9911796707
TMI Blog2017 (12) TMI 306X X X X Extracts X X X X X X X X Extracts X X X X ..... ths and not 12 months as per the first proviso to section 2(42A) (as applicable during the year under consideration), read with section 2(29A) of the Act. 1.2 That the CIT(A) erred on facts and in law in holding that the shorter period of 12 months to qualify as 'long term capital asset' was only applicable to unlisted shares sold during the period 01.04.2014 to 10.07.2014, in terms of second proviso to Section 2(42A), which was inserted by the Finance (No.2) Act, 2014 with effect from 01.04.2015. 2.That the CIT(A) erred on facts and in law in re-computing the amount of capital gain arising from sale of shares of M/s Scorpio Beverages Pvt. Ltd. ('SBPL') by substituting actual sales consideration of Rs. 9,97,92,44,200 with alleged fair market value of Rs. 2233,42,850,070, determined by adopting price per share of Rs. 142.70. 2.1 That the CIT(A) erred on facts and in law in confirming the action of the assessing officer in substituting actual sale price with notional/alleged consideration, determined as per alleged fair price of Rs. 142. 70 per share, invoking section 50D of the Act. 3. That the CIT(A) erred on facts and in law in upholding the action of t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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; (ii) write up on the structure of erstwhile Hutchison Group and the details of its acquisition of interests pertaining to Indian Telecommunication Market; and (iii) financial statements of SBPL and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s 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 sale of shares of SBPL which has been discussed by the AO at pages 22 to 26 of his assessment order.In sum and substance, the facts as discussed by the AO are that assessee alongwith his wife, Mrs. N ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... BPL 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. Thereafter, he discusses how there has been extreme movement of share price in SBPL from the years 2006-2014, that is, it was originally at Rs. 10 in the year 2006 and when the assessee sold 4,900 shares for a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 these documents can be summarized in the following manner:- A) Framework Agreement of 2006:- (i) This agreement is executed amongst the assessee (AS) and the companies in which he has direct or indirect interest and 3 GSP ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s 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 of capital contributed by the appellant by way of right issue was utilized in acquisition of further shares. The appellant has not disclosed how and in what manner the increased share capital of SBPL was put to use. This document throws light on this aspect of the issue which would be very relevant for deciding the c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... al 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 the filing of such additional evidence, Mr. Ajay Vohra had filed detailed rejoinder in writing which for the sake of ready reference are reproduced hereunder:- At the outset, before dealing with specific objections qua admission of each of the aforesaid additional evidences submitted by the Revenue, it may be pointed out ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ertain options to GSPL to acquire shareholding in the aforesaid companies belonging to the appellant. (The detailed terms and conditions of the said agreement are discussed in detail infra.) The aforesaid agreement has been sought to be produced as additional evidence by the Revenue to draw analogy from the methodology for determining the sale consideration for shares on exercise of certain options outlined under the said agreement, with the method for determination of sale consideration agreed between the parties under the impugned Framework agreement dated 5.7.2007. It is further alleged that the aforesaid agreement goes to the root of the matter involved in ground of appeal no.2 and was never brought to the notice of the lower authorities by the appellant. It is submitted that the aforesaid agreement has no relevance with the transaction under consideration and is, therefore, not required to be admitted nor considered for adjudicating the impugned ground of appeal, for the following reasons: * Vodafone India Limited, ('VIL')', i.e., the company engaged in the business of providing telecommunication services across different circles in India, prior to takeover by Vodafone Inte ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ave been exercised, the entire stake of Hutchison Group in the Indian telecom company, i.e., HEL was acquired by Vodafone International in May, 2007. As a result of the aforesaid acquisition, the existing option agreements entered by various Indian partners, including the appellant, with Hutchison Group were rescinded and superseded by new agreements entered into with the Vodafone Group on fresh terms and conditions. It was under the aforesaid circumstances that the aforesaid agreement dated 01.03.2006 was rescinded and fresh agreement dated 05.07.2007 was entered into between the parties ('Analjit Singh' and 'Neelu Analjit Singh'), with inclusion of Vodafone International Holdings BV as a confirming party, on completely fresh terms and conditions agreed between the parties. Reference in this regard can be made to Clause 11.11 of the impugned agreement dated 05.07.2007 which clearly provided that on execution of the said agreement all earlier agreements between the parties would stand superseded. The said Clause is reproduced hereunder for ready reference: "11.11 Entire agreement This Agreement supersedes any previous written or oral agreement between any and all of the Parti ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... or 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 gathered particulars frompapers that were in our possession, from public records, and other informationthat had been gathered at the time of the due diligence process. ii. At places where there were gaps, enquiries were made from the HutchisonGroup. While the Hutchison Group was unwilling to provide any formal written notes, their officials did provide some information to our English lawyers, through their ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... that - (i) the appellant was not even a party in the litigation before the Supreme Court; (ii) the pleadings of Vodafone do not bind the appellant; and (iii) as per the preamble to the aforesaid write up, the same was prepared on the basis of documents/information available in public domain and certain general enquiries. Reliance, in this regard, is placed on the decision of the Supreme Court in the case of Kishanchand Chela Ram vs. CIT 125ITR 713, wherein, the Court while allowing the appeal of the assessee observed that third party document, based on hearsay, was not a legally valid and admissible piece of evidence. The relevant observations of the Court in this regard are as: "Moreover, this letter was said to have been addressed by the manager of the bank to the ITO on 18-2-1955 in relation to a remittance alleged to have been sent on 16-10- 1946 and it is impossible to believe in the absence of any evidence to that effect, that manager who wrote this letter on 18-2-1955 must have been in-charge of the Madras office on 16-10-1946 so as to have personal knowledge as to who remitted the amount of Rs. 1,07,350.What the manager of thebank wrote in thisletter could, not possibly ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... annot, 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 Tribunal is the evidence adduced in Harihara Iyer's case.It is also contended by the learned counsel appearing for the Department that a business which was admittedly being carried on escapes without anybody being made liable to pay the tax. We are fully alive to this situation, but the question before us is whether there is legal evidence to support the finding of the Tribunal in this case. Almost all the circumstances pointed, out by the T ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n 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. 13,955 which had been made by the Income-tax Officer to the income of the assessee. The Income-tax Appellate Tribunal erred in law in restoring that deletion merely on the basis of the copy of the Uchanti Bahi of M/s. Goel Iron Stores supplied by the sales tax department to the Income-tax Officer, which could not be relied upon for the reasons already stated." To the same effect is the decision of Gujarat High Court in the case of Dr. Devendra D ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... port 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 earlier year(s) or even for the year ending 31.03.2014 will not be relevant and / or determinative of the value adopted by Kotak for such companies. Further, (while adopting the book value of assets as on 31.12.2013 or 28.02.2014, Kotak has reduced the accrued liability towards outstanding preference shares, such as, for premium payable on redemption or cumulative amount of dividend payable on such shares etc., as per the contractual terms therefor, on a rational and scientific basis, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... spute 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 Revenue:- 13. We have heard the rival contentions and also perused the relevant additional evidences filed by the Revenue qua its implication thereof on the issues involved. So far as the Framework Agreement dated 01.03.2006 is concerned, it is between the AS, SBPL, MVH, 3GSPL and NDS. 3 GSPL is a company in which HEL had indirect interest and the said agreements grants call/put option to the parties whereby,3 GSPL or its nominee got the right to exercise the option of acquiring the shares held by th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... und 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 intermediary companies are concerned, these documents have been filed by the Revenue only in support of the valuation of the shares which has been considered by the independent valuer 'Kotak Mahindra Capital' for the purpose of demonstrating the correct state of affairs of liability and investment of various chains of intermediary companies. Based on these statements, the Revenue has filed a chart showing assets and liabilities of various intermediary companies and resultant valuation of the shares of VIL. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 foreign investment in the telecommunication sector, GSPL, or person(s) nominated by GSPL, shall have the option to acquire the shares of Scorpio from AS. The relevant clauses of the Agreement are reproduced hereunder for the sake of ready reference: (d) In consideration of the grantof the Call Option by AS to GSPL, GSPL or an Affiliate shall pay to AS an aggregate amount of US$10.2 million per annum accruing on a daily basis (the "Option Payment"). GSPL's obligation to pay AS the Option Payment as aforesaid shall be deemed to be effect ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... fIndian Rupees equivalent of US$266,250,000 (United States Dollars Two Hundred arid Sixty Six Million Two Hundred and Fifty Thousand only), converted into Rupees at the prevailing US$:Rs. exchange rate published in the London edition of the Financial Times on the business day immediately prior to the Completion Date PLUS (ii) Where the fair market value of the entire issued share capital of HEL exceeds US$25,000,000,000, the SBP Value, converted into Rs. at the prevailing US$:Rs. Exchange rate published in the London edition of the Financial Times on the Business Day immediately prior to the Completion Date such aggregate amount being the Transfer Price. For the avoidance of doubt, the Transfer Price shall not in any event be less than the amount referred to in paragraph (a) (i) above. For the purpose of paragraph (a)(ii) of this Schedule 1, the SBP value means the proportion of such part of the fair market equity value of the entire issued share capital of HEL which is in excess of US$25,000,000,000 which is attributable to the SBP Shares(or MVH Shares if the MCH Shares are purchased pursuant to the exercise of the Option in terms of Clause 4.3(e) or Clause 4.4(c), as the c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... een 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% stake in SBPL at Rs. 1088 crores agreed under the Framework Agreement dated 05.07.2007; appellant sold 4900 shares, i.e., 49% stake in SBPL, to CGP for Rs. 533 crores (i.e., 49% of Rs. 1088 Crores). Necessary applications were filed before FIPB, for the aforesaid divestment which was approved by FIPB on 04.12.2009. Pursuant to the aforesaid approval, consideration of Rs. 533 crores was paid by CGP and 4900 shares of Scorpio were transferred by AS to CGP on 16.12.2009. He stressed upon the fact that long term capital gains qua the aforesaid transfer of 4900 shares by the assessee for lumpsum consideration ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the manner incorporated above. Accordingly, CGP filed necessary application before FIPB seeking approval for the aforesaid acquisition, wherein the proposed consideration of Rs. 1241.32 crores, was duly disclosed and thereafter approved by FIPB on 20.02.2014. Pursuant to the aforesaid approval from FIPB, AS and CGP entered into Share Purchase Agreement dated 12.03.2014, prescribing the terms and conditions for transfer of the entire 51% stake held by AS in SBPL to CGP for consideration of Rs. 1241.32 crores. Mr. Vohra pointed out that although the lumpsum consideration receivable by assessee as per the Framework Agreement dated 05.07.2007 read with Fourth Supplement thereto dated 07.08.2012, aggregated to Rs. 855 crores only, the parties mutually, agreed for enhanced consideration of Rs. 1241.32 crores, under 'Share Purchase Agreement dated 12.03.2014'. The relevant clauses of the said Agreement dated 12.3.2014 as highlighted by him are reproduced hereunder: "2. Sale and Purchase: 2.1 Subject to the terms and conditions herein and the terms the Framework Agreement, CGP hereby undertakes to purchase 195,005,079 Shares from AS (the 'Sale Shares') and AS hereby undertakes to sell ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Co. Ltd. 66 ITR 622 (SC) (heavy reliance was placed on this decision) * CIT V. Gillanders Arbuthnot & Co.: 87 ITR 407 (SC) * K. P. Varghese v. ITO: 131 ITR 597 (SC) * CIT v. Shivakami Co. P. Ltd. 159 ITR 71 (SC) * CIT v. NandiniNopany: 230 ITR 679 (Cal.) * CIT v. Ms. Sushila Mittal & Others: 250 ITR 531 (Del.) * CIT V. Kami Singh 256 ITR 165 (Del) * CIT V. Smt. Sushila Devi 256 ITR 179 (Del.) * CIT v. Nilofer I. Singh: 309 ITR 233 (Delhi) * CIT v. Nilofer I Singh :309 ITR 233 (Del.) * Dev Kumar Jain v. ITO : 309 ITR 240 (Del.) * Sanjay Chawla v. ITO: 89 ITD 586 (Del.) * Bigjos Stores (P) Limited v. ACIT: 106 Taxman 127 (Del.) 21. Clarifying the intention of legislature, Mr. Vohra submitted that, wherever the legislature intended to substitute the actual consideration with the fair market value, provision to the said effect has been specifically prescribed in the Statute, for instance, Section 50C prescribed for substitution of actual consideration incase of transfer of land and/ or building with circle rate which is adopted for the purpose of payment of stamp duty, in the event the actual sale consideration is less than the circle rate. In the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ight, in certain circumstances, have been made in the books of account." 15. The above passage was cited with approval in Morvi Industries Ltd. v. CIT [Morvi Industries Ltd. v. CIT, (1972) 4 SCC 451 : 1974 SCC (Tax) 140 : (1971) 82 ITR 835] in which this Court also considered the dictionary meaning of the word "accrue" and held that income can be said to accrue when it becomes due. It was then observed that: (SCC p. 454, para 11) "11. ... the date of payment ... does not affect the accrual of income. The moment the income accrues, the assessee gets vested with the right to claim that amount even though it may not be immediately." 16. This Court further held, and in our opinion more importantly, that income accrues when there "arises a corresponding liability of the other party from whom the income becomes due to pay that amount". 17. It follows from these decisions that income accrues when it becomes due but it must also be accompanied by a corresponding liability of the other party to pay the amount. Only then can it be said that for the purposes of taxability that the income is not hypothetical and it has really accrued to the assessee. 18. Insofar as the present case is co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the difference between the fair market value and actual consideration received on transfer of the capital asset was not subject to taxation in the hands of either the transferor or the transferee. In order to overcome the aforesaid lacuna, sub-clauses (vii)/(viia) were inserted in section 56(2) of the Act by the Finance Act, 2009 and 2010, with effect from 01.10.2009/ 01.06.2010, respectively, to deem the difference between the fair market value of the capital asset, subject of transfer, determined on the basis of prescribed method in Rule 11U/11UA of the Rules and the actual consideration paid, therefore, as income chargeable to tax under the head "income from other sources" in the hands of the recipient / transferee. Reference in this regard he pointed out that can be made in the Memorandum explaining the amendments made by the relevant Finance Bill and the Notes on Clauses thereto. In view of the above, he submitted that it would be appreciated that under the scheme of the Act, the difference between the fair market value of an asset (in case the same is higher) and actual consideration received / paid on transfer of asset is not taxable in the hands of the transferor, but is ta ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 referred to the decision of the Hon'ble Supreme Court in the case of K.P. Varghese vs. ITO, 131 ITR 597. He pointed out that it is not the departmental case that the assessee or his wife Mrs. Neelu Analjit Singh had received anything over and above the sale consideration of Rs. 1241.32 crores as disclosed and approved by FIPB. Otherwise also, the hypothetical amount of Rs. 2233.42 crores as determined by the AO cannot be reckoned as "accrued" to the assessee and to demonstrate that such right vested in the assessee lies wholly to the Revenue that there was a corresponding debt owed by CGP to pay such higher amount to the assessee. The Revenue authorities have not been able to justify that the amount of Rs. 2233.42 crores could be said to have legally accrued to the appellant ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 Cardiac Diseases Hospital: 300 ITR 75 (Del.) * CIT vs. P. Khrishna Warrier: 208 ITR 823 (Ker) * CIT vs. Harishchandra Gupta: 132 ITR 799 (Ori) 26. Coming to the issue of invoking of section 50D from first appellate stage by the Ld. CIT (A), Mr. Vohra submitted that the said section does not empower the Assessing Officer orthe Revenue authorities to substitute the actual consideration that has been passed between the parties pursuant to contract/agreement for sale of capital assets with any hypothetical or notional consideration or fair market value of the assets. He submitted that the said section has no application in a case where transfer of capital assets is for determination/ascertained consideration duly reflected in the agreement for sale of the capital assets which is actually changed hands between the c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... le 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 based on several factual inaccuracy, inconsistency etc. which otherwise cannot be sustained. He highlighted the following discrepancies in the order of the AO and point wise rebuttal of such observations and conclusions of the Assessing Officer in the assessment order which by and large have been confirmed by the Ld. CIT(A):- (i) Allegation of the assessing officer: The assessing officer has alleged that while 49% of the shares were sold at a value of Rs. 10.88 lakhs per share (Rs.533 crores/4900 shares) in the previous year relevant to assessment year 2010-11, the average realization per share for original and rights shares received by AS on the basis of total lumpsum consideration of Rs. 1241.32 crores, worked out to Rs. 63.65 per share only. Rebuttal by the Assessee: In coming to the aforesaid conclusion, the assessing offi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 provided that the parties would request Kotak, a SEBI registered Category I merchant banker, to prepare a valuation report relating to the fair market value of VIL pursuant to Schedule 1 of the Framework Agreement dated 5.7.2007, to confirm the transfer price determined by the parties. Further it would be pertinent to point out as per paragraph 2.2 of Annex - 2 of Consolidated FDI Policy (effective from April 5, 2013), which was applicable during the period in question, price of shares of an unlisted Indian company, transferred by resident to a non-resident, shall not be less than fair value determined by a SEBI registered Category I Merchant Banker or Chartered Accountant as per the discounted free cash flow ('DCF') method. In order to determine whether the enterprise valuation of VIL exceeded US $ 25 billion, which would trigger payment of additional, consideration in terms of clause a(ii) o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... a Sum of the Parts Approach, which involves valuation of VIL Group (which is involved in providing telecom services across all telecom circles in India) and the value of VIL's42% equity stake in Indus. The valuation of both VIL Group and Indus has been done using the Discounted Cash Flow methodology ("DCF") - primarily based on the information and representations received from CGP and VIL. The valuation of VIL so arrived at has been factored in while valuing each of the companies in the HoldCo Chain and SBP considering the net value of other assets and liabilities in the respective companies, to arrive at the value of SBP. This Report is to be used only for the purpose of which it is intended, and is not to be used or referenced for any other purpose. Valuation Methodology and Assumptions We have computed the equity valuation of SBP, and the value of each company in the HoldCo Chain, based on the value of the downstream investments of SBP, or the respective company in the HoldCo Chain, as the case may be (which, in each such 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 accoun ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lue of holding companies including SBPL. Accordingly, since SBPL had no direct shareholding in VIL, which was held through several intermediate companies, the valuation of SBPL was to necessarily factor the net assets (i.e. assets less debts) position of all such intermediate companies, as rightly carried out by the Valuation Expert, viz., Kotak in its Valuation Report. Thus, he submitted that the aforesaid method followed by Kotak in considering the value of intermediaries companies is a universally acceptable method and was also factored in by the parties at the time of negotiating the consideration for transfer of shares under the Framework Agreements, in the following manner:- I. The erstwhile Rule 12 relating to valuation of unquoted equity shares of an investment companies contained under the Wealth Tax Act, 1957 provided that the value of shares of an investment company shall be computed by applying the net assets value method and the value of shares held by such investment company shall also be valued in accordance with the said method. In other words, the aforesaid valuation rule provided for computing fair value of the shares/investments held by the holding company, whi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ., the company engaged in the business of providing telecommunication services across different circles in India, prior to takeover by Vodafone International in May 2007, was held by Hutchison Group, Hong Kong with certain other Indian partners and was known as Hutchison Essar Limited, ('HEL'). Accordingly, in the aforesaid agreement, Vodafone International Holding BV was not a party, which joined as a confirming party in the later agreement dated 05.07.2007. Further, the contours and terms and conditions of the agreement dated 01.03.2006 were at substantial variance with the subsequent agreement dated 05.07.2007. To highlight the difference in the substantial clause of both the agreements, he has filed following chart given a comparison of clauses of the agreement dated 01.03.2006 and 05.07.2007:- S.N o. Clauses 01.03.2006 05.07.2007 1. Parties to the agreement Agreement was entered between- i Analjit Singh; and ii. Scorpio Beverages Pvt. Ltd.; and iii MV Healthcare Services Pvt. Ltd.; and iv 3 Global Services Pvt. Ltd.; and v. ND Callus Info- Services Pvt. Ltd Agreement was entered between- i Analjit Singh and Neelu Analjit Singh (' AS ') and ii Scorpio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ess day immediately prior to the completion date. a) Transfer Price shall be equal to the FMV of 0.23% of the issued share capital of HEL. a) FMV of HEL shall be such FMV as may be determined by Hongkong offices of Goldman Sachs, ABN Amro or HSBC a) The above formula would apply regardless of the amount of third party debt or other liabilities in MVH or any other company in which MVH has an interest and irrespective of the fact that SBP is not a direct shareholder in HEL. ii. Where FMV of the entire issued share capital of HEL exceeds USD 25,000,000,000 (Rs. 102200 crores converted at an exchange rate of Rs. 40.88), the SPB value; 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, 29. Thus, he submitted that considering the terms and conditions and also the parties to the agreement were substantial different, no parallel can be drawn between the two agreements. In any case, it is a matter of record that, before the aforesaid agreement could have been acted upon or the options vested in different parties therein could have been exer ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he aforesaid agreement dated 1.3.2006, do not support the fresh plea of the respondent Revenue qua accrual of notional fair market value as the consideration for transfer of shares of SBPL for the following reasons:- a. The computation of transfer price of the shares at 0.23% of the fair market value of theissued share capital of HEL agreed in the Schedule II of the said agreement was subject to terms and conditions contained in clause 4.6 thereof. The said clause provided that the transfer of relevant shares by appellant to GSPL would happen at fair market value, as may be agreed between the parties. It was only when the parties would fail to reach agreement qua such fair market value, that the method of determination of FMV stipulated in Schedule II, i.e., 0.23% of the fair market value of the issued share capital of HEL, was to be resorted to.In that view of the matter, it would be appreciated that, even under the aforesaid agreement of 2006, the transfer price of shares was to be determined as per the mutual agreement between the parties. The said price was not to be automatically computed on the basis of the interest held by appellant in the FMV of HEL. b. Further without pr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . 56,448 crores only, as per the valuation carried out by Kotak, which has been accepted by the Revenue. Accordingly, since the aforesaid FMV of HEL/VIL computed at Rs. 56,448 crores, did not exceed the threshold FMV of Rs. 1,02,200 crores as stipulated in Schedule 1 of the Framework Agreement, the aforesaid clause (a)(ii) relating to computation and payment of additional consideration never became applicable. In that view of the matter, in accordance with the terms of the Framework Agreement dated 05.07.2007, AS was entitled to receive lump sum consideration of USD 266.25 million only for the entire shares of Scorpio held at that point of time, i.e., prior to issuance and subscription of right shares in 2012. With the additional lump sum consideration of Rs. 300 crores agreed to be paid to the AS pursuant to fresh allotment of shares on right basis, the total lump sum consideration receivable by the appellant aggregated to Rs. 1388 crores, i.e. Rs. 1088 crores (USD 266.25 million x 40.88)] + Rs. 300 crores. Accordingly, no amount over and above the lump sum amounts stated in the Framework Agreement dated 05.07.2007 read with Fourth Supplement thereto dated 07.08.2012 accrued to th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ous.Without prejudice to the above, if the Share Purchase Agreement dated 12.03.2014 and the revised higher consideration of Rs. 1241.32 crores stated therein was superfluous, as contended by the Revenue, then AS was only entitled to receive consideration ofRs.855 crores for transfer of remaining original shares and entire right shares, as stipulated in the original Framework Agreement dated 5.7.2007 read with the Fourth Supplement thereto, which alone could be adopted for the purpose of computing capital gains on transfer of shares of Scorpio, to the detriment of the Revenue. 34. During the course of the hearing, it was noticed from the arguments made by the parties that post Framework Agreement dated 05.07.2007, there were further Supplementary Agreements dated 07.04.2009; 10.05.2010; and 07.08.2012, through which shares of other Indian partners of Vodafone, viz., Aseem Ghosh, IDFC etc. who indirectly held the shares in VIL were acquired and added in the chain of intermediary companies between SBPL & VIL. As per the direction given by the Bench, Ld. Sr. Counsel, Mr. Vohra filed the entire chain of agreements in form of Supplementary Paper Book dated 10.10.2017. The summary of ch ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ned on CGP to pay such an amount, albeit in violation .of the approval granted by the FIPB, by leading tangible evidence in that regard. The Revenue has miserably failed to discharge such burden and has purely on surmises, suspicions and conjectures averred that for computing capital gains on sale of shares of SBPL "some higher consideration" needs to be substituted in place of the declared consideration, without making an attempt to quantify such alleged higher consideration. 36. Thus, he concluded that the actual/declared consideration received by the assessee which is more than the fair market value shares of SBPL should regarded as sale consideration on transfer of shares and no addition is warranted at all specifically on the basis of notional consideration. Arguments put forth by Special Counsel on behalf of the Revenue:- 37. Mr. G.C. Srivastava, Ld. Spl. Counsel on behalf of the Revenue, first of all presented factual background and certain events as a prelude to understand the factual matrix and the culmination of the controversy involved in the present case.The facts and the background as submitted by him in sum and substance are as under:- a) In 1992, the Hutchiso ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ramework agreement was entered into amongst the appellant, Scorpio Beverages Pvt. Ltd. (SBP), MVH Services Ltd. (MVH), 3 Global Services Pvt. Ltd. (3GSPL) and ND Callus Ltd. Scorpio Beverages Ltd. was held 100% by the appellant and his wife. MV Healthcare Ltd. was a 100% subsidiary of SBP Ltd. and ND Callus was again a 100% subsidiary of MVH Ltd. Under this framework agreement, it was agreed that in consideration of 3GSPL providing financial assistance for ND Callus to subscribe to 38.78% shares in TIL (which holds directly and indirectly 19.54% in HEL), Scorpio granted 3GSPL a right to subscribe to equity in ND Callus and/or to purchase equity of MV Healthcare. A call/ put option was granted to the parties whereby 3GSPL or its nominee got the right to exercise the option of acquiring the shares held by the appellant in HEL through a chain of subsidiaries for a transfer price set out in Schedule 2 of the said Framework Agreement. e) Schedule 2 of the said agreement defines the transfer price of shares, as and when the option is exercised, as under: i. The transfer price shall be equal to the fair market value of 0.23% of the issued share capital of HEL. ii. The Schedule also ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y entered into between Vodafone and Hutch and the new Framework Agreement of July 2007 was entered only to transfer the economic interest hitherto held by Hutch to Vodafone with the entire arrangements in spirit remaining unchanged. (h) Under 'the Framework Agreement dated 5th July, 2007, entered into amongst the same very parties as were parties to Framework Agreement 2006 (Vodafone joining in only as a confirming party, similar call/put options were granted and the transfer price was determined at: USD 266.25 million converted into INR at the prevailing exchange rate as on completion date, i.e., 8th of May, 2007. PLUS Where the fair market value of share capital of HELexceeds USD 25 billion, the proportionate value of shares held by SBP in HEL determined in a manner provided in Schedule 2. The assessee was also to receive USD 10.2 million per annum for holding these shares in HEL on behalf of VEL till the option is exercised. (i) CGP, a company in the chain of holding companies of VEL (earlier HEL), acquired 49% in SBP (and a similar stake in the companies held through Aseem Ghosh) in November, 2009 and the price paid was in terms of Framework Agreement dated 5th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... not been placed before the Revenue. (q) While the Framework Agreement of 2007 clearly stipulated a price of 266.25 million representing the proportionate value of HEL shares, taking the total value of HEL shares at USD 25billion, the other part of the agreement of revaluing the shares of HEL when the value exceeds 25 billion was never carried out. It is interesting to note that the Enterprise Value of HEL was determined at 18 billion in February, 2007 and at 25 billion in July, 2007 after the consolidation and the company having been taken over by Vodafone. There has been a phenomenal growth in telecom sector in India in these years and accordingly the customer base and revenues of the Indian company did also witness substantial growth. (r) The buyer, CGP, got a valuation done by Kotak Mahindra and Kotak worked out the total value of HELNIL at Rs. 564,483 million under DCF method. Kotak, thereafter proceeded to value the shares of SBP at Rs. 540 per share. Kotak valued HEL shares under DCF method and they adopted NAV method to value shares of SBP. The report of Kotak observed as under: "It is clarified that CGP has provided us with the historical financials of the companies ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ued share capital of HEL 0.23% of value of shares of HEL The liability of intermediary companies not to be recognized for working out the transfer price. 2. Framework Agreement 2007 05.07.2007 Indian Rupees equivalent of US$ 26,62,50,000 + If fairmarket value of issued share capital of HEL exceeds US$ 25,00,00,00,000 (25 Billion) the SBP Ltd. value 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. 26,62,50,000 X 40.88 ( rate of US$ in July, 2007) = Rs. 10,88,43,00,000/10,000 Rs. 10,88,430.25 per share (Rs.10,88,43,00,000 / 10000 =Rs.10,88,430as per exchange rate @ 40.88 as per the agreement) + Possible markup as a result of higher value of VIL + Annual call option fee from GSPL US$ 10.2 mil/annum At this stage AS holds through NDC 38.78% of TII shares which in turn, holds 19.54% in VIL. Basis of base price of 26,62,50,000 is not given. For delivering FMV of VIL shares to work out the additional price (in case the value of HEL share exceeded 25 billion USD), the valuation was to be done by UBS Investment or Goldman Sachs or Lehman brothers (and not any ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ks 4. Framework Agreement as amended in 2011 24.11.2011 As Sh. Analjit Singh sold only 4,900 he received 49% of Rs. 1088 Cr. i.e. Rs. 533.33 Cr. (US$ 130,462,500) which is Rs. 10.88 lacs per share as on 17.12.2009. Sh. Analjit Singh has already received US$ 130,462,500. For balance sale of shares, the balance amount of US$ 135,787,500 was to be received on sale of 5100 shares + 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$ 3.2 million per annum accruing on a daily basis as per framework agreement 2010 + Further call option fee from M/s VISPL (formerly GSPL) of an amount of US$ 2.6 million per annum accruing on a daily basis as per framework agreement 2011 The value per share is Rs. 555,09,93,000/ 5100 = Rs. 10,88,430/- per share(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 + Additional annual call option fee from VISPL as per amended ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s :- Rights share - 300 Cr. (@15.38 per share) Original share - 941.32 Cr. Rs.18,45,726/- per share As per the submission dated 30.12.2016 of the assessee, the original share i.e. 5100(4100 + 1000) shares were sold at Rs. 9,41,32,06,200 /- in terms of agreed price. It is not clear how the agreed price was arrived at by both the parties to transaction. For original shares, the price works out to be Rs. 18,45,726/- (9,41,32,06,200 / 5100) per share. It is worth noticing that on the same day i.e. on 12.03.2014 as per the Sale purchase agreement dated 12.03.2014 the value of shares of S. No . Agreement s Date Value of consideration Value of shares Remarks M/s SBP Ltd. was valued at two different prices i.e. @ Rs. 15.38 per share for right issue & @ Rs. 18,45,726 for original shares S. No . Agreement s Date Value of consideration Value of shares Remarks M/s SBP Ltd. was valued at two different prices i.e. @ Rs. 15.38 per share for right issue & @ Rs. 18,45,726 for original shares B. Sale Consideration disclosed:- S. No Year Actual receipt Price per share ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sidiary companies for computing the share value of SBPL. 40. After explaining the factual backdrop and referring to the various relevant clauses of the Framework Agreements specifically that of 2006 and 2007, Mr. Srivastava vehemently argued that the addition made by the AO is not only justified on facts but also in law. He submitted that it is not simple case of purchase and sale of a capital asset. In the present case, the appellant held the shares in the Indian company, HEL/VIL, for the benefit of Hutch/Vodafone primarily to beat the foreign equity cap for which the appellant was paid call option fee for holding the shares and with a stipulation that the shares would be transferred to Hutch/VIL once the cap is lifted at a pre-agreed price. It is precisely for this reason that the decisions relied upon by the appellant would be wholly inapplicable to facts of the present case as the Revenue has only adopted the full value of consideration as agreed to in the successive agreements between the parties.The perusal of both the Framework agreements of 2006 and 2007 clearly shows thatthe transfer price as agreed between the parties was linked to the fair market value of shares of HEL/ ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e constituted as market price but as the price bargain by the parties for sale. There could be no debate on such a proposition as laid down by the Hon'ble Supreme Court. But the language of section 48 is entirely different from section 12B of the old Act, because now the expression used is "the full value of consideration received or accruing as a result of transfer of the capital assets". 42. The word "accruing" would mean the right to receive. Here in this case, the assessee had a right to receive the proportionate fair market value of HEL shares and this right had flown to him in 2006 when the loan financing was made available to him and under that special arrangement, he subscribed to the equity of HEL to facilitate Hutch to hold their interest to that extent without trespassing the foreign equity cap. The same arrangement continued after Vodafone acquired the interest of Hutch in HEL in its entirety including the arrangements with the appellant. In fact, Vodafone paid the full market value of HEL shares falling to the share of the AS to Hutch and only thereafter it got the opportunity to continue with the arrangements with the appellant as it were.From the said judgment itsel ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e is no separate market price of right shares as distinct from original shares. The market price of right shares will always be the same per share as that of the original shares. Under the SPA, the value of original shares comes to Rs. 18,45,726 per share but the value of right shares comes to only Rs. 15.38 per share which is absurd on the face of it.In the first place, the value of right shares cannot be different from the original shares. In fact, at the point of sale there can be no such distinction as the right share or the original share. Secondly, the Framework Agreement itself provided that the option would be exercised for whole or part of the shares held in SBP which, in turn, holds in HEL/VIL. This kind of bifurcation of the shareholding into original shares and right shares is wholly impermissible and still worse is the assignment of an absurd value to these shares. Thus, the share purchase agreement is contrary to the terms of the Framework Agreement and there is absolutely no explanation of such a major departure. The document (SPA) is a superfluous one for the reason that the rights of the parties had already been determined under the Framework Agreements. It was cle ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r price, the onus is not on the Revenue to establish the mode and the manner in which the obligations have been mutually discharged/settled particularly in cases of such close association. Revenue has only to demonstrate that the right to receive a certain consideration accrued to the appellant.The manner of discharge of the right is in the exclusive knowledge of the assessee. Revenue has no onus to demonstrate beyond the accrual of the right to the amount of consideration. The onus would be on the assessee to justify the transfer price which is in departure of the price actually agreed for under the Framework Agreement. The case of CIT v Balbir Singh Maini in CA no.15619/2017 relied upon by the appellant, in fact, goes to support the case of Revenue because in the present case the consideration for the call/put option was very well recognized by both the parties and what was the right of one was the obligation of the other. The AO did not proceed on any hypothetical assumptions but his determination of the full value of consideration was based on the terms of the agreement. The consideration did in fact accrue. The basis of the transfer price under the SPA of 2014 is obscure and r ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... een done as contemplated in the Framework Agreements and the results of such valuation are not being made available to the Revenue or the exercise of carrying out a valuation has been left to a closely associated party like Kotak Mahindra in complete violation of the terms of the Framework Agreement of 2006 as also of 2007.The AO has not disputed the valuation of shares of HEL/VIL as done by Kotak. He has not gone into the question whether the enterprise value of HEL had exceeded USD 25 billion. He has only adopted the value of HEL shares as determined by Kotak and has taken the same as the basis for determining the value of appellant's indirect holding in HEL. Since Assessing Officer has not questioned the valuation of HEL shares, therefore, same is not raised by the Revenue under the given circumstances. Thus, there is no dispute as regards the value of HEL shares is concerned. However, the subsequent process of determining the value of shares of SBPL was not the act of an independent valuer. An independent valuer would have valued the shares of a holding company depending upon the internationally accepted rules of valuation. It would then not go by the parameters set out in one ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... endent of the original shares and to that extent the provisions of section 50D would also get attracted. The contention of the assessee that under the present regime of taxation, the difference between the fair market value of the asset and the consideration received is subject to tax in the hands of the purchaser of the asset under section 56(2)(x) or (viia) is misplaced. These are not alternate basis of taxation. For the difference between the arm's length value of consideration and the actual consideration, the buyer is charged to tax under section 56 irrespective of the consequences that may flow in the hands of the seller. In view of the above, the action of the AO in adopting the proportionate market value of HEL shares as the full value of consideration in terms of section 48 is fully justified as the said consideration emanates from the rights of the parties which got determined at the time of grant of the call/put options and had a rational basis. The reliance on SPA which was entered into a few days before the transaction in disregard of the rights of the parties already determined under earlier agreements and without having any basis whatsoever for a significant departur ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he regulation of Government of India as it then stood, the foreign equity participation in the telecommunication industry could not exceed 49% of the total capital. The Hutchison Group held direct interest in the Indian company called as Hutchison Essar Ltd. (in short "HEL") to the extent of nearly 42%; and 10% of the interests were held through indirect holdings. The balance out of the total stake of 67% was held through the companies owned and controlled by the AS and other entities. Major share of HEL was held by Telecom Investment India Pvt. Ltd. through various subsidiaries and TIL in turn was majorly held by CGP India Investment Ltd. which was subsidiary of Hutchison Group. With view to beat the equity cap of 49%, an arrangement was entered between the AS and the Hutch Group in which it was agreed amongst the parties that the assessee would be provided necessary finances under the guarantee of the Hutch Group and the money would be invested in the equity of Indian company 'HEL'. With a further stipulation that shares so owned by the AS would be subject to call/put option. It was clearly contemplated that, as and when foreign equity cap would be relaxed; Hutch Group through it ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ule 2 of the said agreement defined the transfer price in the following manner:- (a) The transfer price shall be equal to the fair market value of 0.23% of the issued share capital of HEL. (b) The Schedule also provided in very clear terms as under: "For the avoidance of doubt, the above formula will apply to the transfer price regardless of the amount of third party debt or other liabilities in MVH or any other company in which MVH has an interest and irrespective of the fact that SBP is not a direct shareholder in HEL." Thus, under the Framework Agreement of 2006, the value of the share capital of SBPL (i.e., transfer price of SBPL) was agreed to 0.23% of value of shares of HEL and the liability of the intermediary companies was not to be recognized for the working out of the transfer price. 48. Later on when Hutchison Group sold its entire stake to Vodafone International, another 'Framework Agreement' was entered into on 05.07.2007 between following parties:- I. MR ANALJIT SINGH and MRS NEELU ANALJIT SINGH and II. SCORPIOS BEVERAGES PRIVATE LIMITED and III. MV HEALTHCARE SERVICES PRIVATE LIMITED and IV. 3 GLOBAL SERVICES PRIVATE LIMITED and V. ND CALLUS IN ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... te the equity fair market value of SBPL/NDC/MVH. The said illustration for the sake of ready-reference is reproduced hereunder:- (in US $ millions) Item As per Illustrative example in Schedule 2 Market enterprise value of HEL 26,327 Less: Net debt of HEL (1,327) Equity value of HEL 25,000 Less: Holding company discount 40% (10,000) Implied 100% equity value of HEL at TIL level 15,000 Enterprise value of TIL (19.54%) 2,931 Less: Investment cost of TIL (419.75) Profit on disposal 2,511.25 Less: long term capital gains tax on profit (22.7%) (569.05) Post tax enterprise value of TIL 2,361.95 Less: net debt of TIL (160.45) Less: book value of preference shares (570.29) Indicative equity fair market value of TIL 1,631.21 NDC enterprise value 38.78% 632.58 Less: liquidity discount on local shares (27%) (170.51) Enterprise value post liquidity discount 462.07 Less: net debt (178.07) Less: preference shares (17.75) Indicative NDC equity fair market value 266.25 From the aforesaid illustrative calculation, it can be culled out that, the fair market value of HEL has been first arrivedat US $ 26,327 billion and after reducing net ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... alue of issued share capital of HEL for determining the value of SBPL shares. * Even if we agree with the contention of the Ld. Sr. Counsel, Mr. Ajay Vohra that the agreement of 05.07.2007 alone is to be reckoned, then we find that in 'Framework Agreement of 2007' also, not only the similar clause of call/put option has been enshrined but also the determination of transfer price is by and large based on fair market value of equity share of HEL. * In the agreement of 2007, the SBPL value of US $ 266.25 million was based on fair market value of HEL. In terms of INR, the value of SBPL shares in the year 2007 aggregated to Rs. 1088 crores. * So far as the option fee is concerned, there is no dispute and the assessee has been offering the same as return of income and same has been taxed as revenue receipt year after year. 51. In the F.Y. 2009-10, there was a change in FDI regulation relating to sectoral cap which enabledthe GSPL acquire some shares in SBPL and thereby increase its indirect share holding in VIL and accordingly, on 07.04.2009, CGP and person nominated by GSPL entered into an agreement relating to transfer of shares of 4900 of SBPL which constitute 49% stake by ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Agreement' was entered between the AS and CGP on 12.03.2014, whereby CGP purchased the entire 51% stake of the AS in SBPL for an aggregate consideration of Rs. 1241.32 crores. The relevant recitals as given in the sale purchase agreement are as under:- (A) "The company is engaged in the business of investing (but not trading) in securities of telecommunications companies in India. (B) Presently, AS holds 51% of the issued equity share capital of the company and CGP holds 49% of the issued equity share capital of the company. (C) Pursuant to the Framework Agreement (as defined below). As is entitled to exercise options, subject to certain terms and conditions set cut in the Framework Agreement to put any or all the shares (as defined below) held by AS at any time to GSPL (as defined below) or any person nominated by GSPL to the extent. GSPL or any of its Affiliates (as defined in the Framework Agreement) becomes eligible under application Indian laws to hold such shares. (D) Pursuant to the exercise by AS of the put options described in Recital (C) above, As proposes to sell to CGP, which has been nominated by GSPL, and CGP proposes to purchase from AS< the sale shares (as d ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... been stated to be US $ 25 billion and this is borne out from the fact that subclause (ii) of clause (a) provides that the transfer price would be different when the fair market value of the entire issue share capital of HEL exceeds US $ 25 billion, then there would be change in SBPL value. Otherwise, the transfer price of the SBPL shares was fixed at US $ 266.25 million which was based on some illustrative working given in Schedule-2 by taking the fair market value of entire issued share capital of HEL at US $ 25 billion. Though, there is absolutely no clarity as to whether this illustrative working is the basison which transfer price of US $ 266.25 million have been worked out, but, since this transfer price determined at that time was clearly linked with the fair market value of the entire issued share capital of HEL, therefore, it has to be reckoned that FMV of HEL and later on VIL was always construed to be the basis of determination of SBPL shares. In the 'Sale Purchase Agreement' though there is an acknowledgement of the fact that the fair market value of the entire issued share capital of VIL should be taken in pursuant to Schedule-1 of the Framework Agreement of 2007 and th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... onnection with such transfer; (ii) the cost of acquisition of the asset and the cost of any improvement thereto." What has been envisaged here in this section is the full value of consideration received or accruing as a result of the transfer of capital asset. Mr. Vohra had strongly contented that the "full value of consideration" does not refer to or can be said to mean fair market value. In support strong reliance was placed on the judgment of Hon'ble Delhi High Court in the case of CIT vs. Nilofar I. Singh reported in 2009 (309 ITR 323) and catena of other judgments, the list of which has already been incorporated above while dealing with the Ld. Counsel's arguments. So far as the said proposition of the Ld. Sr. Counsel is concerned,we are in tandem and agree with him that the full value of consideration does not refer to fair market value of the assets and this proposition is wellsettled for which there cannot be much debate. Wherever the legislature, intended to substitute the actual/full value consideration with the fair market value, specific deeming provisions have inserted in the statute, for example, section 50CA, 50D etc. Earlier, when there was a difference, if any ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tion as mentioned in the share purchase agreement dated 12.03.2014 can be said to be "accrued" to the assessee or not, we will deal in brief the invoking of the provision of section 50D of the Act from the stage of CIT (A). For the sake of ready-reference, section 50D is reproduced hereunder:- "Fair market value deemed to be full value of consideration in certain cases. 50D. Where the consideration received or accruing as a result of the transfer of a capital asset by an assessee is not ascertainable or cannot be determined, then, for the purpose of computing income chargeable to tax as capital gains, the fair market value of the said asset on the date of transfer shall be deemed to be the full value of the consideration received or accruing as a result of such transfer." The Finance Bill 2012 and the Memorandum explaining the insertion of section 50D clarifies the purpose for which said section has been brought on the Statute in the following manner:- "Capital gains are calculated on transfer of a capital asset, as sale consideration minus cost of acquisition. In some recent rulings, it has been held that where the consideration in respect of transfer of an asset is not if ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ng provision envisaged therein cannot be applied retrospectively. On this aspect, without going into much detail analysis, the arguments of Mr. Ajay Vohra as noted above are upheld as such and we hold that, invoking of the provision of section 50D to justify the fair market value by the Ld.CIT(A) is not correct and the same is rejected. 58. We will now dwell uponthe core issue raised by the parties, that is, whether the sale consideration of Rs. 1241.32 crores can be said to have been "accrued" to the assessee in the facts and circumstances of the case as discussed in detail herein above, within the expression used in section 48. Section 48 envisages that income must have been received or have accrued under section 48 as result of the transfer of a capital asset. The income may be said to have been 'accrued' if the assessee acquires the right to receive the income from the contractual obligation or as per any other legal obligation. It is sine-qua-non that the assessee must have acquired the right to receive the income and there is corresponding debt owed to him by somebody. The concept of accrual of income have been well-settled by the Hon'ble Supreme Court in the case of E.D. Sa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on VIL). How it is linked with the fair market value of HEL, we have already discussed in the forgoing paragraphs. Succinctly, put the Scheduel-1 which was for the determination mechanism of the transfer price of the SBPL's shares, has fixed the transfer price in the year 2007 at US $ 266.25 million which converted into INR was Rs. 1088.43 crores. This transfer price of US $ 266.25 million was based on some illustrative working given in Schedule-2 which was though was to come into operation when the condition of the 2nd clause was to be fulfilled, i.e., the fair market value of issued share capital of HEL exceeds US $ 25 billion and then the SBPL value was again to be re-valued. This illustrative working, proceeds with the fair market value of HEL at that time at US $ 25 billion and with some hypothetical working and assumption of liabilities, a transfer price of US $ 266.25 million was arrived and the same figure has been incorporated in Schedule-1. Though, we have already observed that the amount of US $ 266.25 million may not be based on correct working or does not have any proper basis, but it clearly indicates that such a transfer price was to be computed after taking into acc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Report' which has been placed in the Paper Book before us by the Ld. Sr. Counsel at page 85 to 190, it is seen that the equity value of VIL has been worked out by adopting DCF method in the following manner:- Valuation Construct, as on February 28, 2014 Details INR in Million Enterprise Value of VIL (A) 900,899 Enterprise value of Indus 432,701 Less:Net Debt of Indus (as on February 28, 2014) 67,909 Equity Value of Indus(B) 364,792 Consolidated Enterprise Value (A+42%B) 1,054,112 Less:Net Debt of VIL (as on February 28,2014) 489,629 Equity Value of VIL (C) 564,483 61. This value of VIL has not been disturbed by the AO even though in the year 2007, the value of HEL was indicated at US $ 25 billion which was at then more than Rs. 1 lakh crores. Since, the AO has accepted this valuation, therefore, we are not opining anything on this point. In the valuation report while determining the share value of SBPL, the valuer has adopted hybrid method, i.e., DCF method for VIL and net asset value method (NAV) for intermediary companies which does not finds any support under the Rule 11UA of the Act. From the perusal of the Annexure 8 of the said valuation report, we find that ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... (PE) where, A =book value of the assets in the balance-sheet as reduced by any amount of tax paid as deduction or collection at source or as advance tax payment as reduced by the amount of tax claimed as refund under the Income-tax Act and any amount shown in the balance-sheet as asset including the un-amortised amount of deferred expenditure which does not represent the value of any asset; L = book value of liabilities shown in the balance-sheet, but not including the following amounts, namely:- (i) the paid-up capital in respect of equity shares; (ii) the amount set apart for payment of dividends on preference shares and equity shares where such dividends have not been declared before the date of transfer at a general body meeting of the company; (iii) reserves and surplus, by whatever name called, even if the resulting figure is negative, other than those set apart towards depreciation; (iv) any amount representing provision for taxation, other than amount of tax paid as deduction or collection at source or as advance tax payment as reduced by the amount of tax claimed as refund under the Income-tax Act, to the extent of the excess over the tax payable wit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sale/transfer of shares took place on 12.03.2014, i.e., prior to 31.03.2014); and lastly, to give the actual value of SBPL's shares based on this calculation after taking into consideration the correct holding of SBPL in VIL at 8.9055% and assessee's stake which was 3.6512 %. Based on these guidelines, the AO has filed the following calculation which is reproduced hereunder:- Name of the Company Shareholding in the immediate step down subsidiary in the chain Details Value as per Kotak Mahindra(in INR million) VIL valuation as per Kotak DCF valuation of VIL and takingbalan ce sheets of intermedia ry companies (in INR million) Description of Basis of Calculation Profit/ (Loss) Nature of Revenue VIL 564,483 564,483 Omega 5.11% Value of 5.1108% equity stake in VIL 28,850 28,850 Add: Value of Net Assets (Liabilities) excluding in VIL 502 486 Assets - Liabilities - Market Value of Investment in VIL + Income Tax 28.07 Investme nt Activities Equity value of Omega 29,352 29,335 SMMS 61.60% Value of 61.60% equity stake in Omega 18,081 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s (Liabilities) excluding in MVH 3 4 Assets - Liabilities - Market Value of Investment in MVH -1.45 Investme nt Activities Equity value of SBP 2,065 52,293 Total SBP shares 382,362,900 SBP valuation per share 5.4 131.86 AO had taken the value at Rs. 142.7 per share in the assessment order. But after taking the correct share of the assessee on SBPL as directed by us, the value will come to Rs. 131.86 per share by taking the 3.6512% share of assessee in VIL. 64. Based on this calculation, the 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... vement while calculating the capital gains on sale of shares of SBPL. The assessee while computing the long term capital gain on the sale of shares has reduced the interest expenditure on the loan taken for acquisition of right shares. As discussed in the earlier part of the order, the assessee has subscribed to Rs. 15,67,64,689/- right shares of SBPL on 09.08.2012 which was financed directly out of the loan borrowed from Capricon Health Services Pvt. Ltd. on which interests aggregating to Rs. 39,95,01,050/- (Rs.13,88,26,342 in FY 2012-13 & Rs. 26,06,74,708/- in FY 2013-14) was paid from the date of acquisition till the date of transfer of such shares. The assessee's claim has been that, since the interest expenditure incurred on such borrowing has a direct nexus with the acquisition of the shares of the aforesaid company, therefore, same was capitalized as part of the cost of acquisition of such shares for the purposes of computing capital gain arising from transfer thereof. 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 dis ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s investment in shares of SBPL on the same date. Thus, it has been submitted that there was a direct nexus between the fund borrowed and the investment made in the shares of SBPL and, therefore, entire premise of the AO is based on wrong assumption of facts. He submitted that under the Act, distinction has been made between the assets held by an assessee for different purposes,like, stock in trade, assets used for the purpose of business; and capital asset held as investment and not used for the purposes of business. The objective behind classification of assets in the aforesaid categories is that the Act provides different provision for computation of interest of each asset and also 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 acquisit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... dard, which provides that "other, investmentsand those inventories that are routinely manufactured or otherwise produced in large quantities on a repetitive basis over a short period of time, are not qualifying assets. Assets that are ready for their intended use or sale when acquired also are not qualifying assets."The aforesaid clause of the Accounting Standard clearly excludes assets like shares which are ready for intended use as soon as the same are acquired, from the meaning of 'qualifying assets' for the purpose of applying content and treatment of various cost contained 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 n ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ital asset; (ii) Cost of improvement of the said asset; and (iii) any other expense incurred whollyand exclusively for the purposes oftransfer of the said asset.The claim of the assessee with regard to the interest on borrowed funds is admittedly not a deductible item under (ii) and (iii). The claim is that the interest payable on the borrowed funds forms part of the cost of acquisition of the capital asset. He submitted that under the normal meaning of the expression "cost of acquisition", the cost can only include the price paid for acquiring the asset and it cannot include any other expense incurred by the appellant post the acquisition of the asset. It is obvious that the interest accrued after the acquisition of the asset and the period of such interest extends till the date of transfer. The amount of interest that the assessee may have to pay cannot, thus, represent the cost of acquisition. The cost of acquisition of an asset cannot vary from month to month or year to year depending upon how long the 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 propos ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... capital asset,including any expenditure of a capital nature incurred and borne by him in making any additions or alterations thereto, but excluding any expenditure in respect of which any allowance is admissible under any provision of sections 8,9,10 and 12" It is seen that under the said section 12B of the 1922 Act, there was a provision which implied that only deductions not admissible under sections 8,9, 10 and 12 could be added to the cost of capital asset. It was in this backdrop, that the court came to the conclusion that interest on borrowed funds constituted cost of acquisition.This decision, he submitted that is no longer relevant for the reason that the law as applicable w.e.f. 01.04.1995 defines the expression "cost of acquisition" in express terms and in an exhaustive manner for the right shares and bonus shares. In view of the change in law, the decision is wholly inapplicable.Regarding reliance placed on further decisions like KS Gupta (119 ITR 372), Maithreyi Pai (152 ITR 247), Trishul Investments (305 ITR 434), Raja Gopal Rao (252 TTJ 449)etc., He submitted that in none of these cases, the issue was the determination of the cost of acquisition of right shares of b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , here again, the issue was whether the cost of the original shares could be spread over the bonus shares.The issue of any deduction with regard to the interest on borrowed funds was not at all there in this case. 72. After distinguishing judgments relied upon by the assessee, Mr. Srivastava also placed reliance upon certain decisions like in the case of L.N. Dalmia reported in 207 ITR 89, where the question of deduction of interest while computing capital gains was examined.It was held that the assessee was not entitled to claim the amount 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 acq ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the ratio laid down in the aforesaid judgment applies to computation of cost of acquisition of a capital asset, be it land, shares or any other asset, for purpose of section 48 of the Act, in the determination of capital gains arising from transfer of such "asset. It is illusory to draw such an artificial distinction and contend that the ratio of the said judgment is limited in its application to acquisition of land alone. The issue, thus, that arises is with regard to capitalization of interest expenditure incurred after the date of acquisition of a capital asset, which is not a business asset in terms of section 48 of the Act, which in stands answered in favour of the assessee by the decisions of the various Courts relied upon by the assessee supra, wherein it has been held that interest expenditure incurred even after the date of acquisition of the capital asset shall be liable to be added to the cost of such asset for purpose of the aforesaid section. The Revenue was unable to controvert the proposition of law laid down in the said decisions by pointing out any decisions to the contrary. Further, the other consequential argument of the Respondent Revenue that the cost of acquis ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ACIT and in the case of ABAN Offshore Ltd. (supra), and submitted that they are clearly distinguishable on facts. Likewise the reliance placed on the decision of Kolkata High Court in the case of L.N. Dalmia (supra) & CIT vs. Octavious Steel & Co. Ltd. are again distinguishable on facts. For making distinction, he has made his detailed submissions in his written submissions filed before us. 74. Without prejudice, Mr. Ajay Vohra submitted that if the Hon'ble Bench is pleased to uphold the contention of the revenue that interest paid on 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... /modification/variation of the aforesaid basic cost with regard to interest expenditure incurred to finance such acquisition.Thus, the argument of the Revenue that cost actually paid for acquisition would, in all circumstances to be regarded as the cost of right shares in terms of section 55(2)(aa) and same is not opened in enhancing/variation is not based on correct appreciation of law and, therefore, deserves to be rejected. He thus, submitted that the interest capitalized upto the date of transfer has to be allowed as cost of acquisition. 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 ti ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 45, the capital gains rising on transfer of a capital assets has to be computed as per section 48 by reducing from "full value of consideration" received on transfer, aggregate of the following amounts;firstly, the expenditure incurred wholly and exclusively in connection with such transfer; and secondly, the cost of acquisition of the assets and the cost of any improvement thereto.Section 49 illustrates various costs with reference to certain modes of acquisition. Whereas, section 55 defines the scope of the terms "adjusted", "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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hich could be other costslike interest etc. which is also be treated as part of acquisition. Here the word "means" has to be constituted as exhaustive, i.e., the amount actually paid for acquiring such assets and no any other payment or cost incurred for acquiring such assets. Whence the cost of acquisition with regard to the additional financial assets, i.e., right shares has been strictly circumscribed to the amount actually paid for acquiring such shares,then it is not open to include any other costs like interest expenditure incurred or accrued on loan taken for acquiring the right shares. Had there been the intention of the legislature to allow any additional cost to such kind of additional financial assets, then there was no requirement to insert part A in clause (aa) and sub-clause (iii) which specifically confines the cost of acquisition to mean actual amount paid. Thus, we are in complete agreement with the contention of the Ld. Special Counsel, Mr. G.C.Srivastava that under the scope and provision of Section 55(2)(aa) read with sub clause (iii) thereto, incase of right shares the cost of interest expenditure cannot be allowed as deduction as cost of acquisition for comput ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ment. " The said memorandum merely clarifies that earlier there was no specific provision dealing with the determination of the cost of the financial instrument such as right shares, right entitlement, etc. and in absence of any such provisions, the Courts have laid down certain methods for determining the cost. For avoiding such kind of situation, the Finance Bill proposed to introduce the computation of cost of acquisition which have been acquired without cost, then in that case, cost of acquisition has to be taken on NIL and where the assessee becomes entitled to such financial assets like right issue, then the cost of acquisition will be the amount actually paid. This has been clarified also by the notes and clauses of the Finance Bill and also by the CBDT Circular No.684 dated 10.06.1994. The relevant clause18 of the Notes and clauses on sub-section (2) of section 55 of the income Tax Act, 1961 is reproduced hereunder:- "It is also proposed to insert a new clause (aa) for the purpose of defining the cost of acquisition of a share or any other security (referred to as "financial asset" in the section), and of the right to renounce the entitlement, in those cases where the a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on qua the right shares in light of specific section 55(2). 81. So far as the other arguments placed by both the parties as to whether the cost of interest can be capitalized for the purpose of cost of acquisition while computing the transfer of shares or not, we are not entering into semantics of such arguments, because here in the present case, the cost of acquisition is purely on 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he Ld.CIT(A), nor any ground or additional ground has been taken before us. The assessee has not even sought any permission of this Tribunal under Rule 11 of ITAT Rules or under any other Rule to raise such plea. If at all this plea was sought to be raised then same should have been done by way of additional ground or by way of any application on which respondent Revenue would have been given opportunity to raise any objection or put forth their argument. Such a plea at the re-joinder stage without any opportunity to the respondent,would be difficult to entertain especially when the facts regarding to admissibility of such claim is not arising from the impugned order. Accordingly, we reject such plea taken by the Ld. Sr. Counsel for the assessee at the re-joinder stage without complying with the necessary requirement of Rules or giving the opportunity to the other party to rebut or place its objections. Thus, Ground No.3 & 3.1 are dismissed. E. Issue relating to gain arising from sale of unlisted shares to be taxed as long-term capital gain or short term capital gain 83. In the return of income, the assessee has declared income of Rs. 825,12,22,942/- under the head 'long term capi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... han 36 months and not 12 months; and only period of holding for listed companies can be considered as 12 months instead of 36 months, if the particular share is transferred during the period beginning on 01.04.2014 and ending on 10.07.2014. After referring to these provisions, he re-characterized the long term capital gain and short term capital gain. 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 applica ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y the Finance Bill, 1994 and notes on clauses thereto.From the extracts of memorandum and notes on clauses, he submitted that it clarifies that the purport of the amendment in proviso to section 2(42A) was to extent to the benefit of shorter period of holding of 12 months to all other financial instruments/securities which are listed on stock exchange in order to provide level playing field in investment in shares of a company whether listed or unlisted. Coming to the amendment brought by the Finance (No.2) Act, 2014, whereby the provisions of section 2(42A) were further amended and the words "shares held in a company" were removed from first proviso w.e.f. 01.04.2015, thereby taking away the benefit of shorter period of holding of 12 months available to unlisted shares to qualify as long term capital assets.Simultaneously, 2ndproviso was inserted to provide that unlisted shares sold during the period 01.04.2014 to 10.07.2014 would enjoy the benefit of shorter period of holding of 12 months to qualify as long term capital assets. The said amendment itself goes to prove that the benefit of shorter period of 12 months was available to unlisted shares prior to the said amendment and i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... urities as a class and these have got to be listed to enjoy the benefit of the proviso. The words 'any other' put the two-shares and other securitiesin the same basket. One cannot be read independent of the other. The contention put forth by the assessee cannot flow from the language employed in the proviso. If the legislative intent were to treat the shares as a different class from other securities, the only way such an intent could be expressed was either to add a second proviso carving out an exception to the first proviso or to use the expression"securities (other than shares)" in the proviso itself as has been done in the proviso while carving out similar exception for units by the subsequent amendment made by the Finance Act of 2014. The law as amended reads 'a security (other than a unit)'. This could be the only way the provisions would have been drafted had the legislative intent been the same as the appellant is seeking to canvass.This contention becomes significant in view of the fact that the law as enacted, imports the definition of 'securities' as contained in the Securities Contracts Regulation Act by virtue of Explanation 2 to the provision. It would really be a wh ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ard. Subsequent amendments to the provision only support the case of Revenue. Thus, he submitted that the AO was fully justified in treating the right shares as short term capital asset and applying the prescribed rate of tax accordingly. DECISION 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:- ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in a company, the provisions of this clause shall have effect as if for the words "thirtysix months", the words "twelve months" had been substituted." Here no such condition was placed in the aforesaid proviso for shares to be listed on a recognized stock exchange for taking the benefit of the reduced period of holding. When amendment by the Finance Act, 1994 was brought in the statute, so far as the category "share held in a company", was concerned, the same was not disturbed, albeit, new category was included like 'any other security listed in recognized stock exchange in India'.The said provision was amended to extend the benefit of shorter holding period, to a new category of securities other than shares in a company. Under this provision, the condition of listed in a recognized stock exchange was applicable only to the new category and not to the earlier category of 'shares held in a company'. This has been clarified by Memorandum explaining the provision in the Finance Bill which read as under:- "Period of holding in the case of securities and units of Mutual Funds Long-term capital assets enjoy certain tax concessions vis-a-vis short-term capital assets. The Income-t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... k exchange in India or a unit of the Unit Trust of India established under the Unit Trust' of India Act, 1963 (52 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 ha ..... X X X X Extracts X X X X X X X X Extracts X X X X
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