received/accrued to the assessee from the sale of shares at Rs.2233.37 crores by taking the value per share at Rs.142.70 and thereby worked out the Short Term Capital Gain of Rs.2075.75 crores (which has been contested by the assessee vide Ground no. 1, that it is Long Term Capital Gain as the right shares which were sold were held for more than 12 months).

8 | P a g e

I.T.A .No.-4737/Del/2017

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

B. Admissibility of additional evidence filed by the Revenue vide application made under Rule 29 of the ITAT Rules, 1963

9 | P a g e

I.T.A .No.-4737/Del/2017

A) Framework Agreement of 2006:- (i) This agreement is executed amongst the assessee (AS) and the companies in which he has direct or indirect interest and 3 GSPL, a company in which HEL had indirect interest. The agreement grants ‘call option’ or ‘put option’ to the parties and seek to determine the consideration payable for the transfer of shares on the exercise of such call/put options in future. (ii) This agreement was never filed before the tax authorities by the assessee, though he was the main party to this agreement. (iii) The assessee did file ‘Framework Agreement of 2007’ and its amendment letters of 2010 and 2011 and supplementary agreement of 2012 which dealt with the rights and obligations of different parties to the agreement with regard to call/put options. However, the ‘Framework Agreement of 2006’ which forms part of additional evidence, was the first document executed by the assessee in the context of call/put options, which was never brought to the notice of the authorities below. (iv) The agreement sought to be led by the Revenue as additional evidence is the earliest of the agreements which defines the rights and obligations and provide a basis for determination of the sale consideration of shares on the exercise of the option.

10 | P a g e

I.T.A .No.-4737/Del/2017

(v) The document goes to the root of the matter involved in ground no. 2 and is directly relevant to the issues concerned. He submitted that it is worth to be noted that the arrangements of the AS with Hutch and its subsidiaries continued as such after the acquisition of 67% interest of Hutch in HEL by Vodafone. (vi) Thus, the document at hand is not only relevant but its examination and consideration is absolutely necessary for appreciating the issues involved in ground no. 2 of the appeal.

History of Hutchison Group in India:- B) This document gives a historical perspective of the (i) involvement of the assessee in telecommunication sector and the joint venture operations of the companies in which he had substantial interest with Hutch in India. Revenue seeks to refer to this document to give a historical (ii) background to the evolution of the call/put option resulting in transfer of shares. The document also explains how some part of (iii) shareholding of HEL got vested in TIL which is a step down subsidiary of the appellant. The holding of TIL in HEL forms the basis of the transfer price. (iv) Thiswrite up would help the Hon’ble Bench in having a comprehensive understanding of the background of the issues involved.

Financial Statements of Subsidiaries:- C) This paper book contains financial statements of Scorpio (i) Beverages Pvt. Ltd. and its step down subsidiaries including Jaykay Finholding India Pvt. Ltd. One of the issues involved in the ground of appeal no. 2 is (ii) the mechanism to work out the value of shares of HEL and whether or not the valuation of shares done by Kotak Mahindra

11 | P a g e

I.T.A .No.-4737/Del/2017

and relied upon by the appellant before the lower authorities and the Hon’ble ITAT should account for the liabilities of the step down subsidiaries. The financials as contained in the paper book contain copies of the Balance Sheet and its corresponding schedules which give details of such liabilities. In the event the liabilities are to be taken into consideration, as urged by the appellant, the correctness or otherwise of such liabilities can only emerge from a reading of these financials. The amount of capital contributed by the appellant by way (iii) of right issue was utilized in acquisition of further shares. The appellant has not disclosed how and in what manner the increased share capital of SBPL was put to use. This document throws light on this aspect of the issue which would be very relevant for deciding the correctness or otherwise of the consideration disclosed by the appellant.

12 | P a g e

I.T.A .No.-4737/Del/2017

documents needs to be admitted. He further pointed out that ‘Framework Agreement of 2006’, completes the chain of different framework agreements entered into by the assessee in relation to call/put option, because all the agreements entered subsequently flow from the ‘Framework Agreement of 2006’ only, which is the evident from the fact that the subscription of share capital of HEL, the loan financing, the call/ put option and the stipulation of the transfer price of the shares on the exercise of option commences not from the ‘Framework Agreement of 2007’ as relied upon by the assessee albeit by the ‘Framework Agreement of 2006’ which is being sought to be admitted as additional evidence by the Revenue in order to put the facts in correct perspective. In absence of this document, the chain of framework agreements would be incomplete and it would be difficult for the Bench to appreciate the true nature of the transaction and the consideration accruing to the assessee from the various Framework Agreements. In support of the admissibility of additional evidence by the revenue, he strongly referred and relied upon the judgment of Special Bench of the Tribunal in the case of L.G. Electronics Pvt. Ltd. (ITA No.510/Del/2011), wherein the Special Bench after referring to catena of decisions held that the additional evidence produced by the Revenue should be entertained provided opportunity is given to the opposite party to controvert the additional evidence. In this case also, the additional document was filed before the Tribunal before the commencing of the arguments of the Revenue and after completion of the arguments of the Ld. Counsel for the assessee. Thus, in the light of the judgment of Special bench which was rendered on similar set of facts and circumstances, these additional evidences should be admitted as it would only bring factual clarity to the issues involved and there is no attempt whatsoever on the part of the Revenue to set up any new case for the revenueby filing these documents. Lastly, he prayed that when the question of substantial

13 | P a g e

I.T.A .No.-4737/Del/2017

justice involved, all procedural and technical aspects must yield in the interests of justice.

14 | P a g e

I.T.A .No.-4737/Del/2017

must be relevant to and confined to the case set up by the assessing officer. In other words, the additional evidence can be placed on record by the respondent Revenue, admitted with the leave of Hon’ble Tribunal, provided the same are relevant to the controversy at hand and do not change the complexion of the case / case set up by the AO. [Refer: Motiram v. CIT: 34 ITR 646 (SC); CIT v. Babulal Nim: 47 ITR 864 (MP)] Viewed in the said overall broad conspectus, the appellant seeks to place on record its specific objection against admission of each of the aforesaid additional evidences for the following reasons: Re:Framework Agreement dated 01.03.2006 (a) The aforesaid agreement was executed in 2006 between the appellant along with companies in which the appellant held direct and indirect interest, with 3 Global Services Private Limited (‘GSPL’) providing certain options to GSPL to acquire shareholding in the aforesaid companies belonging to the appellant. (The detailed terms and conditions of the said agreement are discussed in detail infra.) The aforesaid agreement has been sought to be produced as additional evidence by the Revenue to draw analogy from the methodology for determining the sale consideration for shares on exercise of certain options outlined under the said agreement, with the method for determination of sale consideration agreed between the parties under the impugned Framework agreement dated 5.7.2007. It is further alleged that the aforesaid agreement goes to the root of the matter involved in ground of appeal no.2 and was never brought to the notice of the lower authorities by the appellant. It is submitted that the aforesaid agreement has no relevance with the transaction under consideration and is, therefore, not required to be admitted nor considered for adjudicating the impugned ground of appeal, for the following reasons:

15 | P a g e

I.T.A .No.-4737/Del/2017

• Vodafone India Limited, (‘VIL’)’, i.e., the company engaged in the business of providing telecommunication services across different circles in India, prior to takeover by Vodafone International in May 2007, was held by Hutchison Group, Hong Kong with certain other Indian partners and was known as Hutchison Essar Limited, (‘HEL’). • The aforesaid agreement dated 01.03.2006 was entered amongst the appellant, Scorpio [a company wholly owned by the appellant], MV Healthcare Services Private Limited, [a wholly owned subsidiary of Scorpio (hereinafter referred to as ‘MVH’)], ND Callus Info Services Private Limited, [a wholly owned subsidiary of MVH (hereinafter referred to as ‘NDC’)] and 3 Global Services Private Limited, a company belonging to Hutchison Group at the relevant time (hereinafter referred to as ‘GSPL’), providing following rights/ options to the various parties: • Option to GSPL to subscribe to fresh equity shares of NDC, subject to a maximum of 97% of the total issued and paid up capital of NDC (Refer Clause F of the Preamble read with Clause 4.2 and Schedule I of the agreement); • Call option with GSPL to purchase equity shares of MVH from Scorpio (Refer Clause 0 of the Preamble read with Clause 4.4 of the agreement); • Put option with Scorpio to sell equity shares of MVH to GSPL (Refer Clause H of the preamble read with Clause 4.3 of the agreement). Akin to the reasons behind granting such options for sale of shares of companies belonging to the appellant under the impugned Framework agreement dated 05.07.2007, viz., transfer of shareholding in the down-stream operating companies, i.e., VIL, to the foreign JV partner as and when FDI regulations permitted increase in foreign investment in telecommunication companies in India, the aforesaid agreement dated 01.03.2006 was also entered with GSPL, being a company then belonging to Hutchison Group, in order to transfer direct and indirect interest Held by the appellant in

16 | P a g e

I.T.A .No.-4737/Del/2017

Vodafone India (then known as Hutchison Essar Limited) to companies belonging to Hutchison Group, so as to increase their investment in such company, as and when permitted by FDI regulations. It is a matter of record that the aforesaid agreement was never acted upon nor various options vested with different parties under the aforesaid agreement were exercised, in as much as neither any fresh shares were issued by NDC to GSPL nor shares of MVH were acquired by GSPL from Scorpio. Before the aforesaid agreement could have been acted upon or the various options Rested with different parties therein could have been exercised, the entire stake of Hutchison Group in the Indian telecom company, i.e., HEL was acquired by Vodafone International in May, 2007. As a result of the aforesaid acquisition, the existing option agreements entered by various Indian partners, including the appellant, with Hutchison Group were rescinded and superseded by new agreements entered into with the Vodafone Group on fresh terms and conditions. It was under the aforesaid circumstances that the aforesaid agreement dated 01.03.2006 was rescinded and fresh agreement dated 05.07.2007 was entered into between the parties (‘Analjit Singh’ and ‘Neelu Analjit Singh’), with inclusion of Vodafone International Holdings BV as a confirming party, on completely fresh terms and conditions agreed between the parties. Reference in this regard can be made to Clause 11.11 of the impugned agreement dated 05.07.2007 which clearly provided that on execution of the said agreement all earlier agreements between the parties would stand superseded. The said Clause is reproduced hereunder for ready reference: “11.11 Entire agreement This Agreement supersedes any previous written or oral agreement between any and all of the Parties in relation to the matters dealt with in this Agreement which, for the avoidance of doubt shall be terminated on

17 | P a g e

I.T.A .No.-4737/Del/2017

execution of this Agreement, and contains the whole agreement between the Parties relating to the subject matter of this Agreement at the date hereof to the exclusion of any terms implied by law which may be excluded by contract. In this sub-Clauses ‘this Agreement’ includes all documents entered into pursuant to this Agreement.” In that view of the matter, it would be appreciated that the agreement dated 01.03.2006, being entered between different set of parties, i.e., during the tenure of the operating company being held by Hutchison Group, stood rescinded and superseded by the new agreement dated 05.07.2007, which was entered into between new set of parties, with inclusion of Vodafone International after acquisition of shareholding of Hutchison Group in the Indian telecom company by Vodafone International. Accordingly, the method of computation for determining the consideration for transfer of shares agreed in that agreement has no relevance / nexus with the method for computing transfer price agreed by the new set of parties in the impugned agreement dated 05.07.2007. In that view of the matter, the former agreement is completely irrelevant to the transaction under consideration and, therefore, was neither required to be furnished by the appellant before the lower authorities nor the same needs to be admitted as evidence at this stage. It is pertinent to point out that the AO has accepted that the disinvestment of shares in Scorpio was in terms of the binding agreement dated 5.07.2007 read with the amendments thereto, in as the assessing officer accepted the: initial disinvestment of 51% shares of Scorpio in the year 2009 at (i) the proportionate consideration agreed in the agreement dated 5.7.2007; number of shares held by the appellant in Scorpio (after the initial (ii) disinvestment and pursuant to right issue in terms of the amended agreement dated 7.8.2012); and

18 | P a g e

I.T.A .No.-4737/Del/2017

iii) option fee received and offered to tax by the appellant in terms of the agreement dated 5.7.2007 read with the amendments thereto. The agreement dated 1.03.2006 sought to be placed on record as additional evidence not having been considered by the AO and not being relevant to the transaction, being subject matter of ground No.2 and 2.1, does not, therefore, call for being admitted.

Re:Write up on the structure of Hutchison Group in India (b) As pointed out by the Ld. Special Counsel of the Revenue during the course of oral arguments, the captioned write up on the structure of Hutchison Group has been drawn from the written statements filed by Vodafone Group in their SLP filed before the Supreme Court in the case reported at 341 ITR 1. Even the preamble to the aforesaid write up categorically provides that the same has been prepared on the basis of public record and other information available in the public domain, which reads as under:- i. As far as the information relating to the structure of Hutchison Group (as defined below), and its acquisition of interests pertaining to the Indian telecommunications market is concerned, we have gathered particulars from papers that were in our possession, from public records, and other information that had been gathered at the time of the due diligence process. ii. At places where there were gaps, enquiries were made from the Hutchison Group. While the Hutchison Group was unwilling to provide any formal written notes, their officials did provide some information to our English lawyers, through their English lawyers, that has assisted us in drawing up a complete chronology of events. Information as to the Hutchison Group’s first associates.viz. the Max Group has also been similarly derived. The Revenue seeks to place on record the aforesaid write up as additional evidence to give a historical background behind (i) evolution

19 | P a g e

I.T.A .No.-4737/Del/2017

of the impugned call/put options resulting in transfer of Scorpio by the appellant, and (ii) acquisition of shareholding in HEL by Telecom Investment India Limited (TIL) which allegedly forms the basis of the transfer price for the impugned transaction of sale of shares. In this regard, without going into the merits / contents of the aforesaid write up and relevance thereof with the impugned transaction of sale of shares and computation of fair market value thereof, it is submitted that aforesaid document does not constitute “evidence” that can be relied upon by the Revenue. The same, therefore, deserves to be rejected and ignored for the following reasons: In this regard, attention is invited to the meaning of the term “evidence” and “admissible”, as defined in Black’s law dictionary, as follows: “Evidence” Something (including testimony, documents, and tangible objects) that tends to prove or disprove the existence of an alleged fact. “Admissible evidence” Evidence that is relevant and is of such a character (e.g., not unfairly prejudicial, based on hearsay, or privileged) that the court should receive it. On an analysis of the dictionary meaning of the word ‘evidence’, it can inferred that evidence means any tangible material on the basis of which a fact in issue can be proved or disproved. Mere hearsay or a third party statement/document, being based on many possible sources of inaccuracy and untrustworthiness, cannot be considered as legally admissible evidence. Similarly, a statement contained or recorded in any book, document or record whatever, proof of which is not admitted on other grounds, are deemed to be irrelevant for the purpose of proving the truth of the matter stated therein. In view of the above position, the aforesaid write up, which was prepared by a third party, i.e., Vodafone International Holding BV in their pleadings filed before the Supreme Court, does not, in our

20 | P a g e

I.T.A .No.-4737/Del/2017

respectful submission, constitute “evidence” which can be taken on record for adjudicating the present appeal of the appellant, considering that - (i) the appellant was not even a party in the litigation before the Supreme Court; (ii) the pleadings of Vodafone do not bind the appellant; and (iii) as per the preamble to the aforesaid write up, the same was prepared on the basis of documents/information available in public domain and certain general enquiries. Reliance, in this regard, is placed on the decision of the Supreme Court in the case of Kishanchand Chela Ram vs. CIT 125ITR 713, wherein, the Court while allowing the appeal of the assessee observed that third party document, based on hearsay, was not a legally valid and admissible piece of evidence. The relevant observations of the Court in this regard are as: “Moreover, this letter was said to have been addressed by the manager of the bank to the ITO on 18-2-1955 in relation to a remittance alleged to have been sent on 16-10- 1946 and it is impossible to believe in the absence of any evidence to that effect, that manager who wrote this letter on 18-2-1955 must have been in-charge of the Madras office on 16-10-1946 so as to have personal knowledge as to who remitted the amount of Rs.1,07,350.What the manager of the bank wrote in this letter could, not possibly be based on his personal knowledge and_ it does not appear from the, letter as to whatever the original documents and papers, from which he gathered the information conveyed by him to the ITO. The statements contained in this letter addressed by the manager of the bank to the ITO were in the nature of hearsay evidence and could not be relied upon by the revenue authorities. The revenue authorities could have very well called upon the manager of the bank to produce the documents and papers on the basis of which he made the statements contained in his letter and confronted the assessee

21 | P a g e

I.T.A .No.-4737/Del/2017

with those documents and papers but instead of doing so, the revenue authorities chose to rely merely on the statements contained in the letter and that too, without showing the letter to the assessee. There is also one other important circumstance which deserves to be noted.

In the case of N.S. Choodamani v. CIT 35 ITR 676, the Kerala High Court observed that evidences quoted in the assessment proceedings of a third party could not be considered as legally admissible evidence for assessment of another assessee and, thus, could not be relied upon by the Revenue authorities to prove or disprove a fact in such assessment. The relevant observations of the Court are as under:- “Therefore, it is very clear that Choodamani Iyer, who gave evidence in the proceedings relating to Harihara Iyer, had no opportunity to state what he had to say independently nor had he the opportunity to cross-examine Iyer. Apart from the fact that the Tribunal in this case has not considered the existence of an association of persons, from the point of view of the tests laid down by the decisions quoted above, the question is whether there was legal material before it to justify its conclusion. The final order dated May 1, 1956, of the Tribunal does not give us much assistance. In fact the Tribunal has disposed off the objection regarding information obtained in the other proceedings very summarily by saying that the counsel who appeared in the proceedings was fully briefed with the proceedings in the other cases toy so that it cannot be said that the assessee was not aware of them. Once again, we may point out that this is not a correct approach to this objection. A counsel may be appearing in several matters closely connected with one another, but when the parties sought to be are knowledge of the Counsel cannot, certainly be treated as the knowledge of the party In this case there is no

22 | P a g e

I.T.A .No.-4737/Del/2017

dispute that Choodamani Iyer as such was not a party to any the previous proceedings. In fact, his grievance is that his family was not permitted to cross-examine Harihara Iyer the original proceedings. Apart from the fact that the statements of Harihara Iyer relied upon by the Tribunal are not legal evidence in these proceedings the reference to Choodamani Iyer can relate only to Choodaniani Iyer as representing the N.S.V. family and not in his individual capacity Further, the statement of Harihara Iyer is absolutely valueless inasmuch as Choodamani Iyer never got an opportunity to cross-examine Harihara Iyer. Thus the entire evidence that is relied on by the Tribunal is the evidence adduced in Harihara Iyer's case.It is also contended by the learned counsel appearing for the Department that a business which was admittedly being carried on escapes without anybody being made liable to pay the tax. We are fully alive to this situation, but the question before us is whether there is legal evidence to support the finding of the Tribunal in this case. Almost all the circumstances pointed, out by the Tribunal during the proceedings of Harihara Iyer and, in our opinion the Tribunal was not entitled to rely upon that evidence in these proceedings. In this view, there is no legal evidence whatsoever to support the finding of the Tribunal. Considering the cases also fromanother point of view the conclusions arrived by the Tribunal are based upon evidence which is inadmissible in these proceedings.

In the case of Chiranji Lai Steel Rolling Mills Vs. CIT: 84 ITR 222, the Punjab and Haryana High Court observed that copy of entries supplied by the sales tax department to the Income- tax Officer were not legal and admissible evidence on which the Income-tax Officer could act for imposing extra burden of income-tax on the assessee. Relevant observations of the Court are as under:

23 | P a g e

I.T.A .No.-4737/Del/2017

“It is evident from his statement that Sagar Mal did not support the entries in Uchanti Bahi and no other material was brought on the record to connect the entries the Uchanti Bahi with any transaction between the assessee-firm and M/s. Goel Iron Stores. In our opinion, the mere copy of the Uchanti Bahi supplied by the sales tax department, in the circumstances of this case, was not a legal or admissible evidence on the basis of which the addition ofRs. 13,955 could be made to the income of the assessee-firm from undisclosed sources. Legal and admissible evidence means evidence on which a judicial mind can act by forming a belief that itis true although the assessee denies it. We agree with the counsel for the revenue that the provisions of the Indian Evidence Act cannot be resorted to judge the admissibility or legality of a particular piece of evidence on which the Income-tax relies for the purpose of assessment. The Income-tax hast the power to collect evidence from any source but it is his duty to put it to the assessee before making it the basis of his assessment....... But he has no rigid to burden the assessee with an extra amount of tax on vague information given to him without himself verifying its truthfulness or reliability. In the preset case, the Income-tax Officer made no independent enquiries and merely relied on the copy supplied by the sales tax department. XXX The sales tax department also did not notify to the Income-tax Officer that on the basis of that Bahi they had made enquiries from other parties with whom M/s. Goel Iron Stores had dealings and which were mentioned in that Bahi. If only the transactions relating to the assessee were mentioned in that Bahi, then on the face of it was unreliable. The Income-tax Officer gravely erred in relying on the entries from the Uchanti Bahi without ascertaining their correctness from any other source andacted on a mere

24 | P a g e

I.T.A .No.-4737/Del/2017

suspicion which was not justified. For these reasons, we hold that the edgy of entries from the Uchanti Bahi supplied to the Income- tax Officer by the sales tax department was not legal and admissible evidence on which the Income-tax Officer could act far imposing extra burden of income-tax on the assessee. We are further of the opinion that the Appellate Assistant Commissioner took the correct view of the matter and rightly deleted the addition of Rs. 13,955 which had been made by the Income-tax Officer to the income of the assessee. The Income-tax Appellate Tribunal erred in law in restoring that deletion merely on the basis of the copy of the Uchanti Bahi of M/s. Goel Iron Stores supplied by the sales tax department to the Income-tax Officer, which could not be relied upon for the reasons already stated.” To the same effect is the decision of Gujarat High Court in the case of Dr. Devendra D. Patel : 56 taxmann.com 457 wherein the Hon’ble Court held that third party evidence(s) could not be relied upon by the Revenue authorities for making addition in case of other assessee. In view of the above, considering that the written note on the structure of Hutchison Group, for the reasons stated above, does not constitute legally valid and/ or authentic evidence, the same deserves to be rejected at the threshold.

Re: Financial Statements of intermediate companies (c) The Revenue has placed on record audited financial statements of Scorpio and certain other step down subsidiary companies for different financial year(s), which as stated were downloaded from the website of Ministry of Corporate Affairs (‘MCA’). The reasons set out for admission and consideration of the aforesaid financial statements, as per the respondent Revenue, are as under:- a. To verify the liabilities of step down subsidiary companies for the purposes of arriving at the value of Scorpio;

25 | P a g e

I.T.A .No.-4737/Del/2017

b. To verify the utilization of funds procured by Scorpio on right issue of shares to the appellant and CGP. In this regard, it is respectfully submitted as under:- The Revenue has placed on record balance sheet of the various intermediate companies for several years commencing from financial year 2004-05 and going up to FY 2013-14. At the outset, it is submitted that considering the shares of Scorpio were sold by the appellant in the month of March, 2014, the audited financial statements of Scorpio and other subsidiary companies for the years prior to F.Y. 2012-13 have no relevance for computation of the fair market value of such shares on the date of transfer. The said shares can at best be valued on the basis of the last available audited balance sheet, i.e., FY 2012-13 only and not for any earlier or succeeding year(s). Accordingly, all the balance sheets furnished by the Revenue of Scorpio and other intermediate companies for the said years are irrelevant and, therefore, the request for admission thereof needs to be rejected at the threshold. That apart, since Kotak had arrived at the net asset value of the intermediaries/ step down subsidiary companies on the basis of the books of accounts of such companies as on 31.12.2013 or 28.02.2014, the aforesaid financial statements are, in any case, irrelevant. Attention in this regard is invited to the following extract from the valuation report at page 90 of the paper book: “VALUATION METHODOLOGY AND ASSUMPTIONS We have computed the equity valuation of SBP, and the value of each company in the HoldCo Chain, based on the value of the downstream investments of SBP, or the respective company in the HoldCo Chain, as the case may be (which, in each such case, is linked to the value of VIL), and adjusting the same for the net value of other assets and liabilities of such company based on the books of accounts of such company as on31 December. 2013. except that in case of any outstanding preference shares, the

26 | P a g e

I.T.A .No.-4737/Del/2017

same is been valued as on 28 February. 2014 as per its contractual terms.’

In view of the above, the financial statements of the earlier year(s) or even for the year ending 31.03.2014 will not be relevant and / or determinative of the value adopted by Kotak for such companies. Further, (while adopting the book value of assets as on 31.12.2013 or 28.02.2014, Kotak has reduced the accrued liability towards outstanding preference shares, such as, for premium payable on redemption or cumulative amount of dividend payable on such shares etc., as per the contractual terms therefor, on a rational and scientific basis, which were not included in the figures disclosed in the financial statements. Accordingly, for the aforesaid dual reasons, all the financial statements of various intermediate companies sought to be placed on record by the Revenue would not be relevant to verify the valuation arrived at by Kotak. That apart, it is the submission of the appellant that Kotak, an independent and a well reputed d carried out the valuation at the request of the purchaser, on a rational and scientific determine the minimum floor price below which shares could not have been acquired in-resident purchaser from the appellant, in terms of the applicable FDI regulations. The Assessing officer and CIT(A) did not dispute the methodology or figures adopted by Kotak using each company, i.e., all the intermediate / step down subsidiary companies and fact, the assessing officer adopted the same fair market value of VIL as computed by e only dispute raised was whether while computing the value of shares of Scorpio, ought to be valued on the basis of indirect beneficial interest of that company in VIL, or by arriving at the value of each intermediate company, after substituting the fair market value of VIL. Accordingly, the dispute between the appellant and Revenue was restricted to the

27 | P a g e

I.T.A .No.-4737/Del/2017

methodology of valuation, without any dispute to the valuation of each intermediate company arrived at by Kotak. Any dispute to the valuation of each intermediate company, for the first time before the Tribunal would, in our respectful submission, tantamount to the Revenue making out a completely new case and / or raising a fresh plea, which as submitted above, is not permissible. As regards the other issue raised by the Revenue with regard to verifying the utilisation of funds procured by Scorpio on right issue of shares, the same, too, in our respectful submission, is completely irrelevant and extraneous to the issue under consideration. The relevance of the same has not been pointed out in the impugned application for admission of additional evidence. The utilisation of funds procured by Scorpio on rights issue has, in our respectful submission, no bearing on the valuation of shares of Scorpio or any of the intermediate companies. In that view of the matter, the Revenue cannot, in our respectful submission, be permitted at this belated stage to refer to the balance sheet of various companies so as to dispute the valuation arrived at by Kotak for the various companies, which issue, as submitted earlier, has been raised without prejudice and in the alternate to the main submission, namely, no power with the assessing officer to substitute actual consideration with any other hypothetical / notional value. PRAYER For the aforesaid cumulative reasons, it is submitted that the aforesaid various additional evidenced sought to be placed by the Revenue for the first time before the Tribunal deserve to be rejected and not admitted /taken into consideration while adjudicating ground of appeal No.2 raised by the appellant.

28 | P a g e

I.T.A .No.-4737/Del/2017

C. Decision on the admissibility of additional evidence filed by the Revenue:-

29 | P a g e

I.T.A .No.-4737/Del/2017

determinative factor for our decision, but at the threshold we cannot reject this document and how much would be its relevance and bearing on the case shall be discussed in detail in the later part of this order. Accordingly, we are admitting the Framework Agreement dated 01.03.2006 as submitted by the Revenue in application made under Rule 29 for the purpose of our adjudication and understanding all the issues involved here in this appeal.

30 | P a g e

I.T.A .No.-4737/Del/2017

investment of various chains of intermediary companies. Based on these statements, the Revenue has filed a chart showing assets and liabilities of various intermediary companies and resultant valuation of the shares of VIL. We partly agree with the contention of the Ld. Sr. Counsel, Mr. Ajay Vohra, that all the financial statements of various financial years has no relevance, like the financial statements from the F.Y.s 2004-05 till 2011-12 are not relevant for the purpose of our adjudication except for the balance sheet for the F.Y. 2012-13, as the transaction of sales took place on 12th of March 2014. Accordingly, we do not find any reason to admit the financial statement for the earlier years as they are not much relevant, because even if the valuation of the shares has to be worked out, the relevant balance sheet of these intermediary companies would be for the F.Y. 2012-13 and not the other earlier or subsequent years. Thus, we are admitting the financial statement/balance sheet of intermediaries companies for the F.Y. 2012-13;and rest of the statements are rejected to be admitted as additional evidence. Accordingly, we are admitting, Framework Agreement of 2006; and financial statements of intermediary companies for the F.Y. 2012-13. After admitting partly the additional evidences as discussed above, we shall now deal with the submissions made by the Sr. Counsel on behalf of the assessee.

Arguments on behalf of the assessee on this issue:-

31 | P a g e

I.T.A .No.-4737/Del/2017

shares in Hutchison Essar Limited (HEL) which was subsequently renamed as Vodafone India Limited ("VIL”). It would be pertinent to point out that HEL, a company engaged in the business of providing telecom services across different circles in India, was originally held by Hutchison Group, Hong Kong with certain other Indian partners, including AS through SBPL. On 08.05.2007, Hutchison Group sold its entire stake with respect to telecom business being carried on in India through HEL to Vodafone International Holdings BV and consequently the name of HEL was changed to VIL.Pursuant to the aforesaid change in shareholding of HEL from Hutchison to Vodafone Group, a Framework Agreement was entered on 05.07.2007 amongst the following: � Assessee and Mrs. Neelu Analjit Singh (i.e. AS); � SBPL and two subsidiaries thereof, i.e., MVH and NDC; � Vodafone international Holdings B.V. (‘Vodafone International); and � 3 Global Services Private Limited (now known as Vodafone India Services Private Limited), which was an indirect subsidiary of Vodafone International [hereinafter referred as ‘GSPL’].

32 | P a g e

I.T.A .No.-4737/Del/2017

aforesaid shall be deemed to be effective from 1 May 2007. The Option Payment for the period from 1 May 2007 to 30 April 2008 be paid as soon as practicable and any case the 20th Business Day after the date of this Agreement and the Option Payment for each twelve (12) month period from 1 May 2008 shall be paid in four equal installments arrears on 1 August, 1 November, 1 February and 1 May, commencing 1 November 2008. The Option Payment shall be paid to AS until AS ceases to hold indirectly through his interest in TII, any equity shares in HEL or, if earlier, 7 May 2017. The Option Payment shall be paid by GSPL or any of its Affiliates by wire transfer to AS’s bank account in India designated by AS in advance. 4.6 Transfer price (a) Except as stipulated by Clause 4.6(b) and Clause 4.7 and subject to the requirements of any applicable regulatory requirements, the price payable to AS for the Shares to be transferred (‘'Transfer Price”) pursuant to the Put Option or the Call Option shall be as determined in accordance with the formula set out in Schedule 1 on each exercise of the relevant option, subject to a maximum of an aggregate of Rs.150 billion less any amounts paid or payable to AS pursuant to Clause 4.3 or Clause 4.4”

In consideration of the grant of the aforesaid option by AS to GSPL, AS was entitled to a fixed option fee of USD 10.2 million per annum (clause 4.4(d) of the said Agreement). Further, clause 4.6 read with Schedule I of the said Agreement provided that the minimum transfer price for 100% shares of Scorpio held by AS was fixed at Indian rupees equivalent of US$ 26,62,50,000 converted into Indian rupees at the prevailing exchange rate as on the completion date prescribed in the agreement i.e., 08.05.2007, to be further increased by the appropriate proportion, to be computed in the prescribed

33 | P a g e

I.T.A .No.-4737/Del/2017

manner, if the fair market value of the entire issued share capital of VIL exceeded USD 25 billion (to be converted into Indian rupees at the prevailing exchange rate as on the completion-date i.e. 08.05.2007). The relevant portion of Schedule I of the Framework Agreement-dated 5.7.2007 is reproduced hereunder for ready reference: “Schedule 1 Determination of the Transfer Price a) For the purposes of determining the Transfer Price in accordance with Clause. 4.6, the following formula shall be applied:- (i) The Transfer Price shall be an amount equal to the aggregate of Indian Rupees equivalent of US$266,250,000 (United States Dollars Two Hundred arid Sixty Six Million Two Hundred and Fifty Thousand only), converted into Rupees at the prevailing US$:Rs. exchange rate published in the London edition of the Financial Times on the business day immediately prior to the Completion Date PLUS (ii) Where the fair market value of the entire issued share capital of HEL exceeds US$25,000,000,000, the SBP Value, converted into Rs. at the prevailing US$:Rs. Exchange rate published in the London edition of the Financial Times on the Business Day immediately prior to the Completion Date such aggregate amount being the Transfer Price. For the avoidance of doubt, the Transfer Price shall not in any event be less than the amount referred to in paragraph (a) (i) above. For the purpose of paragraph (a)(ii) of this Schedule 1, the SBP value means the proportion of such part of the fair market equity value of the entire issued share capital of HEL which is in excess

34 | P a g e

I.T.A .No.-4737/Del/2017

of US$25,000,000,000 which is attributable to the SBP Shares(or MVH Shares if the MCH Shares are purchased pursuant to the exercise of the Option in terms of Clause 4.3(e) or Clause 4.4(c), as the case maybe) applying the methodology and assumptions set out in Schedule 2. For the avoidance of doubt, if the Put Option is exercised more than once, the SBP Value shall be computed each such time, with respect to the Put Shares proposed to be transferred pursuant to such exercise, based on the fair market value of the entire issued share capital of HEL as on the date of the relevant Transfer Notice. For purposes of paragraph (2)(ii) of this Schedule 1, the fair market value of the share capital of- HEL shall be arrived at as follows:

The fair market value of HEL, if HEL has been listed on any stock exchange, shall be based on the average closing price of shares in HEL on the principal stock exchange on which its shares are listed, taken over a period of 30 trading days-(or- such period that HEL has been listed for if less than 30 trading days) immediately prior to but' not including the date of the Transfer Notice;

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

35 | P a g e

I.T.A .No.-4737/Del/2017

36 | P a g e

I.T.A .No.-4737/Del/2017

Rs. 533 crores was disclosed under the head “capital gains” in his return of income, for assessment year 2010-11, which was accepted as such by the Revenue vide intimation under section 143(1) of the Act. In the previous year ending on 31.03.2013, SBPL offered ‘rights shares’ which was subscribed by both, AS and CGP, being existing shareholders, in full, i.e., in the ratio of their existing shareholding. Accordingly, AS subscribed to 19,44,99,979 shares and CGP subscribed to 18,73,52,921 shares of SBPL. Since AS and CGP subscribed to the right shares offered in full, the percentage shareholding of both the groups continued to be the same, viz., 51:49 prior to the rights issue. He submitted that it would be pertinent to mention that, out of the aforesaid 51% stake held by AS, the assessee held 41% and the remaining 10% was held by Mrs. Neelu Analjit Singh. In view of the increase in the number of shares held in SBPL as a result of rights issue, the Framework Agreement dated 05.07.2007 was amended through ‘Fourth Supplement deed dated 07.08.2012’, providing the mechanism for sale of newly issued right shares by AS to GSPL or any person nominated by GSPL. As a result of fresh subscription of shares on right basis, under the aforesaid Fourth Supplement to the Framework Agreement, it was agreed that GSPL or any person nominated by GSPL would pay additional lumpsum consideration of Rs.300 crores, on exercise of option by GSPL as and when permissible as per the FD1 regulations. In view of the terms of original Framework Agreement dated 05.07.2007 read with the Fourth Supplement thereto dated 07.08.2012, the consideration receivable by AS for 51% stake in Scorpio (represented by Original Shares and Rights Shares) aggregated to Rs.855 crores, in the following manner: � For Original Shares: Rs. 555 crores (Rs.1088 crores - Rs.533 crores received on 16.12.2009) � For Rights Shares:–Rs. 300 crores � Total:–Rs. 855 crores

37 | P a g e

I.T.A .No.-4737/Del/2017

In the year 2013, there was further relaxation in FDI regulations, which permitted 100% FDI in the telecom sector. As a result, CGP decided to acquire the remaining entire 51% stake in Scorpio held by AS, at re-negotiated lumpsum consideration of Rs. 1241.32 crores, as against lumpsum consideration of Rs.855 crores originally payable as per the Framework Agreement dated 05.07.2007 read with the Fourth Supplement deed dated 07.08.2012, in the manner incorporated above. Accordingly, CGP filed necessary application before FIPB seeking approval for the aforesaid acquisition, wherein the proposed consideration of Rs. 1241.32 crores, was duly disclosed and thereafter approved by FIPB on 20.02.2014. Pursuant to the aforesaid approval from FIPB, AS and CGP entered into Share Purchase Agreement dated 12.03.2014, prescribing the terms and conditions for transfer of the entire 51% stake held by AS in SBPL to CGP for consideration of Rs. 1241.32 crores. Mr. Vohra pointed out that although the lumpsum consideration receivable by assessee as per the Framework Agreement dated 05.07.2007 read with Fourth Supplement thereto dated 07.08.2012, aggregated to Rs.855 crores only, the parties mutually, agreed for enhanced consideration of Rs. 1241.32 crores, under ‘Share Purchase Agreement dated 12.03.2014’. The relevant clauses of the said Agreement dated 12.3.2014 as highlighted by him are reproduced hereunder: “2. Sale and Purchase: 2.1 Subject to the terms and conditions herein and the terms the Framework Agreement, CGP hereby undertakes to purchase 195,005,079 Shares from AS (the ‘Sale Shares’) and AS hereby undertakes to sell to CGP the Sale Shares, free and clear from all Encumbrances, on the Closing Date for a consideration equal to the Transfer Price. 2.2 In consideration for the Sale Shares, CGP hereby agrees to pay AS an aggregate amount of Rs.12,413,206,200/- (Rupees

38 | P a g e

I.T.A .No.-4737/Del/2017

Twelve Billion Four Hundred and Thirteen Million Two Hundred and Six Thousand and Two Hundred only) (the Price ”). 2.3 The Parties acknowledge that Kotak Mahindra Capital Company Limited -has been requested to prepare a valuation report relating to the fair market value of the entire- issued share capital of V1L pursuant to schedule 1 to the Framework Agreement to confirm the Transfer Price determined by the Parties.”

39 | P a g e

I.T.A .No.-4737/Del/2017

“received” or “accruing”, which connotes to the actual consideration received and there is no authority or power with the AO to substitute such actual consideration with a notional consideration or any fair market value. The Courts have held that the word ‘full value of consideration received’ does not mean the ‘fair market value’ and in support, he relied upon the following judgments, compilation of which has been filed separately before us:- • CIT V. George Henderson and Co. Ltd. 66 ITR 622 (SC) (heavy reliance was placed on this decision) • CIT V. Gillanders Arbuthnot & Co.: 87 ITR 407 (SC) • K. P. Varghese v. ITO: 131 ITR 597 (SC) • CIT v. Shivakami Co. P. Ltd. 159 ITR 71 (SC) • CIT v. NandiniNopany: 230 ITR 679 (Cal.) • CIT v. Ms. Sushila Mittal & Others: 250 ITR 531 (Del.) • CIT V. Kami Singh 256 ITR 165 (Del) • CIT V. Smt. Sushila Devi 256 ITR 179 (Del.) • CIT v. Nilofer I. Singh: 309 ITR 233 (Delhi) • CIT v. Nilofer I Singh :309 ITR 233 (Del.) • Dev Kumar Jain v. ITO : 309 ITR 240 (Del.) • Sanjay Chawla v. ITO: 89 ITD 586 (Del.) • Bigjos Stores (P) Limited v. ACIT: 106 Taxman 127 (Del.)

40 | P a g e

I.T.A .No.-4737/Del/2017

inserted by the Finance Act, 2017 by inserting section 50CA w.e.f. 01.04.2018 which provides for substitution of the actual consideration with the fair market value in the case of transfer of unlisted shares of company from 01.04.2018. There is no such provision by which full value of consideration for transfer of unlisted /unquoted shares can be enhanced by taking the fair market value. This provision cannot be made retrospective as this is a substantial provision brought in the statute from a particular date i.e., from A.Y. 2018-19.

41 | P a g e

I.T.A .No.-4737/Del/2017

is subsequently given up in such circumstances that it remains the income of the recipient, even though given up, the tax may be payable. Where, however, the income can be said not to have resulted at all, there is obviously neither accrual nor receipt of income, even though an entry to that effect might, in certain circumstances, have been made in the books of account.” 15. The above passage was cited with approval in Morvi Industries Ltd. v. CIT [Morvi Industries Ltd. v. CIT, (1972) 4 SCC 451 : 1974 SCC (Tax) 140 : (1971) 82 ITR 835] in which this Court also considered the dictionary meaning of the word “accrue” and held that income can be said to accrue when it becomes due. It was then observed that: (SCC p. 454, para 11) “11. ... the date of payment ... does not affect the accrual of income. The moment the income accrues, the assessee gets vested with the right to claim that amount even though it may not be immediately.” 16. This Court further held, and in our opinion more importantly, that income accrues when there “arises a corresponding liability of the other party from whom the income becomes due to pay that amount”. 17. It follows from these decisions that income accrues when it becomes due but it must also be accompanied by a corresponding liability of the other party to pay the amount. Only then can it be said that for the purposes of taxability that the income is not hypothetical and it has really accrued to the assessee. 18. Insofar as the present case is concerned, even if it is assumed that the assessee was entitled to the benefits under the advance licenses as well as under the duty entitlement passbook, there was no corresponding liability on the Customs Authorities to pass on the benefit of duty-free imports to the assessee until the goods are actually imported and made available for clearance. The benefits represent, at best, a hypothetical income which may or may not

42 | P a g e

I.T.A .No.-4737/Del/2017

materialize and its money value- is, therefore, not the income of the assessee.” 27. In the facts of the present case, it is clear that the income from capital gain on a transaction which never materialized is, at best, a hypothetical income. It is admitted that, for want of permissions, the entire transaction of development envisaged in the JDA fell through. In point of fact, income did not result at all for the aforesaid reason. This being the case, it is clear that there is no profit or gain which arises from the transfer of a capital asset, which could be brought to tax under Section 45 read with -Section 48 of the Income Tax Act. 28. In the present case, the assessee did not acquire any right to receive income, inasmuch as such alleged right was dependent upon the necessary permissions being obtained. This being the case, in the circumstances, there was no debt owed to the assessees by the developers and therefore, the assessees have not acquired any right to receive income under the JDA. This being so, no profits or gains “arose” from the transfer of a capital asset so as to attract Sections 45 and 48 of the Income Tax Act. 29. We are, therefore, of the view that the High Court was correct in its conclusion, but for the reasons stated by us hereinabove. The appeals are dismissed with no order as to costs.”

43 | P a g e

I.T.A .No.-4737/Del/2017

Gift Tax Act, the difference between the fair market value and actual consideration received on transfer of the capital asset was not subject to taxation in the hands of either the transferor or the transferee. In order to overcome the aforesaid lacuna, sub-clauses (vii)/(viia) were inserted in section 56(2) of the Act by the Finance Act, 2009 and 2010, with effect from 01.10.2009/ 01.06.2010, respectively, to deem the difference between the fair market value of the capital asset, subject of transfer, determined on the basis of prescribed method in Rule 11U/11UA of the Rules and the actual consideration paid, therefore, as income chargeable to tax under the head “income from other sources” in the hands of the recipient / transferee. Reference in this regard he pointed out that can be made in the Memorandum explaining the amendments made by the relevant Finance Bill and the Notes on Clauses thereto. In view of the above, he submitted that it would be appreciated that under the scheme of the Act, the difference between the fair market value of an asset (in case the same is higher) and actual consideration received / paid on transfer of asset is not taxable in the hands of the transferor, but is taxable, in the hands of the transferee in accordance with the provisions of section 56(2)(vii)/(viia) of the Act. The scope and width of the deeming fiction enacted in sections 56(2)(vii)/(viia) has been enlarged by insertion of section 56(2)(x) in the statute by the Finance Act, 2017 w.e.f. 1.04.2017 to provide for taxation in the hands of the transferee recipient, the difference between the fair market value of the property and the consideration paid therefor. With the insertion of section 56(2)(x), the earlier provisions of section 56(2)(vii)/(viia) have been made inoperative with effect from 1.04.2017. He further highlighted a point that a specific provision has been introduced in the form of section 50CA by the Finance Act, 2017 w.e.f. 1.04.2018 to bring to tax in the hands of the transferor, the difference between the fair market value of shares of an unquoted company and the consideration

44 | P a g e

I.T.A .No.-4737/Del/2017

received therefor. The said section specifically provides to tax the transferee on difference between the fair market value of the unquoted shares and the declared consideration in respect of shares transferred during the previous year relevant to assessment year 2018-19 and onwards. As a consequence of insertion of the above deeming provision from assessment year 2018-19, the transferor would be liable to tax under the head; (i) “capital gains” with respect to the difference between the declared / actual consideration received and the cost of acquisition; and (ii) “income from other sources” on the difference between the fair market value of such shares and the declared consideration. The aforesaid insertion would further go to show that prior to assessment year 2018-19, there was no provision in the Act to bring to tax the difference, if any, between the fair market value of the shares of an unquoted company, subject of transfer, and the actual consideration received, in the hands of the transferor, although such difference was subject matter of taxation in the hands of the transferee in terms of sections 56(2)(vii) /(viia) /(x) of the Act. Accordingly, in the absence of any provision providing the assessing officer with the power of substituting the actual consideration with the fair market value, the action of the assessing officer and upheld by the CIT(A) cannot be sustained, being contrary to law.

45 | P a g e

I.T.A .No.-4737/Del/2017

Analjit Singh had received anything over and above the sale consideration of Rs.1241.32 crores as disclosed and approved by FIPB. Otherwise also, the hypothetical amount of Rs.2233.42 crores as determined by the AO cannot be reckoned as “accrued” to the assessee and to demonstrate that such right vested in the assessee lies wholly to the Revenue that there was a corresponding debt owed by CGP to pay such higher amount to the assessee. The Revenue authorities have not been able to justify that the amount of Rs.2233.42 crores could be said to have legally accrued to the appellant under the agreement with VIL for sale of shares held by the appellant in Scorpio on the basis of any other document / evidence. The onus on the Revenue to prove that consideration of Rs. 2233.42 crores “accrued to the assessee” in terms of a legally binding contract, enforceable at law, has clearly not been discharged. The ratio emanating from the recent judgment of the Supreme Court in the case of CIT vs. Balbir Singh Maini & Ors. (supra), is squarely applicable to the facts of the present case in as much as; firstly, the alleged fair market value of the shares of SBPL computed by the Revenue was not agreed to be exchanged between the appellant and CGP under the terms of the agreement and, therefore, no right to receive the same vested with the appellant nor was a corresponding obligation to pay the said amount fastened on to the transferee, i.e., CGP, and secondly, the alleged fair market value represents hypothetical consideration, which on the basis of real income theory cannot be brought to tax as capital gains in the hands of the transferor /assessee. Thus, in view of the aforesaid clear dictum laid down by the Supreme Court in the recent decision in the case of Balbir Singh Maini & Ors. (Supra), there is no scope for the Revenue to consider the notional fair market value of the shares of Scorpio as accruing to the appellant for the purposes of taxing the same as capital gains under section 45 read with section 48 of the Act.

46 | P a g e

I.T.A .No.-4737/Del/2017

47 | P a g e

I.T.A .No.-4737/Del/2017

application in a case where transfer of capital assets is for determination/ascertained consideration duly reflected in the agreement for sale of the capital assets which is actually changed hands between the contracting parties viz., transferor or the transferee. Section 50D would be applicable in a transaction involving exchange of assets or mode or transfer where the consideration is not fixed. By way of illustrative reference, he referred to the decision of Delhi ITAT Bench in the case of ACIT vs. KB Investment and Finance Company Ltd. 53 ITD 410, wherein it was held that in the case of exchange of capital assets, no amount could be brought to tax u/s 45 Act, since it was not possible to compute capital gains and in absence of any enabling provision permitting the AO to substitute the FMV of assets as the full value of consideration. Here in this case, the shares of SBPL have been transferred for ascertained consideration clearly spelt out in the ‘Share Purchase Agreement dated 12.03.2014’ and it is not a case where the full value of consideration is either not ascertainable or not determinable. He submitted that it would further be appreciated that if section 50D is to be applied for substituting actual consideration with the fair market value in any and every situation of transfer of all kinds of capital asset, then, the law would have provided for the said section to override section 48 of the Act, which is not the case. Further, in that event, section 50D would have provided for an exception in respect of transfer of capital asset, being land or building or both, for which specific provision in section 50C of the Act was already on the statute prior to the former section being incorporated in the Act. If section 50D of the Act was sufficient to capture the situation as in the present case, then there was no necessity to insert provision of Section 50CA of the Act in the statute by the Finance Act, 2017 w.e.f. 01.04.2018. The very fact that section 50CA has been brought in the Statute in the case of unlisted shares, it goes to show that section 50D does not empower the Revenue

48 | P a g e

I.T.A .No.-4737/Del/2017

authorities to substitute the declared/determined consideration agreed between the parties with the fair market value of the assets subject to transfer. Thus, he submitted that the substitution of actual sale consideration of Rs.1241.32 crores with hypothetical consideration of Rs.2233.42 crores is sans any authority of law and, therefore, cannot be upheld and same should be deleted.

(i) Allegation of the assessing officer: The assessing officer has alleged that while 49% of the shares were sold at a value of Rs. 10.88 lakhs per share (Rs.533 crores/4900 shares) in the previous year relevant to assessment year 2010-11, the average realization per share for original and rights shares received by AS on the basis of total lumpsum consideration of Rs.1241.32 crores, worked out to Rs.63.65 per share only.

Rebuttal by the Assessee: In coming to the aforesaid conclusion, the assessing officer has erred in ignoring the ‘Fourth Supplement deed dated

49 | P a g e

I.T.A .No.-4737/Del/2017

07.08.2012’whereunder it is provided that the ‘right shares’ subscribed by AS would be sold for lumpsum consideration of Rs.300 crores, as and when permitted by the FDI regulations. On that basis, the right shares subscribed in the year 2012 and sold in March, 2014 resulted in average realization of Rs. 15.38 per share. The original 5100 shares have been sold for Rs.941.32 crores (Rs. 1241.32 crores - 300 crores) giving an average realization of Rs. 18,45,726.71 per share, which is much more than the price realized while selling 49% of the shareholding in 2009. The allegation labeled by the assessing officer is, therefore, contrary to record.

(ii) Wrong working of indirect interest of AS/Scorpio in VIL by the assessing officer: Taking into account the enterprise value of VIL determined by Kotak vide valuation report dated 19.03.2004 at Rs.56,448 crores and determining the economic interest of Scorpio in VIL at 9.65%, the assessing officer determined the valuation of SBPL at Rs.5447.23 crores and accordingly, computed the fair market value of shares of SBPL at Rs. 142.70 per share. On that basis, the assessing officer taking fair market value of appellant’s shareholding in Scorpio at Rs.2233.42 crores, substituted the same for declared consideration crores while computing capital gains.

Rebuttal by the Assessee: The assessing officer erred in taking the indirect interest of Scorpio in VIL at 9.65% as against 8.9055% as evident from the structure chart annexed to the Chart of Date filed by the appellant. On that basis, indirect stake of the appellant in VIL on pass through basis was 3.6512% (being 41% of 8.9055% and not 3.95% as considered by the assessing officer in paragraph 7.14

50 | P a g e

I.T.A .No.-4737/Del/2017

on page 26 of the assessment order passed. The aforesaid revised percentage of economic interest cannot be disputed by the Special Counsel of the Revenue also.

(iii) Ignoring value of intermediary companies, while computing FMV of Scorpio adopting enterprise value of VIL determined by Kotak:

In the assessment order, the assessing officer directly applied the indirect interest of the appellant/Scorpio in VIL to enterprise value of VIL, i.e., Rs. 56448 crores, to compute the FMV of Scorpio at Rs. 2233.36 crores, thereby ignoring the value of intermediary companies.

Rebuttal by the Assessee: Reasons behind engagement of Kotak: A. As per clauses 2.1 and 2.2 of the Share Purchase Agreement dated 12.3.2014,the entire shares held by AS in Scorpio were agreed to be sold for “transfer price” of Rs. 1241.32 crores, which was a mutually negotiated and agreed consideration. Clause 3.2 of the said Agreement provided that the parties would request Kotak, a SEBI registered Category I merchant banker, to prepare a valuation report relating to the fair market value of VIL pursuant to Schedule 1 of the Framework Agreement dated 5.7.2007, to confirm the transfer price determined by the parties. Further it would be pertinent to point out as per paragraph 2.2 of Annex - 2 of Consolidated FDI Policy (effective from April 5, 2013), which was applicable during the period in question, price of shares of an unlisted Indian company, transferred by resident to a non-resident, shall not be less than fair value determined by a SEBI registered Category I Merchant Banker or Chartered Accountant as per the discounted free cash

51 | P a g e

I.T.A .No.-4737/Del/2017

flow (‘DCF’) method. In order to determine whether the enterprise valuation of VIL exceeded US $ 25 billion, which would trigger payment of additional, consideration in terms of clause a(ii) of Schedule 1 to the Framework Agreement dated 5.7.2007 and further ensure that the transfer price agreed between the parties under the Share Purchase Agreement dated 12.3.2014 did not violate the extant provisions of Foreign Exchange Management Act, 1999, CGP had engaged Kotak to provide a valuation report. It needs to be emphasized that the valuation arrived at by Kotak was not the basis for the consideration payable by CGP to AS for transfer of shares of SBPL. The consideration was independently negotiated and agreed between the parties, as spelt out in clauses 2.1 and 2.2 of the Share Purchase Agreement dated 12.3.2014. The-valuation report obtained from Kotak in terms of clause 3.2 of the said Agreement was only a confirmation that the transfer price agreed between the parties was not below the minimum threshold in terms of the applicable Government /Foreign Exchange regulations and also to determine whether any additional consideration was payable in terms of clause a (ii)of Schedule 1 of the Framework Agreement dated 5.7.2007.The valuation report submitted by Kotak determined the enterprise value of VIL at Rs.56448 crores, which has been accepted by the assessing officer. In that view of the matter, no additional consideration over and above the mutually agreed transfer price was payable by GSPL/CGP to AS for transfer of shares of SBPL in terms of clauses a (i) and a (ii) of Schedule 1 of the Framework Agreement dated 05.07.2007. The said report also demonstrates that the consideration agreed between the parties, being more than the fair market value determined for shares of Scorpio was not violative of applicable Government regulations.

52 | P a g e

I.T.A .No.-4737/Del/2017

Valuation methodology followed by Kotak: B. Our attention, in this regard, was drawn to the following relevant extracts of the valuation report issued by Kotak regarding the valuation methodology followed for valuing different downstream companies. “Background CGP, as a shareholder of SBP, has requested Kotak Mahindra Capital Company Ltd. (‘ KMCC’) to carry out an equity valuation of SBP as of February 28, 2014 (“Valuation Date”) and provide the price per share of SBP, in relation to the proposed acquisition of shares of SBP that CGP does not already own from the Sellers. SBP, through a series of companies in the HoldCo Chain, is an indirect shareholder of VIL. We have carried out the equity valuation of VIL using a Sum of the Parts Approach, which involves valuation of VIL Group (which is involved in providing telecom services across all telecom circles in India) and the value of VIL’s42% equity stake in Indus. The valuation of both VIL Group and Indus has been done using the Discounted Cash Flow methodology (“DCF”) – primarily based on the information and representations received from CGP and VIL. The valuation of VIL so arrived at has been factored in while valuing each of the companies in the HoldCo Chain and SBP considering the net value of other assets and liabilities in the respective companies, to arrive at the value of SBP. This Report is to be used only for the purpose of which it is intended, and is not to be used or referenced for any other purpose. Valuation Methodology and Assumptions We have computed the equity valuation of SBP, and the value of each company in the HoldCo Chain, based on the value of the downstream investments of SBP, or the respective company in the HoldCo Chain, as the case may be (which, in each such

53 | P a g e

I.T.A .No.-4737/Del/2017

case, is linked to the value of VIL), and adjusting the same for the net value of other assets and liabilities of such company based on the books of accounts of such company as on 31 December, 2013, except that in case of any outstanding preference shares, the same has been valued as on 28 February 2014 as per its contractual terms.”

As per the aforesaid method, Kotak had arrived at a fair market value of shares of Scorpio by taking the value/ valuation of underlying companies including VIL. The fair market value of the main underlying operating company, i.e., VIL was computed by Kotak on the basis of DCF method at Rs.56,448 crores which has been accepted by the assessing officer. Considering that the other intermediary companies between SBPL and VIL were only investment companies, without having any business operations, and no business projections/forecast were available for such companies, the same were valued on the basis of net asset value (NAV) of each such company, which were added (in case of positive net assets) or reduced (in case of negative net assets), as the case may be, from the fair value of VIL arrived on the basis of DCF method as pointed above. It would further be pertinent to point out that the NAV of the intermediaries/step down subsidiary companies was computed on the basis of books of account of such companies as on 31.12.2013 or 28.02.2014. Further, while adopting the book value of assets as on 31.12.2013 or 28.02.2014, Kotak reduced the accrued liability towards outstanding preference shares, such as, premium payable on redemption or cumulative amount of dividend payable on such shares etc., as per the contractual terms of issue thereof, on a rational and scientific basis, which were not reflect in the financial statements. On the basis of the aforesaid method, Kotak arrived at the fair value of Scorpio at Rs.2065

54 | P a g e

I.T.A .No.-4737/Del/2017

crores, which resulted in price per share of Rs.5.40. Valuation methodology adopted by Kotak justified: C. Mr. Vohra drew our attention to the structure chart on page 6 of Kotak’s Valuation Report. On perusal of the same, he submitted that it would be seen that SBPL was not directly holding shares in VIL, but held economic interest therein through several intermediate companies, which had independent assets and liabilities. Although, the said companies were mainly investment companies, having shareholding in subsidiary companies, such investments were financed through third party borrowings, which in our respectful submission ought to be considered while computing the value of holding companies including SBPL. Accordingly, since SBPL had no direct shareholding in VIL, which was held through several intermediate companies, the valuation of SBPL was to necessarily factor the net assets (i.e. assets less debts) position of all such intermediate companies, as rightly carried out by the Valuation Expert, viz., Kotak in its Valuation Report. Thus, he submitted that the aforesaid method followed by Kotak in considering the value of intermediaries companies is a universally acceptable method and was also factored in by the parties at the time of negotiating the consideration for transfer of shares under the Framework Agreements, in the following manner:- The erstwhile Rule 12 relating to valuation of unquoted I. equity shares of an investment companies contained under the Wealth Tax Act, 1957 provided that the value of shares of an investment company shall be computed by applying the net assets value method and the value of shares held by such investment company shall also be valued in accordance with the said method. In other words, the aforesaid valuation rule provided for computing fair value of the shares/investments

55 | P a g e

I.T.A .No.-4737/Del/2017

held by the holding company, while computing the value of shares of such later company; II. Similarly, the amended Rule 11UA of the Income Tax Rule, 1962 also provides that the fair market value of the shares held by such company will also need to be considered, while computing the fair market value of the shares of such holding company; III. Schedule 2 of the Framework Agreement dated 05.07.2007, which prescribed for the method to be followed for computing the fair market value /enterprise value of the shares of HEL/VIL for the purposes of Clause (a)(ii) of Schedule 1 to check whether the said value exceeds USD 25 billion also provided that NAV of intermediary companies will need to be added and / or reduced from the enterprise value of HEL, for arriving at the fair market value of the shares of Scorpio. In that view of the matter, the methodology adopted by Kotak in valuing the shares of Scorpio was correct and the assessing officer erred in disregarding the said method and arriving at the alleged FMV of Scorpio by directly applying its indirect economic interest to the enterprise value of VIL by ignoring the value of intermediary companies.

56 | P a g e

I.T.A .No.-4737/Del/2017

impugned framework agreement dated 01.302.006. He submitted that the reliance on agreement dated 1.03.2006 is completely misplaced for the reason that the Framework Agreement dated 01.03.2006 was entered amongst the assessee, SBPL [a company wholly owned by the assessee]; MVH [a wholly owned subsidiary of SBPL]; NDC [a wholly owned subsidiary of MVH] & GSPL (a company belonging to the Hutchison Group at the relevant time]. The aforesaid agreement has no relevance with the transaction under consideration as HEL is no longer the party and, therefore, it is neither required to be admitted nor should be considered for adjudication or the impugned issued. VIL, i.e., the company engaged in the business of providing telecommunication services across different circles in India, prior to takeover by Vodafone International in May 2007, was held by Hutchison Group, Hong Kong with certain other Indian partners and was known as Hutchison Essar Limited, (‘HEL’). Accordingly, in the aforesaid agreement, Vodafone International Holding BV was not a party, which joined as a confirming party in the later agreement dated 05.07.2007. Further, the contours and terms and conditions of the agreement dated 01.03.2006 were at substantial variance with the subsequent agreement dated 05.07.2007. To highlight the difference in the substantial clause of both the agreements, he has filed following chart given a comparison of clauses of the agreement dated 01.03.2006 and 05.07.2007:-

S.N Clauses 01.03.2006 05.07.2007 o. 1. Parties to Agreement was entered Agreement was entered between- the between- i. Analjit Singh and Neelu Analjit agreement i. Analjit Singh; and Singh (' AS ') and ii. Scorpio Beverages Pvt. Ltd.; ii. Scorpio Beverages Pvt. Ltd. and and iii. MV. Healthcare Services Pvt. iii. MV Healthcare Services Pvt. Ltd. and Ltd.; and iv. 3 Global Services Pvt. Ltd. and iv.3 Global Services Pvt. Ltd.; v. ND Callus Info Services and Pvt. Ltd. and v. ND Callus Info- Services Pvt. Ltd vi. Vodafone International Holdings- BV ('Confirming Party')

57 | P a g e

I.T.A .No.-4737/Del/2017

58 | P a g e

I.T.A .No.-4737/Del/2017

to the agreement. exchange rate published in Schedule 2 London Edition of Financial For the purpose of determining times on the business day Transfer Price, the following immediately prior to the formula shall be applied: completion date. a) Transfer Price shall be equal ii. Where FMV of the entire issued to the FMV of 0.23% of the share capital of HEL exceeds USD issued share capital of HEL. 25,000,000,000 (Rs. 102200 - crores converted at an exchange a) FMV of HEL shall be such rate of Rs.40.88), the SPB value; FMV as may be determined converted into INR at the prevailing by Hongkong offices of exchange rate published in London Goldman Sachs, ABN Edition of Financial times on the Amro or HSBC business day immediately prior to the completion date, a) The above formula would apply regardless of the amount of third party debt or other liabilities in MVH or any other company in which MVH has an interest and irrespective of the fact that SBP is not a direct shareholder in HEL.

59 | P a g e

I.T.A .No.-4737/Del/2017

superseded. Thus, the agreement dated 01.03.2006, which was entered between different set of parties and with different terms and conditions, which, in any case, stood rescinded and superseded by the new agreement dated 05.07.2007, had no relevance/ nexus with the method for computing transfer price agreed by the new set of parties in the fresh agreement dated 05.07.2007. It is pertinent to point out that the assessing officer has also accepted that the disinvestment of shareholding in SBPL was in terms of the binding and governing agreement dated 5.07.2007read with the amendments thereto as also approved by FIPB from time to time, in as much as the assessing officer accepted the:-

initial disinvestment of 51% shares of Scorpio in the year (i) 2009 at the proportionate consideration agreed in the agreement dated 5.7.2007; number of shares held by the appellant in Scorpio (after (ii) the initial disinvestment and pursuant to right issue in terms of the amended agreement dated 7.8.2012); and Option fee received and offered to tax by the appellant in (iii) terms of the agreement dated 5.7.2007 read with the amendments thereto.

60 | P a g e

I.T.A .No.-4737/Del/2017

the respondent Revenue qua accrual of notional fair market value as the consideration for transfer of shares of SBPL for the following reasons:-

a. The computation of transfer price of the shares at 0.23% of the fair market value of the issued share capital of HEL agreed in the Schedule II of the said agreement was subject to terms and conditions contained in clause 4.6 thereof. The said clause provided that the transfer of relevant shares by appellant to GSPL would happen at fair market value, as may be agreed between the parties. It was only when the parties would fail to reach agreement qua such fair market value, that the method of determination of FMV stipulated in Schedule II, i.e., 0.23% of the fair market value of the issued share capital of HEL, was to be resorted to. In that view of the matter, it would be appreciated that, even under the aforesaid agreement of 2006, the transfer price of shares was to be determined as per the mutual agreement between the parties. The said price was not to be automatically computed on the basis of the interest held by appellant in the FMV of HEL.

b. Further without prejudice to the above, even applying the formula prescribed in the aforesaid agreement of 2006, i.e., 0.23% of Rs. 56,448 crores (being fair market value of HEL/VIL accepted by the Revenue), the value of Scorpio would calculate to Rs. 129.83 crores only, much less than the fair market value of Scorpio determined at Rs. 2065 crores by Kotak and / or consideration of Rs. 1241.32 crores actually agreed between the parties for the transfer of 51% shareholding of Scorpio.

61 | P a g e

I.T.A .No.-4737/Del/2017

right to GSPL to acquire shares of Scorpio. In consideration thereof, GSPL had agreed to pay an option fee of USD 10.2 million per-annum accruing on a daily basis under clause 4.4 (d) of the Agreement. Clause 4.6 of the Agreement provided that the price payable by GSPL to AS on transfer of shares pursuant to exercise of option by GSPL shall be determined in accordance with the formula set out in Schedule 1 of the agreement. In view of the above, the price for transfer of shares was to be determined in accordance with Schedule 1 of the Framework Agreement dated 05.07.2007, which has been reproduced supra. As per the said clause; the shares were to be transferred by AS at a minimum transfer price of USD 266.25 million (converted into rupees at prevailing exchange rate on the completion date i.e. 08.05.2007). Clause (a) (ii) provided for payment of additional consideration, to be computed as per the prescribed method, in the event the fair market value of the entire issued share capital HEL/VIL exceeded USD 25 billion, converted into rupees at prevailing exchange rate as on the completion date i.e. 08.05.2007. It would be pertinent to point out that, the exchange rate r a i l i n g as on 08.05.2007 amounted to Rs.40.88 per dollar (which has not been disputed by the Ld. Special Counsel of the Revenue). Accordingly, the equivalent fair market value of HEL/VIL at USD 25 billion, amounted to Rs. 1,02,200 crores. In the present case, FMV of HEL/VIL in the year of transfer of the impugned shares was computed at Rs.56,448 crores only, as per the valuation carried out by Kotak, which has been accepted by the Revenue. Accordingly, since the aforesaid FMV of HEL/VIL computed at Rs.56,448 crores, did not exceed the threshold FMV of Rs. 1,02,200 crores as stipulated in Schedule 1 of the Framework Agreement, the aforesaid clause (a)(ii) relating to computation and payment of additional consideration never became applicable. In that view of the matter, in accordance with the terms of the Framework Agreement dated 05.07.2007, AS was entitled to receive lump sum consideration

62 | P a g e

I.T.A .No.-4737/Del/2017

of USD 266.25 million only for the entire shares of Scorpio held at that point of time, i.e., prior to issuance and subscription of right shares in 2012. With the additional lump sum consideration of Rs. 300 crores agreed to be paid to the AS pursuant to fresh allotment of shares on right basis, the total lump sum consideration receivable by the appellant aggregated to Rs.1388 crores, i.e. Rs.1088 crores (USD 266.25 million x 40.88)] + Rs.300 crores. Accordingly, no amount over and above the lump sum amounts stated in the Framework Agreement dated 05.07.2007 read with Fourth Supplement thereto dated 07.08.2012 accrued to the assessee/AS under the said agreements, which could be brought to tax as capital gains in the hands of the assessee under section 45 read withsection48oftheAct.

63 | P a g e

I.T.A .No.-4737/Del/2017

“62. Effect of novation, rescission, and alteration of contract. –If the parties to contract agree to substitute a new contract for it, or to rescind or alter it, the original contract need not be performed. ”

He submitted that it is not open to the Revenue to question the conduct of the parties in revising /novating an already executed agreement, which is a matter of contract/agreement between the parties. The Share Purchase Agreement dated 12.3.2014 was entered into to document exercise of call option by GSPL to purchase the shares held by AS in Scorpio and to record the revised consideration payable for such transfer. While it is true that the essence of the Framework Agreement dated 5.7.2007, viz., vesting of put/ call option and transfer of shares pursuant thereto was retained in the Share Purchase Agreement dated 12.3.2014, the execution of such an agreement was necessary in order to document the factum of transfer of shares consequent upon exercise of call option by GSPL and revision in the sale consideration payable by GSPL. It cannot, therefore, be said that the Share Purchase Agreement dated 12.3.2014 was superfluous. Without prejudice to the above, if the Share Purchase Agreement dated 12.03.2014 and the revised higher consideration of Rs. 1241.32 crores stated therein was superfluous, as contended by the Revenue, then AS was only entitled to receive consideration ofRs.855 crores for transfer of remaining original shares and entire right shares, as stipulated in the original Framework Agreement dated 5.7.2007 read with the Fourth Supplement thereto, which alone could be adopted for the purpose of computing capital gains on transfer of shares of Scorpio, to the detriment of the Revenue.

I.T.A .No.-4737/Del/2017

07.04.2009; 10.05.2010; and 07.08.2012, through which shares of other Indian partners of Vodafone, viz., Aseem Ghosh, IDFC etc. who indirectly held the shares in VIL were acquired and added in the chain of intermediary companies between SBPL & VIL. As per the direction given by the Bench, Ld. Sr. Counsel, Mr. Vohra filed the entire chain of agreements in form of Supplementary Paper Book dated 10.10.2017. The summary of changes in indirect economic interest of SBPL & VIL from time to time is as under:-

Date: Economicinterest of SBPL inVIL 07.04.2009: 7.58% 10.05.2010: 7.67% (shares held by Aseem Ghosh through subsidiary companies, like,AG Mercantile, etc., acquired by NDC belonging to AS) 24.11.2011: 8.91% (shares of SMMS belonging to IDFC acquired by intermediaries companies)

65 | P a g e

I.T.A .No.-4737/Del/2017

Ram Rawatmul (87 ITR 349), wherein Hon’ble Apex Court held that the apparent is real unless contrary is proved and onus to prove the contrary is on the question who alleges that apparent is not real. The assessee was adequately compensated for the aforesaid additional acquisition of shares in the form of payment of additional option fee of USD 26,57,000 per annum, which has been offered to tax as revenue receipt by AS, and would have earned higher consideration from transfer thereof, in the event the enterprise value / FMV of shares of VIL exceeded USD 25 billion as per clause (a) (ii) of Schedule 1 of the Framework Agreement dated 05.07.2007, considering that the additional acquisition of shares of VIL by the intermediary companies resulted in corresponding increase in the indirect economic interest of Scorpio in VIL. In the instant case, the onus was on the Revenue to prove that for such additional acquisition, the appellant was legally entitled to any amount over and above the declared consideration in the Share Purchase Agreement dated 12.3.2014, with corresponding liability fastened on CGP to pay such an amount, albeit in violation .of the approval granted by the FIPB, by leading tangible evidence in that regard. The Revenue has miserably failed to discharge such burden and has purely on surmises, suspicions and conjectures averred that for computing capital gains on sale of shares of SBPL “some higher consideration” needs to be substituted in place of the declared consideration, without making an attempt to quantify such alleged higher consideration.

66 | P a g e

I.T.A .No.-4737/Del/2017

Arguments put forth by Special Counsel on behalf of the Revenue:-

b) Under the regulations of the Government of India as it then stood, foreign equity participation could not exceed 49% of the total capital. Thus, Hutchison group held direct interest in the Indian company (HEL) to the extent of nearly 42%; 10% interest was held through indirect holding companies and the 67 | P a g e

I.T.A .No.-4737/Del/2017

balance 25% out of the total stake of 67% was held through the companies owned and controlled by the appellant, Aseem Ghosh, IDFC etc. The holding structure stands recorded and discussed elaborately in the decision of the Hon’ble SC in the case of Vodafone vs. UOI in CA No. 733/2012. The ownership structure was placed before the Hon’ble Bench at the time of oral hearing.

c) With the view to beat the equity cap of 49%, an arrangement was entered into between the appellant and the Hutchison Group under which it was agreed that the appellant would be provided the necessary finances under the guarantee of the Hutchison Group and the monies would be invested by the appellant in the equity of the Indian company, HEL, with a further stipulation that the shares so owned by the appellant would be subject to call/put option. It was contemplated that as and when the foreign equity cap is relaxed, Hutchison group would exercise the option and the shares would be acquired from the appellant at a predetermined price, a chart showing the holding structure is enclosed as annexure 1 to this written submission.

d) On 1st March, 2006, a framework agreement was entered into amongst the appellant, Scorpio Beverages Pvt. Ltd. (SBP), MVH Services Ltd. (MVH), 3 Global Services Pvt. Ltd. (3GSPL) and ND Callus Ltd. Scorpio Beverages Ltd. was held 100% by the appellant and his wife. MV Healthcare Ltd. was a 100% subsidiary of SBP Ltd. and ND Callus was again a 100% subsidiary of MVH Ltd. Under this framework agreement, it was agreed that in consideration of 3GSPL providing financial assistance for ND Callus to subscribe to 38.78% shares in TIL

68 | P a g e

I.T.A .No.-4737/Del/2017

(which holds directly and indirectly 19.54% in HEL), Scorpio granted 3GSPL a right to subscribe to equity in ND Callus and/or to purchase equity of MV Healthcare. A call/ put option was granted to the parties whereby 3GSPL or its nominee got the right to exercise the option of acquiring the shares held by the appellant in HEL through a chain of subsidiaries for a transfer price set out in Schedule 2 of the said Framework Agreement.

e) Schedule 2 of the said agreement defines the transfer price of shares, as and when the option is exercised, as under: The transfer price shall be equal to the fair market i. value of 0.23% of the issued share capital of HEL. The Schedule also provided in very clear terms as ii. under: For the avoidance of doubt, the above formula will apply to the transfer price regardless of the amount of third party debt or other liabilities in MVH or any other company in which MVH has an interest and irrespective of the fact that SBP is not a direct shareholder in HEL.

The Schedule also goes on to explain that the above transfer price is agreed on the assumption that HEL has on issue 414,086,049 paid up and issued ordinary shares and the TII has or will have after completion of the restructuring currently being undertaken a direct and indirect 19.54% beneficial interest in HEL. The Schedule further goes on to state that in the event that in the period between the date of this agreement and the determination of transfer price, there occurs a change in the number of shares issued by HEL based on a third party market based mechanism, then the transfer price formula shall be suitably adjusted. If the beneficial interest of the appellant in

69 | P a g e

I.T.A .No.-4737/Del/2017

HEL suffers any change during the period, a fair and reasonable adjustment in the price would be made.

(f) On 8th May, 2007, Hutchison group sold its entire stake to Vodafone Pic and as observed by the Hon'ble SC in their judgment referred to above, “Vodafone stepped into the shoes of Hutch in all its entirety.”All the arrangements with different parties to beat the foreign equity cap were kept intact as it were with the only change that Hutch was released from its obligations arising from the agreements with different parties like the appellant, Aseem Ghosh, IDFC etc. and Vodafone entered into similar agreements with these parties to continue the existing arrangements. Thus, while the appellant facilitated Hutch to hold a certain economic interest in the Indian company, HEL, he continued to extend similar facilities to Vodafone with similar call/put options etc. A new framework agreement was entered into on 5th of July, 2007, with the same parties in place and Vodafone Plc acting only as a confirming party. (g) Mr. Srivastava emphasize the point that Vodafone paid the price of 67% interest in HEL to Hutch group which included the stake held by the appellant in the Indian company. Hence, it may be appreciated that Vodafone had acquired the interest in HEL held through the appellant directly from Hutch. The new Framework Agreement was necessary fallout of the transaction already entered into between Vodafone and Hutch and the new Framework Agreement of July 2007 was entered only to transfer the economic interest hitherto held by Hutch to Vodafone with the entire arrangements in spirit remaining unchanged.

(h) Under 'the Framework Agreement dated 5th July, 2007,

70 | P a g e

I.T.A .No.-4737/Del/2017

entered into amongst the same very parties as were parties to Framework Agreement 2006 (Vodafone joining in only as a confirming party, similar call/put options were granted and the transfer price was determined at:

USD 266.25 million converted into INR at the prevailing exchange rate as on completion date, i.e., 8th of May, 2007. PLUS Where the fair market value of share capital of HEL exceeds USD 25 billion, the proportionate value of shares held by SBP in HEL determined in a manner provided in Schedule 2.

The assessee was also to receive USD 10.2 million per annum for holding these shares in HEL on behalf of VEL till the option is exercised.

(i) CGP, a company in the chain of holding companies of VEL (earlier HEL), acquired 49% in SBP (and a similar stake in the companies held through Aseem Ghosh) in November, 2009 and the price paid was in terms of Framework Agreement dated 5th July, 2007. The appellant received Rs. 533 crores which worked out to 10.88 lacs per share. This acquisition was a consequence of modification of FDI rules in terms of press note no. 2 0f 2009.

(j) On 18/09/2009, NDC sold 11.75% stake in TIL to CGP so that CGP thereafter holds 49% in TII and the balance 51 % is held indirectly by the appellant and his wife.

(k) On 10/0512010, Aseem Ghosh sold 51% stake in AGM to NDC, i.e., 2.39% in VIL. For this additional interest, the appellant was paid an additional option payment equivalent to USD 3,213,000.

71 | P a g e

I.T.A .No.-4737/Del/2017

(l) On 24/11/2011, IDFC sold 100% stake in SMMS to TII and HTIL sold 7.39% in Omega to SMMS so that SMMS held 61.6% in Omega. The effect of this transaction was that TII now held 22.69% in VIL and SBPL held 8.91 % in VIL.

(m) The appellant was further given additional call option fee of USD 2,657,000 per annum for holding these additional shares.

(n) SBPL issued Right Shares and the appellant subscribed to 19,49,99,979 right shares. However, the appellant's holding in SBP remained 51%. It was agreed that 3GSPL would pay further amounts of Rs. 2,76,00,000 as a onetime payment and Rs. 5,00,00,000 as fee p.a. for holding these shares. It was also agreed that the transfer price of the right shares would be Rs. 300 crores.

(o) A share purchase agreement (SPA), dated 12th March, 2014 was entered into which followed the lifting of the foreign equity cap. CGP purchased entire 51 % stake held by the appellant in HELNIL for a total consideration of Rs. 12,41,32,06,200. The details of the basis for arriving at this figure have not provided except that in his submissions, the appellant stated that Rs. 300 crores represents the value of rights shares and the balance amount of Rs. 941.32 crores represents that of original shares.

(p) While it was stipulated under the Framework Agreement of 2006 as also under the Framework Agreement of2007 that the valuation of HEL shares at the time of exercise of option and the transfer would be done by Valuers of international repute specifically named under these agreements, no valuation was ever done as stipulated in these Framework Agreements, to find out the correct value of HEL shares and the proportionate

72 | P a g e

I.T.A .No.-4737/Del/2017

interest of the appellant in these shares. If the parties to the agreement did, in fact, adhere to the terms of the agreement, such a valuation has been withheld and has not been placed before the Revenue.

(q) While the Framework Agreement of 2007 clearly stipulated a price of 266.25 million representing the proportionate value of HEL shares, taking the total value of HEL shares at USD 25billion, the other part of the agreement of revaluing the shares of HEL when the value exceeds 25 billion was never carried out. It is interesting to note that the Enterprise Value of HEL was determined at 18 billion in February, 2007 and at 25 billion in July, 2007 after the consolidation and the company having been taken over by Vodafone. There has been a phenomenal growth in telecom sector in India in these years and accordingly the customer base and revenues of the Indian company did also witness substantial growth.

(r) The buyer, CGP, got a valuation done by Kotak Mahindra and Kotak worked out the total value of HELNIL at Rs. 564,483 million under DCF method. Kotak, thereafter proceeded to value the shares of SBP at Rs. 540 per share. Kotak valued HEL shares under DCF method and they adopted NAV method to value shares of SBP. The report of Kotak observed as under: "It is clarified that CGP has provided us with the historical financials of the companies in the HoldCo chain and SBP, and further, COP has confirmed that since the companies in the HoldCo chain and SBP do not have any business operations, there are no projections/ forecasts available for the companies in the HoldCo chain and SBP. It is clarified that we have assumed and relied upon, without independent verification, the accuracy and

73 | P a g e

I.T.A .No.-4737/Del/2017

completeness of the information/ projections/ forecasts provided to us, whether in oral or written form, or used by us and we assume no responsibility and make no representations with respect to the accuracy or completeness of any such information provided by VIL or CGP. We have assumed that VIL and CGP have furnished all information concerning the financial statement and assets and liabilities of VIL group, Indus, till earnings before interest and taxes, and all other cash flow items relevant for valuation. We clarify that in respect of VIL and Indus, we have not been provided with financial projections below earnings before interest and taxes or the balance sheet. Further, we have not been provided with financial projections for the companies in the Holdco chain and SBP. We have assumed that there is no material information or material change in the business and operations of VIL group, Indus, companies in the HoldCo chain and SBP post February 28, 2014 that would impact the valuation in this Report, and we assume no risk of any material adverse change having any impact on the businesses of VIL group. Indus, companies in the HoldCo chain and SBP.". Thus he submitted that the aforesaid disclaimer of Kotak explicitly brings out material weaknesses in the assumptions and the final value arrived at by them.

74 | P a g e

I.T.A .No.-4737/Del/2017

Accrued Sale Consideration of Call Options

Sale consideration as per different agreements:

A. Agreements entered by parties:-

S. Agreement Date Value of consideration Value of shares Remarks No s . 1. Framework 01.03.2006 Fair market value (FMV) of 0.23% of value of The liability of Agreement issued share capital of HEL shares of HEL intermediary 2006 companies not to be recognized for working out the transfer price.

75 | P a g e

I.T.A .No.-4737/Del/2017

S. Agreement Date Value of consideration Value of shares Remarks No s .

76 | P a g e

I.T.A .No.-4737/Del/2017

S. Agreement Date Value of consideration Value of shares Remarks No s .

77 | P a g e

I.T.A .No.-4737/Del/2017

S. Agreement Date Value of consideration Value of shares Remarks No s . against the original share of 4,100. 300 Crores for rights shares.

The amount of Rs. 300/- has not basis whatsoever. 6. Sale 12.03.2014 Rs.12,41,32,06,200/-is the The value per share is The assessee has (i) purchase sale consideration of both worked out as under:- not provided any agreement original shares and right 12,41,32,06,200 / valuation as to between shares 19,50,05,079 how the assessee Sh. Analjit = Rs.63.65 has reached the Singh and The breakup of the above figure of Smt. Neelu amount of Rs. Rs.1241.32 Cr. Analjit 12,413,206,200/- as is given Singh and as below:- M/s SBP • Ltd and Mr. Analjit Singh M/s CGP 9,979,244,200 India (41/51*12,413,206,20 Investment 0) Ltd. • MrsNeeluAnaljit Singh 2,433,962,000 (10/51*12,413,206,20 0)

Rs.1241.32 cr. (300 Cr. + Rs.18,45,726/- per As per the 941.32 Cr.) share submission dated As per the submission dated 30.12.2016 of the 30.12.2016 the total assessee, the consideration received is original share i.e. Rs.12,41,32,06,200/-. 5100(4100 + 1000) shares were The breakup of this amount is sold at :- Rs.9,41,32,06,200 Rights share – 300 Cr. /- in terms of (@15.38 per share) agreed price. It is Original share – 941.32 Cr. not clear how the agreed price was arrived at by both the parties to transaction. For original shares, the price works out to be Rs.18,45,726/- (9,41,32,06,200 / 5100) per share. It is worth noticing that on the same day i.e. on 12.03.2014 as per the Sale purchase agreement dated 12.03.2014 the value of shares of 78 | P a g e

I.T.A .No.-4737/Del/2017

S. Agreement Date Value of consideration Value of shares Remarks No s . M/s SBP Ltd. was valued at two different prices i.e. @ Rs.15.38 per share for right issue & @ Rs.18,45,726 for original shares

B. Sale Consideration disclosed:-

S.No. Year Actual Price per Remarks receipt share 1 17.12.2009 Rs.533 Cr. Rs.10.88 lacs Sh. Analjit Singh Sold 4,900 shares out of 9,000 shares of M/s SBPL to M/s CGP on 17.12.2009. As per the Framework agreement 2007 the amount for sale of whole amount of 10,000 shares is US$ 266,250,000 (with forex rate at Rs.40.88 per US $ the amount is Rs.1088.43 Cr.). No exercise done for FMV of shares of VIL. As Sh. Analjit Singh sold only 4,900 he received 49% of Rs.1088 Cr. i.e. Rs.533.33 Cr. (US$ 130,462,500) which is Rs.10.88 lacs per share.

2 21.03.2014 Rs.997.92 Cr. Rs.63.65 Total consideration received by Sh. Analjit Singh Received by and Smt. Neelu Analjit Singh Sh. Analjit isRs.12,41,32,06,200/-. The total shares sold Singh and including right share and original share is total 19,50,05,079. Therefore, the value per share is consideration worked out as under:- received was 12,41,32,06,200 / 19,50,05,079 Rs.1,241.32 = Rs.63.65 per share cr. which is total However, the aforesaid working does not reflect the consideration acquisition of AG Mercantile shares and SMMS of Sh. Analjit shares in 2010 and 2011 respectively. Singh and Smt. Neelu Analjit Singh.

79 | P a g e

I.T.A .No.-4737/Del/2017

C. Points related to valuation:-

S. Agreeme Year Value of shares (Rs.) Remarks Valuation N nt / o basis of share price 1 Valuation 19.03.2014 Rs.5.4/- The buyer CGP India Valuation by Hybrid report dated per share Investment Ltd. got the method. 19.03.2014 of valuation of M/s SBP Ltd. from Kotak Kotak Mahindra Capital Therefore,it arrived Mahindra Company Ltd. which valued the share price of Capital shares of M/s SBP Ltd. at SBP Ltd. by Company Ltd. Rs.5.4/- per share by aHybrid following a Hybrid (Merchant methodwhich is not the method which is not banker) prescribed method as per a prescribed method Income Tax Act/ Rules. as per the Income Tax Act / Rules, nor It valued VIL by following DCF by any yardstick, a method. However thereafter, to recognizable arrive the valuation of M/s SBP /correct method of Ltd. NAV method was adopted valuation. for all the companies in the holding chain after taking the value of VIL as per DCF method. By this method the valuation was done at a lower price such as only to claim that the agreed price of actual transaction was higher than the valuation done by a merchant banker.

80 | P a g e

I.T.A .No.-4737/Del/2017

fee for holding the shares and with a stipulation that the shares would be transferred to Hutch/VIL once the cap is lifted at a pre-agreed price. It is precisely for this reason that the decisions relied upon by the appellant would be wholly inapplicable to facts of the present case as the Revenue has only adopted the full value of consideration as agreed to in the successive agreements between the parties.The perusal of both the Framework agreements of 2006 and 2007 clearly shows thatthe transfer price as agreed between the parties was linked to the fair market value of shares of HEL/VIL. This was not a hypothetical price or notional value which the AO took into account but the price which was originally agreed to in 2006 and the same basis continued in 2007 agreement with some modification in the mode of working in as much as upto the date of the agreement a fixed amount was set out which represented the proportionate value of shares held by SBP inHEL/VIL by taking the enterprise value at USD 25 billion and any increase in the value of HEL/VIL beyond 25 billion was to be further added to the price after getting the valuation done by Valuers of international repute. The provisions of section 48 contemplate “full value of consideration” received or accruingas the starting point for the computation of the amount of capital gains. It is not in dispute that the full value of consideration accruing would represent the consideration agreed between the parties. In this case, the consideration agreed between the parties was always linked with the fair market value of shares of HEL. The AO was, therefore, fully justified in adopting the fair market value of HEL shares as the full value of consideration agreed between the parties. It is not the case of Revenue that full value of consideration necessarily means and represents the fair market value of the capital asset. However, the given case, the agreements do provide for the rights of the parties and the amount of consideration the appellant is entitled to once the

81 | P a g e

I.T.A .No.-4737/Del/2017

options are exercised. It is submitted, even at the cost of repetition, that the transfer price determined between the parties was none other than the market value of proportionate shares held in HEL. Thus,the argument that the AO exceeded his jurisdiction in adopting the fair market value of HEL shares as the full value of consideration in terms of section 48 is wholly misplaced.

I.T.A .No.-4737/Del/2017

market value of HEL shares falling to the share of the AS to Hutch and only thereafter it got the opportunity to continue with the arrangements with the appellant as it were. From the said judgment itself, he pointed out that the Hon’ble Supreme Court quoting the finding of the Tribunal that the assessee cannot shut out the ITO from finding out what is the full value of the assets transferred by merely putting a figure on the documents of transfer. In that case, ITO took the value to be market price of the share which was 620 per share but the transfer has taken place at Rs.136 per share. Their Lordships are further quoted from the order of the Tribunal at the right of the ITO to determine the full value of the assets is always there especially in the case where the assessee refused to keep all the information to the ITO and the value of the assets is given by him is so suspiciously flow. Based on these findings of the Tribunal, the Hon’ble Supreme Court reached to the conclusion that the question referred to the Hon’ble High Court cannot be answered as the contract was obscure. Accordingly, the Hon’ble Court directed the Tribunal to rehear the matter to determine the unusual nature of the transaction and the conduct of the party’s concern and to find out what was the actual price received by the assessee. Thus, it needs to be appreciated when a certain transfer price for shares under call/put option was agreed to between the parties and the rights and obligations had accrued to the parties, it was not necessary to enter into a fresh share purchase agreement which puts an arbitrary figure of Rs. 300 crores for right shares and Rs. 941 crores for original shares without specifying any basis whatsoever how these figures have been arrived at or what was the reason for the deviation from the prices agreed to in the framework agreement of 2006 and that of 2007. If the market value of HEL shares was the basis of the transfer price agreed to between the parties, any departure there from has to have some rational basis and an arbitrary

83 | P a g e

I.T.A .No.-4737/Del/2017

figure in the Sale Purchase Agreements (SPA) cannot be the basis to suggest that the amount mentioned in the SPA alone represented the rights of the parties or to suggest that once the SPA was signed all other earlier arrangements became a nullity. It is submitted that the options were exercised in full including the right shares. When the right shares are issued, these are subscribed on the basis of the entitlement of the existing shareholder but after these are subscribed, these get merged into the total equity of the company. There is no separate market price of right shares as distinct from original shares. The market price of right shares will always be the same per share as that of the original shares. Under the SPA, the value of original shares comes to Rs. 18,45,726 per share but the value of right shares comes to only Rs. 15.38 per share which is absurd on the face of it.In the first place, the value of right shares cannot be different from the original shares. In fact, at the point of sale there can be no such distinction as the right share or the original share. Secondly, the Framework Agreement itself provided that the option would be exercised for whole or part of the shares held in SBP which, in turn, holds in HEL/VIL. This kind of bifurcation of the shareholding into original shares and right shares is wholly impermissible and still worse is the assignment of an absurd value to these shares. Thus, the share purchase agreement is contrary to the terms of the Framework Agreement and there is absolutely no explanation of such a major departure. The document (SPA) is a superfluous one for the reason that the rights of the parties had already been determined under the Framework Agreements. It was clearly provided in those agreements that once the option is exercised, the shares would get transferred under a procedure set out thereinand the appellant would be entitled to receive the price as agreed earlier. If the entire process of transfer and the consideration is pre-determined, there would be absolutely no

84 | P a g e

I.T.A .No.-4737/Del/2017

occasion or justification to enter into a fresh SPA unless there are some compelling reasons for the same. The assessee has not been able to point out any reason as to why the SPA was at all required to be entered into and what was the reason for such a vast departure from the rights which had already accrued to the appellant. In the absence of a valid explanation, the terms of the SPA have got to be ignored and the rights as agreed to in the successive agreements have to be the basis for arriving at the full value of consideration accruing to the appellant. It is submitted that contrary to the assertions of the assessee, the transaction is not at arm’s length. In the first place, the transaction is not between unrelated parties. As pointed out earlier, the appellant has been associated with the Hutch group since 1992 and also with Vodafone from the day Vodafone took over the business from Hutch. The assessee remained the director of the Indian company for a long period of time. The appellant is also associated with Vodafone in a number of other business ventures. A subscription agreement was entered into on 07/04/2009 between CGP India Investments, Malsi Estates Ltd. and the appellant which forms part of the Revenue’s paper book. Further, the amendment letter dated 18/08/2010 records in para 2 that the assessee acknowledges the amount of consultation fee having been paid to him. As pointed out at the time of oral hearing, that the reference to consultancy agreement in the framework agreement or its amendment letter was really baffling. The close association of the appellant with Hutch/Vodafone in holding the shares and in the operation of the company in India is a matter of record and the transaction cannot be regarded as having been entered into independent third parties. The assessee had contended at the time of hearing that the Revenue ought to establish that the parties have duly acknowledged their rights before substituting any price for the declared price. This plea is wholly

85 | P a g e

I.T.A .No.-4737/Del/2017

misplaced. Once the agreement between the parties’ sets out the transfer price, the onus is not on the Revenue to establish the mode and the manner in which the obligations have been mutually discharged/ settled particularly in cases of such close association. Revenue has only to demonstrate that the right to receive a certain consideration accrued to the appellant.The manner of discharge of the right is in the exclusive knowledge of the assessee. Revenue has no onus to demonstrate beyond the accrual of the right to the amount of consideration. The onus would be on the assessee to justify the transfer price which is in departure of the price actually agreed for under the Framework Agreement. The case of CIT v Balbir Singh Maini in CA no. 15619/2017 relied upon by the appellant, in fact, goes to support the case of Revenue because in the present case the consideration for the call/put option was very well recognized by both the parties and what was the right of one was the obligation of the other. The AO did not proceed on any hypothetical assumptions but his determination of the full value of consideration was based on the terms of the agreement. The consideration did in fact accrue. The basis of the transfer price under the SPA of 2014 is obscure and remains unspecified. The appellant has not been able to explain how the price of Rs. 300 crore for right issue and Rs. 941 crore for original shares was determined when he had the clear mandate/ right to receive proportionate market value of HEL shares under the Framework Agreement. Besides, when the shares were sold in 2009, the appellant received the price as per the framework agreement atleast to the extent of the first part which goes on the presumption that the total value of HEL shares has not exceeded USD 25 billion but the amount of consideration indicated in the SPA is a complete departure and is wholly arbitrary. It is an admitted fact that there is no working for the price of Rs. 941 crores indicated in the SPA. The

86 | P a g e

I.T.A .No.-4737/Del/2017

argument that a third party cannot decide what consideration has accrued between the parties is wholly untenable in the facts of the present case for the reason that Revenue is not seeking to decide the amount of consideration that has accrued between the parties. Revenue is only going by the agreement reached between the parties which decide that the fair market value of HEL shares would represent proportionately, the value of SBP shares as clearly agreed to between the parties. The transfer price agreed between the parties is a vested right of the appellant and cannot be given a complete go by only on the basis of SPA entered into a few days before the transfer particularly when the appellant has no explanation whatsoever for the departure from the existing agreement which had already created such rights in his favour.

87 | P a g e

I.T.A .No.-4737/Del/2017

Agreement of 2006 as also of 2007.The AO has not disputed the valuation of shares of HEL/VIL as done by Kotak. He has not gone into the question whether the enterprise value of HEL had exceeded USD 25 billion. He has only adopted the value of HEL shares as determined by Kotak and has taken the same as the basis for determining the value of appellant’s indirect holding in HEL. Since Assessing Officer has not questioned the valuation of HEL shares, therefore, same is not raised by the Revenue under the given circumstances. Thus, there is no dispute as regards the value of HEL shares is concerned. However, the subsequent process of determining the value of shares of SBPL was not the act of an independent valuer. An independent valuer would have valued the shares of a holding company depending upon the internationally accepted rules of valuation. It would then not go by the parameters set out in one agreement or the other. It is in this context that Revenue is seeking to point out that the valuation report of Kotak as regards the valuation of SBP shares is not an independent report. In the first place, the framework agreement of 2006 clearly stipulates that the liability of intermediary companies is not to be taken into account. Secondly, these are 100% subsidiaries of the appellant. The liability of one company represents the assets of the other. There are no third party liabilities which need to be accounted for. Even going by the contention of the appellant, Revenue has filed a chart showing the actual liabilities appearing in the accounts of these intermediary companies and this table shows that the value of consideration adopted by the AO is in tune with the value as may be finally determined after accounting for such liabilities. This contention is without prejudice to the primary contention that the liabilities of intermediary companies have not to be taken into account. Mr. Srivastava has filed separately a chart providing a working of the

88 | P a g e

I.T.A .No.-4737/Del/2017

liabilities of the intermediary companies. As regards the submission on behalf of the assessee that difference arises primarily on account of the amount set apart for payment of dividends to preference shareholders, he submitted that such a claim is clearly inadmissible in view of sub-rule 2(ii) of Rule 11UA of the IT Rules. Even otherwise, such liabilities cannot be taken into account in arriving at the value of shares of a company under NAV method. The valuation done as per the rule works out to Rs. 136 per share and the AO has taken the value of Rs. 132 per share only (initially it was Rs. 142.70, which was arrived at after taking the appellant’s stake in VIL at 3.9% instead of the correct stake at 3.65%. Thus, the valuation adopted by the AO is in conformity with the Framework Agreements, value of HEL shares as determined by Kotak and rules of valuation provided for under Rule 11UA.

I.T.A .No.-4737/Del/2017

the AO in adopting the proportionate market value of HEL shares as the full value of consideration in terms of section 48 is fully justified as the said consideration emanates from the rights of the parties which got determined at the time of grant of the call/put options and had a rational basis. The reliance on SPA which was entered into a few days before the transaction in disregard of the rights of the parties already determined under earlier agreements and without having any basis whatsoever for a significant departure there from is completely misplaced, particularly in view of the fact of there being a close relationship between the parties to the transaction.

Decision

� Firstly, whether the Assessing Officer or the Ld. CIT(Appeals) were justified in enhancing the sale consideration of SBPL shares from Rs.1241.32 crores (assessee’s part of sale consideration is Rs.997,92,44,200) to Rs.22,33,42,85,070/- and consequently, enhancing the amount of capital gains declared by the assessee; � Secondly, flowing from the above issue, whether on the facts and circumstances of the case enhancement of such sale consideration can be said to have been “accrued” to the assessee in terms of section 48 of the Act or not; � Thirdly, whether the valuation of the shares of SBPL by taking the fair market value of VIL shares as adopted by the AO and by the Ld.CIT(A) at Rs.142.70 per share is justified;

90 | P a g e

I.T.A .No.-4737/Del/2017

� Fourthly, whether the provisions of section 50D can be invoked on the facts of the present case to justify the adoption of fair market value of unquoted/unlisted shares of SBPL; and � Lastly, what should be the value of sale consideration of SBPL on the facts and circumstances of the case?

I.T.A .No.-4737/Del/2017

India Investment Ltd. which was subsidiary of Hutchison Group. With view to beat the equity cap of 49%, an arrangement was entered between the AS and the Hutch Group in which it was agreed amongst the parties that the assessee would be provided necessary finances under the guarantee of the Hutch Group and the money would be invested in the equity of Indian company ‘HEL’. With a further stipulation that shares so owned by the AS would be subject to call/put option. It was clearly contemplated that, as and when foreign equity cap would be relaxed; Hutch Group through its own subsidiaries would acquire the shares from the assessee at a pre- determined price. On 02.02.2006, SBPL was incorporated with the share capital divided into 10,000 equity shares of Rs.10/-each, being jointly held by Shri Analjit Singh & Ms. Neelu Analjit Singh. In pursuance of intention of the parties, a Framework Agreement was entered on 01.03.2006 which has been placed before us by the Revenue at the time of hearing. This ‘Framework Agreement of 2006’ was entered into amongst the; i) AS; ii) SBPL (a company owned by AS; iii) MVH (100% subsidiary of SBPL); iv) NDS (a 100% subsidiary of MVH); v) 3 Global Services Pvt. Ltd (a Mauritius based company held by Hutchison Group). This was precursor to all the agreements and first of such agreement whereby the parties have mutually entered into contractual obligation for “call option” and “put option” to be exercised on SBPL shares on certain events and also decided the transfer price of such shares. The transfer price was linked to the fair market value of HEL shares, that is, equity capital value of HEL and it was also decided that no liabilities of intermediary companies would be reduced from such valuation. At this stage of entering into the agreement it would be relevant to see the shareholding structure/ pattern of the various intermediary companies of the AS, CGP, 3 GSPL and TIL holding direct and indirect interest in HEL.

92 | P a g e

I.T.A .No.-4737/Del/2017

CGP India Investment Ltd 01-03-2006 (CGP)

Asim Ghosh & subsidiaries Analjit Singh & wife (AS) 100% Scorpio Beverages P Ltd (SBP) (SBP in VIL = 3% x 38.78% x 19.54% = 0.23%) As per Framework Agreement 100% 2006 (FA 2006), GSPL has call MV Healthcare Services P Ltd (MVH) option to purchase MVH shares at a transfer price determined at fair market value given in Schedule 2. 100% (3%) 3 Global Services Pvt Ltd The transfer price is 0.23% of fair (GSPL) finance ND Callus Infoservices P Ltd (NDC) market value of VIL(earlier HEL). Financed NDC to acquire 97% After GSPL subscribes to NDC 38.78% stake in TII with a shares, MVH has only 3% stake in right to subscribe 97% shares 23.97% 38.78% NDC which in turn has 38.78% of NDC stake in TII. Further, TII has 19.54% stake in VIL. Therefore, 37.25% Telecom Investment India P Ltd (TII) transfer price is 3% x 38.78% x 19.54% = 0.23% of VIL 100% JayKay Finholding India P Ltd (JKF) 100% UMT Investments 12.9583% 0.5126% Ltd(UMTI) 100% Usha Martin Telematics Ltd (UMT) 6.0672% Hutchison Essar Limited (HEL)

(a) Such fair market value as may be agreed between the Parties; and if the Parties fail to reach agreement within 30 days of the date of the Transfer Notice, then;

93 | P a g e

I.T.A .No.-4737/Del/2017

(b) Such fair market value as may be determined in accordance with the formula set out in Schedule 2.

Schedule 2 of the said agreement defined the transfer price in the following manner:-

(a) The transfer price shall be equal to the fair market value of 0.23% of the issued share capital of HEL. (b) The Schedule also provided in very clear terms as under: “For the avoidance of doubt, the above formula will apply to the transfer price regardless of the amount of third party debt or other liabilities in MVH or any other company in which MVH has an interest and irrespective of the fact that SBP is not a direct shareholder in HEL.”

Thus, under the Framework Agreement of 2006, the value of the share capital of SBPL (i.e., transfer price of SBPL) was agreed to 0.23% of value of shares of HEL and the liability of the intermediary companies was not to be recognized for the working out of the transfer price.

I. MR ANALJIT SINGH and MRS NEELU ANALJIT SINGH and II. SCORPIOS BEVERAGES PRIVATE LIMITED and III. MV HEALTHCARE SERVICES PRIVATE LIMITED and IV. 3 GLOBAL SERVICES PRIVATE LIMITED and V. ND CALLUS INFO SERVICES PRIVATE LIMITED and VI. VODAFONE INTERNATIONAL HOLDINGS B.V.

94 | P a g e

I.T.A .No.-4737/Del/2017

Under this agreement also, the AS was given an option to sell the shares of SBPL in any part thereof (put option); or the option to GSPL either directly or through any person nominated by GSPL to buy the shares of SBPL (call option), as per agreed formula as and when the FDI regulation permitted in regards any foreign investment in tele- communication company in India. Under this agreement of 2007, one of the circumstances for the grant of call option by the assessee to GSPL or its affiliate was that, they will pay the AS an amount aggregating to US $ 10.2 million per annum accruing on daily basis. Clause 4.6 stipulated for the transfer price pursuant to the put/call option as per the formula set out in Schedule-1(the relevant portion of which has been reproduced above). Under the said schedule, the transfer price was determined, firstly, at US $ 26,62,50,000 converted into INR at the prevailing exchange rate at the completion date on 08.05.2007; and secondly, it was provided that if the fair market value of the entire issued share capital of HEL exceeds US $ 25 billion, then proportionate shares held by SBPL in HEL would be determined by the manner provided in Schedule-2. Thus, the working of transfer price given in Schedule-2 was to come into play when the fair market value of the entire issued share capital of HEL exceeds US $ 25 billion, but before that, i.e., if it does not exceed US $ 25 billion, then the transfer price was stipulated/determined at Rs.26,62,50,000/-.

I.T.A .No.-4737/Del/2017

not revisited this clause, then in that case, US $ 266.25 million was recognized as the transfer price of entire SBPL shares. However, on a hind sight perusal of the fair market value calculation as given in Schedule-2, it is seen that an illustrative working has been given to calculate the equity fair market value of SBPL/NDC/MVH. The said illustration for the sake of ready-reference is reproduced hereunder:- (in US $ millions) Item As per Illustrative example in Schedule 2 Market enterprise value of HEL 26,327 Less: Net debt of HEL (1,327) Equity value of HEL 25,000 (10,000) Less: Holding company discount 40% 15,000 Implied 100% equity value of HEL at TIL level Enterprise value of TIL (19.54%) 2,931 Less: Investment cost of TIL (419.75) Profit on disposal 2,511.25 (569.05) Less: long term capital gains tax on profit (22.7%) Post tax enterprise value of TIL 2,361.95 Less: net debt of TIL (160.45) (570.29) Less: book value of preference shares 1,631.21 Indicative equity fair market value of TIL NDC enterprise value 38.78% 632.58 (170.51) Less: liquidity discount on local shares (27%) 462.07 Enterprise value post liquidity discount Less: net debt (178.07) Less: preference shares (17.75) 266.25 Indicative NDC equity fair market value

From the aforesaid illustrative calculation, it can be culled out that, the fair market value of HEL has been first arrived at US $ 26,327 billion and after reducing net debt, equity value of HEL has been given at US $ 25 billion. From this working one thing is

96 | P a g e

I.T.A .No.-4737/Del/2017

ostensibly clear that the market value of HEL has been taken for the purpose of calculation. Another strange feature which is seen that, suddenly in the working, there are adhoc discounts, like 40% discount on account of holding companies for which again no basis has been provided. At the end, somehow the fair market value of SBPL/NDC/MVH shares has been worked out at US $ 266.25 million, which incidentally happens to be the same figure which has been adopted as a transfer price of the SBPL shares in Schedule-1 as discussed above. If the working of US $ 266.25 million as given in Schedule-1 is to be reckoned from the aforesaid illustrative working, then ostensibly the fair market value of equity of HEL are the foundation and the criteria for working/ determining the transfer price which has been agreed by the parties to the agreement. Another important fact permeating all through the subsequent agreements is that, this amount of US $ 266.25 million as taken in agreement of 2007 has been adopted as the transfer price by the parties and the entire case of the assessee before us is that, this transfer price is the value of SBPL which is to be adopted as a true value. We are finding it bit difficult to fathom this proposition, firstly, how this US $ 266.25 million has been arrived as transfer price in Schedule-1; and secondly, if this is the transfer price, then it is seen that it has been arrived at by taking the fair market value of HEL shares as on May 2007 which has been taken at US $ 25 billion after reducing the net debt. Now, whether this price of US $ 266.25 million is to be reckoned as the final price for value of SBPL shares, for all the future call/put option when exercised? Answer is bit elusive as how the transfer price of US $ 266.25 million which is based on FMV of HEL shares in 2007 and too was on the equity capital valuation at US$ 25 billion can be the price for all future reference. Be it that as may be, one thing is fairly evident that the transfer price as per this agreement also is based on FMV of

97 | P a g e

I.T.A .No.-4737/Del/2017

HEL. This is substratum of the matter that the FMV of HEL and later on VIL has to be reckoned as transfer price.

� The ‘Framework Agreement dated 01.03.2006’ envisaged fair market value of issued share capital of HEL for determining the value of SBPL shares. � Even if we agree with the contention of the Ld. Sr. Counsel, Mr. Ajay Vohra that the agreement of 05.07.2007 alone is to be reckoned, then we find that in ‘Framework Agreement of 2007’ also, not only the similar clause of call/put option has been enshrined but also the determination of transfer price is by and large based on fair market value of equity share of HEL. � In the agreement of 2007, the SBPL value of US $ 266.25 million was based on fair market value of HEL. In terms of INR, the value of SBPL shares in the year 2007 aggregated to Rs.1088 crores. � So far as the option fee is concerned, there is no dispute and the assessee has been offering the same as return of income and same has been taxed as revenue receipt year after year.

98 | P a g e

I.T.A .No.-4737/Del/2017

also granted. Post this event, the share holding structure was changed in the following manner:-

CGP India Investment Ltd 07-04-2009 (CGP)

AS + NAS = 3.87% Asim Ghosh Analjit Singh & wife (AS) As = 3.11% 49% 51% 51% (41% with AS + 10% with NAS 49% (SBP in VIL = 38.78% x 19.54% Scorpio Beverages P Ltd (SBP) AG Mercantile Co P Ltd (AGM) = 7.58%) (earlier Goldspot Mercantile) 100% 100% MV Healthcare Services P Ltd (MVH) Plustech Mercantile Co P Ltd 100% 100% ND Callus Infoservices P Ltd (NDC) Nadal Trading Co P Ltd (earlier Centrino Trading) 38.78% CGP acquired 49% each in SBP and 23.97% AGM in Nov 2009 from AS and AG or 533 cr and 329 cr respectively – FA 37.25% Telecom Investment India P Ltd (TII) 05-07-2007 provides value of SBP and AGM at $266.25m and $164.51m 100% till FMV of VEL is $ 25 billion. exchange rate to be taken on 07-05- JayKay Finholding India 2007 i.e., Rs. 40.88 per 1 US $ P Ltd (JKF) 100% 12.9583% 0.5126% UMT Investments SMMS Investments 100% IDFC Ltd(UMTI) P Ltd 100% 54.21% Usha Martin Telematics Omega Telecom 45.79% HTIL Ltd (UMT) Holdings P Ltd 6.0672% 5.1108% Vodafone India Limited (VIL)

99 | P a g e

I.T.A .No.-4737/Del/2017

Supplement to the Framework Agreement’ was entered between the AS, SBPL, GSPL and various other companies to provide similar call/put option for the sale of newly issued right shares by the AS to GSPL at pre-agreed lump sum consideration of Rs.300 crores.

100 | P a g e

I.T.A .No.-4737/Del/2017

consideration of Rs.1241.32 crores. The relevant recitals as given in the sale purchase agreement are as under:- (A) “The company is engaged in the business of investing (but not trading) in securities of telecommunications companies in India. (B) Presently, AS holds 51% of the issued equity share capital of the company and CGP holds 49% of the issued equity share capital of the company. (C) Pursuant to the Framework Agreement (as defined below). As is entitled to exercise options, subject to certain terms and conditions set cut in the Framework Agreement to put any or all the shares (as defined below) held by AS at any time to GSPL (as defined below) or any person nominated by GSPL to the extent. GSPL or any of its Affiliates (as defined in the Framework Agreement) becomes eligible under application Indian laws to hold such shares. (D) Pursuant to the exercise by AS of the put options described in Recital (C) above, As proposes to sell to CGP, which has been nominated by GSPL, and CGP proposes to purchase from AS< the sale shares (as defined below), constituting 51% of the total issued and paid up equity share capital of the company on the terms and conditions contained herein. By way of a letter dated 20 February 2014, the Foreign Investment Promotion Board has issued a letter, inter alia, granting approval to the transactions contemplated under this Agreement. (E) This Agreement sets out the terms and conditions on which the sale shares will been purchased by CGP from AS. The relevant clause for sale and purchase are as under:- …………………………. 2.1. “Subject to the terms and conditions herein and the terms of the Framework Agreement CGP hereby undertakes to purchase 195,005,079 shares from AS (the “Sale Shares”) and AS hereby undertakes to sell to CGP the Sale Shares free and clear from as Encumbrances, on the Closing Date for a consideration equal to the Transfer Price. 2.2. In consideration for the sale shares, CGP hereby agrees to pay AS an aggregate amount of Rs.12,413,206,200 (Rupees Twelve Billion Four Hundred and Thirteen Million Two Hundred and Six Thousand and Two Hundred only) (The “Transfer Price”). 101 | P a g e

I.T.A .No.-4737/Del/2017

From the perusal of the aforesaid agreement it is seen that, the framework agreement as referred in the sale purchase agreement is the ‘Framework Agreement dated 05.07.2007’ and it is in pursuant of the same framework agreement that put option has been exercised by the AS and the entire share in SBPL has been sold to CGP. So far as the consideration of Rs.1241.32 crores is concerned, no working of the determination of sale price of the shares has been mentioned. Clause 3.2 as reproduced above though indicate that Kotak Mahindra has been requested to prepare a valuation report relating to the fair market value of the entire issued share capital of VIL pursuant to Schedule-1 to the framework agreement (i.e. dated 05.07.2007) to confirm the transfer price determination by the parties. As discussed in detail herein above, the transfer price in Framework Agreement dated 05.07.2007 in Schedule-1, the value of the HEL has been stated to be US $ 25 billion and this is borne out from the fact that sub- clause (ii) of clause (a) provides that the transfer price would be different when the fair market value of the entire issue share capital of HEL exceeds US $ 25 billion, then there would be change in SBPL value. Otherwise, the transfer price of the SBPL shares was fixed at US $ 266.25 million which was based on some illustrative working given in Schedule-2 by taking the fair market value of entire issued share capital of HEL at US $ 25 billion. Though, there is absolutely no clarity as to whether this illustrative working is the basis on which transfer price of US $ 266.25 million have been worked out, but, since this transfer price determined at that time was clearly linked with the fair

102 | P a g e

I.T.A .No.-4737/Del/2017

market value of the entire issued share capital of HEL, therefore, it has to be reckoned that FMV of HEL and later on VIL was always construed to be the basis of determination of SBPL shares. In the ‘Sale Purchase Agreement’ though there is an acknowledgement of the fact that the fair market value of the entire issued share capital of VIL should be taken in pursuant to Schedule-1 of the Framework Agreement of 2007 and then to confirm the transfer price determined by the parties, but it seems that while adhering to this clause, the transfer price has been agreed at Rs.1241.32 crores which apparently is not based on the framework agreement of 2007. In the valuation report of Kotak which has been placed on record, it is seen that the fair market value of VIL has been computed at Rs.56,448 crores and SBPL’s shares have been valued at far lower price, i.e., per share of SBPL has been valued at Rs.5.40. Now, whether this valuation report and the value of SBPL is correct or not would be a subject matter of discussion in our later part of the order, however, what we find from the perusal of the ‘Sale Purchase Agreement’ is that, the sale price consideration of the entire SBPL shares is neither in accordance with the Framework Agreement dated 05.07.2007; nor it is in accordance with the valuation report of Kotak. Nowhere in the said agreement, there is any clause that all the earlier framework agreements or the agreements entered between the parties have been superseded or rescinded. Albeit in the sale purchase agreement there is reference that, it is in pursuance of Framework Agreement of 2007. In the earlier framework agreement, it was agreed amongst the parties that once the option is exercised, then the shares would get transferred under the procedure set out therein and the assessee would be entitled to receive the price accordingly. The entire process of transfer under consideration was agreed as per the formula/procedure as laid down therein, which has discussed above, was based/linked with fair

103 | P a g e

I.T.A .No.-4737/Del/2017

market value of HEL and now VIL. Based on this fair market value of VIL, the value of SBPL shares should have been worked out.

What has been envisaged here in this section is the full value of consideration received or accruing as a result of the transfer of capital asset. Mr. Vohra had strongly contented that the “full value of consideration” does not refer to or can be said to mean fair market value. In support strong reliance was placed on the judgment of Hon’ble Delhi High Court in the case of CIT vs. Nilofar I. Singh reported in 2009 (309 ITR 323) and catena of other judgments, the list of which has already been incorporated above while dealing with the Ld. Counsel’s arguments. So far as the said proposition of the Ld. Sr. Counsel is concerned, we are in tandem and agree with him that the full value of consideration does not refer to fair market value of the assets and this proposition is well settled for which there cannot be

104 | P a g e

I.T.A .No.-4737/Del/2017

much debate. Wherever the legislature, intended to substitute the actual/full value consideration with the fair market value, specific deeming provisions have inserted in the statute, for example, section 50CA, 50D etc. Earlier, when there was a difference, if any, between the fair market value of the assets and the actual consideration received, then the same was taxed as a deemed gift u/s 4(i)(a) of the Gift Tax Act, 1958 in the hands of the transferor till the repeal of the said Act, w.e.f 01.10.1998. Otherwise in the Income tax Act, 1961 earlier there was no such provision to tax, such difference between the fair market value and the actual consideration received on the transfer of a capital asset either in the hands of the transferors or the transferee. To overcome this situation, sub-clause (vii) was inserted in section 56(2) w.e.f. 01.10.2009 and sub-clause (viia) w.e.f. 01.06.2010. Now where there is difference in the fair market value of the capital assets then it is chargeable to tax under the head “income from other sources” in the hands of recipient, i.e., the transferee. Later on, when the legislature wanted to tax, such difference in the fair market value of the capital assets in the hands of transferor, section 56(x) has been brought in the statute by the Finance Act, 2017, w.e.f., 01.04.2017. Now, as per the new provision, the earlier provisions of section 56(2)(vii) & (viia) had been made inoperative w.e.f 01.04.2017, that is, now difference is to be added in the hands of the transferor only. Apart from that, a specific provisions have been introduced in the Statute by inserting of new provisions i.e. section 50CA by the Finance Act, 2017 w.e.f. 01.04.2017 to bring the tax in the case of the transferor, the difference between the fair market value of the unquoted/unlisted shares. Thus, so far as this proposition as canvassed by Mr. Ajay Vohra is concerned we are in complete agreement with him that, firstly, the term “full value consideration” cannot be reckoned as a fair market value; and secondly, such deeming fiction of taxing the

105 | P a g e

I.T.A .No.-4737/Del/2017

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

I.T.A .No.-4737/Del/2017

transfer of an asset is not if determinable under the existing provisions of the Income-tax Act, then, as the machinery provision fails, the arising from the transfer of such assets is not taxable. It is, therefore, proposed that where in the case of a transfer, consideration for the transfer of a capital asset(s) is not attributable or determinable then for purpose of computing income chargeable to tax as gains, the fair market value of the asset shall be taken to be the full market value of consideration. Accordingly, it is proposed to insert a new provision (section 50D) in the Income-tax Act to provide that fair market value of the asset shall be deemed to be the full value of consideration if actual consideration is not attributable or determinable. This amendment will take effect from 1st day of April, 2013 and will accordingly apply to assessment year 2013-14 and subsequent assessment years.”

From the aforesaid explanation given in the Memorandum to the Finance Bill, it can be gauged that the said provision has been introduced when the consideration received or accruing as a result of the transfer of a capital asset cannot be ascertained or cannot be determined and in that case, the fair market value of the said asset is deem to be the full value of consideration received or accruing as a result of such transfer. For invoking this provision, the situation should be that the consideration in respect of transfer of an asset is not determinable or ascertainable case and in absence of such determination, the machinery provision for computing of the capital gain gets failed. Here in this case, it is not a situation because the consideration has been received which as per the parties is ascertainable and determinable. The Revenue’s case is that the said consideration as determined in the agreement has to be reckoned as fair market value. This section has no application in the present 107 | P a g e

I.T.A .No.-4737/Del/2017

situation, otherwise also, if section 50D could have applied for substituting the actual consideration of the fair market value in situation like that of the assessee, then there was no reason or occasion for the legislature to introduce specific section, viz., section 50CA by Finance Act 2017, w.e.f A.Y. 2017-18. This section as discussed in detail has been specifically brought in the statue to tax the FMV of unlisted shares in the hands of the transferor. However being a substantial provision the deeming provision envisaged therein cannot be applied retrospectively. On this aspect, without going into much detail analysis, the arguments of Mr. Ajay Vohra as noted above are upheld as such and we hold that, invoking of the provision of section 50D to justify the fair market value by the Ld. CIT(A) is not correct and the same is rejected.

I.T.A .No.-4737/Del/2017

and CIT vs. Balbir Singh Maini(supra) as relied upon by Mr. Ajay Vohra. There cannot be any iota of doubt that the word “accrued” in section 48 means there has to be a right to receive the income arising from contractual obligation between the parties and such a right has to be with a corresponding liability of the other party from whom the income becomes due to pay that amount. Thus, one party has the right and the other party has liability to pay, but such right and liability has to originate from the understanding of all the terms and conditions of the contracting parties and the contractual obligation qua the transactions for which income can be said to be accrued to one party with the corresponding liability to pay on the other.

I.T.A .No.-4737/Del/2017

of SBPL was linked with the fair market value of entire issued share capital of HEL (later on VIL). How it is linked with the fair market value of HEL, we have already discussed in the forgoing paragraphs. Succinctly, put the Scheduel-1 which was for the determination mechanism of the transfer price of the SBPL’s shares, has fixed the transfer price in the year 2007 at US $ 266.25 million which converted into INR was Rs.1088.43 crores. This transfer price of US $ 266.25 million was based on some illustrative working given in Schedule-2 which was though was to come into operation when the condition of the 2nd clause was to be fulfilled, i.e., the fair market value of issued share capital of HEL exceeds US $ 25 billion and then the SBPL value was again to be re-valued. This illustrative working, proceeds with the fair market value of HEL at that time at US $ 25 billion and with some hypothetical working and assumption of liabilities, a transfer price of US $ 266.25 million was arrived and the same figure has been incorporated in Schedule-1. Though, we have already observed that the amount of US $ 266.25 million may not be based on correct working or does not have any proper basis, but it clearly indicates that such a transfer price was to be computed after taking into account the fair market price/ value of equity capital of HEL, later on substituted with VIL. In all the subsequent Framework Agreements and Supplement Agreement, including the Share Purchase Agreement, the parties unequivocally have agreed that the transfer price has to be determined in accordance with the Framework Agreement and that to be of 05.07.2007. Nowhere the parties have rescinded or given go-by to said framework agreement. Albeit the parties have time and again have reiterated that the transfer price for SBPL’s shares is to be determined in accordance with the Framework Agreement of 2007, which in turn was based on the working of fair market value of HEL/VIL. Once there is binding contractual obligation as acquiesced

110 | P a g e

I.T.A .No.-4737/Del/2017

by the parties’ agreement after agreement, then it cannot be held that such a binding contractual obligation amongst the parties has simply withered away without any agreed clause of rescinding or abrogating the earlier obligation. In fact there is unanimity permeating through all the agreements on such transfer price which is to be determined on the basis of fair market value of VIL and, therefore, it is binding on the parties. Thus, as per the binding agreement, the accrued price consideration for the transfer of the SBPL shares has to be determined on the basis of fair market value of VIL which here in this case has been pegged at Rs.56,448 crores as determined by the Kotak Mahindra by adopting DCF method and also accepted by the AO. Accordingly, we hold that in terms of section 48, what is accrued to the assessee on the transfer of the unquoted shares of SBPL, is that, which is determinable on the basis of the fair market value of VIL. On this reasoning, the arguments put forth by the Ld. Sr. Counsel that the consideration accrued to the assessee is only as per the share purchase agreement dated 12.03.2014 is not acceptable.

111 | P a g e

I.T.A .No.-4737/Del/2017

Details INR in Million Enterprise Value of VIL (A) 900,899

Enterprise value of Indus 432,701 Less:Net Debt of Indus (as on February 28, 2014) 67,909 Equity Value of Indus(B) 364,792

Consolidated Enterprise Value (A+42%B) 1,054,112 Less:Net Debt of VIL (as on February 28,2014) 489,629 Equity Value of VIL (C) 564,483

I.T.A .No.-4737/Del/2017

have assumed that VIL and CGP have furnished all information concerning the financial statement and assets and liabilities of VIL group, Indus, till earnings before interest and taxes, and all other cash flow items relevant for valuation. We clarify that in respect of VIL and Indus, we have not been provided with financial projections below earnings before interest and taxes or the balance sheet. Further, we have not been provided with financial projections for the companies in the Holdco chain and SBP. We have assumed that there is no material information or material change in the business and operations of VIL group, Indus, companies in the HoldCo chain and SBP post February 28, 2014 that would impact the valuation in this Report, and we assume no risk of any material adverse change having any impact on the businesses of VIL group. Indus, companies in the HoldCo chain and SBP." The said disclaimer of Kotak Mahindra itself diminishes the various figures of liabilities which have been taken into consideration while valuing the shares of SBPL. In any case, the liability of the intermediary companies which can be reduced for the purpose of valuation has to be seen with reference to Rule 11UA(2)(a), wherein following liabilities have stated to be not to be included:- [2](a) the fair market value of unquoted equity shares =(A–L)× (PV), (PE) where, A =book value of the assets in the balance-sheet as reduced by any amount of tax paid as deduction or collection at source or as advance tax payment as reduced by the amount of tax claimed as refund under the Income-tax Act and any amount shown in the balance-sheet as asset including the un-amortised amount of deferred expenditure which does not represent the value of any asset; L = book value of liabilities shown in the balance-sheet, but not including the following amounts, namely:— (i) the paid-up capital in respect of equity shares;

113 | P a g e

I.T.A .No.-4737/Del/2017

(ii) the amount set apart for payment of dividends on preference shares and equity shares where such dividends have not been declared before the date of transfer at a general body meeting of the company; (iii) reserves and surplus, by whatever name called, even if the resulting figure is negative, other than those set apart towards depreciation; (iv) any amount representing provision for taxation, other than amount of tax paid as deduction or collection at source or as advance tax payment as reduced by the amount of tax claimed as refund under the Income-tax Act, to the extent of the excess over the tax payable with reference to the book profits in accordance with the law applicable thereto; (v) any amount representing provisions made for meeting liabilities, other than ascertained liabilities; (vi) any amount representing contingent liabilities other than arrears of dividends payable in respect of cumulative preference shares; PE = total amount of paid up equity share capital as shown in the balance-sheet; PV = the paid up value of such equity shares.

114 | P a g e

I.T.A .No.-4737/Del/2017

valuing the unquoted shares. The reason for not following the value of Kotak for SBPL shares is that, the Valuer has adopted NAV for valuing the intermediary companies; and if NAV method is to be adopted, then he can reduced liabilities as envisaged under Rule 11UA and not any other liabilities suggested by the companies without being authenticated by the companies or independently examined by the Valuer. Only liability which can be excluded while examining the book value is the liability shown in the balance sheet.

115 | P a g e

I.T.A .No.-4737/Del/2017

Name of Share- Details Value as per VIL Description of Profit/ Nature the holding in Kotak valuation Basis of (Loss) of Company the Mahindra(in as per Calculation Revenue immediate INR million) Kotak DCF step down valuation subsidiary of VIL and in the takingbalan chain ce sheets of intermedia ry companies (in INR million) VIL 564,483 564,483 Omega 5.11% Value of 28,850 28,850 5.1108% equity stake in VIL Add: Value of 502 486 Assets - 28.07 Investme Net Assets Liabilities - nt (Liabilities) Market Value of Activities excluding in Investment in VIL VIL + Income Tax Equity value 29,352 29,335 of Omega SMMS 61.60% Value of 18,081 18,071 61.60% equity stake in Omega Add: Value of Assets - 131.62 Investme -23,318 4,559 Net Assets Liabilities - nt (Liabilities) Market Value of Activities excluding in Investment in Omega Omega + Income Tax + Provisions Equity value -5,237 22,630 of SMMS UMT 6.07% Value of 34,248 34,248 6.0672% equity stake in VIL Add: Value of -3,725 -3,265 Assets - -166.53 Investme Net Assets Liabilities - nt (Liabilities) Market Value of Activities excluding in Investment in VIL VIL + Income Tax + Provisions Equity value 30,523 30,983 of UMT UMTI 100% Value of 30,523 30,983 100% equity stake in UMT Add: Value of -4,470 -4,463 Assets - -32.16 NBFC Net Assets Liabilities -

116 | P a g e

I.T.A .No.-4737/Del/2017

(Liabilities) Market Value of excluding in Investment in UMT UMT + Income Tax Equity value 26,053 26,520 of UMTI JKF 0.51% Value of 2,894 2,894 0.5126% equity stake in VIL 100% Add: Value of 26,053 26,520 100% equity stake in UMTI Add: Value of -18,012 4,687 Assets - 0.91 NBFC Net Assets Liabilities - (Liabilities) Market Value of excluding in Investment in VIL & UMTI UMTI & VIL + Income Tax Equity value 10,935 34,101 of JKF TII 12.96% Value of 73,147 73,147 12.9583% equity stake in VIL 100% Add: Value of 10,935 34,101 100% equity stake in JKF 100% Add: Value of - 22,630 100% equity stake in SMMS Add: Value of -37,700 302 Assets - -133.63 NBFC Net Assets Liabilities - (Liabilities) Market Value of excluding in Investment in VIL, JKF & JKF, SMMS & SMMS VIL + Income Tax Equity value 46,382 130,179 of TII NADAL 23.97% Value of 11,118 31,204 23.97% equity stake in TII Add: Value of -4,873 -4,881 Assets - -23.03 Investme Net Assets Liabilities - nt (Liabilities) Market Value of Activities excluding in Investment in TII TII + Income Tax Equity value 6,245 26,323 of NADAL PLUSTECH 100% Value of 6,245 26,323 100% equity stake in Nadal

117 | P a g e

I.T.A .No.-4737/Del/2017

Add: Value of Assets - -17.1 Investme -3,014 10 Net Assets Liabilities - nt (Liabilities) Market Value of Activities excluding in Investment in Nadal NADAL + Income Tax Equity value 3,231 26,333 of Plustech AGM 100% Value of 3,231 26,333 100% equity stake in Plustech Add: Value of 10 10 Assets - -20.15 Investme Net Assets Liabilities - nt (Liabilities) Market Value of Activities excluding in Investment in Plus tech PLUSTECH + Income Tax Equity value 3,241 26,343 of AGM NDC 51% Value of 51% 1,653 13,435 equity stake in AGM 27.03% Add: Value of 12,537 35,187 27.03% equity stake in TII Add: Value of -8,494 2,820 Assets - 258.3 Net Assets Liabilities - (Liabilities) Market Value of excluding in Investment in AGM & TII AGM & TII Equity value 5,696 51,442 of NDC MVH 100% Value of 5,696 51,442 100% equity stake in NDC Add: Value of -3,634 847 Assets - -12.99 Investme Net Assets Liabilities - nt (Liabilities) Market Value of Activities excluding in Investment in NDC NDC Equity value 2,062 52,289 of MVH SBP 100% Value of 2,062 52,289 100% equity stake in MVH Add: Value of 3 4 Assets - -1.45 Investme Net Assets Liabilities - nt (Liabilities) Market Value of Activities excluding in Investment in MVH MVH Equity value 2,065 52,293 of SBP

Total SBP shares 382,362,900 SBP valuation per share 5.4 131.86

118 | P a g e

I.T.A .No.-4737/Del/2017

AO had taken the value at Rs. 142.7 per share in the assessment order. But after taking the correct share of the assessee on SBPL as directed by us, the value will come to Rs.131.86 per share by taking the 3.6512% share of assessee in VIL.

� Firstly, the sale value of SBPL as shown by the assessee is not in consonance with the contractual obligations entered by the parties under various Framework Agreements wherein it has been repeatedly envisaged that the value of SBPL was linked with the FMV of HEL/VIL and therefore, the share value as determined accordingly would get enhanced accordingly. � Secondly, the sale consideration received by the assessee as per the Sale Purchase agreement of 12.03.2014 cannot be reckoned as “accrued” to the assessee in terms of section 48 of the Act, because herein this case it is not a case of simple sale and purchase transaction, albeit rights and obligation of the parties as per the agreements for transfer of shares was in exercise of

119 | P a g e

I.T.A .No.-4737/Del/2017

call/put option, for which transfer price of the shares was determinable on FMV of the share value of VIL. What has been accrued to the assessee is the price of the shares which was to be determined as per the mechanism provided in the Framework Agreements, which stipulated FMV of VIL. � Thirdly, section 50D as invoked by Ld. CIT (A) would not be applicable on the facts and circumstances of the case; and if at all it could have been brought to tax in the hands of the transferor under the deeming fiction of Section 50CA or Section 56(2)(x), then same are not applicable for the year under consideration as these provisions are applicable from the A.Y. 2017-18. � Lastly, the value of the SBPL shares as per FMV of VIL would be Rs. 131.86 per share as determined above; and accordingly, AO is directed to compute the capital gain taking the sale value of SBPL at Rs. 131.86 per share.

D. Whether the interest cost on loan taken for purchase of rights shares is to be allowed from the cost of acquisition u/s 48 while computing the capital gains.

120 | P a g e

I.T.A .No.-4737/Del/2017

financed directly out of the loan borrowed from Capricon Health Services Pvt. Ltd. on which interests aggregating to Rs.39,95,01,050/- (Rs.13,88,26,342 in FY 2012-13 & Rs.26,06,74,708/- in FY 2013-14) was paid from the date of acquisition till the date of transfer of such shares. The assessee’s claim has been that, since the interest expenditure incurred on such borrowing has a direct nexus with the acquisition of the shares of the aforesaid company, therefore, same was capitalized as part of the cost of acquisition of such shares for the purposes of computing capital gain arising from transfer thereof.

i. There was no direct nexus between the funds borrowed and investment made in the shares of SBPL. ii. Interest expenditure incurred after the date of acquisition of shares could not be considered as part of cost of acquisition of shares or as cost of improvement, to be reduced while computing capital gains under section 48 of the Act. For purpose of arriving at the aforesaid conclusion, the assessing officer relied upon: (a) Accounting Standard-13 relating to ‘Accounting for Investments’ and Accounting Standard 16 relating to ‘Borrowing Costs’ issued by the Institute of Chartered Accountants of India (ICAI) to hold that borrowing cost incurred in relation to a

121 | P a g e

I.T.A .No.-4737/Del/2017

‘qualifying asset’ shall not be capitalized when substantially all the activities necessary to prepare such asset for its intended use or sale are complete. (b) Decisions of Courts, rendered in the context of allowability of interest under section 36(l)(iii), wherein it has been held that interest expenditure incurred in connection with construction/purchase of plant is to be capitalized as part of cost of fixed assets only upto the date of construction and interest expenditure incurred after the asset is put to use is allowable revenue, deduction.

Ld. CIT(Appeal)has confirmed the said action of the AO, in his detailed order.

Arguments on behalf of the appellant/assessee:

122 | P a g e

I.T.A .No.-4737/Del/2017

facts. He submitted that under the Act, distinction has been made between the assets held by an assessee for different purposes, like, stock in trade, assets used for the purpose of business; and capital asset held as investment and not used for the purposes of business. The objective behind classification of assets in the aforesaid categories is that the Act provides different provision for computation of interest of each asset and also provides different treatment qua the liability of interest expenditure incurred on borrowed funds utilized for acquiring such assets. Since, in the present case, the shares of SBPL was held as capital assets which had no nexus with the business of the assessee, the cost of acquisition for the purpose of computing the capital gains on transfer thereof is to be determined in terms of section 48. He submitted that u/s 48 of the Act, what is to be reduced is the cost of acquisition/ indexed cost of acquisition and cost of improvement of the capital assets. In the absence of any provision in the Act providing the method of computation of cost for the purpose of section 48, other than sections 49 & 55 which deals with the mode of computation in certain specific cases, then the said expression used in section 48 should be construed to include all expenses incurred in relation to acquisition of capital assets. Interest expenditure incurred in respect of funds borrowed which are directly utilized for the utilization of assets has to be allowed as cost of acquisition. In support of this contention, he strongly relied upon the judgments of Hon’ble Delhi High Court in the case of CIT vs. Mithilesh Kumari (92 ITR 9) & catena of other decisions which are as under:- • Trishul Investments Ltd vs. CIT: 305 ITR 434 (Mad.) • ACIT v: K S Gupta: 119-ITR372 (Andh.) • CIT v, MaithreyiPai: 152 ITR 247 (Kar.) • CIT v. K. Raja Gopala Rao: 252 ITR 459 (Madras) • CIT v. Sri Hariram Hotels (P.) Ltd: 188 Taxman 170 (Kar.)

123 | P a g e

I.T.A .No.-4737/Del/2017

• Praveen Gupta v. ACIT: 20 Taxmann.com 308 (Del.) • S. Balan alia Shanmugam v. DCIT: 120 ITD 469 (Pune) • Gayatri Maheshwari vs. ITO: 187 TTJ 33 (Jodhpur)

I.T.A .No.-4737/Del/2017

grossly erred in applying the aforesaid Accounting Standard to hold that the interest expenditure incurred on borrowed funds, after acquisition of shares, cannot be capitalized as part of cost of acquisition of such shares and consequently holding that the appellant had flouted the provisions of the Accounting Standards. In the absence of any specific Accounting Standard dealing with the treatment of borrowing costs incurred in relation to acquisition of shares, the cost of such shares has to be determined on the basis of normal commercial principles do not prohibit an assessee to capitalize the interest expenditure incurred after acquisition of shares as part of cost thereof. He further submitted that, be that as it may, even assuming without admitting that AS-16 is applicable and the same prohibits capitalization of interest expenditure post acquisition of shares, even then, the said Standard cannot be applied to compute cost of acquisition of shares for the purpose of section 48 of the Act. It is a well settled legal position that entries in the books of account are not conclusive for determination of tax liability, which has to be computed in accordance with the provisions of the Act. In support he placed reliance on the following decisions: Kedarnath Jute Mfg. Co. Ltd. v. CIT: 82 ITR 363 (SC); Sutlej Cotton Mills Ltd. v. CIT: 116 ITR 1 (SC); and Taparia Tools Ltd. V.JCIT: 372 ITR 605 (SC).

Arguments on behalf of the respondent/ Revenue

125 | P a g e

I.T.A .No.-4737/Del/2017

borrowed for specific purpose of making subscription to the ‘right shares’ issued by the company and such interest accrued after the event of acquisition of shares. The claim of interest is in respect of interest accruing till date of transfer of ‘right shares’. He submitted that it is a settled position of law that income under different heads are computed having regard to the provisions governing such computation as contained in various provisions appearing in that head of income. Thus, expenses for earning income from salary or property or from business or profession are allowable only if and to the extent these are deductible under the specific provisions governing such heads of income. If a certain expense is not deductible by a specific provision, it would not be taken into computation of income. In this backdrop, he submitted that it needs to be appreciated that the provisions of section 48 contemplate only the following deductions from the ‘full value of consideration, viz., (i) Cost of acquisition of the capital asset; (ii) Cost of improvement of the said asset; and (iii) any other expense incurred wholly and exclusively for the purposes of transfer of the said asset. The claim of the assessee with regard to the interest on borrowed funds is admittedly not a deductible item under (ii) and (iii). The claim is that the interest payable on the borrowed funds forms part of the cost of acquisition of the capital asset. He submitted that under the normal meaning of the expression “cost of acquisition”, the cost can only include the price paid for acquiring the asset and it cannot include any other expense incurred by the appellant post the acquisition of the asset. It is obvious that the interest accrued after the acquisition of the asset and the period of such interest extends till the date of transfer. The amount of interest that the assessee may have to pay cannot, thus, represent the cost of acquisition. The cost of acquisition of an asset cannot vary from month to month or year to year depending upon how long the

126 | P a g e

I.T.A .No.-4737/Del/2017

borrowed funds have remained outstanding, nor the cost of an asset will be one if acquired out of own funds and will be the other if acquired out of borrowed funds. Such a proposition defies logic even in commercial terms. The expression “cost of acquisition” has been statutorily defined in section 55(2) in an exhaustive manner. This definition covers only certain kinds of assets for which a precise and exhaustive definition was considered necessary. A bare reading of the aforesaid provision brings out in unambiguous terms that where an assessee becomes entitled to subscribe to any additional financial assets like ‘right shares’ or is allotted any additional financial asset without any payment like bonus shares, the cost in the case of the former means the amount actually paid by him for acquiring such asset and in the case of the latter the cost shall be taken to be ‘nil’. The use of the expression “means” in the said clause renders the definition of the cost of acquisition as exhaustive and not inclusive.The argument of the appellant that it only defines the base price and not the additional burden of interest is devoid of any merit in view of the exhaustive definition of the expression “cost of acquisition” given in the enactment. In view of the specific statutory provision governing the scope and ambit of “cost of acquisition”, there is no room for any debate that cost can include anything over and above the “amount actually paid by him for acquiring such asset”. These amendments to section 55(2) were introduced w.e.f. 01.04.1995. The amendments were carried out with the specific object of settling the issue of determination of cost of acquisition of right shares or bonus shares.

127 | P a g e

I.T.A .No.-4737/Del/2017

pointed out that the said case was rendered in the context of section 12B(2) of old Act of 1922, wherein the language was entirely different which is evident from the following reading of the then provision, Income Tax Act, 1922:- “The amount of a capital gain shall be computed after making the following deductions from the full value of the consideration for which the sale, exchange, relinquishment or transfer of the capital asset is made, Expenditure incurred solely in connection with such sale, (i) exchange, relinquishment or transfer; the actual cost to the assessee of the capital asset,including (ii) any expenditure of a capital nature incurred and borne by him in making any additions or alterations thereto, but excluding any expenditure in respect of which any allowance is admissible under any provision of sections 8,9,10 and 12”

It is seen that under the said section 12B of the 1922 Act, there was a provision which implied that only deductions not admissible under sections 8,9, 10 and 12 could be added to the cost of capital asset. It was in this backdrop,that the court came to the conclusion that interest on borrowed funds constituted cost of acquisition. This decision, he submitted that is no longer relevant for the reason that the law as applicable w.e.f. 01.04.1995 defines the expression “cost of acquisition” in express terms and in an exhaustive manner for the right shares and bonus shares. In view of the change in law, the decision is wholly inapplicable.Regarding reliance placed on further decisions like KS Gupta (119 ITR 372), Maithreyi Pai (152 ITR 247), Trishul Investments (305 ITR 434), Raja Gopal Rao (252 TTJ 449)etc., He submitted that in none of these cases, the issue was the determination of the cost of acquisition of right shares of bonus.These were cases mostly relating to house property, or other kinds of immovable properties and in nowhere the amended provisions have been considered. In the cases of Maithreyi Pai (supra) and Trishul

128 | P a g e

I.T.A .No.-4737/Del/2017

Investments (supra), the capital asset involved was shares but in the case of the former the matter was remanded and the question was not answered and in the case of the latter, it was again not a case of cost of right shares which has been specifically taken care of in the amended definition falling in section 55(2) of the Act. In this backdrop, he submitted that all these cases referred to by the Ld. Sr. Counsel deal with the cost of the assets for which cost of acquisition is not statutorily defined in the Act.These cases thus, lose their relevance in view of the specific nature of assets under dispute in the present case. The cost in the present case has to be governed by the specific provisions of the Act. Regarding reliance placed on the judgment in the case of Saharanpur Electric Supply Co. (194 ITR 294), it deals with the actual cost for the purposes of section 43(1) of the Act, whereas the case of Escort Farms reported in 222 ITR 508 relied upon by the appellant refers to cost of acquisition of bonus shares under the pre- amended provisions of the Act. Reference to Miss Dhun Dadabhoi Kapadia (63 ITR 651) refers to renunciation of rights in shares and now in wake of the amendment in section 55(2) negates the effect of this decision. The case of Naveen Jindal (320 ITR 708) deals with the issue of debentures granted on the right basis but the matter relates AY 1992- 93, which again is prior to the amendment made in section 55(2) of the Act. In this case, the narrow issue which arose for consideration of the Court was whether the loss suffered by the appellant was a short term capital loss or a long term one. The question of cost of acquisition was neither an issue nor was the subject matter of the decision. There was no issue of deduction of any amount of interest as the cost of acquisition. In the case of Rajkumari Bangar (154 ITR 868) referred to by the Ld. Counsel, the issue was whether in computing the capital gains the cost of original shares could be spread over bonus shares. The issue of any deduction over

129 | P a g e

I.T.A .No.-4737/Del/2017

and above the actual cost of acquisition like interest on borrowed funds was never an issue. As regards Dalmia Investment Co. Ltd. (52 ITR 567), here again, the issue was whether the cost of the original shares could be spread over the bonus shares. The issue of any deduction with regard to the interest on borrowed funds was not at all there in this case.

I.T.A .No.-4737/Del/2017

computing the capital gains. The AO has rightly rejected the claim and the action of the CIT(A) in upholding the said finding deserves to be sustained.

Rejoinder by Assessee

131 | P a g e

I.T.A .No.-4737/Del/2017

or any other asset, for purpose of section 48 of the Act, in the determination of capital gains arising from transfer of such "asset. It is illusory to draw such an artificial distinction and contend that the ratio of the said judgment is limited in its application to acquisition of land alone. The issue, thus, that arises is with regard to capitalization of interest expenditure incurred after the date of acquisition of a capital asset, which is not a business asset in terms of section 48 of the Act, which in stands answered in favour of the assessee by the decisions of the various Courts relied upon by the assessee supra, wherein it has been held that interest expenditure incurred even after the date of acquisition of the capital asset shall be liable to be added to the cost of such asset for purpose of the aforesaid section. The Revenue was unable to controvert the proposition of law laid down in the said decisions by pointing out any decisions to the contrary. Further, the other consequential argument of the Respondent Revenue that the cost of acquisition of the capital asset as on the date of acquisition is sacrosanct and cannot be varied subsequently, is contrary to the legal position laid down in the catena of decisions (referred to by him earlier) wherein it has been repeatedly held that the cost of acquisition of a capital asset is not sacrosanct and is capable of variation subsequently. He again re-iterated the ratio of Hon’ble Supreme Court in the case of Sharanpur Electric supply Company Ltd. vs CIT and referred to judgment of Hon’ble Allahabad High Court in the case of CIT vs. Jindal Polyster Ltd. 248 Taxmann 321 and submitted that in view of the legal proposition as laid down in these judgments, the arguments of the Revenue and the interest borrowed fund after the date of acquisition of assets cannot be capitalized or added to the cost of assets is contrary to the settled legal position and, therefore, needs to be rejected. He further submitted that the reference of the judgment of Hon’ble Supreme Court in the case of Rajendra

132 | P a g e

I.T.A .No.-4737/Del/2017

Prasad Moody (115 ITR 519) by the revenue during the course of argument to canvass that shares borrowed from loan amount cannot be allowed, is also misplaced as in the said decision, the finding of fact was that the assessee was invested in shares using interest bearing borrowed funds for the purpose of earning dividend income therefrom and the question before the Hon’ble Supreme Court was, whether the interest expenditure would be allowable as deduction u/s 57, and no dividend was earned by the assessee during the relevant year. It was in this context, the Hon’ble Supreme Court held that since section 57 only requires that expenditure must be wholly and exclusively incurred for earning income, without any further condition of income to be actually owned by the assessee and the interest paid on money borrowed for investment in shares to own dividend income was allowable deduction under the said section, notwithstanding the fact that the share did not yield any dividend income during the relevant year. The said decision has no applicability to the present case as the investment in right shares was to acquire/retain share holding/controlling interest in SBPL and not to dividend income, therefore, and in fact no dividend income has been received by the assessee. He further distinguished the decisions relied upon by the Revenue in the case of Macintosh Finance Estates Ltd. vs. ACIT and in the case of ABAN Offshore Ltd. (supra), and submitted that they are clearly distinguishable on facts. Likewise the reliance placed on the decision of Kolkata High Court in the case of L.N. Dalmia (supra) & CIT vs. Octavious Steel & Co. Ltd. are again distinguishable on facts. For making distinction, he has made his detailed submissions in his written submissions filed before us.

I.T.A .No.-4737/Del/2017

computing the under the head “income from other sources”, then same has to be allowed as deduction while computing the income under the head “income from other sources” and resultant loss should be allowed to set off against the income from capital gains in terms of section 71; and further direction should be issued to allowed deduction income incurred in the earlier year 2013-14 AY. He also relied upon the following decisions to canvass that the Tribunal has the power to issue direction for allowance for interest expenditure incurred during the AY 2013-14 against the option fee earned in that year and discussed under the head “other sources”:- JCIT v. HMA Udyog Limited: ITA No.2230/Del/1999 (Del); and Perfect Equipments v. DCIT: 85 ITD 50 (Ahm.)

134 | P a g e

I.T.A .No.-4737/Del/2017

Dhun Dadabhoy Kapadia v. CIT: (supra); iii) Navin Jindal v. ACIT: 320 ITR 708 (SC); andiv) ACIT v. Raj Kumari Bangur: 154 ITR 868 (Raj).

DECISION

135 | P a g e

I.T.A .No.-4737/Del/2017

part of the order, the assessee had subscribed to 15,67,64,689 ‘right shares’ of SBPL on 09.08.2012, i.e., in the F.Y. 2012-13, in terms of 4th Supplement Agreement. The said right shares were financed directly out of the loan borrowed from Capricon Health Services Pvt. Ltd. on which interest aggregating Rs. 39,95,01,050/-(i.e., Rs.13,88,26,342 in F.Y. 2012-13 & Rs.26,06,74,708/- in F.Y. 2013- 14), was paid from the date of acquisition till the date of transfer of such shares on 12.03.2014. The assessee had claimed the interest expenditure incurred on such borrowing which has been capitalized as part of the cost of acquisition of such ‘right shares’ for the purpose of computing capital gain arising on transfer of such shares. The Assessing Officer first of all denied the cost of acquisition in view of the provisions contained in section 55(2) and held that meaning of cost of acquisition and cost of improvement as appearing in section 48 & 49 has been restricted by the scope of section 55(2)(b). One of the major limbs of the arguments of Mr. Ajay Vohra was that interest incurred for acquisition of ‘right shares’ has to be allowed as cost of acquisition while computing the capital gain in accordance with section 45(1) r.w.s 48. His entire arguments revolved on the proposition that under the scheme of the Act, there is distinction between different class of assets and how the capitalization of interest for cost of acquisition of asset or allowability of interest has been recognized under the various provisions of the Act, like for stock-in- trade; assets used for the purpose of business; and capital assets held as investment and not used for the purpose of business. Here in this case, it cannot be doubted that interest expenditure incurred in respect of the funds borrowed were directly utilized and had a proximate nexus to the acquisition of right shares and also the principal loan amount is liable to be included as part of cost of acquisition of such assets. The submissions made by the parties in

136 | P a g e

I.T.A .No.-4737/Del/2017

this regard and reliance placed on catena of decisions has already been discussed in detail herein above. Before us, Mr. Srivastava, Ld. Special Counsel for the Revenue has vehemently contended that in view of the specific provision contained in section 55(2)(aa) read with sub-clause (iii) thereto, only the amount actually paid for acquiring of such asset could be allowed, i.e., the amount paid for acquiring of ‘right shares’ and not the interest thereupon. Thus, all the decisions relied upon by the Mr. Vohra will have no bearing on the facts of the present case and in the light of the specific provisions u/s 55(2) of the Act. In wake of this specific contention, we will first examine, whether within the scope of section 55(2), interest can be allowed as cost of acquisition of ‘right shares’ or not.

55(2) For the purposes of sections 48 and 49, "cost of acquisition",— (a) xxxxxxxxxxxxxxxxxx (aa) in a case where, by virtue of holding a capital asset, being a share or any other security, within the meaning of clause (h) of

137 | P a g e

I.T.A .No.-4737/Del/2017

section 2 of the Securities Contracts (Regulation) Act, 1956 (42 of 1956) (hereafter in this clause referred to as the financial asset), the assessee— (A) becomes entitled to subscribe to any additional financial asset; or (B) is allotted any additional financial asset without any payment, then, subject to the provisions of sub-clauses (i) and (ii) of clause (b),— (i) xxxxxxxxxxxx (ii) xxxxxxxxxxxx (iii) in relation to the financial asset, to which the assessee has subscribed on the basis of the said entitlement, means the amount actually paid by him for acquiring such asset ; (iiia) in relation to the financial asset allotted to the assessee without any payment and on the basis of holding of any other financial asset, shall be taken to be nil in the case of such assessee. (b) xxxxxxxxxxxxxxxxxx

From a plain reading of the aforesaid provision, it can be seen that the cost of acquisition in the case of ‘additional financial assets’ like bonus shares, right shares, etc., firstly, where the assessee becomes entitled to subscribe any such additional financial assets; or secondly, is allotted any additional financial asset without any payment; then, in the first case, the cost of acquisition of such financial assets (herein this case right shares) would be the amount actually paid for acquiring such asset; and in second case, the cost of acquisition would be nil. Since, here the assessee had subscribed the right shares on the basis of said entitlement (i.e., by virtue of holding 138 | P a g e

I.T.A .No.-4737/Del/2017

the capital asset in the form of shares in SBPL), therefore, the assessee’s case fall in first category, that is, the amount actually paid by him for acquiring such assets. In other words the actual amount paid for acquiring the right shares. In case the financial asset is allotted to the assessee without any payment then it has to be reckoned as NIL. Here as stated above, the assessee was entitled to subscribe to right shares for a payment of Rs.300 crores and such an amount has actually been paid by the assessee. In the present case, ostensibly, sub-clause (iii) would be applicable, because the financial assets has not been allotted to the assessee without any payment in which case the cost of acquisition would have to be taken as NIL. The said clause makes it evidently clear that cost of acquisition would be the amount actually paid by the assessee for acquiring such assets (i.e., right shares). The word “means” as appearing in sub-clause (iii) cannot be reckoned as inclusive, i.e., other than amount actually paid which could be other costs like interest etc. which is also be treated as part of acquisition. Here the word “means” has to be constituted as exhaustive, i.e., the amount actually paid for acquiring such assets and no any other payment or cost incurred for acquiring such assets. Whence the cost of acquisition with regard to the additional financial assets, i.e., right shares has been strictly circumscribed to the amount actually paid for acquiring such shares, then it is not open to include any other costs like interest expenditure incurred or accrued on loan taken for acquiring the right shares. Had there been the intention of the legislature to allow any additional cost to such kind of additional financial assets, then there was no requirement to insert part A in clause (aa) and sub-clause (iii) which specifically confines the cost of acquisition to mean actual amount paid. Thus, we are in complete agreement with the contention of the Ld. Special Counsel, Mr. G.C. Srivastava that under the scope and provision of Section 55(2)(aa) read

139 | P a g e

I.T.A .No.-4737/Del/2017

with sub clause (iii) thereto, in case of right shares the cost of interest expenditure cannot be allowed as deduction as cost of acquisition for computing the capital gain on sale of right shares.

I.T.A .No.-4737/Del/2017

proposes to deem the cost o f rights entitlement in the hands o f the original shareholders as nil. Of course, the cost of the rights share acquired by the original shareholder is the price actually paid by him to the company for acquiring the rights share: But where the rights renounce acquires the rights share, the-cost of the rights share is equal to the cost incurred by him for purchasing the rights entitlement plus the price paid by him to the company for - acquiring the rights share. The amount realized by the original shareholder by selling his rights entitlement will be short term- capital gains in his hands (as the cost is taken as nil). The period of holding of the rights entitlement will be reckoned from the date of offer made by the company to the date of renouncement. ”

The said memorandum merely clarifies that earlier there was no specific provision dealing with the determination of the cost of the financial instrument such as right shares, right entitlement, etc. and in absence of any such provisions, the Courts have laid down certain methods for determining the cost. For avoiding such kind of situation, the Finance Bill proposed to introduce the computation of cost of acquisition which have been acquired without cost, then in that case, cost of acquisition has to be taken on NIL and where the assessee becomes entitled to such financial assets like right issue, then the cost of acquisition will be the amount actually paid. This has been clarified also by the notes and clauses of the Finance Bill and also by the CBDT Circular No.684 dated 10.06.1994. The relevant clause18 of the Notes and clauses on sub-section (2) of section 55 of the income Tax Act, 1961 is reproduced hereunder:- “It is also proposed to insert a new clause (aa) for the purpose of defining the cost of acquisition of a share or any other

141 | P a g e

I.T.A .No.-4737/Del/2017

security (referred to as “financial asset” in the section), and of the right to renounce the entitlement, in those cases where the assessee becomes entitled to subscribe to additional financial assets on the basis of rights issue. The cost of acquisition in such cases will be as follows:- (i) in the case of the original financial asset, on the basis of which the assessee becomes entitled to a rights issue, cost of acquisition will be the amount actually paid for acquiring such financial asset; (ii) in the case of right to renounce the entitlement, when such right is actually renounced by the assessee in favour of any other person, the cost of acquisition shall be taken to be nil in the case of such assessee; (iii) in the case of financial asset subscribed to by the assessee on the basis of his entitlement, i.e., rights issue, the cost of acquisition shall be the amount actually paid by him for acquiring such asset ; (iv) in the case of additional financial asset purchased by the person in whose favour the right to subscribe to such additional financial asset has been renounced, the cost of acquisition shall be the aggregate of the amount of the purchase, price paid by such person for purchasing such right and the amount paid by him to the company, or institution, as the case may be, for acquiring such financial assets..... ' This amendment will take effect from 1st April, 1995, and will, accordingly, apply in relation to assessment year 1995-96 and subsequent years.”

142 | P a g e

I.T.A .No.-4737/Del/2017

The aforesaid notes and clauses spells out the purpose of intention of the legislature for defining the cost of acquisition in the case of additional financial assets like right issues etc. Thus, the reliance placed by the Sr. Counsel on the aforesaid memorandum and notes and clauses are of no avail and does not support the case of assessee.

143 | P a g e

I.T.A .No.-4737/Del/2017

144 | P a g e

I.T.A .No.-4737/Del/2017

(A). Before the AO in response to the show cause notice, the assessee in one of his plea had though submitted that the assessee has not claimed any deduction of the above interest under the head “income from other sources” neither in the AY 2013-14 nor in the AY 2014-15, but no such claim was made that such an interest could be allowed alternatively from income from other sources. Nowhere, the AO had mentioned that such interest can only be claimed or is allowable under the head “income from other sources”. At this stage, it would be very difficult to entertain such a plea, when it is neither emanating from the order of the AO nor from the order of the Ld. CIT(A), nor any ground or additional ground has been taken before us. The assessee has not even sought any permission of this Tribunal under Rule 11 of ITAT Rules or under any other Rule to raise such plea. If at all this plea was sought to be raised then same should have been done by way of additional ground or by way of any application on which respondent Revenue would have been given opportunity to raise any objection or put forth their argument. Such a plea at the re-joinder stage without any opportunity to the respondent, would be difficult to entertain especially when the facts regarding to admissibility of such claim is not arising from the impugned order. Accordingly, we reject such plea taken by the Ld. Sr. Counsel for the assessee at the re-joinder stage without complying with the necessary requirement of Rules or giving the opportunity to the other party to rebut or place its objections. Thus, Ground No.3 & 3.1 are dismissed.

E. Issue relating to gain arising from sale of unlisted shares to be taxed as long-term capital gain or short term capital gain

I.T.A .No.-4737/Del/2017

Name of script Date of Date of sale Period of Capital purchase Holding gain/loss Rs. Vana Hotels Pvt. Ltd. 13.07.2012 16.12.2013 17 months (9,190) 13.07.2012 16.12,2013 17 months (9,190) Vana Lifestyles Pvt. Ltd. 13.07.2012 16.12.2013 17 months (9,190) Vana Resorts and Hotels Pvt. Ltd. 13.07.2012 16.12.2013 17 months (9,190) - Vana Retreats Pvt. Ltd. 01.04.2012 21.03.2014 23 months 8251,259,702 Scorpio Beverages Pvt. Ltd. Capital Gain 825,12,22,942

The AO, required the assessee to explain as to why the sale of shares of SBPL should not be taxed as short term capital gain in view of the provision of section 2(42A), as the period of holding is less than 36 months and being unlisted shares why it should not be treated as short term capital gain. In response, the assessee submitted that the assessee had acquired the shares of SBPL on 23.02.2006 (4100 original equity shares and right shares of 15,67,64,689 on 09.08.2012) and these shares have been sold by the assessee on 21.03.2014. Since the period of holding was more than 12 months, therefore, the capital gain was offered to tax as long term capital gain. The provision of section 2(42A) as applicable for the AY 2014-15 provides that share of a company, whether listed or unlisted will be treated as ‘long term capital asset’ if the period held is more than 12 months. The exception was only curved out for unlisted shares sold on or after 1.07.2014, from where the period for holding for unlisted shares to qualify as long term was increased to 36 months by the Finance (No.2) Act, 2014, which again later on was reduced to 24 months by the Finance Act, 2016. However, the AO held that the proviso of sub-section 42A of section (2) clearly specifies that for the purpose of considering assets as ‘short term capital asset’, the period of holding is 12 months instead of 36 months, which is only in respect of following:

146 | P a g e

I.T.A .No.-4737/Del/2017

(i) Share or security listed in recognized stock exchange in India; (ii) Unit Trust of India; (iii) Unit of a mutual fund under clause 23D of section 10; and (iv) Zero coupon Bond. In no other cases, the period of holding is 12 months. The 2ndproviso to section 2(42A) makes it very clear that for treating the assets as short term period, holding must be less than 36 months and not 12 months; and only period of holding for listed companies can be considered as 12 months instead of 36 months, if the particular share is transferred during the period beginning on 01.04.2014 and ending on 10.07.2014. After referring to these provisions, he re-characterized the long term capital gain and short term capital gain.

Arguments on behalf of the Assessee:

147 | P a g e

I.T.A .No.-4737/Del/2017

from the plain reading of the section that the shorter period of holding of 12 months is applicable to the shares either listed or unlisted held in a company. There was no such distinction under the Statute for determining period of holding for the listed or unlisted shares. The condition of listing on a recognized stock exchange is applicable only to the category of “security other than shares of a company”. If the intention of the legislature was to provide the benefit of shorter period of 12 months only on listed shares then considering the meaning of the word “security” as defined in section 2(h) of the Securities Contract Act, 1956, includes shares in a company and there was no necessity to carve out separate category “share held in a company”. To clarify this legal position, he took us to the legislative history of the amendments carried out from time to time in section 2(42A). First of all, we drew our attention to the “amendment by the Finance Act, 1987”, wherein shorter period of holding of 12 months in certain exception cases was inserted in section 2(42A) of the Act, whereby a proviso was added clearly specifying that in the case of share held in a company, 36 months was substituted with the period of 12 months. He also drew our attention to Finance Bill, 1987, and memorandum explaining the amendment and notes on clauses thereto. He also referred to the relevant portion of the speech of the then Finance Minister, wherein it was clarified that period of 36 months have been proposed to be reduced to holding period of 12 months for the shares. In the amendment brought by the Finance Act, 1994, the proviso to section 2(42A) was further amended to include the category of other securities listed in a recognized stock exchange in India which was applicable to the AY 2014-15, including the assessment year under consideration. The aforesaid inclusion was to the extent of benefit of shorter holding period for a new category of financial instrument, i.e., in security other than shares in a company. The condition of listed in

148 | P a g e

I.T.A .No.-4737/Del/2017

a recognized stock exchange was applicable only to the new category and not to the earlier category to the share held in a company. To clarify the purpose in the legislature he again drew our attention to Memorandum explaining the amendments made by the Finance Bill, 1994 and notes on clauses thereto. From the extracts of memorandum and notes on clauses, he submitted that it clarifies that the purport of the amendment in proviso to section 2(42A) was to extent to the benefit of shorter period of holding of 12 months to all other financial instruments/securities which are listed on stock exchange in order to provide level playing field in investment in shares of a company whether listed or unlisted. Coming to the amendment brought by the Finance (No.2) Act, 2014, whereby the provisions of section 2(42A) were further amended and the words “shares held in a company” were removed from first proviso w.e.f. 01.04.2015, thereby taking away the benefit of shorter period of holding of 12 months available to unlisted shares to qualify as long term capital assets. Simultaneously, 2ndproviso was inserted to provide that unlisted shares sold during the period 01.04.2014 to 10.07.2014 would enjoy the benefit of shorter period of holding of 12 months to qualify as long term capital assets. The said amendment itself goes to prove that the benefit of shorter period of 12 months was available to unlisted shares prior to the said amendment and if the contention of the AO is to be accepted then there was no necessity for the legislature to introduce the aforesaid amendment. He again made reference to explanatory notes to the amendments and the CBDT Circular No.1/2015 dated 21.01.2015, wherein the purpose of bringing the said provisions brought w.e.f. 01.04.2015 has been clearly spelt out. Thus, he submitted that considering the facts that all unlisted shares sold during the year were held by the assessee for the period of 12 months, then surplus arising from sale thereof were taxable as long term capital gains.

149 | P a g e

I.T.A .No.-4737/Del/2017

Arguments on behalf of the Revenue:

The definition is very wide enough to include not only shares but all other marketable Securities of a company or other body corporate. He emphasized that ‘Shares’ and ‘Securities’ are not two distinct items. The latter includes the former.

150 | P a g e

I.T.A .No.-4737/Del/2017

holding period) contained in the proviso. The use of the expression ‘or any other security’ necessarily puts the shares and other securities as a class and these have got to be listed to enjoy the benefit of the proviso. The words ‘any other’ put the two-shares and other securities- in the same basket. One cannot be read independent of the other. The contention put forth by the assessee cannot flow from the language employed in the proviso. If the legislative intent were to treat the shares as a different class from other securities, the only way such an intent could be expressed was either to add a second proviso carving out an exception to the first proviso or to use the expression “securities (other than shares)" in the proviso itself as has been done in the proviso while carving out similar exception for units by the subsequent amendment made by the Finance Act of 2014. The law as amended reads ‘a security (other than a unit)’. This could be the only way the provisions would have been drafted had the legislative intent been the same as the appellant is seeking to canvass. This contention becomes significant in view of the fact that the law as enacted, imports the definition of ‘securities’ as contained in the Securities Contracts Regulation Act by virtue of Explanation 2 to the provision. It would really be a wholly untenable proposition to suggest that the qualification of being listed in a stock exchange will apply to all securities other than shares. Such an intention of the lawmakers would necessarily have to be stated in express terms and cannot be inferred more so when the definition of the "Security" stands imported by virtue of the aforesaid Explanation. The entire thrust of the argument of the Ld. Sr. Counsel is that in earlier years, shares (listed or unlisted) enjoyed a lower holding period to fall in the exception and the law as introduced w.e.f. 01.04.1995 cannot be read otherwise. He submitted that any reference to earlier enactments or the subsequent

151 | P a g e

I.T.A .No.-4737/Del/2017

amendments is irrelevant and wholly out of context for the reason that: a. there is no ambiguity in the language employed in the proviso; b. the listing requirement for being entitled to the exception contained in the proviso was introduced for the first time w.e.f. 01.04.1995 and once this condition was brought in, it was applicable to all kinds of securities of a company as defined in Securities Contracts Regulation Act unless stated otherwise in express terms; c. it would be absurd to assume that the legislature intended all securities other than shares of a company to undergo the rigors of being listed but not the shares of a company.

152 | P a g e

I.T.A .No.-4737/Del/2017

proviso. The use of the expressions “any” and “other” leaves no room for doubt in this regard. Subsequent amendments to the provision only support the case of Revenue. Thus, he submitted that the AO was fully justified in treating the right shares as short term capital asset and applying the prescribed rate of tax accordingly.

DECISION

I.T.A .No.-4737/Del/2017

"thirty-six months", the words “twelve months" had been substituted.

From the plain reading of the aforesaid section, it is clear that ‘short term capital asset’ has been defined to mean a capital asset held by the assessee for not more than 36 months immediately preceding the date of its transfer. The proviso thereto carves out an exception of such period of holding; firstly, in the case of a share held in a company; or secondly, in other securities listed in recognized stock exchange in India; or thirdly, Unit Trust of India established under the Unit Trust of India Act, 1963; or fourthly, unit of mutual fund specified under clause (23D) of section (10); or lastly, Zero Coupon Bond; and only for these categories of capital assets, the period of holding of 36 months have been substituted for 12 months. In other words, the capital assets enlisted in proviso shall be reckoned as short term capital assets if such asset is held by an assessee for not more than 12 months. So far as the term used ‘shares held in a company’ are concerned, there is no category mentioned as listed or unlisted shares, albeit the condition for being listed in recognized stock exchange in India is for ‘any other security’. The expression listed in a recognized stock exchange in India is only used for the category of ‘any other security’ and not for the category of ‘share held in a company’. When for the first time, the condition for the period of holding was curtailed from 36 months to 12 months by the Finance Act, 1987 it was only for ‘share held in a company’. This is clear from the following provision as then existed post amendment w.e.f. 01.04.1988:-

“(42A) "short-term capital asset" means a capital asset held by an assessee for not more than thirty-six months immediately preceding the date of its transfer:

154 | P a g e

I.T.A .No.-4737/Del/2017

Provided that in the case of a share held in a company, the provisions of this clause shall have effect as if for the words "thirty- six months", the words "twelve months" had been substituted.”

Here no such condition was placed in the aforesaid proviso for shares to be listed on a recognized stock exchange for taking the benefit of the reduced period of holding. When amendment by the Finance Act, 1994 was brought in the statute, so far as the category “share held in a company”, was concerned, the same was not disturbed, albeit, new category was included like ‘any other security listed in recognized stock exchange in India’. The said provision was amended to extend the benefit of shorter holding period, to a new category of securities other than shares in a company. Under this provision, the condition of listed in a recognized stock exchange was applicable only to the new category and not to the earlier category of ‘shares held in a company’. This has been clarified by Memorandum explaining the provision in the Finance Bill which read as under:- "Period of holding in the case of securities and units of Mutual Funds Long-term capital assets enjoy certain tax concessions vis-a-vis short-term capital assets. The Income-tax Act defines long-term capital assets as those assets which are not short-term. Short-term capital assets are those capital assets which are held for a period of up to 36 months. However, the Finance Act, 1987, through an amendment to the provisions of section 2 (4 2A), reduced the maximum period of holding in respect of company shares from 36 months to 12 months for being treated as short-term capital assets. There are many financial instruments, other than company shares, through which the investors are entering the capital market. The units of the Unit Trust of India and Mutual Funds specified under section 10(23D) of the Income-tax Act are the instruments through which the small investors are increasingly getting the benefit of investment in the capital market. In order to provide such units and all the securities traded in the recognised stock exchanges a level 155 | P a g e

I.T.A .No.-4737/Del/2017

playing field with company shares, it is proposed to amend the provisions of section 2(42A) so that the maximum holding period for which such instruments are to be considered as short-term will be 12 months in place of the present 36 months. In other words, such assets are proposed to be considered long-term capital assets if they are held for more than 12 months. The expression “securities” will have the meaning assigned to it in clause (h) of section 2 of the Securities Contracts (Regulation) Act, 1956. The' proposed amendment will take effect from 1st April, 1995, and will, accordingly, apply in relation to assessment year 1995-96 and sub-sequent years. [Emphasis added is ours]

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

156 | P a g e

I.T.A .No.-4737/Del/2017

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

The aforesaid provision which has been brought in the Statute w.e.f. 01.04.2015 applicable from the A.Y. 2015-16 has now removed the exception for the unlisted shares from the benefit of shorter period, because in the 1st Proviso, the benefit of period is now only limited to security listed in recognized stock exchange in India and to other financial instruments. In this manner the Legislature has clearly withdrawn the benefit of shorter period of less than 36 months for the unlisted shares. But, the 2nd proviso makes it very clear that the unlisted shares of a company or unit of mutual fund will enjoy the benefit of shorter period only when the shares are transferred during the period between 01.04.2014 to 10.07.2014. The CBDT Circular while providing the explanatory notes to the amendments has clarified the said amendment in the following manner:- 5.2. “The shorter period of holding of not more than twelve months for consideration as short-term capital asset was introduced for encouraging investment on stock market where prices of the securities are market determined. However, all shares whether listed or unlisted have enjoyed the benefit of short period of holding and even any investment in shares of private limited companies enjoyed long-term capital gains on its transfer after twelve months. Accordingly, clause (42A) of section 2 of the Income-tax Act has been amended so as to provide that an unlisted security and a unit of a mutual fund (other than an equity oriented mutual fund) shall be a short-term capital asset if it is held for not more than thirty-six

157 | P a g e

I.T.A .No.-4737/Del/2017

months. However, in the case of share of an unlisted company or a unit of a Mutual Fund specified under clause (23D) of section 10 of the Income-tax Act, which is transferred during the period beginning on 1st April, 2014 and ending on 10th July, 2014, the period of holding for its-qualification as short-term capital asset shall be not- more than twelve months.” Thus, the aforesaid circular clearly clinches the issue and clarifies that, firstly, the benefit of shorter period of holding of 12 months to qualify as long term capital asset to unlisted shares has been removed prospectively from A.Y. 2015-16 and not for the earlier years; and secondly, the benefit of short period for holding of unlisted shares would be available only when such shares are transferred during the period beginning on 01.04.2014 and ending on 10.07.2014. Post 11.07.2014 the benefits of shorter period of unlisted shares could not be applicable.

I.T.A .No.-4737/Del/2017

In the result, the appeal of the assessee is partly allowed.

The order is pronounced in the open court on 01st of December, 2017.

Sd/- Sd/- (O.P.KANT) (AMIT SHUKLA) ACCOUNTANT MEMBER JUDICIAL MEMBER Dated: 01/12/2017 *Amit Kumar* Copy forwarded to: 1. Appellant 2. Respondent 3. CIT 4. CIT(Appeals) 5. DR: ITAT ASSISTANT REGISTRAR ITAT NEW DELHI

159 | P a g e