Delhi ITAT confirms
substantial portion of capital gain addition on sale of shares of Scorpio
Beverages Pvt. Ltd. (‘SBPL’, a company owned by assessee) by Analjit Singh
(‘assessee’) to CGP Investment Ltd. (‘CGP’, a Mauritius based Vodafone
affiliate) during AY 2014-15, holds that the sale value of SBPL as shown by
assessee was not in
consonance with the contractual obligations entered by the parties under various Framework Agreements and with Rule 11UA (dealing specifically with valuation of unquoted shares); During relevant AY, assessee sold 1567 lakh shares of SBPL to CGP for Rs. 997 cr., resultantly offering Long Term Capital Gains of Rs.782 cr, however, Revenue invoked Sec. 50D by substituting the actual sale consideration with fair market value (‘FMV’) of Rs.22,334 cr. by adopting price per share of Rs.142.70 (as against Rs. 63.69 per share adopted by assessee); Firstly, ITAT observes that for invoking Sec. 50D, the consideration in respect of transfer of an asset should not be determinable or ascertainable, which is not so in present case, also accepts assessee’s stand that the full value of consideration cannot be reckoned as FMV, unless specifically provided for; Moreover notes that specific provision u/s. 50CA was inserted only by Finance Act, 2017 to bring to tax the difference between the fair market value of the unquoted/unlisted shares, which is not applicable to relevant AY; ITAT accepts assessee's contention that the word ‘accrued’ in Sec. 48 means there has to be a right to receive the income arising from contractual obligation between the parties and such a right has to be with a corresponding liability of the other party from whom the income becomes due; However, observes that this is not a simple case of sale and purchase of shares emanating from Sale and Purchase Agreement dated March 12, 2014, but the rights and obligations of the parties goes way back to the year 2006 and 2007, when the parties have entered into the Framework Agreements which clearly indicated that a transfer price was to be computed after taking into account the fair market price/ value of equity capital of Hutchison Essar Ltd. (HEL) /Vodafone India Pvt. Limited (VIL); Notes that with a view to beat 49% equity cap under FDI regulation, an arrangement was entered between assessee and Hutch Group under which assessee was provided with necessary finance under guarantee from Hutch Group to invest money in equity of HEL and it was contemplated that as and when such cap is relaxed Hutch Group through its own subsidiaries would acquire the shares from the assessee at a predetermined price; Thus, rejects assessee's argument that sales consideration accrued to the assessee is only as per sale purchase agreement dated March 12,2014 and holds that there is binding contractual obligation amongst parties to determine transfer price based on fair market value of VIL which had not been rescinded or abrogated; Based on the guidelines and clarification of exact percentage of SBPL shareholding in VIL obtained during hearing, ITAT arrives at the SBPL valuation at Rs. 131.86 per share and accordingly directs AO to recompute capital gains considering the same; On the issue of whether capital gains were long term or short term, ITAT observes that the first proviso only used the term ‘share held in a company’, without any bifurcation between listed and unlisted shares; ITAT opines that the benefit of shorter period of holding of 12 months to qualify as long term capital asset to unlisted shares has been removed prospectively from AY 2015-16 vide Finance (No.2) Act, 2014 and not for the earlier years, accordingly accepts assessee’s stand that the gain on transfer of SBPL’s share would be taxable as ‘long term capital gains’; Lastly, ITAT denies deduction for interest cost on loan taken for purchase of rights shares as part of the cost of acquisition while computing capital gain on sale of shares, remarks that “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.”:ITAT
consonance with the contractual obligations entered by the parties under various Framework Agreements and with Rule 11UA (dealing specifically with valuation of unquoted shares); During relevant AY, assessee sold 1567 lakh shares of SBPL to CGP for Rs. 997 cr., resultantly offering Long Term Capital Gains of Rs.782 cr, however, Revenue invoked Sec. 50D by substituting the actual sale consideration with fair market value (‘FMV’) of Rs.22,334 cr. by adopting price per share of Rs.142.70 (as against Rs. 63.69 per share adopted by assessee); Firstly, ITAT observes that for invoking Sec. 50D, the consideration in respect of transfer of an asset should not be determinable or ascertainable, which is not so in present case, also accepts assessee’s stand that the full value of consideration cannot be reckoned as FMV, unless specifically provided for; Moreover notes that specific provision u/s. 50CA was inserted only by Finance Act, 2017 to bring to tax the difference between the fair market value of the unquoted/unlisted shares, which is not applicable to relevant AY; ITAT accepts assessee's contention that the word ‘accrued’ in Sec. 48 means there has to be a right to receive the income arising from contractual obligation between the parties and such a right has to be with a corresponding liability of the other party from whom the income becomes due; However, observes that this is not a simple case of sale and purchase of shares emanating from Sale and Purchase Agreement dated March 12, 2014, but the rights and obligations of the parties goes way back to the year 2006 and 2007, when the parties have entered into the Framework Agreements which clearly indicated that a transfer price was to be computed after taking into account the fair market price/ value of equity capital of Hutchison Essar Ltd. (HEL) /Vodafone India Pvt. Limited (VIL); Notes that with a view to beat 49% equity cap under FDI regulation, an arrangement was entered between assessee and Hutch Group under which assessee was provided with necessary finance under guarantee from Hutch Group to invest money in equity of HEL and it was contemplated that as and when such cap is relaxed Hutch Group through its own subsidiaries would acquire the shares from the assessee at a predetermined price; Thus, rejects assessee's argument that sales consideration accrued to the assessee is only as per sale purchase agreement dated March 12,2014 and holds that there is binding contractual obligation amongst parties to determine transfer price based on fair market value of VIL which had not been rescinded or abrogated; Based on the guidelines and clarification of exact percentage of SBPL shareholding in VIL obtained during hearing, ITAT arrives at the SBPL valuation at Rs. 131.86 per share and accordingly directs AO to recompute capital gains considering the same; On the issue of whether capital gains were long term or short term, ITAT observes that the first proviso only used the term ‘share held in a company’, without any bifurcation between listed and unlisted shares; ITAT opines that the benefit of shorter period of holding of 12 months to qualify as long term capital asset to unlisted shares has been removed prospectively from AY 2015-16 vide Finance (No.2) Act, 2014 and not for the earlier years, accordingly accepts assessee’s stand that the gain on transfer of SBPL’s share would be taxable as ‘long term capital gains’; Lastly, ITAT denies deduction for interest cost on loan taken for purchase of rights shares as part of the cost of acquisition while computing capital gain on sale of shares, remarks that “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.”:ITAT
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