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2017 (12) TMI 306 - AT - Income TaxDetermination of sale value of shares - accrual of sale consideration - deeming fiction of Section 50CA - Held that - 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 consideration received by the assessee as per the Sale Purchase agreement of 12.03.2014 cannot be reckoned as accrued to the assessee in terms of section 48 of the Act, because herein this case it is not a case of simple sale and purchase transaction, albeit rights and obligation of the parties as per the agreements for transfer of shares was in exercise of call/put option, for which transfer price of the shares was determinable on FMV of the share value of VIL. What has been accrued to the assessee is the price of the shares which was to be determined as per the mechanism provided in the Framework Agreements, which stipulated FMV of VIL. Thirdly, section 50D as invoked by Ld. CIT (A) would not be applicable on the facts and circumstances of the case; and if at all it could have been brought to tax in the hands of the transferor under the deeming fiction of Section 50CA or Section 56(2)(x), then same are not applicable for the year under consideration as these provisions are applicable from the A.Y. 2017-18. Lastly, the value of the SBPL shares as per FMV of VIL would be ₹ 131.86 per share as determined above; and accordingly, AO is directed to compute the capital gain taking the sale value of SBPL at ₹ 131.86 per share. Rationalisation of capital gain arising from transfer of right shares and rights renouncements - not allowing the cost of interests expenditure capitalized from the acquisition of right shares at the time of transfer - Held that - In our opinion in case of the assessee who has subscribed to right shares by paying the actual amount of ₹ 300 crores, then by virtue of specific provision contained in section 55(2), only amount to be allowed as cost of acquisition would be ₹ 300 crores; and no other cost, like interest expenditure incurred on loan taken for purchase of right shares could be allowed as deduction as cost of acquisition, while computing the capital gain on transfer of such shares. 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. Gain arising from sale of unlisted shares to be taxed as long-term capital gain or short term capital gain - Held that - Here in this case, the shares have been transferred prior to 31.03.2014, therefore, the newly amended Act would not be applicable at all and the assessee will get the benefit of shorter period, i.e., period of less than 36 months as given in section 2(42A) read withproviso thereto as per the relevant provision existed for the A.Y. 2014-15. Thus, we hold that the AO as 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.
Issues Involved:
1. Whether the gain from the sale of unlisted shares should be treated as Short Term Capital Gains or Long Term Capital Gains. 2. Whether the sale consideration of shares should be substituted with the fair market value under Section 50D. 3. Whether the capitalization of interest expenditure as part of the cost of acquisition should be allowed while calculating capital gains. 4. Whether the additional evidence filed by the Revenue should be admitted. Issue-Wise Analysis: 1. Treatment of Gain from Sale of Unlisted Shares: The assessee argued that the gain from the sale of unlisted shares should be treated as Long Term Capital Gains since the holding period was more than 12 months. The Revenue contended that the shares should be treated as Short Term Capital Gains since the holding period was less than 36 months. The Tribunal held that the relevant provision for the assessment year 2014-15 provided that shares held for more than 12 months qualify as long-term capital assets. The amendment by Finance (No.2) Act, 2014, which increased the holding period to 36 months for unlisted shares, was applicable from AY 2015-16. Hence, the gain from the sale of unlisted shares should be treated as Long Term Capital Gains. 2. Substitution of Sale Consideration with Fair Market Value: The assessee contended that the actual sale consideration received should be considered for computing capital gains. The Revenue argued that the sale consideration should be substituted with the fair market value determined by Kotak Mahindra Capital Ltd., invoking Section 50D. The Tribunal observed that Section 50D applies when the consideration is not ascertainable or determinable, which was not the case here. The Tribunal held that the sale consideration should be determined based on the fair market value of the underlying asset (Vodafone India Ltd.) and directed the AO to compute the capital gains by adopting the per-share value of SBPL at ?131.86. 3. Capitalization of Interest Expenditure: The assessee claimed capitalization of interest expenditure on borrowed funds used for acquiring right shares as part of the cost of acquisition. The AO denied this, citing a lack of direct nexus and that interest incurred after acquisition could not be considered as part of the cost of acquisition. The Tribunal held that under Section 55(2)(aa)(iii), the cost of acquisition of right shares should be the amount actually paid for acquiring such shares, excluding any interest expenditure. Hence, the interest expenditure cannot be capitalized as part of the cost of acquisition. 4. Admissibility of Additional Evidence: The Revenue sought to admit additional evidence, including a Framework Agreement dated 01.03.2006 and financial statements of subsidiaries. The Tribunal admitted the Framework Agreement dated 01.03.2006, finding it relevant to understand the historical context and rights and obligations of the parties. However, it rejected the write-up on the structure of Hutchison Group and admitted financial statements of intermediary companies only for the FY 2012-13, as earlier years' statements were not relevant. Conclusion: - The gain from the sale of unlisted shares should be treated as Long Term Capital Gains. - The sale consideration should be determined based on the fair market value of the underlying asset, Vodafone India Ltd. - Interest expenditure on borrowed funds for acquiring right shares cannot be capitalized as part of the cost of acquisition. - The Framework Agreement dated 01.03.2006 and financial statements for FY 2012-13 were admitted as additional evidence.
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