IDEA CELLULAR LIMITED,MUMBAI vs. DEPUTY COMMISSIONER OF INCOME TAX-3(2), MUMBAI

ICL wanted to consolidate all the telecom operations under itself rather than having them carried out through separate entities. Accordingly, during the year under consideration, i.e., AY 2010-11, under a scheme of arrangement under section 391 to 394 of the Companies Act, 1956 which was approved by the Hon'ble High Courts of Gujarat and Bombay, ABTL's telecom operations (the Undertaking) was demerged into ICL with the appointed date being April 1, 2009.

Under the relevant clauses of the scheme, following term were provided; i) all the assets, rights and liabilities of the Undertaking were transferred (Clause no. 4.1.) at their book values (Clause no.11.1); ii); In terms of the scheme, ABTL revalued its investment in Indus (Clause no. 11.3), an asset separate from the Undertaking, 4513/Mum/2017 Vodafone Idea Limited (Formerly Idea Cellular Limited) and business restructuring reserve was created by crediting a sum of Rs. 7,330 crores; iii) Further, the net book value of the Undertaking being demerged was Rs. 2,069 crores; iv) As per the accounting treatment under the scheme, ICL credited this net book value of assets, being the differential book value of assets and liabilities of the demerged Undertaking, in the General Reserve account (Clause no 11.2); v) As per the said scheme, no shares were issued to Assessee, i.e., ICL being the holding company (Clause 10.1); and vi) Further, the scheme also provided for modification of the terms of conversion of Preference shares. (Part A of Preamble).

The ld. Assessing Officer held that the net book value of undertaking being assets of Rs.2,069 Crores is taxable u/s.28(iv) for which he has given his detailed reasoning which can be summarized in the following manner:- i) Under the scheme, all properties and all the liabilities related to the undertaking are not transferred and no shares allotted by ICL to shareholders of ABTL. Thus, as conditions of section 2(19AA) of the Act not satisfied, it is a non-qualifying demerger. (Para 4.3.3 & 4.3.4 of the assessment order) ii) There is direct business nexus between ABTL & ICL as both the companies are under same corporate management, engaged in similar line of business, headed by same conglomerate, 4513/Mum/2017 Vodafone Idea Limited (Formerly Idea Cellular Limited) providing services under the same brand 'Idea', etc. Thus, the demerger is purely a business transaction. (Para 4.5.9) iii) ICL has received the benefit of difference in net assets of the demerged telecom undertaking transferred under the scheme, without any consideration. Therefore, the same has to be mandatorily taxed as a benefit/perquisite u/s. 28(iv) of the Act. (Para 4.5.9) iv) P5 Asia, who earlier had stake in ABTL's entire telecom and investment business has been reduced to a stake holder only in investment business of ABTL and it has not been compensated by allotting shares of ICL. (Para 4.5.12). v) Assessee has changed stands inter alia that the receipt of Rs. 2,069 crores is a gift, therefore not taxable as per provisions of section 47(iii) of the Act, which as per the AO is not correct in absence of any natural love and affection between the two companies.

Before the ld. CIT (A) assessee‟s explanation in sum and substance was as under:-  the demerger was in accordance with section 2(19AA) of the Act;  the aforesaid arrangement is tax neutral and there is no loss to the Revenue;  there is no benefit at all arising from the demerger, much less any benefit from business of the assessee, hence section 28(iv) of the Act does not apply:

However, Ld. CIT (A) partly gave relief after giving following observations and the findings which reads as under:- “5.3 I find that the appellant’s contention that sub-clauses (iv) & (v) of section 2(19AA) are not applicable to it in view of provisions of section 77 of the Companies Act, rests on the plank that the requirement to issue shares on pro rata basis applies to equity shareholders only and not to preference shareholders. It has contended that in a demerger, there was no need to issue shares to the preference shareholders of ABTL. That the term 'shares' in Section 2(19AA) of the Act will have to be read only as "equity shares" and not "preference shares". I find that this is sweeping contention which is untenable. Sub-clauses (iv) & (v) of section 2(19AA) as they stood during the relevant period read as under: (iv) the resulting company Issues, in consideration of the demerger, its shares to the shareholders of the demerged company on a proportionate basis; (v) the shareholders holding not less than three-fourths in value of the shares in the demerged company (other than shares already held therein immediately before the demerger, or by a nominee for, the resulting company or, its subsidiary) become 4513/Mum/2017 Vodafone Idea Limited (Formerly Idea Cellular Limited) share-holders of the resulting company or companies by virtue of the demerger. From a plain reading of the above sub-clauses, it is evident that it is nowhere specified that the shares on proportionate basis are to be issued to only the equity shareholders of the demerged company. It is a settled principle of interpretation of statutes that one cannot impute words which are not expressly mentioned in the statute. Preference shareholders are also part of the total shareholders of a company. They own part of the company to the extent of the shares held by them. The main difference vis-a-vis the equity shareholders is that they do not have voting power and that they get dividend at fixed rate before paying dividend to equity shareholders; and their capital gets returned first at the time of winding up of the company, before the payment to the equity shareholders. Apart from these, there is no difference in their interest/rights in the company. Perusal of the share holding of M/s Aditya Birla Telecom Ltd. as on 31.03.2009 just before the demerger shows the following: Shareholders Type of No. of shares Amount (Rs.) shares Idea Cellular Equity 10,00,00,000 10,00,00,000/- Ltd P5 Asia Preference 19,25,000 1,92,50,000/- Holding plus premium of Investment 2096,32,50,000/- (Mauritius) Ltd.

We have heard both the parties at length, perused the relevant material placed on record and the findings given by the ld. AO and ld. CIT (A). It is seen that the ld. CIT(A) after considering the entire facts and submissions of the assessee had decided the issue partly in favour which can be summarized in the following manner:- i) CIT (A) partially agreed to the assessee's submission that, due to the terms of the scheme as approved by the High Court and the constraints placed by section 77 of the Companies Act, 1956, ICL could not issue shares to equity shareholders of ABTL in consideration of the transfer. However, he endorsed the conclusion of the AO that the demerger is not a qualifying one since no shares were allotted to P5 Asia.

Before us ld. Sr. Counsel for the assessee Mr. J.D. Mistry submitted that only “income” can fall within the purview of Section 28 and therefore, capital receipts fall outside the ambit of Section 28. Here in this case, there is no income of Revenue in 4513/Mum/2017 Vodafone Idea Limited (Formerly Idea Cellular Limited) nature arising in the course of business. Thus, the first proposition was that Section 28(iv) cannot be invoked for taxing the capital receipts for which he placed reliance on the following judgments:-  CIT vs. Mahindra and Mahindra Ltd [2003] 261 ITR 501 (Bom HC) as affirmed by the Supreme Court in 93 taxmann.com 32 (SC)  CIT vs. Xylon Holdings Pvt. Ltd. (26 Taxmann.com 333) (Bom)  CIT vs. STADS Ltd. (2015) (373 ITR 313/61 taxmann.com 33) (Madras)  ITO vs. Shreyans Investment (P) Ltd. (31 Taxmann.com 11) (Kol-Trib) • ITO vs. M/s. Richvik Enterprises Private Limited (ITA no. 389/KOL/2012 order dated 24/06/2013) • ITO vs. M/s. Kyal Developers Pvt. Ltd. (ITA No. 627/Kol/2012)  Aamby Valley Ltd. vs. ACIT [2019] 102 taxmann.com 385 (Delhi - Trib.)  Sundaram Finance Ltd. vs. ACIT [2017] 165 ITD 563 (Chennai - Trib.)  CIT vs. Areva T&D India Ltd. [2021] 434 ITR 604 (Madras HC)

He submitted that in the aforesaid judgments it has been held that any reserve created under a scheme of amalgamation is a capital receipt and thus not covered u/s. 28(iv) of the Act. This principle clearly applies to any scheme including scheme of demerger and further, whether a merger/demerger is qualifying or not will not alter the position in law that amalgamation/ merger and demerger cannot be considered to be anything but a capital transaction and therefore, provisions of section 28 (iv) cannot apply to it.

Without prejudice he submitted that if at all there is a benefit, the said transaction at worst could be considered to be a gift being a transfer of property without consideration. In this connection, it is further submitted that corporate can also give and accept gifts and the Ld. AO made an erroneous presumption that only natural persons can give and accept gifts out of natural love and affection. Reliance in this regard was placed by him on the decision of DP World (P.) Ltd. v. DCIT [2013] 140 ITD 694 (Mumbai) and the decision of Hon'ble Madras High Court in PCTT v Redington (India) Ltd [2021] 430 ITR 298 (Madras) affirming the Hon'ble Chennai Tribunal decision in [2014] 49 taxmann.com 146 (Chennai - Trib.) Thus, in law, if stand of Department that Assessee received undertaking worth Rs.2069 crores without consideration is accepted, it would be a gift. A gift is a capital receipt and hence again cannot be taxed u/s. 28(iv).

Further, looking from point of view of ABTL, the Department itself treated this very transaction as being on capital account and sought to tax capital gain on transfer of telecom undertaking by treating demerger as slump sale adopting revaluation of investment in Indus as consideration, the Tribunal [ITA No. 341/Mum/2014] held that though there is transfer of telecom undertaking which may be liable to capital gains, in absence of consideration, computation mechanism for capital gain fails and AO was not justified in computing capital gain. This decision is also affirmed by Hon'ble Bombay High Court [ITA No. 1866 of 2017] He thus, submitted in this respect that the revenue cannot take a contrary view on the nature of the transaction in the hands of ICL.

On the other hand, ld. CIT DR after referring to the various points raised by the ld. CIT (A) submitted that the benefits certainly constitute income of the assessee and is Revenue in nature because benefit here is accruing to the assessee is equivalent to the share premium paid by P5 Asia Holding 4513/Mum/2017 Vodafone Idea Limited (Formerly Idea Cellular Limited) Investment (Mauritius) Ltd. Assessee is also in the same line of business. Ld. CIT(A) in para 5.5. has clearly held that the demerger was entered into to consolidate and further the business interests of the assessee. The benefit which accrued to the assessee on account of such demerger, therefore, arose from business. 18.1. Here in this case, following businesses were merged with the assessee during the year  Telecom operations of Spice Communication Ltd with assessee  Telecom operations of ABTL with assessee 18.2 Thus, there was a conscious effort for consolidation and furtherance of business. Assessee before the ld. CIT(A) has clearly stated that investment is telecommunication business is the business of the assessee and it continues to remain "wholly engaged" in the telecommunication business. This being so, it is clearly evident that benefits accruing to the assessee are in the nature of revenue and have been rightly taxed by the ld. AO. 18.3. Further, in the cases of Vodafone Idea Ltd. in (AY 2006-07) & (A.Y 2007-08), the Tribunal has accepted the argument of the assessee that the primary contention of the assessee is that loans have been advanced to sister concerns out of commercial expediency. It is an undisputed fact that the loans has been advanced by the assessee to the group concerns who were in the 4513/Mum/2017 Vodafone Idea Limited (Formerly Idea Cellular Limited) same business and are providing cellular services in different telecom circles in India. 18.4. In so far as reliance placed by the ld. Counsel for the assessee in the case of Vodafone Idea Ltd. in does not support the case of the assessee because here the issue was the loans given out of commercial expediency because all the subsidiaries are in the same line of business i.e. they are providing similar services in different circles in India. Once the loans are claimed to be given for commercial expediency it would not be appropriate to claim the benefits arising out of such business are capital and not taxable in nature. Similarly, in the case of the assessee in A.Y.2008-09, the Tribunal in ITA No.2285/Mum/2014 & ITA No.2273/Mum/2014 all are dated 12/10/2022 after noting down the advances given to subsidiary companies held that these were all due to commercial expediency and as they were engaged in same telecom business. Thus, it could be held that the income arising on account of such business and benefits which have accrued to the assessee are in the same business and are in the nature of revenue receipts and arising in ordinary course of business. 18.5. He further submitted that even if the adventure in the nature of trade is solitary in nature, it is assessable as income from business as held by the Hon‟ble Bombay High Court in the case of Ramesh Babulal Shah vs. CIT reported in (2015) 53 taxmann.com 277. He also quoted the Tribunal judgment in the 4513/Mum/2017 Vodafone Idea Limited (Formerly Idea Cellular Limited) case of Young Indian vs. ACIT Exemptions reported in (2022) 137 taxmann.com 12 wherein following principles were laid down therein.  An adventure in the nature of trade need not be business itself Any activity akin to business may be taken to be adventure in the nature of trade  A single transaction may also constitute adventure in the nature of trade There need not be regularity or repetitiveness in the activity  No hard and fast rule can be laid down in this regard as it has to be understood on the facts and circumstances of each case  The activity alleged/claimed adventure in the nature of trade need not be allied to the already existing activity of the assessee  In the circumstances and the facts as in the present case, it is the duty of the court to see where ingenuity is expended to avoid taxing and get behind the smoke screen of welfare legislation and discover the true state of affairs.

In commentary of Kanga, Palkhivala and Vyas in ―the Law and practice of income tax ―it has been observed that provisions relating to the taxation of the companies involved in the demerger and their shareholders are applicable only if the demerger fulfils the conditions provided u/s 2 (19 AA) of the act, 1961. Mere sanction of scheme is by High Court of demerger under the companies act 1956 is by itself not sufficient.

Hon Bombay High court in Casby CFS P Ltd in re [ 2015] 56 taxmann.com 263 (Bombay)/[2015] 231 Taxman 89 (Bom.) has also held asunder: -

According to the Petitioners, since the Regional Director has stated that the tax issues arising out of the Scheme shall be subject to the final decision of the Income Tax Authority and the approval of the scheme will not deter the Income Tax Authority from scrutinizing the Income Tax Returns filed by the Petitioners and the decision of the Income Tax Authority is binding on the Petitioners and since the Petitioners have accepted this position in their Affidavits in Reply, nothing survives in the objections of the Regional Director. In other words, according to the Petitioners, the objections of the Regional Director do not survive once the Petitioners accept that it will be open to the Income Tax Authorities to deal with the tax issues arising out of the scheme regardless of the approval of the scheme by this Court XXXXXX 42. In my view the contentions of the Regional Director in this regard deserve to be accepted The distinction between para 6(c) and 6(e) of the first affidavit of the Regional Director is apparent. As rightly pointed out by the Regional Director para 6(e) deals with the situation that arises in the event of the Court sanctioning the scheme. According to the Regional Director if the Court sanctioned the scheme, then the tax issues that may arise from the amalgamation must be left open for the Income Tax Authorities to decide in other words according to the Regional Director, the sanction of the scheme should not prevent the Income Tax Authorities from scrutinizing tax returns filed by the Petitioners after giving effect to the amalgamation. In other words the Petitioners should not escape the liability, if any, to taxation upon giving effect to the amalgamation. This is very different from the contention raised by the Regional Director in para 6(c) of his first affidavit as elaborated in his third affidavit to the effect that the scheme itself should not be sanctioned in view of the retrospective appointed date being contrary to the provisions of the Income Tax Act. As such it is not possible to accept the contention of the Petitioners that para 6(e) of the first affidavit of the Regional Director read with para 6 of the Affidavit in Reply of the Petitioners is a complete answer to the 4513/Mum/2017 Vodafone Idea Limited (Formerly Idea Cellular Limited) objection of the Regional Director. This judgment also supports the case of revenue instead of Assessee." 4.2. Hence, this claim of the assessee has no merit.

Thus, the finding of the ld. AO in para 4.5.12 regarding the non- compensation of P5 Asia Holding Investment (Mauritius) Ltd assumes significance. The order of the ld.CIT(A) is also to this effect. In fact, the assessee has been unable to bring any material fact that it had brought these specific facts to the ld. AO or the ld. CIT(A) at any point of time. The ld. AO's order is dated 28.03.2013 while the order of CIT-A is dated 08.03.2017. The special resolution of ABTL held on 30.09.2016 etc. has not been brought before the lower authorities at any point of time. Moreover, no valuation or specifics of how P5 Asia Holding Investment (Mauritius) Ltd was compensated was never demonstrated before the ld. AO.

After considering the aforesaid submissions and the facts brought on record qua the issue whether on account of demerger of ABTL's telecom operations (the Undertaking) into Idea Cellular Ltd. (assessee); the net book value of assets of Telecom circles in Bihar & Jharkhand area of Rs. 2,069 crores can be taxed u/s 28(iv). As noted above ABTL, was a wholly own subsidiary of Idea 4513/Mum/2017 Vodafone Idea Limited (Formerly Idea Cellular Limited) Cellular Ltd. (assessee); a foreign entity, P5 Asia Holdings Investments (Mauritius) Limited was allotted 19,25,000 compulsorily convertible preference shares of Rs. 10/- each of ABTL; ABTL had obtained a Unified Access Services License in November 2006 for providing telecom services in Bihar (including Jharkhand) service area and P5 Asia Holdings Investments (Mauritius) Limited had total share capital of 16.14% in ABTL. Further ABTL had invested 16% of equity share capital in Indus Towers Limited, another company which provides passive infrastructure to telecom operators. Accordingly, as noted above, the net book value of assets of ABTL as on 31/03/2019 was:  Telecom circles in Bihar & Jharkhand area: Rs. 2,069 crores  Investment in Indus: Rs. 0.019 crores  Other Investments: Rs. 0.05 crores. Since, Idea Cellular Ltd., wanted to consolidate all the telecom operations itself, therefore during the year under consideration under a scheme of arrangement under section 391 to 394 of the Companies Act, 1956 which was approved by the Hon'ble High Courts of Gujarat and Bombay, the entire ABTL's telecom operations were demerged into ICL with the appointed date being April 1, 2009. Under the scheme, all the assets, rights and liabilities of the Undertaking were transferred at the book values. Accordingly, ABTL revalued its investment in Indus, an asset separate from the Undertaking, and business restructuring reserve was created by crediting a sum of Rs. 7,330 crores and the net book value of the Undertaking being demerged was Rs. 2,069 crores. Now, as per the accounting treatment under the 4513/Mum/2017 Vodafone Idea Limited (Formerly Idea Cellular Limited) scheme, assessee credited this net book value of assets, being the differential book value of assets and liabilities of the demerged Undertaking, in the General Reserve account. As per the said scheme, no shares were issued to aassessee, i.e., ICL being the holding company. The case of the department is that; firstly, the conditions of Section 2(19AA) of the Act is not satisfied as it is a non-qualifying demerger; secondly, there is direct business nexus between ABTL and ICL, being under the same corporate management, engaged in similar line of business, therefore, the demerger is purely a business transaction; thirdly, the assessee has received benefit in the form of difference in net assets of the demerged telecom undertaking without any consideration, therefore, it is the benefit which is taxable u/s. 28(iv) of the Act. Lastly, P5 Asia, who earlier had stake in ABTL's entire telecom and investment business has been reduced to a stake holder only in investment business of ABTL and it has not been compensated by allotting shares of ICL. Any receipt of income following u/s.28, has to be income chargeable to tax under the head „profits and gains of business or profession‟. Thus, income should be in the nature of revenue arising in the course of business.

If the aforesaid contention of the revenue is to be upheld that demerger is a revenue transaction and is taxable u/s.28(iv) of the Act, then consequence thereof would be that every purchase of an undertaking by any assessee at a value lesser than the market value would be deemed to be a revenue 4513/Mum/2017 Vodafone Idea Limited (Formerly Idea Cellular Limited) transaction and taxable u/s.28(iv). It is important to note here that, prior to the amendment made by the Finance Act, 2017, w.e.f. 01/04/2017 when Clause (x) to Section 56(2) was introduced, section 56(2)(vii) provided that any sum of money or property received without consideration or less than fair market value was taxable in the hands of an individual but not with the companies. Thus in the A.Y. 2010-11 the said provision of section 56(2)(vii) has no application to a Company. One very important fact which is borne out from the term of scheme approved by the Hon‟ble High Court upon the demerger is that, no shares were allotted by ICL against share capital of ABTL as ICL itself being holding company, held the whole of equity share in ABTL and thus one cannot allot share to itself. There is no benefit as such arising to ICL upon the demerger against vesting of the Telecom Undertaking into the ICL, because there was a natural corresponding decrease in the intrinsic value of investment which is in the form of decrease of shareholding of ICL in ABTL. Even the ld. CIT(A) agreed in principle that since Assessee held 100% shares in ABTL, any transfer of assets from wholly owned subsidiary to holding company, would result in corresponding decrease in intrinsic value of investment of ICL in ABTL. Ld. CIT (A) further observed that "when the undertaking belonging to WOS rolls back into its parent, the value of shares held by parent in the WOS correspondingly falls". However, on facts it is noticed that he erroneously held that Preference Shareholders were not compensated, because the benefit arising to ICL were held to be in the ratio of so much of the shares held 4513/Mum/2017 Vodafone Idea Limited (Formerly Idea Cellular Limited) by P5 Asia to the total shares of ABTL just before demerger, comes to 16.14%. Thus, on this logic he held that, out of the addition of Rs. 2,069 crores, the addition to the extent of Rs. 334 crores (i.e., 16.14%) should be confirmed and granted relief for the balance Rs. 1,735 crores.

It appears that ld. CIT (A) was under a mistaken belief that no compensation accrued to P5 Asia. We have perused the facts and material placed on record before us and as per the terms of Hon‟ble High Court, the approved scheme, no shares were issued to P5 Asia, being the preference share holding of 19,25,000 compulsorily convertible preference shares of ABTL. The reason for non-issuance of shares to P5 Asia was that the terms of conversion of CCPS in terms of ABTL have been increased to 16.14%to 23.2456% after the demerger. Before us, the assessee had submitted a letter that P5 Asia has approved the scheme of arrangement vide its letter dated 02/11/2009 which, inter alia mentioned that there would be no discharge of consideration to any shareholder. The shareholder‟s agreement between ABTL, ICL and P5 Asia was again amended vide 3rd and 4th amendment agreement dated 28/04/2010 wherein the terms of conversion of CCPS into equity shares of ABTL have been further increased to 30.31% and this has been stated to be approved by the Board of Directors of ABTL. It has been stated that shareholding pattern of ABTL as on 30/09/2016 were as under:-

Thus, as per the resolution passed on 30/09/2016, Board approved that the issue and subscribed equity share capital of ABTL shall stand reduced from Rs. 14,34,97,760/- divided into 1,43,49,776 fully paid-up equity shares of Rs. 10 each to Rs. 10,00,00,000 fully paid-up equity shares of Rs. 10 each; and such reduction shall be affected by cancelling 43,49,776 equity shares held by P5 Asia representing 30.3125% of the fully paid- up equity share capital of ABTL; and distributing to P5 the following: a) 57,794 equity shares of Re. 1 each (ie. 4.85% holding) presently held by ABTL in Indus Towers Limited, and b) An aggregate sum of Rs. 455,00,00,000/- in cash.

This shows that P5 Asia was well compensated at a higher value than as decided before the demerger. Thus, ld. CIT (A) to that extent was incorrect while deciding the issue against assessee solely on this reason.

Further, any excess fair value of assets taken over under the amalgamation scheme over the shares issued, and transfer to General Reserve account cannot be treated as trading receipt and at the threshold, it cannot be treated as „arising from business‟ so as to be taxed u/s.28(iv). The phrase „arising from business‟ in the context of Section 28(iv) contemplates not only 4513/Mum/2017 Vodafone Idea Limited (Formerly Idea Cellular Limited) some connection with the business undertaking of the assessee which envisages that benefit of perquisite must arise out of actual conduct of the business of the assessee, and it should have live connection with the business carried out by the assessee and the benefit must accrue or arise in the course of carrying of such business. The benefit of perquisite has to be in the nature of trade receipts. Assessee in the course of carrying on his business, there can be benefit on two accounts, either capital or revenue. But both are separate and distinct and benefit in capital account cannot be taxed u/s. 28(iv), albeit the benefit on revenue account can be taxed u/s.28(iv). Even if the claim of deduction u/s.36(1)(iii) is allowed in respect of funds borrowed for the purpose of business, it cannot be inferred that receipt of the entire undertaking under the scheme of demerger is assessable u/s.28(iv). To this extent, we disagree with the contention raised by the ld. CIT DR before us while referring to the decision of the Tribunal in the case of Vodafone. If the contention raised by the ld. CIT DR is to be accepted, then in all cases of purchase or acquiring of capital asset in the form of business or undertaking under the scheme of amalgamation for price lesser than fair value, then the difference should be taxed u/s. 28(iv). This is not purport or the scope of Section 28(iv). To fall within the ambit of Section 28(iv), the value of any benefit or perquisite, whether convertible into money or not, arising from business or the exercise of a profession, should arise from carrying on the business. Here the benefit is not arising from business, albeit the benefit is on account of discount on 4513/Mum/2017 Vodafone Idea Limited (Formerly Idea Cellular Limited) purchase of a capital asset, which can never be treated as benefit or perquisite arising from the business. In the present case when telecom undertaking of ABTL got merged into the assessee without shares being issued because under the Companies Act, the holding company cannot issue shares to subsidiary an therefore, it cannot be envisaged that it is a trading receipt of revenue in nature so as to make addition u/s.28(iv).

here in this case the ld. AO has made addition u/s.28(iv) by assessing the entire net worth of telecom undertaking as revenue receipt assessable under the head „income from business and profession‟ and the basis is that no consideration was paid by the assessee as assessee did not issue shares to itself and to preference share holder of ABTL. We have already held as to why Section 28(iv) cannot apply in case of assessee. In addition, on facts of the present case, a property is transferred without consideration which can be at best be treated as a gift and such a gift even under the then existing provision of Section 56(2)(vii) cannot be taxed in the hands of the assessee being a company and provision which probably might cover such situation is under section 56(2)(x) brought in the statute w.e.f. A.Y.2017-18 at the most.

In so far as the contention that the Section 2(19AA) has been violated by the assessee having failed to compensate preference share holders, we have already noted that assessee had not compensated preference share holders by issuing share of the assessee. However, the preference shareholders were 4513/Mum/2017 Vodafone Idea Limited (Formerly Idea Cellular Limited) compensated as per the terms of the scheme which we have already discussed in detail in the foregoing paragraphs wherein specific reference was made to the manner of compensating the preference shareholder. The reason for non-issuance of any shares to the preference shareholders as such accrued scheme is that the terms of conversion of CCPS into equity shares of ABTL have been increased from 16.14% to 23.456% after the demerger which is inclined in part A of the preamble of the scheme. Thus, the scheme itself contained terms of compensate of preference shareholder which was there before both the authorities. Preference shareholders have approved the scheme of arrangement vide their letter dated 02/11/2009 which interalia mentions that there would be no discharge of consideration to any shareholder. Accordingly, we hold that the entire basis and the premise for taxing Rs. 2,069 Crores u/s.28(iv) had no basis and the same is directed to be deleted.

Now coming to the second issue of disallowance u/s 36(1)(iii) of the act of interest expenditure incurred for acquisition of shares of the erstwhile spice communications limited ("SPICE").

The brief facts are that during the financial year ("FY") 2008-09, the assessee had borrowed Rs.30,000 million for acquiring 41.09% of the paid-up share capital of Spice, another cellular service provider operating in the telecom circles of Punjab and Karnataka. Out of the said borrowing, the assessee repaid Rs. 15,000 million in the financial year 2008-09 and balance sum of Rs. 15,000 million in June 2009. During the year 4513/Mum/2017 Vodafone Idea Limited (Formerly Idea Cellular Limited) under consideration, the assessee incurred interest expense of Rs.30,24,65,753/- on the foregoing loan. Spice was amalgamated with the Assessee under the scheme approved by the Hon'ble Gujarat and Bombay High Courts u/s. 391 to 394 of the Companies Act, 1956 w.e.f. March 1, 2010 i.e. in the current financial year.

The ld. AO has disallowed the interest expenditure u/s.36(1)(iii) on the ground that similar addition was made in A.Y.2009-10. Ld. CIT (A) held that the interest expense was incurred for acquisition of shares of Spice with the ultimate purpose of acquiring ownership of Spice. Subsequently, Spice merged with the assessee and by virtue of this merger, the assessee acquired the telecom license earlier held by Spice and a new asset and advantage of enduring benefit was brought into existence. Thus, the interest expense incurred for acquisition of such capital asset is capital in nature and cannot be allowed as deduction. Thus, CIT (A) upheld the disallowance made by the AO.

Admittedly this issue is covered by assessee‟s own case in A.Y.2009-10 in Idea Cellular Limited v. DCIT Circle 3(2) & vice versa (ITA No. 3424/Mum/2014 & others) order dated 27/07/2023. The Tribunal by following the decision of SA Builders reported in 288 ITR 1(SC) and Hon‟ble Bombay High Court in the case of PCIT vs. Concentrix Services (I) Pvt. Ltd (2019) 111 taxmann.com 269. Thus, in view of the above, we find that this issue is covered by the decision of the Tribunal in 4513/Mum/2017 Vodafone Idea Limited (Formerly Idea Cellular Limited) assessee‟s own case. Accordingly, this ground is decided in favour of the assessee.

Disallowance of year end provisions u/s. 40(a)(ia) of the Act of the non-deduction of taxes.

The brief facts are that the assessee is engaged in the business of telecommunications and for providing such services to the end subscribers, the assessee supplies the SIM cards via its Distributors. The assessee provides for commission based on target activation based on valid KYC which distributor is expected to achieve till the last day of March month. However, the process of verification of such KYC and activation documents takes time and the actual amount payable to Distributor's is determined after the closure of the year in so far as amount payable for March is concerned. While there is a legal liability of company to pay the provisions, the provision for March is made considering the target what distributors have actually achieved in preceding month. Thus, though the distributors have activated new customer, the verification is pending, and hence while the liability to pay such activation commission is also on the Company, however, until the verification is complete, the distributor who is to be paid and how much post verification exactly is unknown. Thus, the liability is accrued but not due as on 31/03/2010 also the identity of recipient individually is not known.

Ld. AO has disallowed the provision of commission on the ground that the said expense cannot be claimed as a deduction as it is contingent in nature and said provision is disallowable u/s. 40(a)(ia) of the Act, since the assessee has not deducted tax thereon. The ld. CIT (A) directed the AO to verify and allow the expenses in the subsequent year in which the provision is reversed and tax is deducted and deposited.

Mr. Mistry informed that in view of the direction of the ld. CIT(A), the ld. AO in the order giving effect noted that assessee has submitted the details of subsequent tax deduction on commission paid to the distributors and after final verification of subscribers, he has granted relief to the extent of Rs.36,54,85,562/-. Before us, ld. Counsel submitted that the said provision is made on the scientific basis based on best estimates i.e. some percentage of last month commission amounts. The assessee has paid commission to the Distributors for activation of SIM cards after final verification of the subscribers. Thus, the liability for commission is accrued but not due. The expense of commission which is an otherwise allowable expense is incorrectly disallowed on the ground of non-deduction 4513/Mum/2017 Vodafone Idea Limited (Formerly Idea Cellular Limited) of TDS, as TDS provisions do not apply if the payee is not identified at the time of making provision of expense.

In this regard, Ld. Counsel placed reliance on the decisions of UCO Bank vs. UOI [2014] 369 ITR 335 (Delhi HC) and Industrial Development Bank of India v. ITO [2007] 107 ITD 45 (Mum. Trib.) wherein it has been held that the whole scheme of TDS proceeds on the assumption that the person whose liability is to pay an income knows the identity of the beneficiary or the recipient of the income. He further relied upon other decisions as cited in the legal compilation filed at bar during the course of hearing and submitted that the whole addition of commission expense be allowed as deduction during the year under consideration.

After considering the submissions and on perusal of the record, it is seen that out of disallowance of provision of commission of Rs.47,66,22,574/-, already ld. AO has allowed in the order giving effect to the ld. CIT(A) order, the claim of expenses of Rs.36,54,85,560/-. The assessee makes the provision based on some percentage of last month commission amounts. The assessee has paid commission to the Distributors for activation of SIM cards after final verification of the subscribers. Thus, the liability for commission has accrued. We are unable to agree with the contention of the ld. Counsel that even if the expenses are related to business of the assessee, however, wherever TDS provisions are attracted for deducting TDS on any expenses, the same has to be discharged. It has 4513/Mum/2017 Vodafone Idea Limited (Formerly Idea Cellular Limited) been informed that there are further details of subsequent deductions of tax or assessee has written back of provisions in the subsequent years. However, this aspect needs to be examined by the AO. Accordingly, assessee will furnish the details deductions of tax or write back of provisions in the subsequent years and AO will examine and thus, this issue is partly allowed for statistical purposes.

Ld. AO has disallowed the said expenses on the ground that the Assessee is incorrect in claiming the said expenses without showing any corresponding income receivable and the unilateral debit of expense which is actually recoverable from subscribers /customers is not accordance with the law and accounting practices. The ld. CIT (A) has upheld the action of the ld. AO.

After hearing both the parties and on perusal of the material on record, it is seen that assessee has to pay the interconnect charges to other operators by using their network and these parties are payable irrespective of recovery from the subscribers. Thus, it cannot be denied that it is purely business expenditure wholly and exclusively incurred during the course of business and accordingly, we agree with the contention of the ld. Counsel that same is to be allowed. Accordingly, disallowance of interconnect charges is deleted.

Ground No.VI relating to disallowance of switching and cell sites rent u/s.40(a)(ia) for non-deduction of tax u/s.194I of the Act, the same has not been pressed and therefore, dismissed as not pressed.

The aforesaid issue in AY 2004-05 had travelled to the Tribunal for adjudication. Therefore, without prejudice to the outcome of the said appeal, a ground was taken by the Assessee before the Ld. CIT (A) in the year under consideration. The ld. CIT(A) held that since this issue is pending before the Tribunal, the ld. CIT(A) directed the ld. AO to follow the decision of the Tribunal as and when received.

Before us, it has been pointed that this issue has been decided by the Hon'ble Tribunal that the deduction u/s. 35DD 4513/Mum/2017 Vodafone Idea Limited (Formerly Idea Cellular Limited) would be available for 5 years starting from AY 2007-08 on the ground that the amalgamation had taken place in FY 2006-07. The Tribunal orders passed for this issue are as under:  Vodafone Idea Ltd. v. DCIT (ITA No. 2285/Mum/2014) (Mumbai Tribunal) for AY 2008-09  Idea Cellular Limited Vs. ACIT & vice versa [(ITA No. 4445/Mum/2013 & others) order dated May 27, 2016 (Mum. Trib.)] for AY 2007-08  Idea Cellular Limited Vs. ACIT & vice versa [(ITA No. 6736/Mum/2012 & others) order dated February 24, 2016 (Mum. Trib.)] for AY 2004-05.

Pursuant to the Tribunal order in AY 2004-05, the order giving effect to the CIT(A) order passed by the AO allowing the deduction u/s. 35DD for the relevant years are as under:  Order Giving Effect to CIT(A) order for AY 2009-10 dated 19.06.2017  Order Giving Effect to CIT(A) order for AY 2008-09 dated 19.06.2017  Order Giving Effect to CIT(A) order for AY 2007-08 dated 12.04.2017.

Thus, in view of the aforesaid fact, ld. AO is directed to give consequential relief and allow the deduction u/s.35DD accordingly. Department’s appeal 49. Now coming to the Revenue‟s appeal wherein the first issue relates to disallowance u/s.14A r.w.r.8D which has been taken by ground No.ii. 50. The brief facts are that during the year under consideration, Spice was merged with the Assessee. Carlos Towers Limited 4513/Mum/2017 Vodafone Idea Limited (Formerly Idea Cellular Limited) ("Carlos") was a wholly owned subsidiary of the erstwhile Spice and pursuant to the said merger it stood transferred to the assessee. Accordingly, an investment of Rs. 0.50 million made in Carlos by Spice was reflected in the Balance Sheet of the assessee. No fresh investment was made by the assessee in Carlos or in any other companies during the year under consideration. The assessee continued to hold investments in its other subsidiaries during the year under consideration. During the year under consideration, the assessee did not receive any dividend income from the shares held as investments in the subsidiaries. Further, during the year under consideration, the assessee had made investments in the units of Growth Schemes of Mutual Funds amounting to Rs. 11,184 million. These investments are not capable of generating any tax-free income.

The ld. AO disallowed Rs. 80,89,24,560/- u/s. 14A of the Act read with rule 8D by applying 0.5% of the average value of tax- free investments and interest expenses proportionate to average total investment to average total assets.

The ld. CIT(A) after perusing the Profit & Loss account of the assessee which shows that no dividend income has been earned during the year and that no exempt income is claimed in the Computation of Income, allowed this ground and deleted the disallowance u/s 14A relying on various decisions of Hon'ble High Courts.

After considering the identical factual matrix involved and considered by Hon'ble Tribunals at Jaipur and Karnataka in Assessee's own case and relying on the decision of Hon'ble Karnataka High Court judgement in the case of Bharti Airtel limited and others vs. DCIT and others reported in 372 ITR 33, which has discussed the legal position in detail and has also considered the previous Delhi High Court and Kerela High Court judgements which are against the Assessee, the CIT(A) had allowed this ground of appeal and deleted the disallowance of Rs. 347,80,25,095/-. Though this issue has been stated to be covered in assessee‟s own case in following cases:-  Idea Cellular Limited v. DCIT Cirl. 3(2) & vice versa (ITA No. 3424/Mum/2014 &  Vodafone Idea Ltd. Vs. DCIT (ITA No. 2285/Mum/2014) in own case for AY 2008-09.  M/s. Vodafone Idea Ltd. (As successor to Spice Communications Ltd.) vs. DCIT (ITA No.3425/Mum/2014)

However, recently the Hon‟ble Supreme Court in the case of Bharti Cellular Ltd (Now Bharti Airtel Ltd.) vs. ACIT [Civil Appeal No. 7257 of 2011] had decided the same issue in favour of the Assessee by holding that no TDS u/s. 194H is required on such transactions. Accordingly, the department appeal is dismissed.

Disallowance of amount debited to the profit & loss account towards amortization of the intrinsic value of shares under the 4513/Mum/2017 Vodafone Idea Limited (Formerly Idea Cellular Limited) Employee Stock Option Scheme ("ESOS"). The facts in brief are that during the year under consideration, the assessee had debited Rs. 28,29,08,135/- towards ESOS amortization cost to the Profit & Loss Account as part of its "Employee Compensation Cost" under "Schedule 15-Personnel Expenditure". The amount of compensation cost of ESOSs was computed as per the Intrinsic Value Method as specified in the Securities and Exchange Board of India ("SEBI") 'Employee Stock Option Scheme and Employee Stock Purchase Scheme Guidelines, 1999 ("SEBI Guidelines"). The term "intrinsic value" under the SEBI Guidelines means the excess of the market price of the shares under the ESOS over the exercise price of the option.

Ld. AO has disallowed the amount of employee compensation cost on the following grounds:

The ld. AO disallowed the foregoing RSLF of Rs. 8,68,29,06,892/- on the ground that the Assessee had already claimed deduction u/s. 35ABB of the Act on the same amount and, hence, allowance of expenses u/s. 37(1) of the Act would result into double deduction.

The ld. CIT(A) following the order of the Hon'ble Tribunal in Assessee's own case for AY 2001-02 [ITA No. 3260/Mum/2008, order dated May 13, 2014] and AY 2003-04 [ITA No. 4513/Mum/2017 Vodafone Idea Limited (Formerly Idea Cellular Limited) 3261/Mum/2008, order dated March 11, 2015), wherein the identical issue has been decided in favour of the assessee, has allowed this ground and directed the AO to delete the disallowance of RSLF of Rs. 8,68,29,06,892/- and treat the same as allowable u/s 37(1) of the Act.

We find that the Hon‟ble Supreme Court in the case of CIT vs. Bharti Hexacom Ltd. in Civil Appeal No.11128 of 2016 vide order dated 16/10/2023 has held that the variable annual licence fee paid by the Telecom Companies to the DoT under the Policy of 1999 are capital in nature and may be amortised in accordance with Section 35ABB of the Act. Accordingly, we restore this issue to the file of the ld. AO to determine the amount of deduction u/s.35ABB applying the principle laid down by the Hon‟ble Supreme Court. Accordingly, this ground is allowed for statistical purposes.

In the result, appeal of the assessee is partly allowed and appeal of the Revenue is allowed for statistical purposes.