AI Drafter 
TaxTMI 
TaxTMI 
2017 (12) TMI 306
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....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. ....
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....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. Since the major issue relates to the addition made on account of computation of capital gain by enhancing the fair market value of SBPL shares as raised vide ground no. 2, therefore, we are taking up this issue first. Both the parties have made their detailed submissionsduring the course of hearing. At the time of hearing, the Revenue has filed a petition for admission of 'additional evidences'under Rule 29 of ITAT Rules, 1963 by bringing on record; (i)Framework Agreement of 01.03.2006; (i....
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....k Mahindra. First of all, he noted the valuation of Vodafone India 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 AssetValue method (NAV) while arriving the value of SBPL. He thus, held that theNAV 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 thatthe 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. The AO, thereafter, traces the background of transaction of acquisition and....
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....n prevailing exchange rate to INR and the market value of the entire share capital of HEL was taken at US $ 25 billion and incase the price of the HEL exceeds US $ 25 billion then the valuation of the SBPL shares would be determined accordingly. Thus, it was submitted that the transfer price of the entire SBPL shares was $ 266.250, that is, Rs. 1088 crores as per the then exchange rate. When 49% of the shares were sold on the basis of same transfer price at Rs. 533 crores, i.e. 49% of 1088 crores, then the balance share value was Rs. 555 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. Thereaf....
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....) Framework Agreement dated 1st March, 2006 between Mr. Analjit Singh, Scorpio Beverages Pvt. Ltd., MV Healthcare Services Pvt. Ltd., 3 Global Services Pvt. Ltd. ("3 GSPL") and ND Callus Info Services Pvt. Ltd. b) A write up on the structure of Hutchison Group and the details of its acquisition of interest pertaining to the Indian telecommunications market, titled 'History Hutchison Group-India. c) Financial statements of Scorpio Beverages Pvt. Ltd. and its step down subsidiaries, namely, ND Callus Info Services Pvt. Ltd., MV Healthcare Services Pvt. Ltd., Telecom Investments India Pvt. Ltd. ("TIL") and Jaykay Finholding (India) Pvt. Ltd. The financial statements have been downloaded from the website of MCA, as filed by the respective companies." 10. Ld. Spl. Counsel, Shri G.C. Srivastava, vehemently submitted that these documents are quite relevant and has a vital bearing on the issues involved as it not only gives the background of the nature of agreements and transactions entered between the parties but also provides the basis for determination of valuation of shares which is the subject matter of the dispute. The argument put forth by the Special Counsel on....
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....t 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. C) Financial Statements of Subsidiaries:- (i) This paper book contains financial statements of Scorpio Beverages Pvt. Ltd. and its step down subsidiaries including Jaykay Finholding India Pvt. Ltd. (ii) One of the issues involved in the ground of appeal no. 2 is the mechanism to work out the value of shares of HEL and whether or not the valuation of shares done by Kotak Mahindra 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. (iii) The amount ....
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.... 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 justice involved, all procedural and technical aspects must yield in the interests of justice. 12. Vehemently, opposing th....
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....ion of each of the aforesaid additional evidences for the following reasons: (a) Re:Framework Agreement dated 01.03.2006 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 consid....
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....nt 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 Claus....
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....ent dated 7.8.2012); and 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. (b) Re:Write up on the structure of Hutchison Group in India 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 g....
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....o 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 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 t....
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....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 thisobjection. A counsel may be appearing in several matters closely connected with oneanother, 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 dispute that Choodamani Iyer as such was not a party to any the previousproceedings. 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 Tribun....
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....einformation given to him without himself verifying its truthfulness or reliability. Inthe preset case, the Income-tax Officer made no independent enquiries and merelyrelied 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 suspicion which was not justified. For these reasons, we hold that theedgy of entries from the Uchanti Bahi supplied to the Incometax Officer by the sales tax department was not legal and admissible evidence on which the Income-taxOfficer 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. ....
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....or 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 same is been valued as on 28 February. 2014 as per its contractual terms.' In view of the above, the financial statements of the ea....
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....r 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. C. Decision on the admissibility of additional evidence filed by the Revenu....
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....g to the write-up of the structure Hutchison Group in India which has been drawn from the written statement filed by the Vodafone before the Hon'ble Supreme Court in the case of Vodafone International Holdings, since reported in 341 ITR 01, merely gives the prequel of the various entities as how they have been involved in the share holding pattern of Hutchison Group in India and the percentage of shareholding in HEL which has been taken over by the Vodafone in May 2007. Though nothing much turns around on this write-up of the structure and has no direct bearing on the adjudication of the issues involved but it merely gives the background to understand how various entities were involved in the share holding pattern by different entities including the assessee in HEL and later on VIL after take over post May 2007. Thus, it is not in the form of additional evidence, therefore, we are not taking any much cognizance of this document filed before us and, therefore, we are rejecting the said document for admission,exceptthat slight reference may be made in our order only for the purpose of giving the prequel of the events. 15. Lastly, so far as the various financial statements of inter....
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...."). 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']. 17. The above referred Framework Agreement provided that as and when permitted by applicable law including the limits imposed by the Government of India, on foreig....
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....alue 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 ofIndian 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 Complet....
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....aid illustrative working, the value of NDC, which was 100% held by SBL, was worked out at USD 266.25 million, which, it appears, was adopted by the parties as consideration payable under clause (a)(i) of Schedule-1 of the Agreement. Accordingly, the transfer price for the 100% share capital of SBPL determined on the basis of exchange rate of Rs. 40.88 per USD prevailing on 08.05.2007, aggregated to Rs. 1088 crores. He pointed out that as per the exchange rate of Rs. 40.88 per USD as on 08.05.2007, the amount equivalent to USD 25 billions, aggregated to Rs. 1,02,200 crores. The option fee received has been offered and assessed to tax as revenue receipt, year after year. In the financial year 2009-10, there was change in FDI regulations relating to sectoral cap, which enabled GSPL to acquire some shares in Scorpio and thereby increase its indirect shareholding in VIL. Accordingly, on 07.04.2009, CGP and a person nominated by GSPL and AS entered into an agreement relating to transfer of 4900 shares of SBPL, constituting 49% stake, by assessee to CGP in accordance with the terms and conditions agreed vide Framework Agreement dated 05.07.2007. Having regard to the valuation for 10.0% st....
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....er: * 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 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 consid....
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....computed by deducting from the full value of consideration "received" or "accruing" as a result of transfer of the capital assets. The terms used in section 48 are the full value of consideration "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) ....
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....s: (ITR p. 148) "... Income tax is a levy on income. No doubt, the Income Tax Act takes into accounttwo points of time at which the liability to tax is attracted, viz., the accrual of the income or its receipt; but the substance of the matter is the income. If income does not result at all, there cannot be a tax, even though in bookkeeping, an entry is made about a 'hypothetical income', which does not materialise. Where income has, in fact, been received and 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) "....
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....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." 23. Mr. Ajay Vohra, further submitted that if one goes as per the scheme of the Act, then capital gains is to be computed in the hands of the transferors taking into account the actual consideration received or accruing and not any hypothetical/notional consideration/ fair market value of the asset subject of transfer. The difference, if any, between the fair market value of the asset and the actual consideration received was taxed as deemed gift under section 4(1)(a) of the Gift Tax Act, 1958 in the hands of transferor, until repeal of the said Act with effect from 01.10.1998. Accordingly, after abolition of the 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 differe....
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....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. 24. He further submitted that the assessee has computed long term capital gain on shares of SBPL by taking into account, the actual consideration received amounting to Rs. 997.92 crores and if the Revenue alleges that the assessee received in amount in excess of the declared consideration, then onus was on the revenue to demonstrate with tangible evidence that excess consideration had actually passed on or has been received by the assessee. In support of this proposition, he....
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....e, part of the shares of SBPL, i.e., 49% stake of the assessee in SBPL wastransferred to CGP at Rs. 533 crores being amount arrived as per the clause of lump sum consideration agreed in Schedule I of the framework agreement dated 05.07.2007, during the AY 2010-11 which was offered to tax under the head "Long Term Capital Gains" which was been accepted by the Revenue as such.In absence of any change in facts more particularly qua the agreement dated 05.07.2007 and mode of computation of transfer price contained in Schedule 1 thereof, the Revenue now cannot be permitted to change its stand and argue that actual consideration received by the assessee on transfer of share needs to be substituted with alleged market fair value. In support of principle of consistency to be followed, he relied upon catena of judgments which are as under:- * Radhasoami Satsang vs. CIT: 193 HR 321 (SC) * CIT vs. Excel Industries Ltd.: 358 ITR 295 (SC) * DIT(E) vs. Apparel Export Promotion Council:244 ITR 734 (Del) * CIT vs. Neo Polypack (P) Ltd.: 245 ITR 492 (Del.) * CIT vs. Dalmia Promoters Developers (P) Ltd.: 281 ITR 346 (Del.) * DIT vs. Escorts Cardi....
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....ficient 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 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. 27. After having made his detailed submissions that the addition made by the AO by enhancing the sale consideration for the purpose of computing the capital gain, Mr. Vohra by way of alternative argument and without prejudice to his earlier submission, submitted that,if FMV of the capital assets can be substituted by actual/full value of consideration received on transfer thereof u/s 45 r.w.s. 48 of the Act, the addition made in the assessment order is ba....
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....ent 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 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: A. Reasons behind engagement of Kotak: 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 pro....
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....e consideration agreed between the parties, being more than the fair market value determined for shares of Scorpio was not violative of applicable Government regulations. B. Valuation methodology followed by Kotak: 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 D....
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.... 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 crores, which resulted in price per share of Rs. 5.40. C. Valuation methodology adopted by Kotak justified: 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 SBPLwas 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 les....
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....sessee should have received consideration on the basis of fair market value of HEL/VIL, without considering the value of intermediary companies and for the aforesaid conclusion, the Revenue has sought to rely upon the methodology prescribed for determination of the sale consideration agreed between the parties under the 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 w....
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....l option, GSPL granted put option to AS to require GSPL to purchase equity shares of SBP. Clause 4.2: Deleted Clause 4.3: AS shall have the right to require GSPL or its nominee to purchase any or all of the SBP shares as and when permitted tinder the applicable Indian laws and regulations. 3. Transfer price agreed Clause 4.6: Shall be determined as follows:- i. Such FMV as may agreed between the parties, and if the parties fail to reach agreement within 30 days of the date of the Transfer Notice, then; ii. Transfer price shall be such FMV as determined in accordance with schedule 2 to the agreement. Schedule 2 For the purpose of determining Transfer Price, the following formula shall be applied: Clause 4.6: Transfer price shall be determined in accordance with formula set out in Schedule 1, subject to a maximum of an aggregate of Rs. 150 billion as reduced by the amount payable to AS as option fee. Schedule 1 i. USD 266,250,000 converted into INR at the prevailing exchange rate published in London Edition of Financial times on the business day immediately prior to the completion date. a) Transfer Price shall be equal to the F....
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....assessing officer accepted the:- (i) initial disinvestment of 51% shares of Scorpio in the year 2009 at the proportionate consideration agreed in the agreement dated 5.7.2007; (ii) number of shares held by the appellant in Scorpio (after the initial disinvestment and pursuant to right issue in terms of the amended agreement dated 7.8.2012); and (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. 30. In view of the above and on the principles of consistency, he submitted that the respondent Revenue cannot be heard to contend that the terms of the agreement dated 05.07.2007 need to be ignored and seek to draw reference to the terms of the old agreement dated 01.03.2006, sought to be placed on record as additional evidence, to canvass an altogether new case for the first time before the Tribunal. 31. Without prejudice to the aforesaid arguments, Mr. Ajay Vohra submitted that even the relevant clause i.e. clause 4.6 read with Schedule II relating to determination of transfer price contained in the aforesaid agreement dated 1.3.2006, do not support the fresh plea of the ....
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....hedule 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....
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.... 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 Ag....
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....he judgment of Hon'ble Supreme Court in the case of CIT vs. Daulat 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....
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....est was held through indirect holding companies and the 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....
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....ts 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 obligationsarisingfromthe 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, withthesame parties in place and Vodafone Pic 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 Framewo....
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.... 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 interest of the ap....
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....er, 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. 38. After narrating the entire facts in the aforesaid manner, he filed a chart showing changes in the interests and the percentage of the holding of the assessee in HEL and later on in VIL at different points of time and also a chart showing accrued sale consideration of call option under different agreement which has quite a relevant bearing on the said issue therefore, for the sake of readyreference same is reproduced hereunder:- Accrued Sale Consideration of Call Options Sale consideration as per different agreements: A. Ag....
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....he minimum price of shares. (Presuming the value of HEL/VIL shares has not crossed 25 billion threshold). Therefore the total consideration at this rate is 135,787,500 X 40.88 which comes to Rs. 555,09,93000/- + If market value of issued share capital of HEL exceeds US$ 25,00,00,00,000 the SBP Ltd. value will include proportionate amount of such excess amount converted into Rupees at prevailing US$ + Call option fee from GSPL of an amount of US$ 10.2 million per annum accruing on a daily basis as per framework agreement 2007. + Call option fee from M/s VISPL (formerly GSPL) of an amount of US$ 3.2million per annum accruing on a daily basis The value per share is Rs. 555,09,93000/ 5100 = Rs. 10,88,430/- (5,55,09,93,000 / 5100 =Rs.10,88,430 as per exchange rate @ 40.88 as per the agreement) + Possible markup + Annual call option fee from GSPL as per framework agreement 2007 -10.2 mil US$ + Additional annual call option fee from VISPL as per amended framework agreement 2010-3.2 mil US$ No valuation was done when the framework agreement amended in 2010 NDC acquires 51% in AG Mercantile by SPA dated 10th May 2010 which holds 23.97% in TII. This substantially raises the....
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....CGP 4,900 18,73,62,921 Total 10,000 38,23,62,900 (a) No submission was made as to how 15,67,64,689/- rights shares were issued (i) Rs.10 per share (right share allotted ) (ii) Rs.15.3 8 per share As per thesupplementary agreement it is already decided that Sh. Analjit Singh will receive Rs. 300 crores (irrespective of the value right shares. Sale price of rights shares of future date is fixed in August, 2012 itself. Even as per this agreement no valuation was done to arrive at an amount of Rs. S. No . Agreement s Date Value of consideration Value of shares Remarks against the original share of 4,100. 300 Crores for rights shares. The amount of Rs. 300/- has not basis whatsoever. 6. (i) Sale purchase agreement between Sh. Analjit Singh and Smt. Neelu Analjit Singh and M/s SBP Ltd and M/s CGP India Investment Ltd. 12.03.2014 Rs.12,41,32,06,200/-is the sale consideration of both original shares and right shares The breakup of the above amount of Rs. 12,413,206,200/- as is given as below:- Mr. Analjit Singh 9,979,244,200 (4....
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....s Rs. 1,241.32 cr. which is total consideration of Sh. Analjit Singh and Smt. Neelu Analjit Singh. Rs.63.65 Total consideration received by Sh. Analjit Singh and Smt. Neelu Analjit Singh isRs.12,41,32,06,200/-. The total shares sold including right share and original share is 19,50,05,079. Therefore, the value per share is worked out as under:- 12,41,32,06,200 / 19,50,05,079 = Rs. 63.65 per share However, the aforesaid working does not reflect the acquisition of AG Mercantile shares and SMMS shares in 2010 and 2011 respectively. C. Points related to valuation:- S. No Agreeme nt / basis of share price Year Value of shares (Rs.) Remarks Valuation 1 Valuation report dated 19.03.2014 of Kotak Mahindra Capital Company Ltd. (Merchant banker) 19.03.2014 Rs.5.4/- per share The buyer CGP India Investment Ltd. got the valuation of M/s SBP Ltd. from Kotak Mahindra Capital Company Ltd. which valued shares of M/s SBP Ltd. at Rs. 5.4/- per share by aHybrid methodwhich is not the prescribed method as per Income Tax Act/ Rules. It valued VIL by following DCF method. However thereafter, to arrive the valuation of M/s SBP Ltd. NAV m....
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....ers 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 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 fu....
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....ase 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 agre....
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....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, th....
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....ndicated in the SPA is a complete departure and is wholly arbitrary. It is an admitted factthat there is no working for the price of Rs. 941 crores indicated in the SPA. The 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 decides 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. 43. Coming to the alternate plea of the Mr. Ajay Vohra on valuation of shares that the transfer price declared by the assessee is much above the price determined by the valuer, Mr. Srivastv....
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....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 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....
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....ly, 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; * 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? 46. We have discussed at length, the facts and background of the case as submitted by the parties before us, however for the purpose of our adjudication; it would be pertinent to reiterate the facts and the background in a succinct manner. As a prelude to the events leading to transaction of shares, we find it quite relevant to refer to the historical prospective which needs to be briefly il....
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....wned 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. 47. Under the framework agreement of 01.03.2006, it was agreed that in consideration of 3 GSPL providing financial assistance for NDC to subscribe to 38.78% of shares in TIL (which holds directly and indirectly 19.54% shares in HEL), SBPL granted 3 GSPL, right to subscribe equity in NDS and or purchase equity in MVH....
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.... 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; andsecondly, 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/-. 49. One very important fact to be seen is that, nowhere in the said Sched....
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....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 is 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 pr....
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....hanged in the following manner:- 52. The long term capital gain on transfer of said shares was offered for tax in the F.Y. 2010-11 by the assessee. In the F.Y. 2012- 13, "rights issue" of 28,23,52,900 equity shares of Rs. 10 each at par was issued by SBPL which was subscribed by the existing shareholders, i.e. AS and CGP in full.Accordingly, the assessee subscribed 19,49,99,979 shares and CGP subscribed to 18,73,52,921 in the existing ratio of 51:49. In pursuance of such acquisition, '4th 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. 53. Now here again, it is quite perplexing to note that a company having 10,000 equity shares had issued 'right shares' of approximately 38.24 crores and the assessee's subscription of such shares was approximately 19.50 crores. Coupled with this oddity, the entire right issue shares of 19.50 crores have been fixed at a price of Rs. 300 crores. This again is without any working or basis. How a company with 10,000 equity shares can issue a ....
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....gn 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"). 3. ............................... 3.2. The parties acknowledge that Kotak Mahindra Capital Company Ltd. has been requested to prepare a valuation report relating to the fair market value of the entire issued share capit....
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....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 proced....
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.... 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) were 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 introduc....
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....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 su....
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....e as discussed in these judgments have been upheld and reiterated time and again by the Hon'ble Supreme Court in catena of decisions including that of CIT vs. Excel industries reported (supra) 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. 59. Here in this case, as discussed in detail, it is not a simple case of sale and purchase of shares emanating from Sale and Purchase Agreement dated 12.03.2014.The rights and obligations of the parties for this particular transaction goes way back tothe year....
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....e 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 by the parties' agreement after agreement, then it cannot be held that such a binding contractual obligation amongst the parties has simply witheredaway 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 b....
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....certainment of liability albeit the figures of liabilities have been given by the companies, which is unauthenticated and uncorroborated. This is evident from the remark given in the valuation report at page 1 which for sake of reference is reproduced hereunder:- "It is clarified that CGP has provided us with the historical financials of the companies in the HoldCo chain and SBP, and further, CGP 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 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 r....
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.... 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. 62. Section 11UA(2) also envisages that the fair market value of the unquoted shares can be determined as per discounted cash free flow method, i.e., DCF but here the valuer seems to have adopted NAV method and he has reduced even those liabilities which are not permissible under 11UA. Accordingly, we hold that the valuation done by the Kotak Mahindra Capital and the value of SBPL's shares is not in accordance with Rules as given in Rule 11UA which is specific for 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 envisa....
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....9,335 SMMS 61.60% Value of 61.60% equity stake in Omega 18,081 18,071 Add: Value of Net Assets (Liabilities) excluding in Omega -23,318 4,559 Assets - Liabilities - Market Value of Investment in Omega + Income Tax + Provisions 131.62 Investme nt Activities Equity value of SMMS -5,237 22,630 UMT 6.07% Value of 6.0672% equity stake in VIL 34,248 34,248 Add: Value of Net Assets (Liabilities) excluding in VIL -3,725 -3,265 Assets - Liabilities - Market Value of Investment in VIL + Income Tax + Provisions -166.53 Investme nt Activities Equity value of UMT 30,523 30,983 UMTI 100% Value of 100% equity stake in UMT 30,523 30,983 Add: Value of Net Assets -4,470 -4,463 Assets - Liabilities - -32.16 NBFC Add: Value of Net Assets (Liabilities) excluding in Nadal -3,014 10 ....
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....he SBPL value has been arrived at Rs. 131.86. So far calculation for arriving at this price in terms of our guidelines, Ld. Sr. Counsel has not disputed this figure, albeit he has challenged the entire valuation set out herein on the ground that the actual consideration received has to be accepted, which we have discussed in detail that is not tenable. Accordingly, we hold that the value of shares for which the sale consideration said to have been accrued to the assessee has to be worked out at Rs. 131.86 per share. Thus, the AO is directed to compute the capital gain by taking the sale consideration by adopting the per share value of SBPL at Rs. 131.86. 65. In view of the finding given above, following conclusions are drawn on the issues/questions we have framed for the purpose of our adjudication:- * 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 ....
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..... 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. 67. The AO first of all, observed that the meaning of the cost of the cost of acquisition and cost of improvement as appearing in section 48 & 49 has been restricted by the scope of section 55(2). He also distinguished the decision of the Delhi High Court in the case of Mithlesh Kumari (92 ITR 9) relied upon by the assessee on the ground that it was under the old Act and now there is change in the provision. Finally, he has denied the said capitalization of interests on the following grounds:- i. There was no direct nexus between the funds borrowed and investment made in the shares ofSBPL. 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....
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....erent provision for computation of interest of each asset and also provide 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 ....
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....ontained in the said Standard. Hence, the assessing officer has 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, w....
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....ot 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 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 ....
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....rrowed 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 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 backd....
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....paid/payable as interest while computing the amount of capital gains. Reference was also made by him to the decision in the case of Octavious Steel & Co. Ltd. reported in 82 taxman 79, where the Hon'ble HC of Calcutta held that the cost of acquisition of asset must be understood in its common sense, i.e., it must represent the expenditure incurred in acquiring the asset. It further held that certain expenditure made later on cannot take the place of the cost of acquisition. The Hon'ble Court went on to observe that except for the provisions like section 43A where special provision is made for determining the cost of acquisition, the cost of acquisition would be the price paid for acquiring the asset. Lastly, he placed reliance on coordinate bench decisions in the cases of Macintosh Finance Estates Ltd. (12 SOT 324); Vikram Sadanand Hoskote (18 SOT 130); and Aban Offshore Ltd. (76 taxmann 47) to rely on the proposition that interest cannot form part of the cost of acquisition. Thus, he submitted that the cost of acquisition can include only the amount actually paid by the appellant for acquiring the asset in terms of specific mandate of section 55(2) of the Act. No deduction for int....
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....isition 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 v....
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.... acquisition of right shares is to be allowed as deduction while 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.) 75. Lastly, with regard to the reliance placed on the provisions of section 55(2)(aa)(iii), he submitted that it would be necessary to appreciate the legislative intent behind insertion of clause (aa) to section 55(2) by the Finance Act, 1994 w.e.f. 01.04.1995, prescribing the mode of computation of cost of acquisition in relation to certain assets, i.e., acquisition of bo....
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....uisition. DECISION 77. We have heard the rival submissions and considered the entire gamut of facts placed before us and the provision of lawand decisions referred to at the time of hearing. As discussed in our earlier part of the order, the assessee had subscribed to 15,67,64,689'right shares' of SBPL on 09.08.2012, i.e., inthe 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 restric....
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....djusted", "cost of improvement" and "cost of acquisition" for the purpose of sections 48 & 49. Sub-section (2) of section 55 enlists as to what should be the "cost of acquisition in certain cases." Clause (aa) of section 55(2) which is relevant for ourpurpose is reproduced hereunder:- 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 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 rela....
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....hares,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 with sub clause (iii) thereto, incase 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. 79. Before us, Ld. Sr. Counsel Mr. Vohra afterreferring to the Memorandum explaining the provision of Finance Bill, 1994 through which section 55(2) was proposed to be inserted, had submitted that the intention of the legislature was only to prescribe uniform method for computing the basic cost of acquisition of bonus/right shares and not to restrict to only the actual cost paid. We are unable to agree w....
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....on 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 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 renounc....
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.... acquisition of right shares and as discussed in the foregoing paragraphs, only amount actually paid would be allowed and no such interest can be allowed as cost of acquisition in the case of rights shares in terms of section 55(2). All such arguments placed by the parties have been rendered academic in view of our finding given above. Accordingly, we hold that the AO was justified in not allowing the cost of interests expenditure capitalized from the acquisition of 'right shares' at the time of transfer. 82. Now coming to the alternative argument put forth by the Ld. Sr. Counsel, Mr. Ajay Vohra before us that, the interest expenditure incurred on the loan taken for acquiring the right shares in SBPL in the FY 2012-13, should be allowed while computing the income shown under the head "income from other sources"; and he also pleaded that direction should be given that such interest should be allowed against "income from other sources" in the earlier year, i.e., AY 2013-14, for which he has relied upon certain decision as noted above. First of all, it is noticed that, neither this issue was raised before the AO,nor before the Ld.CIT(A), nor any such ground or additional ground has....
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.... 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 83. In the return of income, the assessee has declared income of Rs. 825,12,22,942/- under the head 'long term capital gains' in respect of following shares sold during the year under consideration:- Name of script Date of purchase Date of sale Period of Holding Capital gain/loss Rs. Vana Hotels Pvt. Ltd. 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. ....
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....re-characterized the long term capital gain and short term capital gain. 84. Ld.CIT(A) too upheld the action of the AO, observing that shorter period of holding of 12 months qua the unlisted shares instead of 36 months was applicable only in respect of shares transferred during the period beginning on 01.04.2014 and ending on 10.07.2014 in terms of newly inserted 2ndproviso to section 2(42A) brought in the Statute by Finance (No.2) Act, 2014, w.e.f 01.04.2015, i.e., AY 2015- 16. Ld.CIT(A) held that since the impugned transaction of the transfer of unlisted shares of SBPL took place before 01.04.2014 and not between 01.04.2014 to 10.07.2014, therefore, the benefit of the newly inserted 2ndproviso to section 2(42A) was not available to the assessee. Arguments on behalf of the Assessee: 85. Before us, Ld. Sr. Counsel, Mr. Vohra after inviting our attention to the provisions of section 2(42A) as was applicable to the year under appeal, i.e., in the AY 2014-15, submitted that it is an unambiguous 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 distinc....
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.... 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....
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....th 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 ....
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....applying the prescribed rate of tax accordingly. DECISION 89. We have heard the rival submissions, perused the relevant finding given in the impugned order as well as the relevant provisions as referred to by the parties. From the facts as narrated above, it is not in dispute that the period of holding of unlisted shares, i.e., 'rights shares' of SBPL is more than 12 months and less than 36 months (23 months). The assessee had offered the gains arising from sale of such shares as 'long term capital gain' which has been re-characterized/reclassified as short term capital gains by the Revenue authorities. At this stage, it would be quite relevant to refer to the relevant provisions under the Act. First of all, Sub-section (29A) of Section 2, defines'long term capital asset' to mean a capital assets which is not a short term capital assets. The expression"short term capital asset has been defined in sub-section (42A) of section 2 which at the relevant time, i.e. upto A.Y. 2014-15 read as under:- "(42A) "short-term capital asset" means a capital held by an assessee for not more than thirty-six months immediately preceding the date of its transfer: Provided that ....
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....ch 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....
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.... of1963) or a unit of an-equity oriented fund or a zero coupon bond], the provisions of this clause shall have effect as if for the words "thirty-six months", the words "twelve months" had been substituted: 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 exceptionfor 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, t....
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....s well as Ld.CIT(A) are not justified in law in re-characterizing/re-classifying the 'long term capital gain' to 'short term capital gain' shown by the assessee. Accordingly, the gain on transfer of SBPL's share would be taxable as 'long term capital gains' and not short term capital gains and resultantly, Ground No.1 as raised by the assessee is allowed. 92. In view of the finding and reasoning given above on all the three issues, Ground nos. 1,1.1& 1.2 is allowed; Ground no. 2 & 2.1 is partly allowed; Ground no. 3 & 3.1 is dismissed; and Ground no. 4 is also dismissed as same was neither argued nor pressed. In the result, the appeal of the assessee is partly allowed. The order is pronounced in the open court on 01st of December, 2017. ============= Document 1 CGP India Investment Ltd (CCP) Asim Ghosh & subsidiaries 3 Global Services Pvt Ltd (GSPL) Financed NDC to acquire 38.78% stake in TII with a right to subscribe 97% shares of NDC 37.25% Analjit Singh & wife (AS) 100% 01-03-2006 finance 97% Scorpio Beverages P Ltd (SBP) 100% MV Healthcare Services P Ltd (MVH) 100% (3%) 23.97% ND Callus Infoservices P Ltd....