Delhi High Court - Orders
Analjit Singh vs Principal Commissioner Of Income ... on 27 January, 2025
Author: Yashwant Varma
Bench: Yashwant Varma
$~60 to 63
* IN THE HIGH COURT OF DELHI AT NEW DELHI
+ ITA 380/2018
ANALJIT SINGH .....Appellant
Through: Mr. Deepak Chopra, Mr. Rohan
Khare & Mr. Priyam
Bhatnagar, Advs.
versus
PRINCIPAL COMMISSIONER OF INCOME
TAX-6, .....Respondent
Through: Mr. Anuja Pethia, Mr. Dacchita
Sahi, JSCs, Mr. Srikant Singh
& Ms. Anu Minz, Advs. for Mr.
Siddharth Sinha, SSC and Mr.
G.C. Srivastava, Spl. Counsel.
61
+ ITA 819/2018
PR. COMMISSIONER OF INCOME TAX ,
DELHI- 6 .....Appellant
Through: Mr. Anuja Pethia, Mr. Dacchita
Sahi, JSCs, Mr. Srikant Singh
& Ms. Anu Minz, Advs. for Mr.
Siddharth Sinha, SSC and Mr.
G.C. Srivastava, Spl. Counsel.
versus
ANALJIT SINGH .....Respondent
Through: Mr. Deepak Chopra, Mr. Rohan
Khare & Mr. Priyam
Bhatnagar, Advs.
62
+ ITA 24/2021
NEELU ANALJIT SINGH .....Appellant
Through: Mr. Deepak Chopra, Mr. Rohan
Khare & Mr. Priyam
Bhatnagar, Advs.
versus
ITA 380/2018 & Connected matters Page 1 of 9
This is a digitally signed order.
The authenticity of the order can be re-verified from Delhi High Court Order Portal by scanning the QR code shown above.
The Order is downloaded from the DHC Server on 30/01/2025 at 21:50:05
PRINCIPAL COMMISSIONER OF INCOME
TAX-6 .....Respondent
Through: Mr. Anuja Pethia, Mr. Dacchita
Sahi, JSCs, Mr. Srikant Singh
& Ms. Anu Minz, Advs. for Mr.
Siddharth Sinha, SSC and Mr.
G.C. Srivastava, Spl. Counsel.
63
+ ITA 5/2021
PR.COMMISSIONER OF INCOME TAX-7 .....Appellant
Through: Mr. Anuja Pethia, Mr. Dacchita
Sahi, JSCs, Mr. Srikant Singh
& Ms. Anu Minz, Advs. for Mr.
Siddharth Sinha, SSC and Mr.
G.C. Srivastava, Spl. Counsel.
versus
NEELU ANALJIT SINGH .....Respondent
Through: Mr. Deepak Chopra, Mr. Rohan
Khare & Mr. Priyam
Bhatnagar, Advs.
CORAM:
HON'BLE MR. JUSTICE YASHWANT VARMA
HON'BLE MR. JUSTICE HARISH VAIDYANATHAN
SHANKAR
ORDER
% 27.01.2025
1. We have heard Mr. Chopra, learned counsel who appears in support of the assessees. We had, in terms of our order dated 09 May 2018, admitted the instant appeal on the following questions of law:
"1. Did the ITAT fall into error in holding that the Assessing Officer could determine fair market value, having regard to the provisions of Sections 45 and 48 of the Income Tax Act, 1961 in the circumstances of the case?
2. Did the Tribunal fall into error in holding that the interest cost has to be capitalised in the circumstances of the case?"
2. The principal question on which we have heard Mr. Chopra ITA 380/2018 & Connected matters Page 2 of 9 This is a digitally signed order.
The authenticity of the order can be re-verified from Delhi High Court Order Portal by scanning the QR code shown above. The Order is downloaded from the DHC Server on 30/01/2025 at 21:50:05 today pertains to the route as adopted by the Income Tax Appellate Tribunal 1 and which has essentially sought to impute principles of Fair Market Value 2 to the capital gains that had accrued to the appellant from a transfer of shareholding in Scorpio Beverages Pvt. Ltd. 3
3. From a reading of the order of the Tribunal, it would appear that the following would be the undisputed facts which were found from the record:
"5. The AO in the impugned assessment order has noted that during the relevant previous year ending on 31.03.2014, the assessee has sold l5,67,68,689 shares of SBPL to a company called, CGP Investment Ltd. (in short CGP) which was an affiliate of Vodafone International Holdings Pvt. Ltd. (in short "VIHL") holding for a total consideration of Rs. 9, 97,92,44,200/-, resultantly the Long Term Capital Gain of Rs.7,82,92,66,249/- was offered to tax in accordance with the provision of Section 45 r.w.s. 48. The AO observed that the assessee had sold the shares@ 63.69 per share on the basis of his calculation which was the amount of sale consideration divided by number of shares sold; and then required the assessee to submit the basis of valuation of shares of SBPL. In response, the assessee submitted a Valuation Report' of M/s Kotak Mahindra Capital Ltd., dated 19.03.2014, wherein the valuation was done on behalf of the purchaser CGP and the value of the SBPL shares was arrived at by them at Rs.5.40 per shares. The AO observed that there has been a huge variation in the value of shares price of SBPL from the year 2006 to 2014, which was evident from the fact that the shares of SBPL were originally issued at Rs.10 per share in year 2006 and after acquiring the shares at that value, the assessee had sold 4,900 shares @ Rs. 10.88 lakhs per shares totaling to Rs.533.33 crores in the FY 2009-10. Again in the F.Y. 2012-13, SBPL issued 'rights shares' at par value of Rs.10; and now assessee had sold all the shares (including rights shares) in March, 2014 showing the valuation of shares @ Rs. 63.65. Due to this huge variation in the price/ valuation of shares, AO then ventured into examining the background facts of the entire issue leading to acquisition and sale of shares. But before that, he listed out many discrepancies in the Valuation Report of the Kotak Mahindra. First of all, he noted the valuation of Vodafone India Pvt. Ltd. (in short VIL) which was 1 Tribunal 2 FMV 3 SBPL ITA 380/2018 & Connected matters Page 3 of 9 This is a digitally signed order.
The authenticity of the order can be re-verified from Delhi High Court Order Portal by scanning the QR code shown above. The Order is downloaded from the DHC Server on 30/01/2025 at 21:50:05 valued at Rs. 56448.03 crores. However as far as this valuation of entire equity shares of VIL is concerned, the AO has not ultimately disputed this figure which was worked out on the basis of 'Discounted Cash Free Flow Method' (DCF).Thereafter, he noticed that, while determining the share value of SBPL, the Valuer first adopted the DCF method in determining the value of VIL but later on switched to Net Asset Value method (NAV) while arriving the value of SBPL. He thus, held that the NAV 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 that the 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. Neelu Analjeet Singh, held 100% of equity shares of SBPL, the entire share capital divided into 10,000 equity shares of Rs.10 each. The SBPL through its step down subsidiaries like, MV Health Care Services Pvt. Ltd. (MVH) and ND Callus Info Services Pvt. Ltd. (in short "NDS") and others downstream entities held equity shares Hutchison Essar ltd. (HEL) which was subsequently taken over by Vodafone International Holdings BV and was renamed as Vodafone India Pvt. Ltd. (In short "VIL"). The assessee in terms of Framework Agreement dated 05.07.2007 entered into between the AS; subsidiaries companies of the AS; Vodafone International Holdings Pvt. Ltd. [which was earlier called as Global Services Pvt. Ltd.] and VIL. As per the framework agreement, as and when permitted by Government of India on the limits imposed on foreign investment in the telecommunication sector, the GSPL shall have the option to acquire the shares of SBPL from the assessee for which the assessee was entitled to call option fee in lieu of assurance to VIL and Vodafone International Holdings Pvt. Ltd. and the share of SBPL would be sold only on the consent of VIL. In the year 2009, 49% of the SBPL holding were sold to CGP India Investment Ltd., a Mauritius based company and subsidiary of Vodafone Group for sum of Rs.533 crores in the FY 2009-10. In the F.Y. 2012-13, SBPL offered 'right shares' which was subscribed by the assessee as well as CGP being existing shareholders in ratio of their existing shareholding. The right shares subscribed by the assessee were agreed for sum of Rs.300 crores. This right shares alongwith the original shares of 5100 shares have been sold in the A.Y. 2014-15 as per the Sale Purchase Agreement dated 12.03.2014, wherein the aggregate consideration was agreed at Rs.1241.32 ITA 380/2018 & Connected matters Page 4 of 9 This is a digitally signed order.
The authenticity of the order can be re-verified from Delhi High Court Order Portal by scanning the QR code shown above. The Order is downloaded from the DHC Server on 30/01/2025 at 21:50:06 crores, whereby CGP had purchased entire 51% stake of the assessee in SBPL.
7. The assessee before the AO submitted that the entire transfer price as well as the 'call option fee' which was received by the assessee arose from the 'Framework agreement' of 2007 and in the said agreement itself, the transfer price of the entire SBPL shares were determined at US $266.250 which was to be converted on the then prevailing exchange rate to INR and the market value of the entire share capital of HEL was taken at US $ 25 billion and incase the price of the HEL exceeds US $ 25 billion then the valuation of the SBPL shares would be determined accordingly. Thus, it was submitted that the transfer price of the entire SBPL shares was $ 266.250, that is, Rs. 1088 crores as per the then exchange rate. When 49% of the shares were sold on the basis of same transfer price at Rs. 533 crores, i.e. 49% of 1088 crores, then the balance share value was Rs. 555 crores alongwith the value of right shares at Rs.300 crores shares, aggregating to Rs.855 crores. Hence, what the assessee had sold at Rs. l241.32 crores was more than Rs. 855 crores payable as per the frarnework 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 sum of Rs.533.33 crores, it worked out @ 10.88 per share. Now in the year 2014, the assessee has sold the entire shares including right shares @ 63.65 which is not correct and even the value adopted by Kotak Mahindra Ltd. determining the value of shares at Rs.5.40 per share is also not correct. Thus, he worked out the capital given by taking the consideration received/ accrued to the assessee from the sale of shares at Rs.2233.37 crores by taking the value per share at Rs.142.70 and thereby worked out the Short Term Capital Gain of Rs.2075. 75 crores (which has been contested by the assessee vide Ground no. 1, that it is Long Term Capital Gain as the right shares which were sold were held for more than 12 months)."
4. The Tribunal, however, has while dealing with this aspect observed as follows:
"59. Here in this case, as discussed in detail, it is not a simple case of sale and purchase of shares emanating from Sale and Purchase Agreement dated 12.03.2014. The rights and obligations of the ITA 380/2018 & Connected matters Page 5 of 9 This is a digitally signed order.
The authenticity of the order can be re-verified from Delhi High Court Order Portal by scanning the QR code shown above. The Order is downloaded from the DHC Server on 30/01/2025 at 21:50:06 parties for this particular transaction goes way back to the year 2006 and more particularly the year 2007, when the parties have entered into the Framework Agreement on 05.07.2007. The AS had held the shares of the Indian company HEL and then later on in VIL for the benefit of Hutch/Vodafone solely with the aim to beat the foreign equity cap for which the assessee was paid 'call option fee' for holding the shares with stipulation that shares would be ultimately transferred to Hutch/Vodafone through their step down subsidiaries and "put option" would be exercised as when the cap is lifted at a pre-agreed price. The Framework Agreement of 2006 which is the precursor to the framework agreement of 2007, the stipulation for the value of consideration transfer price was based on fair market value of issued share capital of HEL and such value of shares was determined at 0.23% of the value of shares of HEL. Later on when this framework agreement was superseded and re-entered between 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 Rs.l088.43 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 transfer price has to be determined in accordance with the Framework Agreement and that to be of
05.07.2007. Nowhere the parties have rescinded or given go-by to said framework agreement. Albeit the parties have time and again have reiterated that the transfer price for SBPL's shares is to be determined in accordance with the Framework Agreement of 2007, which in turn was based on the working of fair market value of HEL/VIL. Once there is binding contractual obligation as acquiesced by the parties' agreement after agreement, then it cannot be held that ITA 380/2018 & Connected matters Page 6 of 9 This is a digitally signed order.
The authenticity of the order can be re-verified from Delhi High Court Order Portal by scanning the QR code shown above. The Order is downloaded from the DHC Server on 30/01/2025 at 21:50:06 such a binding contractual obligation amongst the parties has simply withered away without any agreed clause of rescinding or abrogating the earlier obligation. In fact there is unanimity permeating through all the agreements on such transfer price which is to be determined on the basis of fair market value of VIL and, therefore, it is binding on the parties. Thus, as per the binding agreement, the accrued price consideration for the transfer of the SBPL shares has to be determined on the basis of fair market value of VIL which here in this case has been pegged at Rs.56,448 crores as determined by the Kotak Mahindra by adopting DCF method and also accepted by the AO. Accordingly, we hold that in terms of section 48, what is accrued to the assessee on the transfer of the unquoted shares of SBPL, is that, which is determinable on the basis of the fair market value of VIL. On this reasoning, the arguments put forth by the Ld. Sr. Counsel that the consideration accrued to the assessee is only as per the share purchase agreement dated 12.03.2014 is not acceptable."
5. It was in the aforesaid context that Mr. Chopra submitted that the Tribunal had clearly erred in proceeding to ascertain the FMV and which would have been an exercise pertinent if Section 56 of the Income Tax Act, 1961 4 were to apply. Our attention was drawn to the principal provisions with respect to capital gains which are made in Section 45 of the Act and which speaks of a computation being undertaken after factoring for deductions to be made from the full value of the consideration received or accruing as a result of the transfer of the capital asset. The provision as it stands today, or for that matter as it did in the relevant Assessment Year 5, namely, 2014- 15, had adopted the principles of a notional value being ascribed only in respect of reconstitution of an entity. This becomes apparent from a reading of Section 45(4). That provision would clearly not be applicable since in the present case the issue of capital gains arose in the context of a transfer of share capital as opposed to a reconstitution of an entity.
4Act ITA 380/2018 & Connected matters Page 7 of 9 This is a digitally signed order.
The authenticity of the order can be re-verified from Delhi High Court Order Portal by scanning the QR code shown above. The Order is downloaded from the DHC Server on 30/01/2025 at 21:50:06
6. Section 56 on the other hand deals with "income from other sources" and by virtue of sub-section (2) whereof, the only reference in that provision which may have applied to a transfer of shareholding would have been with reference to the transferee or the ultimate purchaser. This becomes apparent from a reading of Section 56(2)(vii)(c). We, prima facie, find that Section 56(2)(vii)(c) pertains to an individual who in any previous year would have received from a person or persons any property other than immovable property for a consideration. This would have consequently applied to Vodafone International Holdings BV, which was the ultimate recipient of the shareholding.
7. It is in that context and while dealing with such contingencies that Section 56(2)(vii)(c) of the Act alludes to the principles of FMV being adopted for the purposes of computing consideration. It is in the aforesaid context that Rule 11UA of the Income Tax Rules, 1962 6 and other cognate provisions would have been applicable.
8. However, and undisputedly, in the facts of the present case, we are concerned with the consideration received by the transferor.
9. Mr. Chopra also draws our attention to Section 50CA of the Act which had come to be inserted by virtue of the Finance Act, 2017 and came into effect from 01 April 2018 and which now incorporates principles of FMV in respect of the transfer of a capital asset. According to Mr. Chopra, the Tribunal has thus clearly erred in proceeding to impute the FMV concept.
10. The aforesaid submission would also have to be examined 5 AY 6 Rules ITA 380/2018 & Connected matters Page 8 of 9 This is a digitally signed order.
The authenticity of the order can be re-verified from Delhi High Court Order Portal by scanning the QR code shown above. The Order is downloaded from the DHC Server on 30/01/2025 at 21:50:06 bearing in mind what the Tribunal has chosen to record in paragraph 61 and which is reproduced hereinbelow:
"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 11 UA of the Act. From the perusal of the Annexure 8 of the said valuation report, we find that the working of the various liabilitiesis not based on actual ascertainment of liability albeit the figures of liabilities have been given by the companies, which is unauthenticated and uncorroborated. This is evident from the remark given in the valuation report at page 1 which for sake of reference is reproduced hereunder:- ..."
11. In our considered opinion, and on hearing preliminary submissions, we fail to appreciate how the Tribunal could have tread down the road envisaged by Section 56 once it had come to the conclusion that the valuation as per the Framework Agreement dated 05 July 2007 had been duly accepted by parties.
12. We, however, could not proceed further today, since Mr. G.C. Srivastava, learned special counsel representing the Revenue, was unavailable.
13. Consequently, let these appeals be called again on 04.02.2024 as part-heard.
YASHWANT VARMA, J.
HARISH VAIDYANATHAN SHANKAR, J.
JANUARY 27, 2025/kk ITA 380/2018 & Connected matters Page 9 of 9 This is a digitally signed order.
The authenticity of the order can be re-verified from Delhi High Court Order Portal by scanning the QR code shown above. The Order is downloaded from the DHC Server on 30/01/2025 at 21:50:06