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TMI Blog2019 (12) TMI 1198X X X X Extracts X X X X X X X X Extracts X X X X ..... here is an apparent misinterpretation of the financial statements of the subsidiaries. Therefore, the learned assessing officer is directed to correct the valuation of above five companies by including the value of preference share capital issued by these companies in the total liabilities. Such total liability is to be reduced from total assets of those companies to derive at the value of equity shares. Further, the Assessing Officer is also directed to verify all other figures from the audited balance sheets of all these companies as submitted by assessee and correct it, if it is found that they have been wrongly plotted, compute the value accordingly. Assessee is directed to put before AO such errors and which shall be rectified, if found in order. Capitalization of interest expenditure - HELD THAT:- Cordinate bench has dealt with this issue in case of husband of appellant thus we dismiss ground of the appeal and confirm the orders of the lower authorities in not allowing the capitalization of interest cost of INR 1 00902358/ as part of the cost of acquisition while calculating capital gain on sale of shares of Scorpio beverages private limited. Allowance of brought fo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ad in law since he failed to follow the norms of judicial propriety/discipline by not following the order of the Appellate Tribunal in the Appellant s husband s (Mr. Analjit Singh in ITA No. 4737/Del./2017 dated 1.12.2017) case, in respect of the same transaction. 3. That the CIT(A) also erred in resorting to cherry picking of the conclusions of the ITAT, which is not permissible and reflects a predetermined mind towards the conclusions drawn in the said order. Long term Vs. Short term capital gains 4. That the CIT(A) grossly erred in not following the decision of the Appellate Tribunal in the Appellant s husband s case where the Tribunal had returned a finding of the said gains to be treated as long term capital gains, the transaction being the same. 5. That the CIT(A) erred on facts and in law in treating the gains arising from sale of unlisted shares of M/s. Scorpio Beverages Pvt. Ltd. as short term capital gain , instead of long term capital gain returned by the Appellant. 6. That the CIT(A) erred in law in observing that for unlisted shares to qualify as a long term capital asset , the period of holding was 36 mo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... g that the provisions of subsection (1A) to (4) of section 45 itself provide for situations where the AO is permitted to adopt the fair market value for computation of capital gains under the said provisions and there being no statutory mandate the AO was precluded from substituting the actual sale consideration with any notional consideration. 14. That the CIT(A) failed to appreciate that the only provision which empowered the AO to adopt a fair market value was contained in section 52 of the Act which had since been repealed in 1988. 15. That the CIT(A) grossly erred in law in failing to appreciate that the term accruing as contained in section 48 of the Act, which is a computational provision, could not be relied upon to impose a tax liability when the charging section itself, being section 45 of the Act, did not impose such charge of tax. 16. That the CIT(A) also failed miserably to appreciate the legal position that the term received or accruing in section 48 of the Act was only to cover situations where only part of the sale consideration is received in the assessment year and had to be read in conjunction with the mandate o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... allowance of INR 24,98,22,064 crores being a long term capital loss arising out of a mistake by the accountant when such actual loss was to be restricted to INR 2,49,82,206 brought forward from AY 2011-12. 24. That CIT (A) grossly erred on facts and in law that the accountant while computing the capital gain/loss from the sale of shares of Mohair Investments and Boom Investments had on account of an inadvertent/clerical error added an extra O‟ in both the purchase and sale considerations and which had the effect of enhancing the capital loss which was unintentional and immediately upon realising the error the Appellant brought it to the attention of the AO. 25. That the CIT(A) erred in concluding that the loss pertained to AY 2010-11 and the AO could not have allowed such loss since that year was not before him. 26. That the order of the CIT(A) is also silent about the claim of brought forward long term capital loss of ₹ 1,53,36,932/- for AY 2011-12. Business income 27. Without prejudice, the CIT(A) erred in dismissing the ground of the Appellant agitating the treatment of exempt income ea ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rovisions of section 2 (42A) of The Income Tax Act, ld AO held that sale of shares of an unlisted company, if held for less than 36 months, the asset is not a ‗long term capital asset but a ‗short-term capital asset . Therefore, he issued a show cause notice on 26/12/2016 asking the assessee as to why the sale of shares of Messer Scorpio beverages private limited is not to be treated as short-term capital gain in light of holding period of 23 months, which is less than 36 months. 5. The assessee submitted her reply on 22/12/2016. She stated that provisions of section 2 (29A) read with provisions of section 2 (42A) of The Income Tax Act as applicable for assessment year 2014 15, provides that the shares of the company , whether listed or unlisted, will be treated as a long-term capital asset, if the period of holding is more than 12 months. She further stated that in case of unlisted equity shares transferred on or after 11/07/2014, the period of holding to qualify it as long-term capital asset was increased to 36 months by the Finance (No. 2) Act, 2014. It was later on reduced to 24 months by The Finance Act, 2016 with effect from assessment year 2017 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... /improvement of those shares. Further, the AO noted that assessee has sold these shares at the rate of INR 63.65 per share and assessee was asked to submit the valuation of these shares. Assessee submitted the valuation by Kotak Mahindra capital company limited dated 19/3/2014, which was undertaken by the purchaser M/s CGP India investment Ltd, who is another shareholder of Scorpio beverages Ltd holding 49% shares in that company. Assessee was holding 41-percentage share in that company. AO noted that from 2006 2014 the shares of this company has undergone extreme movements. He noted that the shares were originally issued at a face value of INR 10 per share in 2006. The rights shares were also issued in financial year 2012 13 at INR 10/- per share. These shares are sold by the assessee at the rate of INR 63.65 per share. The AO noted that above shares have been valued by the valuer on account of valuation of Vodafone India Ltd and one of its subsidiary Indus Towers limited. On the combined valuation of these two companies, valuer arrived at a conclusion of the valuation of Vodafone India Ltd at INR 56448.30 crores. He further challenged that the valuer who originally started it ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f the order, wherein assessee requested for admission of following documents as under:- a. framework agreement dated 05/07/2007 b. 4th supplement to the framework agreement dated 7th of August 2012 c. FIPB approval dated 20/02/2014 d. email dated 14/11/2013 from Department of revenue seeking certain clarifications as part of deliberations for FIPB approval regarding purchase price for shares of Scorpio beverages private limited e. Letter dated 19/11/2013 addressed by the assessee in response to above mail. 8. As per para number 4.2 of the order of the learned CIT A, as per letter dated 3/10/2017, he sent the application under rule 46A to the assessing officer for his comments. The AO sent his letter dated 26/9/2017 submitting his comments objecting to the admission of those evidences. The AO further dealt with them which are reproduced by the CIT A at page number 34 43 of his order. The assessee was also given an opportunity to submit rejoinder. Assessee submitted such rejoinder on 10/10/2017, which is reproduced at page number 43 53 of his order. The learned CIT A as per para number 4.9 4.11 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 2433962000/ , but considered by the AO at INR 5 456175883/ , he followed order of the coordinate bench in case of Mr. Analjit Singh, wherein as per para number 58 65 of that order the sale value of the share was taken at INR 131.86 per share. Therefore, the learned CIT A directed the AO to compute the short-term capital gain on sale of the shares by considering the sale consideration at INR 131.86 per share of Scorpio beverages Ltd for computation of the capital gain. Thus, to that extent, he followed the order of the coordinate bench. 11. Regarding the claim of the assessee of granting payment of interest as cost of acquisition on the funds borrowed used for acquisition of the above transferred shares, he referred to para number 77 82 of the order of the coordinate bench in case of husband of the assessee and upheld the action of the assessing officer in disallowing the claim. Thus, he held that interest cannot be considered as either the cost of acquisition or cost of improvement in those shares and therefore, it cannot be reduced while working out the capital gain in the hands of the assessee on sale of sales of Scorpio beverages Ltd. 12. With res ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the Rules suffers from many infirmities/inaccuracies/errors. He submitted that in miscellaneous application proceedings an effort was made to correct certain apparent errors. However, miscellaneous application was rejected by the coordinate bench. He submitted that against dismissal of that petition was challenged and pending before the honourable Delhi High Court. He submitted that if apparent mistakes in above referred computation are corrected, value per share is significantly reduced. For submitting valuation report by a merchant Banker, he requested for another 4 weeks time. However, he submitted that assessee has filed an application under rule 29 of The Income Tax Appellate Tribunal Rules, 1962 in connection with ground number 8 18 relating to the calculation of the fair market value of the shares, which may be considered. He referred to application stating that appellant seeks, without prejudice to its other grounds of appeal, to file the computation determining the fair market value of shares in terms of rule 11 UA of Income Tax Rules along with supporting balance sheets of the respective intermediary Pvt Ltd companies. He further referred to the case of Analjit Singh ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e ground that such computation had not been objected to by the assessee during the course of hearing and if miscellaneous application is allowed it would amount to review. Therefore, he submitted that since the issues involved in the present appeal are identical as decided by coordinate bench in its order dated 1/12/2017 in case of Mr. Analjit Singh, the applicability of rule 11 UA of the rule becomes a binding precedent. He submitted that now assessee is filing the correct computation in the present appeal so that it may be verified as deemed appropriate. For verification of the above computation, which is at annexure A along, with the copies of the audited balance sheet of the intermediary companies as on 31/3/2013 marked as annexure B. He submitted that there also did not arise any occasion prior to this proceedings, for the appellant to submit such computation, and such necessity has arisen only because of the order of the coordinate bench of the tribunal in the case of the appellant s husband. He submitted that given the computational errors made in the case, it is necessary to submit the present computation for consideration of the coordinate bench. He further stated that in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... price cannot be substituted by fair market value. Thus, whether the impugned asset is a short-term capital asset or long-term capital asset, he relied upon the decision of the coordinate bench submitting that it is a long-term capital asset. For determining the full value of sale consideration, he relied upon the decision of the honourable Delhi High Court. 19. Even otherwise, without prejudice, subject to admission of additional evidences, he submitted that the valuation of the share has to be taken according to rule 11 UA of The Income Tax Rules 1962; therefore, it has to be correctly valued. He submitted that the additional evidence submitted before the bench shows the correct valuation of those shares. He extensively referred to the rule 11 UA of The Income Tax Rules 1962 and submitted that when the equity shares are to be valued of a particular company, the preference share capital is to be considered as a liability, otherwise the valuation of equity shares cannot be made, if they are not excluded. He further referred to discrepancies in valuation of AO with respect to each item and tried to substantiate with the balance sheets. 20. The learned depar ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... gs. Hence, it could not be considered in MA now. Therefore, it was submitted that when assessee has accepted FMV noted at ₹ 131.86 per shares in the case of the husband of the appellant, on the identical issue, therefore, for this reason alone also it could not be agitated now. Even otherwise, it was submitted that the additional evidences could not be accepted for the reason that it were not filed before the assessing officer or before the first appellate authority and they did not have any occasion to examine these additional evidences with regard to its genuineness and correctness. Even the coordinate bench in case of the husband of the appellant has not provided an opportunity to the assessing officer and accordingly the opportunity for examination of the valuation by the Department must be provided to the assessing officer. It was further stated that the issue regarding calculation of fair market value is not a legal issue and being a factual issue, it must be dealt with by the assessing officer only since it requires a detailed investigation/ examination, keeping in view all the assets and liabilities of each entity separately. The fair market value cannot be vetted or ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... assessee, on her own, has engaged 3Dimension capital services Ltd to prepare a valuation report based on the information provided by her. It was submitted that this merchant banker is not of international repute, as the name of this company is not coming up on the information retrieved online. It was stated that the according to the terms and conditions of Framework agreement, for valuation of fair market value of shares must be done by a merchant banker of international reputation. It was further stated that as decided by the coordinate bench in case of husband of the assessee and rejection of the miscellaneous application, the matter stands finally adjudicated and now it cannot be disturbed. She further relied upon the decision of the honourable Supreme Court in case of Radhasamoi Satsang vs Commissioner of income tax [1992] 60 Taxman 248 (SC)/[1992] 193 ITR 321 (SC)/[1991] 100 CTR 267 (SC) submitting that parties are not permitted to begin fresh litigations because of new views they may entertain of the law of the case by relying on the full bench decision of the honourable Madras High Court [ 4 ITC 226] . She referred to para number 11 and 12 of the order of the honourable Supr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t an average price of INR 63.65 per share. Therefore the argument of the learned assessing officer/CIT DR is of no significance. It was further stated by filing the additional evidences; the intention of the assessee is to request the coordinate bench to get on record the correct computation in the present appeal so that it may be verified by the assessing officer. It was stated that this is also the request of the revenue. In the end, it was submitted that present appeal is yet to be adjudicated and the conclusion of the coordinate bench of the tribunal in the decision of the appellant s husband are likely to influence the present case also, therefore, to avoid irreparable injury to the assessee, additional evidences submitted by way of this application, complies with the law and therefore should be admitted. 25. Subsequently during the course of hearing, the learned CIT DR submitted a letter dated 4/6/2019, stating that the facts of the case is squarely covered by the findings of the coordinate bench in case of husband of the assessee in ITA number 4737/Del/2018 dated 1/12/2070. Despite this fact, the assessee has filed the additional evidences under rule 29 of the I ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eived or when it is by fixation deemed to accrue, arise or is deemed to be received. He submitted that receipt is not the only test of chargeability of tax if income accrues or arises it may become liable to tax. He submitted that the word accruing and arising are used to contradistinction the word receive. d. He further referred to the decision of the honourable Supreme Court in 18 ITR 47 to CIT vs Ahmadbhai Umarbhai co wherein at para number 35 it is held that strictly speaking the word accrue is not synonymous with arise the former, noting idea of growth or accumulation and the letter of the growth or accumulation with tangible shape so as to be receivable. He further stated that there is a distinction in the dictionary meaning of these words, but throughout the act they seem to did not the same idea or ideas very similar and the difference only lies in this that one is more appropriate when applied to a particular case. e. He therefore submitted that what has accrued to the assessee is on sale of the shares of Scorpio beverages limited is the value derived from Vodaphone India Limited. Therefore, there is no infirmity in the valuation adopted by the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... page number 352 375 of the paper book of the assessee and specifically submitted para number 4.4, 4.6 in schedule 1 of that agreement to substantiate his claim. i. He further referred to the agreement dated 5/7/2000 to place at page number 376 of the paper book, which speaks at para number 4.6 about the transfer price and schedule 1 being the determination of the transfer price. He therefore submitted that there is no infirmity in the order of the learned CIT A partially agreed with the order of the coordinate bench. He further stated that the valuation adopted by the valuer of Vodaphone Ltd has shown the valuation of that company. The assessee is a shareholder in Scorpio beverages private limited, which derives its valuation, only from the valuation of Vodaphone Ltd, therefore, the valuation adopted in the order of the coordinate bench now cannot be disturbed. j. In the end, he submitted that additional evidences submitted by the assessee cannot be admitted and the decision rendered by the coordinate bench binds us, i. with respect to the characterization of the asset i.e. whether it is a long-term capital asset or a short-term capital as ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s under rule 11 UA of The Income Tax Rules. He stated that immediately after filing of the appeal, assessee has filed the balance sheets of the intermediary companies to point out the error. He further submitted that during the course of hearing also the assessee is showing apparent error. He further referred to rule 11 UA of The Income Tax Rules for valuation of equity shares. He submitted that in that rule what the liabilities are not to be taken are specifically mentioned. He submitted that when the equity shares are to be valued which are unquoted, only the equity share value recorded in the balance sheet and relevant reserves and surpluses are only left to the added or deducted. He submitted that it proves that preference shares are different from equity shares and while valuing equity shares, if the preferential capital is also excluded then it gives the value of equity shares plus preference shares. He submitted that for the purpose of valuation of equity shares only specified items mentioned in rule 11 UA (1) (c) (b) is to be seen. He further took us to that rule to state that there is an apparent error in the valuation made by the revenue. He therefore submitted that as as ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... that there are certain factual errors while taking the figures from the annual accounts of those companies. He took us at page number 8 wherein a comparative chart has been prepared comparing the value adopted by the revenue at INR 131.86 per share with respect to different scenarios. He submitted that if the preference share capital is not taken in computation correctly, there are such a glaring factual errors that if those are rectified based on the audited annual accounts of those companies the value per share comes to INR 106.25 per share. He referred to column number C wherein he submitted that if the factual error of not taking the correct figure is not rectified but if the preference share capital is reduced the valuation per share will come to INR 101.11 per share. He referred to column number D to state that if the figures are correctly taken from the annual accounts and rule 11 UA is applied by reducing the preference share capital for purpose of valuation of equity share capital of those companies, then the price per share of Scorpio beverages private limited comes to INR 70.59 per share. He thus submitted that even if the valuation is taken as per Rule 11 UA of the IT ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 33. It is important to note that identical issue has been decided by the coordinate bench, therefore we are duty bound to follow the same, if the issue is decided by the bench after examination of the facts. We are also conscious about the fact that both the parties have challenged the same before the Honourable Delhi high court. 34. Now we 1st come to the issue of admission of the additional evidences submitted by the assessee. For admission of additional evidences Hon Gujarat High court in PARI MANGALDAS GIRDHARDAS vs. COMMISSIONER OF INCOME TAX (1977) 45 CCH 0380 GujHC(1977) 1977 CTR 0647 (Guj) has laid down certain parameters in para no 48 as under :- 48. The principles, which emerge from the decided cases are, as earlier stated, applicable even in relation to the exercise of power under the first part of r. 29 and accordingly, in the context of exercise of such power, the following principles should be borne in mind : (1) The discretion given to the Tribunal to receive and admit additional evidence is not an arbitrary one but is a judicial one circumscribed by the limitations specified in r. 29; (2) The Tribunal has ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d in the miscellaneous application. Further, the coordinate bench has noted that assessee did not challenge during hearing of appeal the valuation made of INR 131.86 per share being fair market value of the shares of Scorpio beverages private limited. In the present case, since the 1st hearing, assessee is challenging the fair market value of those shares and submitting that they have been incorrectly valued by plotting the wrong figures from the balance sheet of the intermediary companies as well as computing the fair market value of those shares incorrectly by not adjusting the book value of the preference share capital for valuation of the equity share capital as per mandate of Rule 11 UA of the IT Rues. Further, the copies of the balance sheet submitted by the assessee are available in public domain from the website of Ministry of corporate affairs. Even the ld AO has worked out the valuation from those balance sheets only. Therefore so far as the balance sheet of intermediary companies are concerned they are admitted because without admitting them and examining them it is not possible for anyone to work out the valuation of the shares transferred by the assessee. It is not the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nce sheets of the intermediary companies whose figures have been incorporated in the certificate. Furthermore the scope of work and data relied upon by the chartered accountant is merely the working submitted by the income tax department in case of Mr. Analjit Singh. Further, in the conclusion, they have verified the valuation sheets however, there is no mention of what valuation sheets have been verified by them. The corrected valuation sheets enclosed with the certificate is merely the arithmetical exercise. Hence, the certificate issued by the chartered accountant is also not admitted as additional evidence. For rejecting the above two certificates of merchant banker and chartered accountant, we are also of the view that there was no application for admitting such evidences in case of husband of the assessee where the valuation has been arrived at by the coordinate bench. Another reason is that assessee during the course of hearing before us has stated so many different figures of valuation at different places, therefore these certificates have lost their evidentiary values as all those certificates of experts have been obtained by the assessee without proper supporting. Thus, o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 8251,259,702 Capital Gain 825,12,22,94 The AO, required the assessee to explain as to why the sale of shares of SBPL should not be taxed as short term capital gain in view of the provision of section 2(42A), as the period of holding is less than 36 months and being unlisted shares why it should not be treated as short term capital gain. In response, the assessee submitted that the assessee had acquired the shares of SBPL on 23.02.2006 (4100 original equity shares and right shares of 15,67,64,689 on 09.08.2012) and these shares have been sold by the assessee on 21.03.2014. Since the period of holding was more than 12 months, therefore, the capital gain was offered to tax as long term capital gain. The provision of section 2(42A) as applicable for the AY 2014-15 provides that share of a company, whether listed or unlisted will be treated as 'long term capital asset' if the period held is more than 12 months. The exception was only curved out for unlisted shares sold on or after 1.07.2014, from where the period for holding for ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ter period of holding of 12 months is applicable to the shares either listed or unlisted held in a company. There was no such distinction under the Statute for determining period of holding for the listed or unlisted shares. The condition of listing on a recognized stock exchange is applicable only to the category of security other than shares of a company . If the intention of the legislature was to provide the benefit of shorter period of 12 months only on listed shares then considering the meaning of the word security as defined in section 2(h) of the Securities Contract Act, 1956, includes shares in a company and there was no necessity to carve out separate category share held in a company . To clarify this legal position, he took us to the legislative history of the amendments carried out from time to time in section 2(42A). First of all, we drew our attention to the amendment by the Finance Act, 1987 , wherein shorter period of holding of 12 months in certain exception cases was inserted in section 2(42A) of the Act, whereby a proviso was added clearly specifying that in the case of share held in a company, 36 months was substituted with the period of 12 months. He also ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n made reference to explanatory notes to the amendments and the CBDT Circular No. 1/2015 dated 21.01.2015, wherein the purpose of bringing the said provisions brought w.e.f. 01.04.2015 has been clearly spelt out. Thus, he submitted that considering the facts that all unlisted shares sold during the year were held by the assessee for the period of 12 months, then surplus arising from sale thereof were taxable as long term capital gains. Arguments on behalf of the Revenue: 86. On the other hand, Special Counsel, Mr. G.C. Srivastava referring to the provision of section 2(42A), submitted that capital assets shall be regarded as 'short term capital assets' if it is held for a period of not more than 36 months immediately preceding the date of transfer. The proviso to the said section carves out exception of the rules set out in the main provision which provides that in the case of; a share held in a company or any other security listed in a recognized stock exchange in India or; (ii) a unit of the Unit Trust of India established under the Unit Trust of India Act, 1963; or (iii) a zero coupon bond; T ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ue of Explanation 2 to the provision. It would really be a wholly untenable proposition to suggest that the qualification of being listed in a stock exchange will apply to all securities other than shares. Such an intention of the lawmakers would necessarily have to be stated in express terms and cannot be inferred more so when the definition of the Security stands imported by virtue of the aforesaid Explanation. The entire thrust of the argument of the Ld. Sr. Counsel is that in earlier years, shares (listed or unlisted) enjoyed a lower holding period to fall in the exception and the law as introduced w.e.f. 01.04.1995 cannot be read otherwise. He submitted that any reference to earlier enactments or the subsequent amendments is irrelevant and wholly out of context for the reason that: a. there is no ambiguity in the language employed in the proviso; b. the listing requirement for being entitled to the exception contained in the proviso was introduced for the first time w.e.f. 01.04.1995 and once this condition was brought in, it was applicable to all kinds of securities of a company as defined in Securities Contracts Regulation Act unless stated otherw ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ets which is not a short term capital assets. The expression short term capital asset has been defined in sub-section (42A) of section 2 which at the relevant time, i.e. upto A.Y. 2014-15 read as under:- '(42A) short-term capital asset means a capital held by an assessee for not more than thirty-six months immediately preceding the date of its transfer: Provided that in the case of a share held in a company or any other security listed in a recognised stock exchange in India or a unit of the Unit Trust of India established under the Unit Trust of India Act, 1963 (52 of 1963) or unit of a Mutual Fund specified under clause (23D) of section 10 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.' From the plain reading of the aforesaid section, it is clear that 'short term capital asset' has been defined to mean a capital asset held by the assessee for not more than 36 months immediately preceding the date of its transfer. The proviso thereto carves out an exception of such period of holding; firstly, in the case of a s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ategory and not to the earlier category of 'shares held in a company'. This has been clarified by Memorandum explaining the provision in the Finance Bill which read as under:- Period of holding in the case of securities and units of Mutual Funds Long-term capital assets enjoy certain tax concessions vis-a-vis short-term capital assets. The Income-tax Act defines long-term capital assets as those assets which are not short-term. Short-term capital assets are those capital assets which are held for a period of up to 36 months. However, the Finance Act, 1987, through an amendment to the provisions of section 2 (4 2A), reduced the maximum period of holding in respect of company shares from 36 months to 12 months for being treated as short-term capital assets. There are many financial instruments, other than company shares, through which the investors are entering the capital market. The units of the Unit Trust of India and Mutual Funds specified under section 10(23D) of the Income-tax Act are the instruments through which the small investors are increasingly getting the benefit of investment in the capital market. In order to provide such units and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... twelve months had been substituted:' [Emphasis added is ours] The aforesaid provision which has been brought in the Statute w.e.f. 01.04.2015 applicable from the A.Y. 2015-16 has now removed the exception for the unlisted shares from the benefit of shorter period, because in the 1st Proviso, the benefit of period is now only limited to security listed in recognized stock exchange in India and to other financial instruments. In this manner the Legislature has clearly withdrawn the benefit of shorter period of less than 36 months for the unlisted shares. But, the 2nd proviso makes it very clear that the unlisted shares of a company or unit of mutual fund will enjoy the benefit of shorter period only when the shares are transferred during the period between 01.04.2014 to 10.07.2014.The CBDT Circular while providing the explanatory notes to the amendments has clarified the said amendment in the following manner:- 5.2. The shorter period of holding of not more than twelve months for consideration as short-term capital asset was introduced for encouraging investment on stock market where prices of the securities are market determined. Howe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... beverages P Ltd would be taxable as long-term capital gains and not short-term capital gains as assessee has held those shares for more than 12 months. Thus, ground number 4 8 of the appeal of the assessee is allowed to above extent. 40. Now we come to ground number 9 20 of the appeal of the assessee with respect to sales consideration received accrued to the assessee. The coordinate bench in case of the husband of the appellant has decided the whole issue as under:- 58. We will now dwell upon the core issue raised by the parties, that is, whether the sale consideration of ₹ 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 rec ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ween the parties on 05.07.2007, again the basis of transfer price for the entire share value of SBPL was linked with the fair market value of entire issued share capital of HEL (later on VIL). How it is linked with the fair market value of HEL, we have already discussed in the forgoing paragraphs. Succinctly, put the Scheduel-1 which was for the determination mechanism of the transfer price of the SBPL's shares, has fixed the transfer price in the year 2007 at US $ 266.25 million which converted into INR was ₹ 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 a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... luer Kotak who has valued the shares of SBPL at ₹ 5.40 per share is the key to benchmark the price on which assessee has sold the shares under put option clause. First of all, on the bare perusal of the said 'Valuation 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 F ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... aterial change in the business and operations of VIL group, Indus, companies in the Hold Co chain and SBP post February 28, 2014 that would impact the valuation in this Report, and we assume no risk of any material adverse change having any impact on the businesses of VIL group. Indus, companies in the Hold Co chain and SBP. The said disclaimer of Kotak Mahindra itself diminishes the various figures of liabilities which have been taken into consideration while valuing the shares of SBPL. In any case, the liability of the intermediary companies which can be reduced for the purpose of valuation has to be seen with reference to Rule 11UA(2)(a), wherein following liabilities have stated to be not to be included:- [2](a) the fair market value of unquoted equity shares = (A-L) (PV), (PE) where, A =book value of the assets in the balance-sheet as reduced by any amount of tax paid as deduction or collection at source or as advance tax payment as reduced by the amount of tax claimed as refund under the Income-tax Act and any amount shown in the balance-sheet a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mining the book value is the liability shown in the balance sheet. 63. When at the time of hearing, Ld. Sr. Counsel, Mr. Ajay Vohra pointed out that while taking the percentage of shares of the holding of VIL with the SBPL, has wrongly been taken at 9.65 % which in fact should be 8.90%. On this factual clarification, Ld. Special Counsel, Mr. G.C. Srivastava admitted that indirect stake of SBPL in VIL was 8.9% and if the stake of the assessee in VIL on pass through basis is taken, then it will come to 3.6512% being 41% of 8.905% and not 3.95% as considered by the AO. Based on this clarification of exact percentage of shareholding at the time of hearing, we directed the concerned AO and the Addl. CIT who were present at the time of hearing to give a proper working of the value of SBPL's share, firstly, by taking the fair market value equity of VIL at ₹ 56,448.30 crores; secondly, to consider the actual liabilities as shown in the balance sheet of the intermediary companies as on 31.03.2013 (because the 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 thi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... -5,237 22,630 UMT 6.07% Value of 6.0672% equity stake in VIL 34,248 34,248 Add: Value of Net Assets (Liabilities) excluding in VIL -3,725 -3,265 Assets - Liabilities - Market Value of Investment in VIL + Income Tax + Provisions -166.53 Investment Activities Equity value of UMT 30,523 30,983 UMTI 100% Value of 100% equity stake in UMT 30,523 30,983 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of Investment in JKF, SMMS VIL + Income Tax -133.63 NBFC Equity value of TII 46,382 130,179 NADAL 23.97% Value of 23.97% equity stake in TII 11,118 31,204 Add: Value of Net Assets (Liabilities) excluding in TII -4,873 -4,881 Assets - Liabilities - Market Value of Investment in TII + Income Tax -23.03 Investment Activities Equity value of NADAL 6,245 26,323 PLUSTECH 100% Value of 100% equity st ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 5,696 51,442 Add: Value of Net Assets (Liabilities) excluding in NDC -3,634 847 Assets - Liabilities - Market Value of Investment in NDC -12.99 Investment Activities Equity value of MVH 2,062 52,289 SBP 100% Value of 100% equity stake in MVH 2,062 52,289 Add: Value of Net Assets (Liabilities) excluding in MVH 3 4 Assets - Liabilities - Market Value of Investment in MVH -1.45 Investment Activities ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... transaction, albeit rights and obligation of the parties as per the agreements for transfer of shares was in exercise of call/put option, for which transfer price of the shares was determinable on FMV of the share value of VIL. What has been accrued to the assessee is the price of the shares which was to be determined as per the mechanism provided in the Framework Agreements, which stipulated FMV of VIL. Thirdly, section 50D as invoked by Ld. CIT (A) would not be applicable on the facts and circumstances of the case; and if at all it could have been brought to tax in the hands of the transferor under the deeming fiction of Section 50CA or Section 56(2) (x), then same are not applicable for the year under consideration as these provisions are applicable from the A.Y. 2017-18. Lastly, the value of the SBPL shares as per FMV of VIL would be ₹ 131.86 per share as determined above; and accordingly, AO is directed to compute the capital gain taking the sale value of SBPL at ₹ 131.86 per share. 41. On careful consideration of the facts before us, which are identical to the facts in the case ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 77; 11830050000/ . Now the assessing officer is required to value the equity share capital. To value the equity share capital, all other items of the balance sheet other than equity capital and free reserve, are required to be considered in the net asset value of those equity shares. As per valuation methodology of rule 11 UA of the income tax rules 1962, while working out the total liabilities for valuation of unquoted equity shares following mathematical formula is to be applied. 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 payme ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e 11 UA of income tax rules 1962 to consider while valuing Equity shares of an unlisted entity, to include preference share capital in total liability of the company and to exclude only Paid up Value of equity share capital issued and free reserve. This sum of liability is required to be reduced from the total assets of the company, then only the net book value assets representing book value of equity shares of that company can be derived. Therefore thus it is apparent that the learned assessing officer has taken the composite figure of share capital erroneously which included the equity share capital and preferential capital both along with the free reserves and surplus of that company. Similar is the case with respect to a. Jaykay Finholding ( India) Pvt Ltd wherein the preferential capital of INR 8709 Million , b. in Telecom Investment India Pvt Ltd where in preference share capital of INR 6924 million, c. in case of Plustech Pvt Ltd Preference share capital of ₹ 1351 Million and d. in case of MV healthcare private limited preference share capital of INR 2 164 million, While working out value of equity shares ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... der :- 58. We will now dwell upon the core issue raised by the parties, that is, whether the sale consideration of ₹ 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. Sasoon Co. Ltd. vs. CIT (supra) and CIT vs. Shoorjee Vallabhdas Co. [1962] 46 ITR 144. The principle as discussed in these judgments have been upheld and reiterated time and again by the Hon'ble Supreme Court in catena of decisions including that of CIT vs. Excel industries reported (supra) a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... price in the year 2007 at US $ 266.25 million which converted into INR was ₹ 1088.43 crores. This transfer price of US $ 266.25 million was based on some illustrative working given in Schedule-2 which was though was to come into operation when the condition of the 2nd clause was to be fulfilled, i.e., the fair market value of issued share capital of HEL exceeds US $ 25 billion and then the SBPL value was again to be re-valued. This illustrative working, proceeds with the fair market value of HEL at that time at US $ 25 billion and with some hypothetical working and assumption of liabilities, a transfer price of US $ 266.25 million was arrived and the same figure has been incorporated in Schedule-1. Though, we have already observed that the amount of US $ 266.25 million may not be based on correct working or does not have any proper basis, but it clearly indicates that such a transfer price was to be computed after taking into account the fair market price/ value of equity capital of HEL, later on substituted with VIL. In all the subsequent Framework Agreements and Supplement Agreement, including the Share Purchase Agreement, the parties unequivocally have agreed that the tran ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... said right shares were financed directly out of the loan borrowed from Capricon Health Services Pvt. Ltd. on which interest aggregating ₹ 39,95,01,050/-(i.e., ₹ 13,88,26,342 in F.Y. 2012-13 ₹ 26,06,74,708/- in F.Y. 2013-14), was paid from the date of acquisition till the date of transfer of such shares on 12.03.2014. The assessee had claimed the interest expenditure incurred on such borrowing which has been capitalized as part of the cost of acquisition of such 'right shares' for the purpose of computing capital gain arising on transfer of such shares. The Assessing Officer first of all denied the cost of acquisition in view of the provisions contained in section 55(2) and held that meaning of cost of acquisition and cost of improvement as appearing in section 48 49 has been restricted by the scope of section 55(2)(b). One of the major limb of the arguments of Mr. Ajay Vohra was that interest incurred for acquisition of 'right shares' has to be allowed as cost of acquisition while computing the capital gain in accordance with section 45(1) r.w.s 48. His entire arguments revolved on the proposition that under the scheme of the Act, there is dist ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s 48 and 49, cost of acquisition ,- (a) xxxxxxxxxxxxxxxxxx (aa) in a case where, by virtue of holding a capital asset, being a share or any other security, within the meaning of clause (h) of section 2 of the Securities Contracts (Regulation) Act, 1956 (42 of 1956) (hereafter in this clause referred to as the financial asset), the assessee- (A) becomes entitled to subscribe to any additional financial asset; or (B) is allotted any additional financial asset without any payment, then, subject to the provisions of sub-clauses (i) and (ii) of clause (b),- (i) xxxxxxxxxxxx (ii) xxxxxxxxxxxx (iii) in relation to the financial asset, to which the assessee has subscribed on the basis of the said entitlement, means the amount actually paid by him for acquiring such asset ; (iiia) in relation to the financial asset allotted to the assessee without any payment and on the basis of holding of any other financial asset, shall be taken to be nil in the case of such assessee. (b) xxxxxxxxxxxxxxxxxx From a plain reading of the aforesaid provision, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... al financial assets, then there was no requirement to insert part A in clause (aa) and sub-clause (iii) which specifically confines the cost of acquisition to mean actual amount paid. Thus, we are in complete agreement with the contention of the Ld. Special Counsel, Mr. G.C. Srivastava that under the scope and provision of Section 55(2)(aa) read with sub clause (iii) thereto, incase of right shares the cost of interest expenditure cannot be allowed as deduction as cost of acquisition for computing the capital gain on sale of right shares. 79. Before us, Ld. Sr. Counsel Mr. Vohra after referring to the Memorandum explaining the provision of Finance Bill, 1994 through which section 55(2) was proposed to be inserted, had submitted that the intention of the legislature was only to prescribe uniform method for computing the basic cost of acquisition of bonus/right shares and not to restrict to only the actual cost paid. We are unable to agree with such an argument, because the said Memorandum explains the background on which the said provision was brought in the statute. For the sake of ready-reference the said Memorandum is reproduced hereunder:- Ration ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the cost of acquisition will be the amount actually paid. This has been clarified also by the notes and clauses of the Finance Bill and also by the CBDT Circular No. 684 dated 10.06.1994. The relevant clause18 of the Notes and clauses on sub-section (2) of section 55 of the income Tax Act, 1961 is reproduced hereunder:- It is also proposed to insert a new clause (aa) for the purpose of defining the cost of acquisition of a share or any other security (referred to as financial asset in the section), and of the right to renounce the entitlement, in those cases where the assessee becomes entitled to subscribe to additional financial assets on the basis of rights issue. The cost of acquisition in such cases will be as follows:- (i) in the case of the original financial asset, on the basis of which the assessee becomes entitled to a rights issue, cost of acquisition will be the amount actually paid for acquiring such financial asset; (ii) in the case of right to renounce the entitlement, when such right is actually renounced by the assessee in favour of any other person, the cost of acquisition shall be taken to be nil in the case of such ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e 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. Therefore respectfully following the decision of the coordinate bench we dismiss ground number 21 and 22 of the appeal and confirm the orders of the lower authorities in not allowing the capitalization of interest cost of INR 1 00902358/ as part of the cost of acquisition while calculating capital gain on sale of shares of Scorpio beverages private limited. 46. Ground number 23 25 of the appeal of the assessee is with respect to the allowance of brought forward long-term capital loss of INR 24982206/ brought forward from assessment year 2011 12. Above loss was inadvertently claimed by the assessee at INR 2 49822064. Even in the grounds of appeal mentioned the assessee in ground number 23 has mentioned an astronomical figure, which is not the cor ..... X X X X Extracts X X X X X X X X Extracts X X X X
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