ESSAR INVESTMENTS LTD, MUMBAI V. ACIT 6(2)(2), MUMBAI

ITA 1942/MUM/2015

• Counselvise Citation: [2021] 107 COUNSELVISE.COM (IT) 6253 (ITAT-MUMBAI)
• Duration Of Justice: 5 year(s) 9 month(s) 1 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 08-01-2021
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: K
• Assessment Year: 2010-2011
• Appeal Filed On: 06-04-2015
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: SUNIL DESH
• Keywords: Capital asset; Depreciation; Transfer pricing; International transaction; Earning of tax free income; Additional evidence; Cost of acquisition; Wholly owned subsidiary; Avoidance of tax; Valuation report; Deemed dividend; Assessment record; Tax effect; Onus to prove; Sham transactions; Unabsorbed depreciation; Rule 8D; Set aside; Capital Gains
• Section: 43B; 143(3); 92B; 92A; 2(22)(e); 14A; 115JB; 10B; 205; 144C; 207; 264; 43; 48; 73; 72; 13; 22; 92CA; 92

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL, MUMBAI BENCH K, MUMBAI BEFORE SHRI RAJESH KUMAR, ACCOUNTANT MEMBER AND SHRI RAM LAL NEGI, JUDICIAL MEMBER ITA NO.1942/M/2015 ASSESSMENT YEAR: 2010-11 M/S. AARADHANA REALITIES LTD. (FORMERLY KNOWN AS ESSAR INVESTMENTS LTD.) MANICKAM COMPLEX, GROUND FLOOR, 1/3, GENERAL PATTERS ROAD, CHENNAI, TAMILNADU- 600 002 PAN: AABCE0686Q VS. ACIT 6(2)(2), AAYAKAR BHAVAN, M.K. ROAD, MUMBAI - 400020 (APPELLANT) (R ESPONDENT) PRESENT FOR: ASSESSEE BY : SHRI NISHANT THAKKAR, A.R. SHRI HITEN CHANDE, A.R. MS. JASMIN AMALSADVALA, A.R REVENUE BY : SHRI SUNIL DESHPANDE, D.R. DATE OF HEARING : 11.12.2020 DATE OF PRONOUNCEMENT : 08.01.2021 O R D E R PER RAJESH KUMAR, ACCOUNTANT MEMBER: THE PRESENT APPEAL HAS BEEN PREFERRED BY THE ASSES SEE AGAINST THE DIRECTIONS VIDE ORDER DATED 29.12.2014 OF THE DISPUTE RESOLUTION PANEL-I [HEREINAFTER REFERRED TO AS THE DRP] RELEVANT TO ASSESSMENT YEAR 2010-11 IN THE MATTER O F ASSESSMENT ORDER DATED 30 JANUARY 2015 UNDER SECTIO N 143(3) R.W. SECTION 144C(13) OF THE ACT.. 2. THE GROUNDS RAISED BY THE ASSESSEE ARE AS UNDER: 1. THE ASSESSING OFFICER ('AO') HAS ERRED IN ASS ESSING THE APPELLANT'S TOTAL INCOME AT RS.247,79,28,937/- AS AGAINST THE RETURNE D LOSS (AS PER THE REVISED ITA NO.1942/M/2015 M/S. AARADHANA REALITIES LTD. (FORMERLY KNOWN AS ESSAR INVESTMENTS LTD.) 2 RETURN OF INCOME) OF RS.86,37,46,423/-. 2. THE AO, UNDER THE DIRECTIONS OF THE DISPUTE RESO LUTION PANEL ('DRP'), HAS ERRED IN MAKING A TRANSFER PRICING ('TP') ADJUSTMENT OF R S.321,30,00,000/- ON ACCOUNT OF THE ARM'S LENGTH PRICE (ALP) OF THE SHARES SUBSCRIB ED AND ANOTHER TP ADJUSTMENT OF RS.2,33,000/- ON ACCOUNT OF THE ALP OF THE SHARES P URCHASED. 3. THE AO, UNDER THE DIRECTIONS OF THE DRP, HAS E RRED IN NOT APPRECIATING THAT THE SUBSCRIPTION / PURCHASE OF SHARES BY AN ASSESSEE RE SULTS IN CAPITAL INVESTMENT WITH NO INCOME ARISING FROM SUCH TRANSACTION AND THEREFO RE TRANSFER PRICING PROVISIONS ARE NOT APPLICABLE. 4. THE AO, UNDER THE DIRECTIONS OF THE DRP, HAS E RRED IN CONSIDERING THE SUBSCRIPTION TO SHARES AS AN INTERNATIONAL TRANSACT ION COVERED UNDER CLAUSES (I)(B) AND (I)(C) OF THE EXPLANATION UNDER SECTION 92B OF THE ACT. 5. THE AO, UNDER THE DIRECTIONS OF THE DRP, HAS E RRED IN MAKING THE ADJUSTMENT WITH RESPECT TO THE SUBSCRIPTION TO / PURCHASE OF E QUITY SHARES BY REJECTING THE CERTIFICATES OBTAINED FROM INDEPENDENT VALUERS AND NOT ACCEPTING THE ECONOMIC ANALYSIS UNDERTAKEN BY THE APPELLANT IN ACCORDANCE WITH THE PROVISIONS OF THE ACT READ WITH THE INCOME TAX RULES, 1962. 6. THE AO, UNDER THE DIRECTIONS OF THE DRP, HAS E RRED IN NOT ACCEPTING THE VALUE AT WHICH THE SHARES WERE SUBSCRIBED / PURCHASED BY THE APPELLANT FROM THE AE, WHICH WAS VALID AS PER THE REGULATIONS OF THE RESERVE BAN K OF INDIA. 7. THE DRP HAS ERRED IN UPHOLDING THE ACTION OF T HE TRANSFER PRICING OFFICER (TPO) IN THE FOLLOWING, WHILST DETERMINING THE VALUE OF T HE SHARES SUBSCRIBED BY THE APPELLANT, AS PER THE DISCOUNTED CASH FLOW (DCF) ME THOD: (A) CONSIDERING THE BETA VALUE OF EQUITY AT 1.27 AN D EQUITY MARKET RISK PREMIUM AT 10.5%, WHILE WORKING OUT THE COST OF EQUITY; (B) CONSIDERING THE DISCOUNT FACTOR / WACC AT 11.72 % FOR THE PURPOSE OF COMPUTING THE PRESENT VALUE OF FREE CASH FLOWS DURING THE EXP LICIT PERIOD AND THE TERMINAL VALUE; (C) CONSIDERING THE TERMINAL VALUE AT RS.965,84,05, 547/-; 8. THE DRP HAS ERRED IN CONFIRMING THE TRANSFER PRI CING ADJUSTMENT OF RS.183,01,50,853/- AS PER THE TPO, TOWARDS THE DIFF ERENCE BETWEEN THE VALUE AT WHICH THE SHARES WERE SUBSCRIBED BY THE APPELLANT A ND THE VALUE AT WHICH THEY WERE TRANSFERRED TO A THIRD PARTY LATER, AS AN ALTE RNATIVE BENCHMARKING OF THE SHARES SUBSCRIBED. 9. WHILE ARRIVING AT THE ALP OF THE SHARES SUBSCR IBED BY THE APPELLANT, THE AO UNDER THE DIRECTIONS OF THE DRP, HAS ERRED IN NOT C ONSIDERING THE ARITHMETIC MEAN OF (A) THE PRICE ARRIVED AT AS PER DCF METHOD AND ( B) THE ACTUAL SALE PRICE AS PER THE LATER TRANSACTION WITH A THIRD PARTY, BOTH OF W HICH ARE CONSIDERED AS COMPARABLE UNCONTROLLED PRICES ('CUP'), AS PER THE PROVISO TO SECTION 92C(2) OF THE ACT. 10. THE DRP HAS ERRED IN HOLDING THAT THE TRANSACTI ON OF SUBSCRIPTION OF SHARES AND THEIR SALE DURING THE YEAR IS A SHAM TRANSACTION AN D THUS DIRECTING THAT THE ENTIRE SHORT TERM CAPITAL LOSS OF RS. 183,06,38,227/- BE D ISALLOWED, AS A THIRD ALTERNATIVE. 11. THE AO HAS ERRED IN ADDING THE AMOUNT OF THE TP ADJUSTMENT OF RS.2,33,000/- ON THE VALUE OF THE PURCHASE OF SHARES TO THE TAXAB LE INCOME, CONTRARY TO THE ITA NO.1942/M/2015 M/S. AARADHANA REALITIES LTD. (FORMERLY KNOWN AS ESSAR INVESTMENTS LTD.) 3 DIRECTIONS OF THE DRP. 12. THE AO HAS ERRED IN COMPUTING THE LONG TERM CAP ITAL GAIN AT RS. 162,56,53,076/- AS AGAINST A SUM OF RS. 162,06,09,9 06/- AS PER THE RETURN OF INCOME AND AS ACCEPTED IN THE DRAFT ASSESSMENT ORDE R. 13. THE AO, UNDER THE DIRECTIONS OF THE DRP, HAS ER RED IN MAKING A DISALLOWANCE OF THE EXPENDITURE ON LEAVE ENCASHMENT OF RS.1,44,60,2 88/- U/S.43B OF THE ACT. 14. THE AO HAS ERRED IN NOT GIVING SET-OFF OF THE B ROUGHT FORWARD LOSS / UNABSORBED DEPRECIATION OF EARLIER YEARS AGAINST TH E INCOME COMPUTED FOR THE YEAR. 15. THE AO HAS ERRED IN ADDING A SUM OF RS.321,32,3 3,000/- TOWARDS THE TP ADJUSTMENT AND ANOTHER SUM OF RS.3,21,62,602/- TOWA RDS THE PROVISION FOR LEAVE ENCASHMENT TO THE NET PROFIT THE APPELLANT, FOR WOR KING OUT THE BOOK PROFIT U/S.115JB OF THE ACT. 16. THE AO HAS ERRED IN ADDING A SUM OF RS.183,01,5 0,853/- TOWARDS THE TP ADJUSTMENT AND ANOTHER SUM OF RS.3,21,62,602/- TOWA RDS THE PROVISION FOR LEAVE ENCASHMENT TO THE NET PROFIT OF THE APPELLANT, FOR WORKING OUT THE BOOK PROFIT U/S.115JB OF THE ACT, UNDER THE ALTERNATIVE COMPUTA TION OF INCOME ON PROTECTIVE BASIS. THE ABOVE GROUNDS ARE WITHOUT PREJUDICE TO EACH OTH ER. THE APPELLANT CRAVES LEAVE TO ADD ANY OTHER GROUND(S) AND / OR MODIFY OR DELETE ANY OF THE ABOVE GROUNDS BEFORE OR DURING THE COURSE OF HEARING BEFO RE THE HON'BLE ITAT. 3. THE ISSUE RAISED IN GROUND NO.1 TO 10 IS AGAINST THE TRANSFER PRICING ADJUSTMENT OF RS.321,30,00,000 IN RESPECT OF SUBSCRIPTION / PURCHASE OF SHARES OF HYBRID CAPITAL PTE. LTD. WHICH HAS BEEN UPHELD BY THE DRP BY AFFIRMING THE O RDER OF TPO ON THIS ISSUE. 4. THE FACTS IN BRIEF ARE THAT THE APPELLANT ASSESS EE IS A PUBLIC LIMITED COMPANY CARRYING ON THE BUSINESS OF PROMOTION OF INDUSTRIAL AND INFRASTRUCTURAL PROJECTS AND REND ERING CONSULTANCY AND BUSINESS SUPPORT SERVICES. THE APPE LLANT FILED ITS RETURN OF INCOME FOR AY 2010-11 ON 15.10. 2010 DECLARING LOSS OF RS. 50,06,18,071/- WHICH WAS LATE R ON REVISED ION 31.3.2012 DECLARING LOSS OF RS. 86,37,4 6,423/-. ITA NO.1942/M/2015 M/S. AARADHANA REALITIES LTD. (FORMERLY KNOWN AS ESSAR INVESTMENTS LTD.) 4 THE ASSESSEE, INTER ALIA, CLAIMED A LOSS OF RS. 20. 49 CRORE ON ACCOUNT OF SALE OF SHARES OF HYBRID CAPITAL WHICH WAS NET RESULT OF SALE OF 6,00,000 SHARES COMPRISING 1,00, 000 SHARES YIELDED A LONG-TERM CAPITAL GAIN OF RS. 162,56,53,0 77 AND 5,00,000 SHARES INCURRING SHORT-TERM CAPITAL LOSS OF RS.183,06,38,227/-. THEREAFTER, THE CASE OF THE ASS ESSEE WAS SELECTED FOR SCRUTINY AND STATUTORY NOTICES WERE DU LY ISSUED AND SERVED UPON THE ASSESSEE. THE AO AFTER NOTICING THAT THE APPELLANT ASSESSEE HAS ENTERED INTO INTERNATIONAL T RANSACTIONS WITH ASSOCIATE ENTERPRISES EXCEEDING RS. 15,00,00, 000/-, REFERRED THE TRANSACTIONS REPORTED BY THE ASSESSEE IN AUDIT REPORT IN FORM 3CEB TO TRANSFER PRICING OFFICER U/ S 92CA(1) OF THE ACT TO DETERMINE THE ARM S LENGTH PRICE AFTER OBTAINING THE APPROVAL OF COMMISSIONER OF INCOME TAX-5 MUMBAI. T HE APPELLANT HAD INVESTED USD 1,00,000 EQUIVALENT TO R S. 45,74,740 1 USD = RS 45.74) IN HYBRID CAPITAL PTE L TD (HEREINAFTER REFERRED TO AS 'HYBRID CAPITAL'), ITS WHOLLY OWNED SUBSIDIARY IN BRITISH VIRGIN ISLANDS, ON 18 NOVEMBE R 2005. HYBRID CAPITAL WAS INCORPORATED TO CARRY ON THE BUS INESS OF FINANCING AND LENDING OUTSIDE INDIA. FROM ITS INCEP TION, HYBRID CAPITAL CARRIED ON THE BUSINESS OF LENDING AND FINA NCING WHICH IS EVIDENT FROM THE FACT THAT FOR F.Y. 2006-07, HYB RID CAPITAL EARNED INTEREST INCOME OF RS. 124.69 CRORE AND IN F.Y. 2007- 08, EARNED INTEREST INCOME OF RS. 78.10 LAKHS .DUR ING F.Y. 2009-10, THE APPELLANT ASSESSEE SPOTTED AN OPPORTUN ITY TO LEND MONEY TO AN OVERSEAS BORROWER NAMELY ARYA INFRASTR UCTURE HOLDINGS LIMITED (HEREINAFTER REFERRED TO AS 'ARYA INFRASTRUCTURE'). HOWEVER, SECTION 6(3)(D) OF FOREI GN EXCHANGE MANAGEMENT ACT, 1999 ('FEMA') READ WITH ITA NO.1942/M/2015 M/S. AARADHANA REALITIES LTD. (FORMERLY KNOWN AS ESSAR INVESTMENTS LTD.) 5 REGULATION 5 OF BORROWING OR LENDING IN FOREIGN E XCHANGE REGULATIONS, 2000 PROHIBITS AN INDIAN RESIDENT TO L END DIRECTLY IN FOREIGN EXCHANGE TO A PERSON OUTSIDE INDIA. SINC E THAT HYBRID CAPITAL WAS IN THE BUSINESS OF LENDING, THE APPELLANT DECIDED TO ENCASH AND MAKE GOOD THE ABOVE REFERRED OPPORTUNITY BY INFUSING THE FUNDS AVAILABLE WITH IT RS. 998,79,87,374/- INTO HYBRID CAPITAL BY WAY OF EQUI TY CONTRIBUTION IN ACCORDANCE WITH THE PROVISIONS OF F EMA. THE ABOVE REFERRED INFUSION WAS EFFECTED BEGINNING WITH JUNE 2009 AND ENDING IN JANUARY 2010, AGGREGATING TO USD 212,836,000 EQUIVALENT TO RS. 998,79,87,374 TOWARDS SHARE CAPITAL. SINCE HYBRID CAPITAL WAS THE APPELLANT'S W HOLLY OWNED SUBSIDIARY AND WOULD CONTINUE TO REMAIN SO EV EN AFTER THE INFUSION, THE NUMBER OF SHARES TO BE ISSUED DID NOT REALLY MATTER. HOWEVER, TO COMPLY WITH THE REQUIREMENT UND ER FEMA, THE SHARES WERE VALUED ON THE BASIS OF THE DISCOUNTED CASH FLOW METHOD ('DCF METHOD') TAKING I NTO CONSIDERATION THE FUTURE EARNINGS AFTER INFUSION OF THE FRESH CAPITAL OF USD 212,836,000. AS PER THE VALUATION RE PORT DATED 12 FEBRUARY 2010, THE VALUE PER EQUITY SHARE OF HYBRID CAPITAL WAS ARRIVED AT RS. 20,550/- AND FOR THE SAKE OF CONVENIENCE IT WAS DECIDED TO ISSUE 5,00,000 S HARES TO THE APPELLANT ASSESSEE AT A PRICE OF RS. 19,975/- PER SHARE. EQUITY SHARES AGAINST THIS INVESTMENT OF USD 212,83 6,000 EQUIVALENT TO RS. 998,79,87,374/- WERE ALLOTTED BY HYBRID CAPITAL TO APPELLANT ON 17 FEB 2010 AT FACE VALUE OF USD 1 AT A PREMIUM OF USD 424.67. HYBRID CAPITAL WOULD CONTINUE TO REMAIN A 100% SUBSIDIARY OF THE APPELLA NT. THUS NUMBER OF SHARES ISSUED AGAINST THE INFUSION O F FRESH ITA NO.1942/M/2015 M/S. AARADHANA REALITIES LTD. (FORMERLY KNOWN AS ESSAR INVESTMENTS LTD.) 6 CAPITAL WAS WHOLLY IRRELEVANT AND DID NOT MATTER. I T IS ONLY FOR CONVENIENCE PURPOSES THAT 5,00,000 SHARES WAS ISSUE D TO THE ASSESSEE IN THE WHOLLY OWNED SUBSIDIARY. WHAT IS RE LEVANT HERE IS THE ENTERPRISE VALUE ARRIVED AND THAT WOULD REMA IN CONSTANT WHETHER 5,00,000 SHARES WERE ISSUED, OR 10,00,000 S HARES WERE ISSUED. HYBRID CAPITAL, IN TURN, LENT THE MONE Y INFUSED BY WAY OF CAPITAL IN IT BY THE ASSESSEE TO ARYA INF RASTRUCTURE ON INTEREST AT 12% P.A. WHICH IS EVIDENT FROM HYBRI D'S BALANCE SHEET AS ON 15 MARCH 2010 WHICH SHOWED BALANCE OF L OANS AND ADVANCES AT USD 214,201,860. HENCE, THE WHOLE OF T HE EQUITY INFUSION OF USD 212,836,000 WAS LENT OUT TO ARYA INFRASTRUCTURE. 5. DURING THE YEAR, HYBRID CAPITAL EARNED INTEREST FROM ARYA OF USD 9,101,781 EQUIVALENT TO RS. 43,13,94,07 9/- WHICH COMES TO 12% P.A. THE ABOVE INTEREST INCOME IS DULY REFLECTED IN THE PROFIT & LOSS ACCOUNT FOR THE YEAR IN THE ACCOUNTS OF THE HYBRID CAPITAL. FROM THE INTEREST E ARNED OF USD 9,101,781, HYBRID CAPITAL PAID A DIVIDEND OF US D 6,000,000 EQUIVALENT TO RS. 28,43,80,000 TO THE APP ELLANT. SUCH DIVIDEND WAS DULY OFFERED TO TAX BY APPELLANT IN ITS RETURN OF INCOME. ON 17 MARCH 2010, APPELLANT SOLD ITS ENTIRE STAKE (I.E. 100% SHARES) IN HYBRID CAPITAL TO ARYA INFRASTRUCTURE AT A VALUE OF USD 215,000,000 TAKING INTO CONSIDERATION THE NET ASSET VALUE OF HYBRID CAPITAL AS ON 15 MARCH 2010.IT IS PERTINENT TO NOTE HERE THAT THE AP PELLANT EARNED USD 2,064,000 AS GAINS ON SALE OF SHARES AN D USD 6,000,000 AS DIVIDEND DECLARED BY THE HYBRID CAPITA L OUT OF INTEREST EARNED. THE GAIN OF USD 2,064,000 ON THE SALE OF SHARES BECAME CAPITAL LOSS UPON CONVERSION AND WA S REPORTED ITA NO.1942/M/2015 M/S. AARADHANA REALITIES LTD. (FORMERLY KNOWN AS ESSAR INVESTMENTS LTD.) 7 AS CAPITAL LOSS IN ITS RETURN OF INCOME DUE TO FOR EIGN EXCHANGE FLUCTUATION. THIS IS EXPLAINED AS BELOW: A. ON SALE OF SHARES OF HYBRID CAPITAL, THE APPELLANT MADE A GAIN OF USD 2,064,000 (USD 215,000,000 USD 212,936,000) WHICH IS EQUIVALENT TO RS. 9.39 CRORES (1USD = RS. 45.53 INR). B. HOWEVER, THE APPELLANT REPORTED A RS.20.49 CRORES LOSS IN ITS RETURN OF INCOME. C. THE APPELLANT SUBMITS THAT A GAIN OF RS. 9.39 CRORES CONVERTED TO A LOSS OF RS.20.49 CRORES ONLY ON ACCOUNT FOREIGN EXCHANGE FLUCTUATION, I.E. BECAUSE RE. APPRECIATED VIS--VIS. THE DOLLAR BY RS. 1.40 BETWE EN THE DATE OF INVESTMENT AND THE DATE OF SALE. THIS CAN B E SEEN FROM WHAT FOLLOWS: GAIN ON SALE OF SHARES USD 2,064,000 (1USD =45.53) RS. 9.39 CRORES EXCHANGE RATE DIFFERENCE RS. (2 9.77 CRORES) (RS. 1.40/USD * 212,836,000 USD) NET CAPITAL LOSS RS. 20.38 CROR ES ACCORDINGLY, WHILE COMPUTING CAPITAL GAINS UNDER SE CTION 48 OF THE ACT, THE APPELLANT CLAIMED A LOSS OF RS. 20,49,85,151 (ON ACCOUNT OF EXCHANGE FLUCTUATION AND INDEXATION OF COST). 6. THE TPO PASSED AN ORDER DATED 13 JANUARY 2014 UNDER SECTION 92CA(3) OF THE ACT HOLDING AS UNDER: THE PROVISIONS OF CHAPTER- X ARE APPLICABLE AS EXPL ANATION TO SECTION 92B SPECIFICALLY COVERS THE TRANSACTION OF PURCHASE OF SHARES BY ITA NO.1942/M/2015 M/S. AARADHANA REALITIES LTD. (FORMERLY KNOWN AS ESSAR INVESTMENTS LTD.) 8 ASSOCIATED ENTERPRISE. AND. THE APPELLANT ITSELF HA S REPORTED THE TRANSACTION OF SUBSCRIPTION OF SHARES AS AN INTERNA TIONAL TRANSACTION AND HAS BENCHMARKED THE SAME ON THE BASIS OF A VALUATIO N REPORT THEREFORE, IT IS NOT OPEN TO THE APPELLANT TO CONTEND THAT THE PROVISIONS OF CHAPTER - X DO NOT APPLY (PARA 6.1 (I),(II),III) PG . 3 OF TP0'S ORDER). THE VALUATION REPORT DATED 12 FEBRUARY 2010 HAS BEE N OBTAINED AFTER THE INFUSION OF MONEY BY THE APPELLANT, THE V ALUATION OF THE SHARES SHOULD HAVE BEEN CARRIED OUT BEFORE MAKING T HE INVESTMENT THEREFORE, SUCH A VALUATION REPORT CANNOT BE ACCEPT ED. FURTHER, THE VALUATION REPORT IS NOT RELIABLE AS THE VALUER HAS MADE VALUATION REPORT ON THE BASIS OF CERTAIN ASSUMPTIONS AND HAS NOT CARRIED OUT THE AUDIT OF CASH FLOW PROJECTIONS THEREFORE, THE VALUA TION REPORT WAS LIABLE TO BE REJECTED (PARA 6.2(I),(II) PG. 5 OF TP0'S ORD ER). THE ARM'S LENGTH PRICE OF THE SHARES OF HYBRID WAS RS. 13,549/ SHARE AS THE DISCOUNTING RATE (COST OF EQUITY) USED BY THE V ALUER OF 7.27% IS LOWER THAN THE CORRECT DISCOUNTING RATE OF 11.72% ( PG.12 OF TP0'S ORDER). ACCORDINGLY, TRANSFER PRICING ADJUSTMENT OF RS. 321,30,00,000 WAS REQUIRED TO BE MADE. TO ARRIVE AT THE DISCOUNTING RATE OF I I .72%: I. THE TPO CONSIDERED MARKET RISK PREMIUM AS 10.5% INS TEAD OF 6% CONSIDERED BY THE VALUER IN THE VALUATION REPORT WH ILE COMPUTING COST OF EQUITY (PARA (II) PG. 9,10 OF TP0'S ORDER) II. THE TPO CONSIDERED BETA AS 1.27 INSTEAD OF 1.00 IN THE VALUATION REPORT WHILE COMPUTING COST OF EQUITY (PARA (I) PG. 9 OF TP0'S ORDER) WITHOUT PREJUDICE TO ABOVE, THE TPO HELD THAT CUP M ETHOD CAN BE APPLIED TO BENCHMARK THE TRANSACTION AND TOOK THE P RICE OF RS. 16,314/SHARE AT WHICH THE SHARES WERE SOLD BY THE A PPELLANT TO ARYA AS THE ARM'S LENGTH PRICE AND PROPOSED ALL ALTERNATE T RANSFER PRICING ADJUSTMENT OF RS. 183,01,50,583 (PARA 6.5 PG.12 OF TP0'S ORDER). 7. AGGRIEVED BY THE ORDER OF LD TOP, THE APPELLANT ASSESSEE PREFERRED AN APPEAL BEFORE THE DRP AND THE DRP PASS ED AN ORDER DATED 29 DECEMBER 2014 UPHOLDING THE ORDER OF THE TPO. THE DRP IN THE ALTERNATIVE HELD THAT THE ENTIR E TRANSACTION OF INVESTING USD 212,836,000 FOR 5,00,0 00 SHARES AND SUBSEQUENT SALE OF 6,00,00 SHARES FOR USD 215,0 00,000 WAS ORCHESTRATED TO GENERATE SHORT TERM CAPITAL LO SS OF RS. 1 83,06,38,227 ON 5,00,000 SHARES TO SET OFF AGAINST LONG TERM CAPITAL GAIN OF RS. 162,56,53 , 076 ON 1 , 00,000 SHARES AND ITA NO.1942/M/2015 M/S. AARADHANA REALITIES LTD. (FORMERLY KNOWN AS ESSAR INVESTMENTS LTD.) 9 THEREFORE, THE ENTIRE ARRANGEMENT WAS SHAM AND ENGI NEERED ONE AND WAS CARRIED OUT FOR AVOIDING TAX. THE RELEV ANT PORTION OF THE ORDER OF DRP IS EXTRACTED BELOW FOR THE SAKE OF CONVENIENCE AND READY REFERENCE: 4.27 CONSIDERING THE FACTS ON RECORD AS WELL AS TH E SUBMISSIONS OF THE ASSESSEE, THE PANEL IS ALSO OF THE VIEW THAT THE TRANSACTION OF SUBSCRIPTION OF 5,.00,000 SHARES DURING THE YEAR AT AN ENHANCED PRICE OF RS. 19,975/- PER SHARE AND ITS SALE WITHIN ONE MONTH AT AN REDUCED PRICE OF RS. 16314.7 0 PER SHARE IS NOTHING BUT A DESIGN OF TAX AVOIDANCE BY BOOKING A LOSS IN THE BO OKS OF THE ASSESSEE COMPANY ARTIFICIALLY TO SET OFF THE LONG TERM CAPITAL GAIN ON SALE OF 1,00,000 SHARES ORIGINALLY HELD. THE SHOW CAUSE NOTICE FOR ENHANCEM ENT AND THE REPLY OF THE ASSESSEE HAVE ALREADY BEEN REPRODUCED AT PARA 4.9 A ND 4.10 ABOVE. OUR FINDING IS BASED ON THE FOLLOWING REASONING: A) IT IS SEEN THAT DURING THE YEAR THE ASSESSEE HAS PURCHASED 5,00,000 HYBRID SHARES AT A PRICE OF RS,19975.97 PER SHARE. EARL IER, THE ASSESSEE WAS ALREADY HOLDING 1,00,000 SHARES, WHICH WERE PURCHASED AT RS .45.74 PER SHARE. THUS THE ASSESSEE, AS A RESULT HELD 6,00,000 SHARES. THE 5,0 0,000 SHARES SUBSCRIBED IN CURRENT YEAR WERE SOLD TO A THIRD PARTY AT RS.16,31 4.70 PER SHARE TO BOOK A NET SHORT TERM CAPITAL LOSS OF RS. 1,83,06,38,227/ - IN ADDITION TO LONG TERM CAPITAL GAINS OF RS. 162,56,53,076/- ON SALE OF ORIGINAL 1, 00,000 SHARES. JUST BY ROUTING THE FUNDS THROUGH THE BANK ACCOUNTS AND PASSING THE ENTRIES IN ITS BOOKS OF ACCOUNTS, THE ASSESSEE HAS CREATED AN ARTIFICIAL ST LOSS WHICH HAS BEEN ADJUSTED AGAINST OTHER INCOME. B) THE ASSESSEE WAS REQUESTED TO FURNISH THE DETAI LS, DOCUMENTS AND DISCUSSION AMONGST THE MANAGEMENT AND THE BOARD OF EIL THAT LE D TO THE DECISION OF MAKING INVESTMENT OF ABOUT RS.998 CRORE IN HYBRID, AND THE REAFTER WHAT WENT WRONG WITH HYBRID THAT THE DECISION WAS MADE TO MAKE INVESTMEN T, AND THAT IMMEDIATELY WITHIN 1 MONTH OF SUCH INVESTMENT, AS A RESULT OF W HICH THE MANAGEMENT EXITED HYBRID FULLY. THE ASSESSEE WAS ALSO REQUESTED TO PR ODUCE ALL DOCUMENTS, AND FILES RELATED TO ABOVE DECISION MAKING DEMONSTRATING THE DECISION MAKING PROCESS AND CONSIDERED FOR DECISION MAKING. DESPITE THE OPPORTU NITY BEING PROVIDED NO SUCH DOCUMENTS HAVE BEEN PRODUCED, AND THE ASSESSEE HAS ONLY CLAIMED THAT IT WAS ON THE BASIS OF COMMERCIAL PRUDENCE. HOWEVER, THE COM MERCIAL PRUDENCE HAS NOT BEEN SUBSTANTIATED IN ANY MANNER. NON PRODUCTION OF THESE DOCUMENTS CAN ONLY LEAD TO THE CONCLUSION THAT THE ENTIRE TRANSACTION WAS A SHAM AND THE ASSESSEE IS UNABLE TO SUBSTANTIATE ITS CLAIM REGARDING THE GENU INENESS OF THE TRANSACTION. C) MEMORANDUM OF UNDERSTANDING DATED 26.02.2010, REFERRED TO IN THE AGREEMENT FOR SALE DATED 17.03.2010 ENTERED BETWEEN THE ASSESSEE, ARYA INFRASTRUCTURE HOLDING LTD. MAURITIUS AND HYBRID CAPITAL PTE LIMITED HAS N OT BEEN PRODUCED BEFORE US, ALTHOUGH IT WAS CALLED FOR. HERE AGAIN, NON PRODUCT ION OF THIS DOCUMENT CAN ONLY LEAD TO THE CONCLUSION THAT THE ENTIRE TRANSACTION WAS A SHAM AND THE ASSESSEE IS UNABLE TO SUBSTANTIATE ITS CLAIM REGARDING THE GENU INENESS OF THE TRANSACTION. ITA NO.1942/M/2015 M/S. AARADHANA REALITIES LTD. (FORMERLY KNOWN AS ESSAR INVESTMENTS LTD.) 10 D) DURING THE HEARING THE ASSESSEE WAS ASKED TO E XPLAIN THE RELATIONSHIP IF ANY BETWEEN THE ASSESSEE AND ARYA INFRASTRUCTURE HOLDIN G LTD, WHETHER BY WAY OF INVESTMENT IN SHARES, DIRECTORSHIPS OR ANY OTHER RE LATIONS BETWEEN THE MANAGEMENT OF THE TWO COMPANIES. OTHER THAN STATING THAT THERE IS NO RELATIONSHIP BETWEEN ARYA INFRASTRUCTURE HOLDING LTD AND THE ASSESSEE, THE AS SESSEE HAS NOT PRODUCED ANY EVIDENCE TO JUSTIFY ITS POSITION. E) THE ASSESSEE WAS ASKED TO PROVIDE DOCUMENTS REGA RDING APPROVAL OBTAINED AND CORRESPONDENCES MADE WITH RBI AND OTHER GOVT. AUTHO RITIES AT THE TIME OF SUBSCRIPTION AND SALE OF SHARES OF HYBRID. OTHER TH AN STATING THAT THE REMITTANCES FOR INVESTMENT IN HYBRID SHARES AND INWARD REMITTAN CES FOR SALE OF SHARES OF HYBRID WERE MADE UNDER THE AUTOMATIC ROUTE AND THAT NO APP ROVAL FROM RBI WAS REQUIRED, NO DOCUMENTS WHAT SO EVER HAVE BEEN PRODUCED BY THE ASSESSEE. THE ASSESSEE HAS NOT EVEN PRODUCED FORM ODI FILED WITH RBI REGARDING THESE TRANSACTIONS. THE DOCUMENTS SUBMITTED REGARDING FILINGS WITH AUTHORIZ ED DEALER BANKS DO NOT PROVE THE GENUINENESS OF THE TRANSACTION. F) AS REGARDS THE CLAIM THAT THE SALE WAS A SINGL E NEGOTIATED TRANSACTION AND IT IS NOT CORRECT TO CONSIDER PART OF TRANSACTION AS VALID AN D OTHER PART AS INVALID, THE PANEL IS OF THE VIEW THAT THE ENTIRE DISPUTE IS REGARDING TH E TAINTED TRANSACTION OF 500000 SHARES ONLY, REGARDING WHICH THE ASSESSEE HAS NOT B EEN ABLE TO PRODUCE THE RELEVANT EVIDENCES. HENCE/THE FACT THAT ON PAPER TH E SALE OF 600000 SHARES IS SHOWN AS A SINGLE TRANSACTION, IT AUTOMATICALLY DOE S NOT MAKE THE NON GENUINE TRANSACTION IN RELATION TO 500000 SHARES AS GENUINE . G) THE ASSESSEE ARGUES THAT WHILE INVESTING IT HA S RELIED ON THE VALUER'S CERTIFICATE VALUING THE SAME AT RS. 20550 /- PER SHARE AND, WHI LE DISINVESTING THEY HAVE CONSIDERED THE NAV OF RS. 16514/- PER SHARE. WHEN T HE ASSESSEE HAD THE VALUER'S REPORT DATED 12.02.2010 (ASSUMING FOR ARGUMENTS SAK E TO BE CORRECT) VALUING AT RS. 20550/- PER SHARE, THERE WAS NO REASON FOR IT TO SE LL THE SAME AT RS.16314/- PER SHARE AND BOOK A LOSS, MORE SO WHEN NO PRUDENCE IN INCURRING THE LOSS HAS BEEN DEMONSTRATED. ON COROLLARY, IF THE SALE WAS MADE ON THE BASIS OF NAV, THEN EVEN THE SUBSCRIPTION SHOULD HAVE BEEN MADE ON THE BASIS OF NAV ONLY. THIS SHOWS THAT THE ENTIRE TRANSACTION WAS ONLY A SHAM TRANSACTION TO BOOK THE ARTIFICIAL LOSS TO OFF SET THE LONG TERM CAPITAL GAINS GENERATED ON ORIGIN ALLY HELD 1,00,000 SHARES. RELIANCE IS PLACED ON THE DECISION OF HON'BLE SUPRE ME COURT IN THE CASE OF SUMATI DAYAL 214 ITR 801(SC), WHEREIN IT HAS BEEN HELD THA T 'IF EXPLANATION OF THE ASSESSEE IS NOT FOUND SATISFACTORY BY THE ASSESSING OFFICER, ACTING REASONABLY, THERE IS A PRIMA FACIE EVIDENCE AGAINST ASSESSEE AND IF ASSESSEE FAI LS TO REBUT THE SAME, SUCH UNREBUTTED EVIDENCE CAN BE USED AGAINST HIM'. IN THE PRESENT CASE, THE ASSESSEE HAS A VALUER'S REPORT SHOWING VALUE PER SHARE OF RS. 20 550/- PER SHARE, BUT SELLS IT AT RS. 16514/-PER SHARE AND PROVIDES NO RATIONALE OR EVIDE NCE TO JUSTIFY THE SAME. THIS WOULD ONLY MEAN THAT IT IS A DEVICE TO BOOK ARTIFIC IAL LOSS. 4.28 IN THIS REGARD, ATTENTION IS DRAWN TO A RECENT DECISION OF HON'BLE DELHI HIGH COURT IN THE CASE OF SHIV RAJ GUPTA IN ITA NO. 41/2002 DATED 22.12.2014 , WHEREIN THE HON'BLE HIGH COURT HAS ELABORATELY DEALT WITH T HE RATIOS OF THE DECISIONS IN THE CASE OF VODAFONE INTERNATIONAL HOLDINGS B.V. VERSUS UNION O F INDIA,[2012] 341 ITR 1 (SC), MCDOWELL AND CO. LTD. VERSUS COMMERCIAL TAX OFFICER (1985) 154 ITR 148 (SC) AND UNION OF INDIA VERSUS AZADI BACHAO ANDOLAN [2003] 263 ITR 706 (SC), AND ALSO ITA NO.1942/M/2015 M/S. AARADHANA REALITIES LTD. (FORMERLY KNOWN AS ESSAR INVESTMENTS LTD.) 11 DEALT WITH THE PRINCIPLES LAID DOWN IN THE CASE OF IRC V. DUKE OF WESTMINSTER,[1936 AC 1 (HL)], RAMSAY [(1981) 1 ALL ER 865 (HL)] FURNISS V. DAWSON [(1984) 1 ALL ER 530 (HL)], CRAVEN V. WHITE (STEPHEN)[(1988) 3 ALL ER 495 (HL)], AND OTHER SUBS EQUENT DECISIONS IN THE CASE OF ENSIGN TANKERS (LEASING) LTD. VERSUS STOKES [1992] 1 AC 655. AFTER ELABORATELY CONSIDERING THE RATIOS OF THESE D ECISIONS, THE HON'BLE COURT AT PARAS 39 TO 54 HELD AS UNDER: 39. EXPRESSIONS 'TAX AVOIDANCE, TAX EVASION AND TAX MITIGATION' ARE OFTEN SPOKEN ABOUT, BUT DIFFERENTLY UNDERSTOOD. RULE OF L AW MANDATES AND REQUIRES A MEASURE OF CERTAINTY IN UNDERSTANDING TH E SAID TERMS. JURISTIC EXPLICATIONS ON THE SUBJECT ARE INDICATIVE OF EQUIV OCATING AND DIVERGENT STAND POINTS. THE DISTINCTION BETWEEN THE EXPRESSIO NS; TAX AVOIDANCE, TAX EVASION AND TAX MITIGATION HAS BEEN A SUBJECT MATTER OF SEVERAL ERU DITE ARTICLES WITH DIFFERENT PERSPECTIVES LIKE MORALITY ON TAX AVOIDANCE BY ZOE PREBBLE AND JOHN PREBBLE; INTERPRETATION OF TAX STA TUTES: TAX AVOIDANCE AND THE INTENTION OF THE PARLIAMENT BY JUDITH FREED MAN; TAX AVOIDANCE, TAX EVASION AND TAX MITIGATION BY PHILIP BAKER; AND , CORPORATE SOCIAL RESPONSIBILITY AND TAX AVOIDANCE: A COMMENT AND REF LECTION BY JOHN HASSELDINE AND GREGORY MORRIS. WE ACKNOWLEDGE BENEF IT OF EXPOSITION AND ANALYSIS IN THESE ARTICLES AS WE ELABORATE ON THE S AID DISTINCTION. DISCUSSION EVEN AFTER VODAFONE'S CASE (SUPRA) IS REFLECTIVE TH AT PENETRATING AND PERFECT CLARITY OF THE SAID TERMS IS NOT EASY TO DI SCERN AND DETERMINE. TO US THE DETERMINATION AND RATIO IN VODAFONE'S CASE IS CLEAR. 40. THE AFORESAID DECISION IN VODAFONE'S CASE (SUPR A) DOES NOT PRESCRIBE CRITERION SIMPLY PREDICATED ON PREORDAINED, CIRCULA R OR SELF CANCELLING TRANSACTIONS WITH A STEP OR STEPS HAVING NO COMMERC IAL OR BUSINESS PURPOSE OTHER THAN OBTAINING TAX ADVANTAGE. THE DECISION DO ES NOT EXERT THE DOCTRINE OF ECONOMIC SUBSTANCE. THE RATIO STEERS CL EAR FROM USING THE SAID TESTS OR PRINCIPLES. THE SAID PROPOSITIONS AND PREM ISE AS SPECIFIC TESTS STANDS DISAPPROVED AND REJECTED. 41. THE PRECISE TEST ENUNCIATED AND PRESCRIBED AS A TENET, NEGATES AND DISQUALIFIES COLOURABLE DEVICE, DECEILAND SHAM AS A LEGITIMATE AND ACCEPTABLE TAX EVENT. THESE TERMS HAVE SOME-WHAT ET HICAL AND CASUISTICAL CONNOTATIONS AND ARE THE ELECTIVE TEST FOR DIFFEREN TIATING TAX PLANNING FROM ABUSIVE TAX AVOIDANCE. 42. TO APPRECIATE THE CONCEPT OF ABUSIVE TAX AVOIDA NCE, IT WOULD BE APPROPRIATE TO FIRST DELINEATE WITH PRECISION THE E XPRESSIONS 'TAX MITIGATION' AND 'TAX EVASION' AS THEIR BOUNDARIES A ND CONFINES WOULD ENABLE US TO DRAW LINES AMONGST THE FOUR CONCEPTS; TAX MITIGATION, TAX EVASION, ACCEPTABLE TAX AVOIDANCE AND ABUSIVE TAX A VOIDANCE. EACH OF THE SAID EXPRESSIONS INVOLVES AN ELEMENT OF TAX PLANNIN G. IT WOULD BE HARD TO CONCEIVE OF A SITUATION WHERE THE ASSESSED DOES NOT INDULGE TO SOME SORT OF TAX PLANNING, BE IT TAX MITIGATION, ACCEPTABLE TAX AVOIDANCE, ABUSIVE TAX AVOIDANCE OR TAX EVASION, 'TAX PLANNING', BEING COM MON TO ALL SITUATIONS, CANNOT BE THE DISTINGUISHING FEATURE, BUT NATURE AN D CHARACTER OF THE PLANNING AND ITS NEXUS WITH THE TRANSACTION IS DECI SIVE. ITA NO.1942/M/2015 M/S. AARADHANA REALITIES LTD. (FORMERLY KNOWN AS ESSAR INVESTMENTS LTD.) 12 43. TAX MITIGATION IN SIMPLE WORDS WOULD REFER TO A TAXPAYER TAKING ADVANTAGE OR BENEFIT OF A BENEFICENT PROVISION UNDE R THE TAX CODE AND COMPLYING WITH THE REQUISITES TO HIS LOWER THE TAX LIABILITY. IN THE WORDS OF LORD NOLAN IN CIR VERSUS WILLOUGHBY [1997] 4 ALL ER 65, IT IS:- 'THE HALLMARK OF TAX MITIGATION, ON THE OTHER HAND, IS THAT THE TAXPAYER TAKES ADVANTAGE OF A FISCALLY ATTRACTIVE O PTION AFFORDED TO HIM BY THE TAX LEGISLATION AND GENUINELY SUFFERS TH E ECONOMIC CONSEQUENCES THAT PARLIAMENT INTENDED TO BE SUFFERE D BY THOSE TAKING ADVANTAGE OF THE OPTION'. THE AFORESAID QUOTE USES THE EXPRESSION 'ECONOMIC C ONSEQUENCES THAT PARLIAMENT INTENDED' WHICH AS PER SOME, CAUSES CONF USION AND IS SELF CONTRADICTORY. HOWEVER, THE SAID CRITICISM OVERLOOK S THAT IF THE INTENTION OF THE PARLIAMENT IS CLEAR AND UNAMBIGUOUS; TAKING ADV ANTAGE OR BENEFIT AS ENVISAGED BY THE PROVISION IS A CASE OF TAX MITIGAT ION. EVEN IN CASE OF DEBATE, WHEN THE INTENTION OF THE PARLIAMENT IS FAV OURABLE AND ADJUDICATION DECIDES THE QUESTION IN FAVOUR OF THE ASSESSEE, IT WOULD BE A CASE OF TAX MITIGATION. COURTS ARE TRUSTED AND GIVE N THE POWER TO DETERMINE AS TO WHAT WAS THE INTENT OF THE PARLIAME NT WHILE ENACTING A PARTICULAR PROVISION. WHEN THE COURT DECISION INTERPRETING THE LEGISLATIV E INTENT IS IN FAVOUR OF THE ASSESSEE, THERE IS NO AVOIDANCE OF TAX BECAUSE THE CONDUCT IS CONSISTENT WITH THE TAXING PROVISION. IF THERE IS NO TAX AVOID ANCE, THE QUESTION OF ABUSIVE TAX AVOIDANCE DOES NOT ARISE, FOR THE LATTE R REFERS TO A PARTICULAR CATEGORY OF TRANSACTIONS THAT ARE UNACCEPTABLE BEIN G PEJORATIVE, I.E. SHAM, COLOURABLE DEVICE OR DECEITFUL AND IS DISTINCT FROM TAX MITIGATION. ALBEIT, WHERE THE PARLIAMENT'S INTENTION IS TO THE CONTRARY AND THE FINDING NEGATES THE ASSESSEE'S SUBMISSION, IT WOULD BE A CASE OF TA X AVOIDANCE, WHETHER ACCEPTABLE OR ABUSIVE IS A DIFFERENT AND ANOTHER MA TTER. THUS, THE TERM 'TAX MITIGATION' IS SIMPLE, INTELLIGIBLE AND UNEQUI VOCAL. IT IS A POSITIVE TERM AND REFERS TO THE ASSESSED TAKING BENEFIT OR ADVANT AGE OF A PROVISION WHICH THE TAX CODE INTENDS AND WANTS TO CONFER, DEDUCTION S UNDER CHAPTER VIA, EXEMPTIONS UNDER SECTIONS 10A, 10AA, 10B ETC. OF TH E ACT ARE ALL PROVISIONS RELATING TO TAX MITIGATION. IF AN ASSESSEE TAKES BE NEFIT OR ADVANTAGE BY COMPLYING WITH THE STIPULATED CONDITIONS THEREIN TO REDUCE HIS TAX LIABILITY, IT WOULD BE A CASE OF TAX MITIGATION. 44. TAX EVASION IS ILLEGAL AND CONSISTS OF WILFUL V IOLATION OR CIRCUMVENTION OF APPLICABLE TAX LAWS TO MINIMISE TAX LIABILITY. THE ASSESSED BREACHES THE RELEVANT LAW AND IT INVOLVES CONTUMACIOUS BEHAVIOUR OR ACTUAL KNOWLEDGE OF WRONG DOING. THIS CAN HAPPEN WHEN AN ASSESSEE DE LIBERATELY FAILS TO REPORT AN ITEM IN THE INCOME TAX RETURN, OR KNOWING LY CLAIMS A DEDUCTION WHICH HE IS AWARE HE IS NOT ENTITLED TO, OR CONSCIO USLY OMITS TO SUPPLY INFORMATION EVEN WHEN THERE IS DUTY TO FURNISH THE SAID DETAILS. IT CAN ALSO APPLY TO SITUATIONS WHEN THE ASSESSEE FAILS TO CLAR IFY A MATTER, WHICH HAS BEEN MISUNDERSTOOD BY THE INCOME TAX AUTHORITIES, A ND KEEPS QUIET. IN THESE CASES, THERE IS ELEMENT OF WILFULNESS, DISHON ESTY OR CONTEMPTUOUS CONDUCT OR EVEN ABSENCE OF HONEST BELIEF. IF THE TA XPAYER CANNOT SHOW THAT ITA NO.1942/M/2015 M/S. AARADHANA REALITIES LTD. (FORMERLY KNOWN AS ESSAR INVESTMENTS LTD.) 13 HE HAD AN HONEST BELIEF THAT HE WAS NOT LIABLE TO T AX OR LIABLE TO A LOWER TAX, THEN PRIMA FADE SUCH CONDUCT WOULD FALL WITHIN THE AMBIT/SCOPE OF TAX EVASION. 45. TAX AVOIDANCE BY ELIMINATION WOULD MEAN THE RES IDUAL AND SURPLUS, AFTER WE EXCLUDE CASES OF TAX MITIGATION AND TAX EV ASION. TAX MITIGATION AND TAX EVASION ARE TWO END POINTS. IT IS EASIER AN D MORE BENEFICIAL TO FOLLOW THIS DISCERNMENT TO DEFINE TAX AVOIDANCE, FO R THE CONFINES AND BOUNDS OF TAX MITIGATION AND TAX EVASION ARE EASIER TO DECIPHER AND DEFINE LEGALLY AND ALSO IDENTIFY WITH SOME EXACTNESS IN PR ACTICE. (REFER TAX AVOIDANCE, TAX EVASION & TAX MITIGATION BY PHILIP B AKER.) 46. IT IS EQUALLY IMPORTANT TO DISTINGUISH AND DIFF ERENTIATE ACCEPTABLE TAX AVOIDANCE AND ABUSIVE TAX AVOIDANCE. THE SUPREME CO URT IN CIT VERSUS ROMAN (A.) & CO. [1968] 67ITR 11, AT P. 17 HAD OBSE RVED:- 'AVOIDANCE OF TAX LIABILITY BY SO ARRANGING COMMERC IAL AFFAIRS THAT CHARGE OF TAX IS DISTRIBUTED IS NOT PROHIBITED. A T AXPAYER MAY RESORT TO A DEVICE TO DIVERT THE INCOME BEFORE IT ACCRUES OR ARISES TO HIM. EFFECTIVENESS OF THE DEVICE DEPENDS NOT UPON CONSID ERATIONS OF MORALITY, BUT ON THE OPERATION OF THE INCOME-TAX AC T. LEGISLATIVE INJUNCTION IN TAXING STATUTES MAY NOT, EXCEPT ON PE RIL OF PENALTY, BE VIOLATED, BUT IT MAY LAWFULLY BE CIRCUMVENTED.' 47. IN CLEAR AND CATEGORICAL TERMS THE AFORESAID RA TIO WAS RESONATED AND APPROVED BY THE SUPREME COURT IN THE VODAFONE'S CAS E (SUPRA). THUS, THE TEST OF 'DEVOID OF BUSINESS PURPOSE' OR 'LACK OF EC ONOMIC SUBSTANCE' IS NOT ACCEPTED AND APPLIED IN INDIA AS IT IS TOO BROAD AN D UNSATISFACTORY. THE SAID TEST, IF ARDENTLY APPLIED, WOULD CONTRADICT AND WOU LD BE IRRECONCILABLE WITH TAXPAYERS' RIGHT TO ARRANGE ONCE AFFAIRS WITHIN THE CONFINES OF LAW, WHICH IS NOT PROHIBITED OR BARRED. 48. NATURALLY, THE DIVIDING LINE BETWEEN ACCEPTABLE AND ABUSIVE TAX AVOIDANCE CANNOT BE DEDUCED OR INFERRED FROM LOWERI NG OR ELIMINATION OF THE TAX LIABILITY. LATTER IS THE CONSEQUENCE AND TH E TAX EFFECT. IT IS THE POST FACTO CONSEQUENCE UNDER THE TAX CODE OF THE EVENT S ELECTED BY THE ASSESSED. THE TEST APPLIED SHOULD NOT CURTAIL THE F REEDOM OF CHOICE TO ADOPT A PARTICULAR TRANSACTION OR COMBINATION OF TRANSACT IONS TO REDUCE OR ELIMINATE THE TAX LIABILITY. 49. AT THE SAME TIME, THE DIVIDING LINE AS PER THE RATIO IN VODAFONE'S CASE (SUPRA) IS ETHICALLY PRINCIPLED AND MORALISTIC AS T AX AVOIDANCE IS DISAPPROVED WHEN THE ASSESSEE ADOPTS A COLOURABLE D EVICE, DUBIOUSNESS AND OTHERWISE INDULGES IN A SHAM ARRANGEMENT OR TRA NSACTION. THIS WOULD MEAN THAT PRE-ORDAINED, CIRCULAR OR SELFCANCELLING TRANSACTION WITH A STEP OR STEPS HAVING NO COMMERCIAL PURPOSE OR LACK OF EC ONOMIC OR BUSINESS PURPOSE COULD IN A GIVEN CASE BE, THOUGH NOT NECESS ARILY, A RELEVANT FACT, VET THEY ARE NOT THE TOUCHSTONE, YARDSTICK OR THE F INAL TEST. THESE COULD BE CIRCUMSTANCES OR FACTS TO INFER AND DISCERN WHETHER THE TAXABLE EVENT SELECTED WAS A COLOURABLE DEVICE, SHAM OR DECEIT AN D NOT THE TAX EVENT ITA NO.1942/M/2015 M/S. AARADHANA REALITIES LTD. (FORMERLY KNOWN AS ESSAR INVESTMENTS LTD.) 14 INTENDED BY THE PARTIES. RIGHT TO CHOICE TO SELECT THE MOST BENEFICIAL LEGAL WAY AND MANNER TO EXECUTE A TRANSACTION IS UNQUESTI ONABLE AND PERENNIAL. A FACT IS NOT THE TEST: RATHER THE CORRUPT AND MEND ACIOUS CONDUCT, I.E. COLOURABLE DEVICE, SHAM OR DECEIT, IS THE SPECIFIED BRIGHT LINE, DIVIDING ACCEPTABLE TAX AVOIDANCE FROM ABUSIVE TAX AVOIDANCE . 50. THE ASSESSED IS WELL WITHIN HIS RIGHT TO CHOOSE ANY ONE EVENT BETWEEN TWO OR MORE EVENTS AND SELECT AN EVENT TO MINIMIZE OR REDUCE HIS TAX LIABILITY. THE ACT, I.E. THE INCOME TAX ACT, 1961, IMPOSES AND SADDLES TAX LIABILITY ON THE CHOSEN TAX EVENT. THE ACT PER SE, UNLESS A PROVISION SO STIPULATES, DOES NOT RESTRICT OR CURTAIL THE RIGHT OF CHOICE. TAX IS DETERMINED AND GETS CRYSTALLIZED ON THE TAX EVENT ADOPTED BY T HE ASSESSEE. FOR EXAMPLE, IN VODAFONE'S CASE (SUPRA), THE ASSESSED HAD SEVERAL OPTIONS AND THEREFORE, RIGHT TO CHOOSE A PARTICULAR TAX EVENT. AS LONG AS THE CHOICE IS WITHIN THE FRAMEWORK OF LAW, THE ASSESSING OFFICER CANNOT DISTURB THE TAX EFFECT OR LIABILITY, WHICH IS THE CONSEQUENCE OF TH E EVENT. THE CHOICE OF THE ASSESSEE IS NOT ABROGATED OR INVALIDATED. FOR EXAMP LE, A COMPANY HAS SEVERAL LEGAL OPTIONS, AND THEREFORE, RIGHT TO CHOO SE HOW TO DISPOSE OF A CAPITAL ASSET, AS IN VODAFONE'S CASE (SUPRA). SIMILARLY, AN ASSESSEE CAN OPT FOR AND HAS MULTIPLE OPTIONS FOR RAISING DEBT TO FI NANCE BUSINESS EXPANSION PLANS. THE ASSESSED MAY HAVE SEVERAL LEGALLY PERMIS SIBLE ALTERNATIVES TO EFFECT AND DIVIDE THE ASSETS ON PARTITION. SUCH EXA MPLES ARE NUMEROUS. THE CHOICE MIGHT RESULT IN MITIGATION OF TAX LIABILITY, BUT THE TAX EFFECT WOULD NOT CLASSIFY OR HELP US DIFFERENTIATE BETWEEN TAX A VOIDANCE AND ABUSIVE TAX AVOIDANCE. ANY ATTEMPT TO MINIMIZE OR ELIMINATE TAX LIABILITY WOULD NOT MAKE THE CHOICE OF THE TAX PAYER ABUSIVE TAX AVOIDA NCE. THE FOUNDATION OF THE SAID PRINCIPLE IS THAT THE TAX CODE BY ITS NATU RE DIFFERENTIATES BETWEEN DIFFERENT TYPES OF ACTIONS, TRANSACTIONS, ARRANGEME NTS AND ACTIVITIES AND THEN IDENTIFIES AND STIPULATES THE CONSEQUENCES. TH E TAX CODE, I.E. THE INCOME TAX ACT, 1961 IS RULE BASED AND COMPLEX. THE ACT IS NOT ENTIRELY PRINCIPLE BASED. THE PROVISIONS ARE READ AND APPLIE D. PRINCIPLE OF PURPOSIVE INTERPRETATION BOTH IN FAVOUR OF REVENUE OR ASSESSE D CAN BE APPLIED BUT WITHIN FOUR CORNERS OF LAW. IN FACT, IN SOME CASES, THE ASSESSED MAY FIND THEMSELVES TAXED AT A HIGHER LIABILITY FOR FAILURE TO CHOOSE A MORE TAX FRIENDLY EVENT. BUT THE RIGHT OF CHOICE IS HEDGED W ITH ONE SIGNIFICANT CONDITION. THE EVENT SELECTED, AS NOTICED ABOVE AND SUBSEQUENTLY, SHOULD BE REAL AND NOT A COLOURABLE DEVICE, SHAM AND DECEI T. 51. TAX REDUCTION IS NOT ON EVIL IF YOU DO NOT DO I T EVILLY [MURPHY LOGGING CO. VS. US. 378 F.2D 222 (1967)]. THE ASSESSEE ACTS EVI LLY WHEN THERE IS CAMOUFLAGE OR DUBIOUSITY TO MASK AND MASQUERADE THE REAL INTENT OF THE TRANSACTION WHICH THE PARTIES INTENDED AND THE DOCU MENT(S)/TRANSACTION(S), IS AT VARIANCE WITH THE ACTUAL INTENT THE ASSESSED IN SUCH CASES DOES NOT CHOOSE THE REAL EVENT AS ONE FROM THE MULTIPLE CHOI CES, BUT ADOPTS A SHAM OR COLOURABLE EVENT. THE ASSESSED THEN ACTS FRAUDULENTLY, DECEITFULLY OR IN A CORRUPT MANNER. HE DOES NOT CHOOSE AN EVENT WHICH I S USEFUL, VIABLE AND TENABLE, BUT EMPLOYS DECEPTION AND VISORS TO PRETEN SE A STATE OF AFFAIR WHICH IS DIFFERENT FROM THE ACTUAL OR REAL STATE OF AFFAIRS. THE EVENT PROPOUNDED IS CONTRARY TO HIS INTENTION. WHEN THE E VENT SELECTED IS ITA NO.1942/M/2015 M/S. AARADHANA REALITIES LTD. (FORMERLY KNOWN AS ESSAR INVESTMENTS LTD.) 15 ARTIFICIAL IT CAN BE TREATED AS COLOURABLE, DECEITF UL OR SHAM. THE ARTIFICIAL EVENT IS ONE WHICH PURPORTS TO BE ONE THING BUT IN FACT IS ANOTHER. THUS, ABUSIVE TAX AVOIDANCE IS A MATTER OF EVIL INTENTION AND A RESULT OF DISHONEST BEHAVIOR OF THE ASSESSED. 52. IN SUCH CASES, QUESTION OF IGNORANCE AS TO TAX OR ADMINISTRATIVE INCOMPETENCE WOULD ARISE FOR CONSIDERATION, FOR ABU SIVE TAX AVOIDANCE SCHEME REQUIRES A MIND SET AND PROPENSITY TO ACT EV ILLY. IT REQUIRES A DEGREE OF KNOWLEDGE AND ABSENCE OF HONEST BELIEF. 53. THE AFORESAID DOCTRINE OF ABUSIVE TAX AVOIDANCE IS A JUDGE MADE LAW OR A JUDICIAL DOCTRINE. THE PARLIAMENT CAN LEGISLATE AND HAS ENACTED PROVISIONS TO NEGATE AND NULLIFY SPECIFIC ANTI-TAX AVOIDANCE R ULES/PROVISIONS. SECTION 2(22)(E) , I.E. THE PRINCIPLE OF DEEMED DIVIDEND, SECTION 94 RELATING TO DIVIDEND STRIPPING, CLUBBING OF INCOME OF MINORS, A RE FEW SUCH PROVISIONS WHERE THE LEGISLATURE HAS ENACTED SPECIFIC ANTI-TAX AVOIDANCE RULES. IT IS THE OBLIGATION AND DUTY OF THE COURT/TRIBUNAL TO APPLY THE SAID PROVISIONS IN TERMS OF THE LEGISLATIVE MANDATE. WHEN A SPECIFIC A NTI-TAX AVOIDANCE SECTION/RULE IS INVOKED, THE COURT AND THE TRIBUNAL MUST LOOK AT AND INTERPRET THE RELEVANT PROVISION TO DECIPHER WHETHE R THE CHOSEN TAX EVENT FALLS WITHIN THE SAID PROVISION AND ACCORDINGLY THE TAX CONSEQUENCES WILL APPLY. 54. A CAVEAT, THE AFORESAID DISCUSSION DOES NOT EXA MINE AND ELUCIDATE SCOPE AND AMBIT OF SECTION 271(L)(C) OF THE ACT. 4.29 COMING TO THE FACTS OF OUR CASE , AS DISCUSSED ABOVE, THE ASSESSEE HAS SUBSCRIBED 5,00,000 HYBRID SHARES AT A PRICE OF RS. 19975.97 PER SHARE WHICH WERE SOLD TO A THIRD PARTY AT RS.16,314.70 PER SHARE WIT HIN ONE MONTH OF ALLOTMENT. ALTHOUGH THE SUBSCRIPTION AND SALE OF 500000 SHARES HAS BEEN SHOWN AS TWO TRANSACTION, IN EFFECT IT IS A PREORDAINED TRANSACT ION TO BOOK A NET SHORT TERM CAPITAL LOSS OF RS.1,83,06,38,227/- IN ADDITION TO LONG TERM CAPITAL GAINS OF RS. 162,56,53,0767- ON SALE OF ORIGINAL 1,00,000 SHARES WITH THE SOLE PURPOSE OF OFFSETTING THE LONG TERM CAPITAL GAINS ON ORIGINAL 1,00,000 SHARES. JUST BY ROUTING THE FUNDS THROUGH THE BANK ACCOUNTS AND PASSING THE ENTRIES IN ITS BOOKS OF ACCOUNTS, THE ASSESSEE HAS CREATED AN ARTIFICIAL ST LOSS WHICH HAS BEEN ADJUSTED AGAINST OTHER INCOME. 4.30 THE REAL INTENTION WAS TO CREATE ARTIFICIAL LO SS, TO SET OFF AGAINST TAXABLE INCOME. IF THE TRANSACTION OF SUBSCRIPTION OF SHARE S WAS REAL, THEN THERE WAS NO NEED TO DISPOSE OFF THE ENTIRE SHAREHOLDING WITHIN ONE MONTH. AT LEAST, THE ASSESSEE HAS NOT DEMONSTRATED ANY COMMERCIAL PRUDEN CE, OR REASON, OR ANY EVIDENCE TO SUBSTANTIATE THE REAL INTENTION AS CLAI MED BY IT. WE HOLD SO BECAUSE, DESPITE THE DIRECTIONS OF THE PANEL, THE ASSESSEE H AS NOT PRODUCED THE DETAILS, DOCUMENTS AND DISCUSSION AMONGST THE MANAGEMENT AND THE BOARD OF EIL THAT LED TO THE DECISION OF MAKING INVESTMENT OF ABOUT RS.99 8 CRORE IN HYBRID, AND THEREAFTER WHAT WENT WRONG WITH HYBRID AND WITH THE DECISION EARLIER MADE TO MAKE INVESTMENT, THAT IMMEDIATELY WITHIN 1 MONTH OF SUCH INVESTMENT, THE MANAGEMENT EXITED HYBRID FULLY. THE ASSESSEE HAS AL SO NOT PRODUCED DOCUMENTS, AND FILES RELATED TO ABOVE DECISION MAKING DEMONSTR ATING THE DECISION MAKING ITA NO.1942/M/2015 M/S. AARADHANA REALITIES LTD. (FORMERLY KNOWN AS ESSAR INVESTMENTS LTD.) 16 PROCESS AND CONSIDERED FOR DECISION MAKING. EVEN TH E CLAIM OF COMMERCIAL PRUDENCE HAS ALSO NOT BEEN SUBSTANTIATED IN ANY MAN NER. THE MEMORANDUM OF UNDERSTANDING DATED 26.02.2010, HAS ALSO NOT BEEN P RODUCED. MOREOVER, OTHER THAN STATING THAT THERE IS NO RELATIONSHIP BETWEEN ARYA INFRASTRUCTURE HOLDING LTD AND THE ASSESSEE, THE ASSESSEE HAS NOT PRODUCED ANY EVIDENCE TO JUSTIFY ITS POSITION. THE ASSESSEE KNOWINGLY TRANSACTED IN 5000 00 SHARES THROUGH AUTOMATIC ROUTE, SO AS TO AVOID SCRUTINY OF RBI AND FEMA. 4.31 THE SUBSCRIPTION OF 500000 SHARES IN FEBRUARY 2010 AND ITS SALE IN MARCH 2010 WITHOUT DEMONSTRATING ANY COMMERCIAL REASONS SHOWS THAT IT IS A PRE-ORDAINED, CIRCULAR OR SELF CANCELLING TRANSACTION HAVING NO C OMMERCIAL PURPOSE OR LACK OF ECONOMIC OR BUSINESS PURPOSE EXCEPT FOR THE SOLE PU RPOSE OF TAX AVOIDANCE BY OFFSETTING THE LTCG BY BOOKING ARTIFICIAL SHORT TER M CAPITAL LOSS. THIS UNSUBSTANTIATED ACTION OF THE ASSESSEE AND THE CIRC UMSTANTIAL EVIDENCE OF SETTING OFF, OF THE ARTIFICIAL LOSS AGAINST TAXABLE GAIN, D EMONSTRATES THE CORRUPT AND MALICIOUS CONDUCT OF THE ASSESSEE AND PROVES THAT T HE ENTIRE TRANSACTION IS NOTHING BUT A COLOURABLE DEVICE, SHAM OR DECEIT. HENCE, WE HOLD THIS TRANSACTION AS ONE OF ABUSIVE TAX AVOIDANCE. 4.32 THE FACT THAT THE ASSESSEE HAS ACTED FRAUDULEN TLY, DECEITFULLY OR IN A CORRUPT MANNER IS FURTHER PROVED BECAUSE IT ARGUES THAT WHI LE INVESTING IT HAS RELIED ON THE VALUER'S CERTIFICATE VALUING THE SAME AT RS. 20550/ - PER SHARE BUT, WHILE DISINVESTING IT HAS CONSIDERED THE NAV OF RS. 16514/- PER SHARE. WHEN THE ASSESSEE HAD THE VALUER'S REPORT DATED 12.02.2010 VALUING AT RS. 205 50/- PER SHARE, THERE WAS NO REASON FOR IT TO SELL THE SAME AT RS. 16314/- PER S HARE AND BOOK A LOSS. THE ASSESSEE BEFORE ENTERING INTO THE TRANSACTION OF SALE KNEW B EFORE HAND THAT IT WOULD HAVE STCL WHICH IT WOULD BE ELIGIBLE TO SET OFF AGAINST OTHER TAXABLE INCOME. THE ASSESSEE IN THIS CASE HAS NOT CHOSEN THE REAL EVENT AS ONE FROM THE MULTIPLE CHOICES (THERE WERE NO MULTIPLE CHOICES). THE REAL INTENTIO N WAS ALWAYS TO DISPOSE OFF THE ORIGINALLY HELD 100000 SHARES. BUT, TO SET OFF THE HUGE CAPITAL GAINS ON WHICH IT WOULD BE LIABLE TO PAY TAX, IT ENTERED INTO THIS SH AM TRANSACTION OF SUBSCRIPTION AND SALE OF ADDITIONAL 500000 SHARES. THUS, THE EVENT P ROPOUNDED IS CONTRARY TO ITS CLAIM. IT HAS NOT CHOSEN AN EVENT WHICH IS COMMERCI ALLY USEFUL, VIABLE AND TENABLE, BUT HAS EMPLOYED DECEPTION AND VISORS TO PRETENSE A STATE OF AFFAIR WHICH IS DIFFERENT FROM THE ACTUAL OR REAL STATE OF AFFAIRS. SINCE, THE ENTIRE TRANSACTION OF SUBSCRIPTION OF 5,00,000 SHARES AND IMMEDIATE SALE THEREOF IS ARTIFICIAL, IT IS TREATED AS COLOURABLE, DECEITFUL OR SHAM AS IT PURPORTS TO BE TRANSACTION OF SUBSCRIPTION AND SALE BUT IN FACT IS A DEVICE FOR ABUSIVE TAX AVOIDA NCE. THIS, ABUSIVE TAX AVOIDANCE, IS NOT ALLOWED. 4.33 WE MAY ALSO MENTION THAT THE FACT THAT 'THE IN COME TAX AUTHORITIES ARE ENTITLED TO LIFT THE CORPORATE VEIL AND EXPOSE THE TAX AVOIDANCE DEVICE/SCHEME' HAS BEEN RECOGNISED IN A NUMBER OF OTHER DECISIONS ALSO , SOME OF WHICH ARE BEING CITED HERE UNDER: (I) JUGGI LAL KAMLAPAT V CIT, 73 ITR 702 (SC) (II) D. H. N, FOOD DISTRIBUTORS LTD V TOWER HAMLETS LOND ON BOROUGH COUNCIL (1976) (3 ALI ER 462) (III) SCOTTISH CO-OPERATIVE WHOLESALE SOCIETY LTD V MEYER (1959) COMP CAS 1 (HL) AC 324 (IV) STATE OF UP V RENUSAGAR POWER CO, AIR 1988 SC 1737 ITA NO.1942/M/2015 M/S. AARADHANA REALITIES LTD. (FORMERLY KNOWN AS ESSAR INVESTMENTS LTD.) 17 (V) HACKBRIDGE HEWITTIC & EASUN LTD V GEC DISTRIBUTION TRANSFORMERS LTD, (1992) 74 COMP CAS 543 (MAD) (VI) U.K. MEHRA V UNION OF INDIA, (1997) 88 COMP CAS 213 (VII) CITV DALMIA L N. 207 ITR 89 (CAL) (VIII) NAYANTARA G AGARWAL V CIT, 207 ITR 639 (BOM) (IX) HELA HOLDINGS PRIVATE LIMITED V CIT, 263 ITR 129 (C AL) ETC. 4.34 ACCORDINGLY IN VIEW OF THE ABOVE DISCUSSION , WE HOLD THAT THE TRANSACTION OF SUBSCRIPTION OF 500000 SHARES IN FEBRUARY 2010 AND ITS SALE IN MARCH 2010 IS A SHAM TRANSACTION. HENCE, THE ENTIRE SHORT TERM CAPITAL L OSS OF RS. RS.1,83,06,38,227/- IS DIRECTED TO BE DISALLOWED. CONCLUSION: 4.35 IN VIEW OF THE DISCUSSIONS ABOVE, BENCHMARKING OF THE TRANSACTION OF SUBSCRIPTION OF 500000 SHARES OF HYBRID BY THE TPO PROPOSING AN ADJUSTMENT OF RS. 321,30,00,000/- IS UPHELD. THE AO IS DIRECTED TO CO NSIDER THIS AMOUNT IN DETERMINATION OF COA OF 5 LAKH SHARES OF HYBRID IN COMPUTATION OF STCG ARISING ON TRANSFER OF THESE SHARES DURING THE YEAR. HOWEVER, IN THE EVENT OF THIS DETERMINATION BEING REVERSED IN APPEAL PROCEEDINGS, THE ALTERNATE DETERMINATION PROPOSING AN ADJUSTMENT OF RS.1,83,06,38,227/- WILL STILL HOLD GOOD AND AO WOULD THEN CONSIDER THIS AMOUNT IN DETERMINATION OF COA O F 5 LAKH SHARES OF HYBRID IN COMPUTATION OF STCG ARISING IN TRANSFER OF THESE SH ARES DURING THE YEAR. 4.36 WE ALSO HOLD THAT THE TRANSACTION OF SUBSCRIPT ION OF 5 LAKH SHARES OF HYBRID IS A DESIGN OF TAX AVOIDANCE BY BOOKING A LOSS IN THE BO OKS OF THE ASSESSEE COMPANY ARTIFICIALLY TO SET OFF THE LONG TERM CAPITAL GAIN ON SALE OF 1,00,000 SHARES ORIGINALLY HELD. ACCORDINGLY, THE ST CAPITAL LOSS ON SALE OF 5 LAKH SHARES OF RS.1,83,06,38,227/- IS DISALLOWED. HOWEVER, THIS FINDING WILL ARISE ONL Y IF THE TP ADJUSTMENTS OF THE RS. 321.30.00,000/- AND RS.1,83,06,38,227/- ARE BOTH REJECTED BY APPELLATE AUTHORITIES. 4.37 WE ALSO UPHOLD THE, BENCHMARKING OF THE TRANSACTION OF PURCHASE OF 5000 0 SHARES OF ESKL BY THE TPO PROPOSING AN ADJUSTMENT O F RS. 2.33.000/ -. THE AO IS HOWEVER DIRECTED TO CONSIDER THIS AMOUNT IN DETERMI NATION OF COA OF THESE SHARES IN COMPUTATION OF CAPITAL GAINS WHENEVER THESE SHAR ES ARE TRANSFERRED. 8. THE LD AR SHRI NISHANT THAKKAR VEHEMENTLY ASS AILED THE ORDER OF DRP UPHOLDING THE ORDER TPO WHICH ENTIRELY WRONG AND AGAINST THE FACTS ON RECORDS AND ALSO CONTRARY TO THE RATIO LAID IN THE VARIOUS JUDICIAL PRONOUNCEMENTS. THE L D AR CHALLENGED THE ORDER OF DRP ON VARIOUS COUNTS PUTTI NG ACROSS VARIOUS PROPOSITIONS EACH OF WHICH ARE WITHOUT PRE JUDICE TO THE OTHER FOR THE CONSIDERATION OF THE HON'BLE BEN CH. ITA NO.1942/M/2015 M/S. AARADHANA REALITIES LTD. (FORMERLY KNOWN AS ESSAR INVESTMENTS LTD.) 18 8.1. ARGUING ON THE FIRST PROPOSITION, THE LD AR SU BMITS THAT A TRANSACTION OF SUBSCRIPTION OF SHARES BY HOLDING CO MPANY IN ITS WHOLLY OWNED SUBSIDIARY CANNOT BE BENCHMARKED UNDER CHAPTER X OF THE ACT. THE LD AR SUBMITS THAT THE TRANSAC TION OF APPELLANT INFUSING USD 212,836,000 IN ITS WHOLLY OW NED SUBSIDIARY HYBRID CAPITAL DOES NOT ATTRACT THE PRO VISIONS OF CHAPTER X OF THE ACT SINCE, A DETERMINATION OF ARM' S LENGTH PRICE FOR SUCH A TRANSACTION WOULD ONLY RESULT IN CHANGE IN NUMBER OF SHARES TO BE ISSUED BY WHOLLY OWNED SUBSI DIARY TO THE HOLDING COMPANY WHICH IS COMPLETELY IRRELEVANT AS THE HOLDING OF THE COMPANY CONTINUED TO BE AT 100% BEFO RE AND AFTER INFUSION OF MONEY. IT IS IMPORTANT TO NOTE TH AT THE INFUSION OF USD 212,836,000 WAS MADE SO THAT WHOLLY OWNED SUBSIDIARY COULD LEND MONEY TO ARYA INFRASTRUCTURE. THEREFORE, THE VALUE OF SHARE AND NUMBER OF SHARES TO BE ISSUE D BY THE WHOLLY OWNED SUBSIDIARY WAS COMPLETELY IRRELEVANT T O THE ENTIRE TRANSACTION. THEREFORE, THE LD AR SUBMITS T HAT THE PROVISIONS OF CHAPTER X RELATING TO DETERMINATION O F ARM'S LENGTH PRICE DO NOT APPLY TO INFUSION MONEY IN THE WHOLLY OWNED SUBSIDIARY. THE LD AR ARGUES THAT IF THE SHA RES WERE TO BE ISSUED AT THE VALUE OF RS. 13,549/- PER SHARE AS DETERMINED BY THE TPO THEN IT WOULD HAVE ONLY RESUL TED INTO 7,37,175 SHARES BEING ISSUED TO THE APPELLANT AND C ONSEQUENTLY THE APPELLANT WOULD HAVE SOLD HIGHER NUMBER OF SHAR ES TO ARYA INFRASTRUCTURE AT USD 215,000,000 AND SUFFERED THE SAME AMOUNT OF CAPITAL LOSS OF RS. 20.49 CRORE ON THE SA ID TRANSACTION. SIMILARLY, HAD THE SHARES BEEN ISSUED AT THE ALTERNATE VALUE OF RS. 16,314/- PER SHARE DETERMIN ED BY THE TPO, THE WHOLLY OWNED SUBSIDIARY WOULD HAVE ISSUED ITA NO.1942/M/2015 M/S. AARADHANA REALITIES LTD. (FORMERLY KNOWN AS ESSAR INVESTMENTS LTD.) 19 6,12,208 SHARES AND WOULD HAVE RESULTED INTO SAME A MOUNT OF CAPITAL LOSS ON SALE OF SHARES TO ARYA INFRASTRUCTU RE. AS CAN BE SEEN FROM THE ABOVE, THE DETERMINATION OF ARMS' LEN GTH PRICE IS WHOLLY IRRELEVANT TO THE TRANSACTION AND THEREFORE, IT IS SUBMITTED THAT THE PROVISIONS OF CHAPTER X DO NOT A PPLY TO THE AFORESAID TRANSACTION BETWEEN THE APPELLANT AND ITS WHOLLY OWNED FOREIGN SUBSIDIARY. IN DEFENSE OF HIS ARGUMEN TS LD AR PLACES RELIANCE ON THE FOLLOWING DECISIONS: I) ITO VS. STERLING OIL RESOURCES (P.) LTD. (67 TAXMANN.COM 2)(MUM TRI). II) UCAL FUEL SYSTEMS LTD. VS. ACIT (ITA NO.725/MDS/201 5) (CHENNAI TRIBUNAL ) THE LD AR SUBMITTED THAT THE AFORESAID FIRST DECISI ON OF THE TRIBUNAL IN THE CASE OF ITO VS STERLING OIL RESOURC ES (P) LTD.(SUPRA) HAS BEEN AFFIRMED BY THE HON'BLE BOMBAY HIGH COURT IN PCIT VS. STERLING OIL RESOURCES (P.) LTD. (1TA NO. 341 OF 2017) AND HENCE, THE JUDGMENT OF THE HIGH COURT IS THE ONLY OPERATIVE DECISION ON THIS POINT AND IS BINDIN G ON THE TRIBUNAL. IN THIS REGARD, THE APPELLANT RELIES ON T HE JUDGMENT OF GUJRAT HIGH COURT IN CASE OF NIRMA INDUSTRIES LT D. VS. DCIT (283 ITR 402) (GUJ.) WHEREIN HIGH COURT HAS HELD T HAT DISMISSAL OF APPEAL RESULTS INTO MERGER OF THE ORDE R OF THE TRIBUNAL WITH THE ORDER OF HIGH COURT AND IS BINDIN G ON THE TRIBUNAL. IN VIEW OF THE ABOVE, IT IS CLEAR THAT IT IS NOT NECESSARY THAT IN ALL CASES PROVISIONS OF BENCH MARKING CONTA INED IN CHAPTER X OF THE ACT MUST BE MADE APPLICABLE SIMPLY BECAUSE THERE IS AN INTERNATIONAL TRANSACTION. IT I S THEREFORE SUBMITS THAT THE PROVISIONS OF CHAPTER X DO NOT APP LY TO THE TRANSACTION OF APPELLANT INFUSING USD 212,836,000 I N ITS WHOLLY OWNED SUBSIDIARY HYBRID CAPITAL AND CONSEQUE NTLY, TRANSFER PRICING ADJUSTMENT OF RS. 321,30,00,000 MA DE BY ITA NO.1942/M/2015 M/S. AARADHANA REALITIES LTD. (FORMERLY KNOWN AS ESSAR INVESTMENTS LTD.) 20 THE TPO DESERVES TO BE DELETED. 8.2. ON THE SECOND PROPOSITION, THE LD AR SUBMITS T HAT GIVEN THE PECULIAR NATURE OF THE TRANSACTION, IT CANNOT BE BE NCHMARKED UNDER CHAPTER X OF THE ACT. THE TPO ASSUMES JURISD ICTION TO BENCHMARK THE TRANSACTION OF SUBSCRIPTION OF SHARE CAPITAL AND MAKES AN ADJUSTMENT BY OBSERVING THAT IN PAGE 10 O F TP0'S ORDER THAT '...CONSEQUENTLY THIS OFFICE IS OF THE OPINION THAT EVEN THE FIGURES ADOPTED BY THE ASSESSEE FOR CASH FLOWS AND EXPENSES WERE TO BE RELIED UPON AND BY REASONABLY CORRECTING THE ABOVE GLARING DEFECTS THE VALUATION OF SHARES WOULD COME TO RS. 13,549/- WHICH IS MUCH LESSER THAN THE VALUE OF RS. 20,550 THAT WAS GIVEN IN THE DCF STUDY. THE CORRECTNESS OF THE COMPUTATION DONE BY THIS OFFICE IS ALSO SUPPORTED BY THE FACT T HAT AS PER VALUATION DONE BY THIS OFFICE EQUITY INFUSION SHOUL D HAVE BEEN DONE AT RS. 812.95 CRORE...' THE LD AR SUBMITS THAT A FTER TAKING THE EQUITY VALUE AT RS. 812.95 CRORE, THE TPO COMPU TES VALUE PER SHARE AT RS. 13,549 (812.95 CRORE / 6,00,000 SH ARES) AND MAKES THE ADJUSTMENT OF RS, 677,45,00,000 (RS. 1354 9 * 5,00,000 SHARES) HOLDING AS UNDER (PG. 12 OF TP0'S ORDER) THUS THE VALUATION OF EQUITY SHARE OF HYBRID CAPITAL PTE . LTD. IS WORKED OUT AT RS. 13,549 PER SHARE. THE ASSESSEE HAS SUBSCR IBED TO 5 LAKH EQUITY SHARES. HENCE THE ARM'S LENGTH PRICE FO R THE INVESTMENT IS WORKED OUT AT RS. 677,45,00,000/-. TH E ASSESSEE HAS MADE THE INVESTMENT RS. 998,75,00,000. THUS, THE RESULTANT ADJUSTMENT TO THE INTERNATIONAL TRANSACTION OF SUBS CRIPTION IN THE SHARES OF THE SUBSIDIARY COMPANY, IS WORKED OUT AT RS. 321,30,00,000' THE LD AR THEREFORE SUBMITTED THAT THE ADJUSTMENT MADE BY THE TPO IS ABSURD, BEREFT OF ANY RATIONALE AND IS WITHOUT JURISDICTION, AS CAN BE SEEN FROM FO LLOWING: ITA NO.1942/M/2015 M/S. AARADHANA REALITIES LTD. (FORMERLY KNOWN AS ESSAR INVESTMENTS LTD.) 21 I) IT IS NOT WITHIN THE JURISDICTION OF THE TPO TO DICTATE TO THE APPELLANT WHAT AMOUNT IT SHOULD HAVE INVEST ED. ONCE THAT BE SO, THE NO. OF SHARES TO BE ISSUED BY A WHOLLY OWNED SUBSIDIARY ITS PARENT IS WHOLLY IRRELEVANT A ND CANNOT BE BENCHMARKED. THE APPELLANT SUBMITS THAT I T IS NOT WITHIN THE JURISDICTION OF THE TPO TO HOLD THAT HOW THE BUSINESS OF THE ASSESSEE IS TO BE CARRIED ON. T HE TPO CANNOT RESTRUCTURE AND RECHARACTERIZE THE TRANSACTI ON AND DICTATE TERMS TO THE ASSESSEE AS TO HOW A PARTICULA R TRANSACTION SHOULD HAVE BEEN CARRIED OUT BY THE ASS ESSEE. THEREFORE, THE FINDING OF THE TPO THAT THE APPELLAN T SHOULD HAVE INVESTED ONLY RS. 677,45,00,000 IS MANIFESTLY ABSURD AND BEYOND JURISDICTION. ON THIS COUNT ALONE THE TP ADDITION DESERVES TO BE DELETED, II) THE TPO HAS FAILED TO APPRECIATE THAT THE INFUS ION OF USD 212,836,000 (RS.998,79,87,374) WAS BASED ON AN OPPORTUNITY WHEREBY THE ENTIRE INFUSION OF CAPITAL WAS TO BE LENT TO ARYA INFRASTRUCTURE BY HYBRID CAPITAL. THEREFORE, IT IS ABSURD TO SUGGEST THAT THE APPELLA NT SHOULD HAVE INFUSED ONLY RS. 677,45,00,000 EVEN AFT ER KNOWING THAT THE ENTIRE AMOUNT OF USD 212,836,000 W AS TO BE LENT TO THE PROSPECTIVE BORROWER, III) SECONDLY, HAD THE APPELLANT INVESTED ONLY RS. 677,45,00,000 THEN THE WHOLLY OWNED SUBSIDIARY WOULD NOT HAVE BEEN ABLE TO CARRY OUT THE LENDING TRANSACTION WITH ARYA INFRASTRUCTURE AND EARN THE INTEREST INCOME OF USD 9,101,781 (I.E. RS. 43,13,94 ,079). III)THIRDLY, HAD THE APPELLANT INVESTED ONLY RS. ITA NO.1942/M/2015 M/S. AARADHANA REALITIES LTD. (FORMERLY KNOWN AS ESSAR INVESTMENTS LTD.) 22 677,45,00,000 THEN IT WOULD NOT HAVE RECEIVED USD 215,000,000 WHICH IS EVIDENT FROM THE FACT THAT BEF ORE INFUSION OF MONEY AS ON 31 MARCH 2009, THE NET ASSE T VALUE OF HYBRID CAPITAL WAS RS. 6.98 CRORES HOWEVER , AFTER INFUSION OF MONEY THE NET ASSET VALUE OF HYBR ID CAPITAL WAS INR 990 CRORES (USD 215,000,000) WHICH WAS DERIVED BASIS INFUSION OF MONEY OF USD 218,360,000 BY THE APPELLANT (PG. 268 OF PAPER BOOK ). 8.3. ARGUING ON THE THIRD PROPOSITION THE LD AR SUB MITS THAT CHAPTER X HAS NO APPLICATION AS NO INCOME ARISES FR OM THE INTERNATIONAL TRANSACTION OF SUBSCRIPTION TO SHARES BY A HOLDING COMPANY IN ITS WHOLLY OWNED SUBSIDIARY. IT IS SUBMI TTED THAT SECTION 92 OF THE ACT STATES THAT '(1) ANY INCOME ARISING FROM AN INTERNATIONAL TRANSACTION SHALL BE COMPUTED HAVING REGARD TO THE ARM'S LENGTH PRICE.' IN THE PRESENT CASE, THE TRANSACTION UNDER DISPUTE IS SUBSCRIPTION TO SHARES OF HYBRID CAPITAL BY THE APPELLANT AND ON SUBSCRIBING TO SHAR ES OF HYBRID CAPITAL, NO INCOME ARISES IN THE HANDS OF APPELLANT UNDER THE PROVISION OF THE INCOME-TAX ACT, 1961. HENCE, IN TH E ABSENCE OF 'ANY INCOME', PROVISIONS OF CHAPTER X OF THE ACT (I.E. TRANSFER PRICING PROVISIONS) DO NOT APPLY TO THIS TRANSACTION. IT IS IMPORTANT TO NOTE THAT PROVISION OF SECTION 56(2)(VIIB) R.W. SECTION 2(24)(XVI) ARE EFFECTIVE W .E.F. 1ST APRIL 2013 TO TAX THE INCOME IN THE FORM OF EXCESS PREMI UM RECEIVED BY A COMPANY ON ISSUE OF SHARES. HOWEVER, BEFORE INTRODUCTION OF THIS SECTION, THERE WAS NO PROVISIO N UNDER THE INCOME- TAX ACT WHICH PROVIDE FOR TAXING THE EXCES S PREMIUM RECEIVED BY A COMPANY. THEREFORE, FOR THE YEAR UNDE R ITA NO.1942/M/2015 M/S. AARADHANA REALITIES LTD. (FORMERLY KNOWN AS ESSAR INVESTMENTS LTD.) 23 CONSIDERATION A.Y. 2010-11, NO INCOME ARISES IN THE HANDS OF THE APPELLANT AS THERE IS NO PROVISIONS WHICH BRING TO TAX INCOME ON PURCHASE / SUBSCRIPTION OF SHARES IN THE HANDS OF THE APPELLANT. HENCE, IN THE ABSENCE OF INCOME, THE PROVISIONS OF CHAPTER X ARE NOT APPLICABLE IN THE INSTANT CA SE. THE LD COUNSEL OF THE ASSESSEE RELIES ON FOLLOWING DECISI ONS IN SUPPORT OF HIS ARGUMENTS: I) VODAFONE INDIA SERVICES P. LTD. VS. U01(368 ITR1 )(BOM) II) SHELL INDIA MARKETS (P.) LTD. VS. ACIT (369 ITR 516) (BOM). III) TOPS GROUP ELECTRONIC SYSTEMS LTD. VS. ITO (67 TAXMANN.COM 310)(MUM TRI) THE LD AR SUBMITS THAT THE TRIBUNAL IN THE CASE OF TOPS GROUP ELECTRONIC SYSTEMS LTD. VS. ITO (SUPRA) HAS HELD TH AT THE RATIO LAID DOWN BY THE HON'BLE BOMBAY HIGH COURT IN THE C ASE OF VODAFONE INDIA (SUPRA) AND SHELL INDIA (SUPRA) IS E QUALLY APPLICABLE TO A SITUATION WHERE AN ASSESSEE MAKES O UTBOUND INVESTMENT IN A SUBSIDIARY OUTSIDE INDIA. THE DECIS ION OF TRIBUNAL IN CASE OF TOPS GROUP (SUPRA) HAS BEEN AFF IRMED BY THE BOMBAY HIGH COURT IN PCIT VS. TOPS GROUP ELECTR ONICS SYSTEMS LTD. (ITA NO. 1721 OF 2016). IN VIEW OF TH E ABOVE, IT IS SUBMITTED THAT THE PROVISIONS OF CHAPTER DO NOT APP LY AS THERE IS NO 'INCOME' WHICH ARISES ON SUBSCRIPTION OF SHARES OF HYBRID CAPITAL. FURTHER, IT IS SUBMITTED THAT EVEN BEFORE THE JUDGMENT OF BOMBAY HIGH COURT IN CASE OF VODAFONE I NDIA (SUPRA) AND SHELL INDIA (SUPRA), THE TRIBUNAL IN TH E FOLLOWING DECISIONS HAD TAKEN A VIEW THAT THE PROVISIONS OF S ECTION 92B DO NOT COVER THE TRANSACTION OF SUBSCRIPTION OF SHA RES OF AN ASSOCIATE ENTERPRISE: A)VI JAI ELECTRICALS VS. ADDL. CIT (36 TAXRNANN.COM 386) B)HILL COUNTRY PROPERTIES LTD. VS. ADDL. CIT (48 TAXMANN.COM 94) IT MAY BE NOTED THAT FINANCE ACT, 2012 ALSO AMENDED ITA NO.1942/M/2015 M/S. AARADHANA REALITIES LTD. (FORMERLY KNOWN AS ESSAR INVESTMENTS LTD.) 24 PROVISIONS OF SECTION 92B OF THE ACT AND BROADENED THE SCOPE OF MEANING OF 'INTERNATIONAL TRANSACTION' BY INSERT ION OF AN EXPLANATION AND HAS INCLUDED EVEN THE TRANSACTION O F PURCHASE OF SHARES AS AN INTERNATIONAL TRANSACTION. HOWEVER, IT IS SUBMITTED THAT THE AMENDMENT TO SECTION 92B IS APPL ICABLE PROSPECTIVELY FROM AY 2013-14 ONWARDS AND THE APPEL LANT WILL STILL BE GOVERNED BY THE ERSTWHILE PROVISIONS AS IN TERPRETED BY VIJAI ELECTRICALS (SUPRA) AND HILL COUNTRY (SUPRA). THE FOLLOWING TRIBUNAL DECISIONS HAVE HELD THE AMENDMEN T TO SECTION 92B IS NOT APPLICABLE TO YEARS PRIOR TO A.Y . 2013- 14: A) SIRO CLINPHARM (P.) LTD. VS. DCIT (177 TTJ 609) (PA RA 17 & 18 PG. 489-490 OF PAPER BOOK); B) JINDAL STEEL & POWER LTD VS. ACIT (106 TAXMANN.COM 179) (PARA 213- 217 PG. 545- 547 OF PAPER BOOK) IN VIEW OF THE ABOVE, IT IS SUBMITTED THAT SINCE TH E AMENDMENT TO SECTION 92B IS NOT APPLICABLE TO THE Y EAR UNDER CONSIDERATION, THE TRANSACTION OF SUBSCRIPTION OF S HARES IS NOT AN INTERNATIONAL TRANSACTION AND CONSEQUENTLY, THE PROVISIONS OF CHAPTER X ARE NOT APPLICABLE. THE TPO AND DRP HAVE HELD THAT THE PROVISIONS OF CHAPTER - X ARE AP PLICABLE AS THE APPELLANT ITSELF HAS REPORTED TRANSACTION OF SU BSCRIPTION OF SHARES OF HYBRID CAPITAL AS AN INTERNATIONAL TRANSA CTION IN FORM 3CEB. IT IS SUBMITTED THAT THE TRANSACTION WAS REPORTED BY WAY ABUNDANT CAUTION AND IN ANY CASE, MERE REPOR TING OF A TRANSACTION IN FORM 3CEB WILL NOT MAKE THE PROVISIO N OF CHAPTER - X APPLICABLE. THIS CONTENTION OF THE DEPA RTMENT HAS BEEN REJECTED BY HON'BLE BOMBAY HIGH COURT IN THE C ASE OF VODAFONE INDIA SERVICES P. LTD. VS. UOJ (SUPRA) (REF ER PARA 27 ON PG. 384 OF PAPER BOOK). ITA NO.1942/M/2015 M/S. AARADHANA REALITIES LTD. (FORMERLY KNOWN AS ESSAR INVESTMENTS LTD.) 25 8.4. ON FOURTH PROPOSITION, THE LD AR SUBMITS THAT THE PROVISIONS OF CHAPTER X ARE NOT APPLICABLE AS THE RE IS NO SHIFTING OF PROFITS OUTSIDE INDIA. THE LD AR REFER RED TO PARA 55.5A OF CIRCULAR NO. 14/2001 ISSUED BY CENTRAL BOA RD OF DIRECT TAXES (`CBDT') WHEREIN IT HAS BEEN EXPLAINED THAT T HE BASIC INTENTION OF INTRODUCING TRANSFER PRICING PROVISION S IN INDIA WAS TO ENSURE THAT PROFITS TAXABLE IN INDIA ARE NOT UND ERSTATED AND THERE IS NO SHIFTING OF PROFITS OUTSIDE INDIA. IN THE PRESENT CASE, IT IS SUBMITTED THAT THE APPELLANT HAS NOT SHIFTED ANY PROFITS OUTSIDE INDIA. ON THE CONTRARY, PURSUANT TO INFUSIO N OF FUNDS BY APPELLANT INTO ITS WHOLLY OWNED SUBSIDIARY, THES E FUNDS WERE LENT TO THE THIRD PARTY AND THE SUBSIDIARY EA RNED INTEREST OF USD 9,101,781, I.E. 12% P.A. OUT OF THE MONEY EA RNED BY HYBRID, THE APPELLANT RECEIVED A DIVIDEND OF USD 6, 000,000 I.E. RS. 28,43,80,000 FROM HYBRID CAPITAL ( PG. 264 OF PAPER BOOK) WHICH WAS OFFERED TO TAX BY APPELLANT IN ITS RETURN OF INCOME A COPY OF WHICH IS FILED AT PG. 269 OF PAPER BOOK. SU CH DIVIDEND WORKS OUT TO AN EFFECTIVE RETURN OF 7.91% ON THE MO NIES INFUSED BY APPELLANT INTO HYBRID CAPITAL (PG. 848 OF PAPER BOOK) WHICH IS MORE THAN THE ARM'S LENGTH INTEREST RATE OF 4-5% DE TERMINED BY THE TRIBUNAL BASED ON LIBOR RATES IN THE FOLLOWING CASES: A) CIT VS. ADANI PORTS (104 TAXMANN.COM 368) B) VIDEOCON INDUSTRIES LTD. VS. ADDL. CIT (55 TAXMANN.COM 263) IN ADDITION, THE APPELLANT HAS ALSO MADE A PROFIT IN FOREIGN CURRENCY AMOUNTING TO USD 2,064,000 ON SALE OF 100% SHARES OF HYBRID CAPITAL. THEREFORE, IT IS SUBMITTE D THAT THERE IS NO SHIFTING OF PROFITS OUTSIDE INDIA AND CONSEQU ENTLY, THE PROVISIONS OF CHAPTER X DO NOT APPLY. THE APPELLANT ALSO SUBMITS THAT THE PROFIT OF USD 2 ,064,000 ITA NO.1942/M/2015 M/S. AARADHANA REALITIES LTD. (FORMERLY KNOWN AS ESSAR INVESTMENTS LTD.) 26 (RS. 9.39 CRORE) GOT CONVERTED INTO A NET SHORT-TER M CAPITAL LOSS OF RS. 20.49 CRORE PRIMARILY ON ACCOUNT OF FLU CTUATION OF FOREIGN EXCHANGE RATE BETWEEN THE TIME OF INFUSION OF FUNDS INTO HYBRID CAPITAL AND RECEIPT OF FUNDS FROM ARYA INFRA STRUCTURE UPON SALE OF SHARES BY APPELLANT. THE SAME IS EVIDE NT FROM THE BANK STATEMENTS OF APPELLANT EVIDENCING PAYMENTS ON ACCOUNT OF INFUSION INTO HYBRID (PG.179 TO PG.204 OF PAPER BOOK) AND RECEIPT OF FUNDS ON SALE OF HYBRID'S SHARES (PG.205 OF PAPER BOOK). SUCH FOREIGN EXCHANGE FLUCTUATIONS ARE BEYO ND THE CONTROL OF APPELLANT. IN VIEW OF THE ABOVE, IT IS SUBMITTED THAT THE PROV ISIONS OF CHAPTER X DO NOT APPLY AS THE BASIC REQUIREMENT OF SHIFTING OF PROFITS OUTSIDE IS NOT SATISFIED. 8.5. SUBMITTING ON THE FIFTH PROPOSITION, THE LD A R CONTENDED THAT REJECTION OF VALUATION REPORT BY TPO AND DRP IS WRONG AND WITHOUT ANY BASIS. THE TPO HAS REJECTED VALUATION R EPORT DATED 12 FEBRUARY 2010 AND HAS DETERMINED THE VALUE OF SHARES AT RS. 13,549/- PER SHARE AFTER MAKING CHANG ES TO THE MARKET RISK PREMIUM AND BETA USED TO ARRIVE AT THE COST OF EQUITY. IT IS SUBMITTED THAT THE TPO IS NOT AN EXPE RT IN DETERMINING THE VALUE OF SHARES, THEREFORE, HE CANN OT REJECT VALUATION REPORT PREPARED BY A CHARTERED ACCOUNTANT WHO IS AN EXPERT IN THE FIELD OF VALUATION OF SHARES. THE TPO HAS NOT BROUGHT ANY MATERIAL TO SHOW AS TO WHY THE VALUE OF SHARES DETERMINED IN THE VALUATION REPORT IS NOT APPROPRIA TE. ON THE CONTRARY, HE HAS USED THE SAME CASH FLOW PROJECTION S AND VALUATION METHOD WHICH WAS USED BY THE CHARTERED ACCOUNTANT IN THE REPORT DATED 12 FEBRUARY 2010. IT IS ITA NO.1942/M/2015 M/S. AARADHANA REALITIES LTD. (FORMERLY KNOWN AS ESSAR INVESTMENTS LTD.) 27 SUBMITTED THAT THE TPO WAS DUTY BOUND TO MAKE A REF ERENCE TO DEPARTMENT VALUATION OFFICER AND DETERMINE THE VALUE OF SHARES BEFORE REJECTING THE VALUATION REPORT PREPARED BY A CHARTERED ACCOUNTANT. IN THIS REGARD, RELIANCE IS PLACED ON T HE FOLLOWING ORDERS OF THE TRIBUNAL, WHEREIN IT HAS BEEN HELD TH AT THE TPO CANNOT REJECT VALUATION REPORT PREPARED BY AN EXPER T WITHOUT MAKING A REFERENCE TO DEPARTMENT VALUATION O FFICER ('DVO'). A) ACIT VS. KOCH CHEMICAL TECHNOLOGY GROUP (I) LTD. (6 4 TAXMANN.COM 464) (PARA 7 PG. 773 OF PAPER BOOK) B) GKN SINTER METALS (P.) LTD. VS. ACIT (71 TAXMANN.COM 297) (PARA 11 PG. 789 OF PAPER BOOK) IN VIEW OF THE ABOVE, IT IS SUBMITTED THAT THE REJE CTION OF VALUATION REPORT WITHOUT MAKING A REFERENCE TO DVO F OR DETERMINATION OF VALUE OF SHARES IS BAD AND UNSUSTA INABLE IN LAW. 8.6. WITHOUT PREJUDICE TO ABOVE, IT IS SUBMITTED TH AT THE VALUATION REPORT HAS BEEN INCORRECTLY REJECTED BY T HE TPO AND DRP ON THE BASIS OF REASONS WHICH ARE UNLAWFUL AND DESERVE TO BE REJECTED. THE REASONS GIVEN BY THE LOWER AUTHORI TIES FOR REJECTING REPORT ARE DEALT AS UNDER: A) THE TPO HAS HELD THAT THE VALUATION REPORT IS IN CORRECT AS THE SHARES HAVE BEEN VALUED AFTER THE AMOUNT OF RS.998,79,87,374 INVESTE D BY THE ASSESSEE. IT IS SUBMITTED THAT FOR ARRIVING AT THE CORRECT MARKET V ALUE OF SHARES IT WAS NECESSARY TO FACTOR IN THE INCOME THAT WOULD BE EAR NED BY HYBRID CAPITAL AFTER INFUSION OF MONEY BY THE APPELLANT. IN FACT, VALUAT ION OF SHARES WITHOUT CONSIDERING THE INCOME TO BE EARNED ON ACCOUNT OF I NFUSION OF MONEY WOULD HAVE LED TO INCORRECT VALUATION OF SHARES OF HYBRID CAPITAL. IN FACT, THE TPO HIMSELF HAS VALUED THE SHARES AFTER CONSIDERING THE INFUSION OF MONEY AND RESULTANT INCOME FROM SUCH INFUSION (PG. II OF TP0' S ORDER). IN THIS REGARD RELIANCE IS ALSO PLACED ON THE JUDGMENT OF SUPREME COURT IN THE CASE OF REVA INVESTMENT (P.) LTD. VS. (249 1TR 337) (SC) (PARA 1 2 PG. 405 OF PAPER BOOK) WHEREIN SUPREME COURT HAS HELD THAT FOR DETERMINING THE CORRECT VALUE OF SHARES, IT MUST BE VALUED AFTER CONSIDERING THE INF USION OF CAPITAL. THEREFORE, ITA NO.1942/M/2015 M/S. AARADHANA REALITIES LTD. (FORMERLY KNOWN AS ESSAR INVESTMENTS LTD.) 28 THE REASONS GIVEN BY TPO FOR REJECTING THE VALUATIO N REPORT ARE BAD AND UNSUSTAINABLE IN LAW. B) THE DRP IN ITS ORDER HAS HELD THAT THE CASH FLOW PROJECTIONS ARE UNREALISTIC AS A COMPANY WITH WEAK FINANCIALS IN THE PAST COULD NO T MAKE SUCH HUGE PROFITS. IT IS SUBMITTED THAT THE CASH FLOW PROJECTIONS WERE ENTIRELY BASED ON THE OPPORTUNITY SPOTTED BY THE APPELLANT REGARDING LEND ING OF MONEY TO A BORROWER (LAST EXTRACT UNDER PARA VIII ON PG.9 OF D RP DIRECTIONS). THEREFORE, ESTIMATION OF CASH FLOW WAS NOT AT ALL UNREALISTIC. ON THE CONTRARY, THE CASH FLOW PROJECTIONS WERE REASONABLY ACCURATE AS THE AP PELLANT FOR THE YEAR ENDING 31 MARCH 2010 HAD ESTIMATED INTEREST INCOME OF RS. 43.15 CRORE (APPROX.) (PG. 35 OF PAPER BOOK) WHICH MATCHES WITH THE ACTUA L INTEREST INCOME OF RS. 43.13 CRORE EARNED BY HYBRID CAPITAL (PG. 264 OF PA PER BOOK) AND THE TPO HIMSELF HAS USED THE SAME CASH FLOW PROJECTIONS FOR VALUATION OF SHARES (PG. 11 OF TP0'S ORDER). THEREFORE, THE SUGGESTION OF THE DRP THAT CASH FLOW PROJECTIONS WERE UNREALISTIC IS INCORRECT AND CONTR ARY TO FACTS ON RECORD. C) THE DRP AND TPO HAVE OBSERVED THAT THE FINANCIAL ST ATEMENTS OF HYBRID CAPITAL ARE NOT RELIABLE HOWEVER, APART FROM MAKING BALD ST ATEMENT, BOTH THE AUTHORITIES HAVE NOT BROUGHT ANY MATERIAL OR EVIDEN CE ON RECORD TO SUBSTANTIATE AS TO HOW THE FINANCIAL STATEMENTS PRE PARED BY THE APPELLANT ARE NOT RELIABLE. IT IS ALSO SUBMITTED THAT SECTION 98 AND 99 OF BVI COMPANIES ACT, 2004 DO NOT SPECIFY ANY PARTICULAR FORMAT FOR MAINTENANCE OF BOOKS OF ACCOUNTS OR PREPARATION OF FINANCIAL STATEMENT (PG. 926 OF PAPER BOOK). THEREFORE, THE ALLEGATIONS OF TPO AND DRP ARE INCOR RECT AND BAD IN LAW. THEREFORE, IT IS SUBMITTED THAT THE TPO AND DRP HA VE ERRED IN HOLDING THAT THE FINANCIAL STATEMENTS OF HYBRID CAPITAL ARE NOT RELIABLE. 8.7. ON SIXTH PROPOSITION, THE LD AR SUBMITS THAT T HE ALTERATIONS MADE BY THE TPO TO MARKET RISK PREMIUM AND BETA TO ARRIVE AT THE DISCOUNTING RATE OF 11.72% (INSTEAD OF THE 7.27% ARRIVE AT BY THE APPELLANTS VALUER) USED FOR THE PURPOSES OF ARRIVING AT THE ENTERPRISE VALUE UNDER THE DISCO UNTED CASH FLOW (DCF) METHOD, IS EX-FACIE ERRONEOUS AND CONTRA RY TO FACTS ON RECORD. IN ARRIVING AT THE DISCOUNTING FACTOR TO ASCERTAIN THE PRESENT VALUE OF FUTURE CASH FLOW UNDER THE DCF MET HOD, IT IS REQUIRED TO COMPUTE THE WEIGHTED AVERAGE COST OF CA PITAL. WEIGHTED AVERAGE COST OF CAPITAL COMPRISES OF TWO C OMPONENTS ITA NO.1942/M/2015 M/S. AARADHANA REALITIES LTD. (FORMERLY KNOWN AS ESSAR INVESTMENTS LTD.) 29 NAMELY COST OF DEBT AND COST OF EQUITY. THE TPO DO ES NOT ALTER THE COST OF DEBT. HOWEVER, IN ARRIVING AT THE COST OF EQUITY TO COMPUTE WEIGHTED AVERAGE COST OF CAPITAL AND IN TURN THE DISCOUNTING RATE TO BE APPLIED, THE TPO HA S ALTERED THE 'MARKET RISK PREMIUM' AND 'BETA' I.E. THE INDUSTRY RISK NUMBER. THESE FACTORS HAVE LED TO AN INCREASE IN WE IGHTED AVERAGE COST OF CAPITAL (`WACC') FROM 7.27% (AS CON SIDERED IN THE INDEPENDENT VALUATION REPORT PG.35-36 OF P APER BOOK) TO 11.72% (PG.11-12 OF TP0'S ORDER) AND THUS, THE V ALUE PER SHARE HAS DECREASED FROM RS 19,975 PER SHARE TO RS 13,549 PER SHARE. IT IS SUBMITTED THAT THE TPO HAS USED INCORR ECT DATA FOR BETA AND MARKET RISK PREMIUM AND IF CORRECT DAT A FROM THE TP0'S OWN SOURCES OF INFORMATION (PG.9 OF TPO O RDER) IS USED, THE FIGURES FOR BETA AND MARKET RISK PREMIUM WOULD STAND CORRECTED AND WOULD MATCH WITH THE RESPECTIVE FIGUR ES CONSIDERED IN VALUATION REPORT OBTAINED BY APPELLAN T. INSOFAR AS THE 'MARKET RISK PREMIUM' IS CONCERNED : A) THE APPELLANT'S VALUER HAS TAKEN THE 'MARKET RISK PREMIUM' AT '6' WHEREAS THE TPO HAS TAKEN 'MARKET RISK PREMIUM' AT '10.5' (SEE PARA (II) ON PAGE 9 OF THE TP0'S ORDER) B) TPO RELIES ON STUDY ON MARKET RISK PREMIUM PUBLISHED BY DR. PABLO FERNANDEZ FOR THE YEAR 2008 (PG. 850 OF PAPER BOOK) IN ORDER TO CONSIDER MARKET RISK PREMIUM FOR INDIA AS 10.5% (PG. 858 OF PAPER BOOK). HOWEVER, TPO FAILED TO APPRECIATE THAT A SIMILAR STUDY WAS PUBLISHED BY DR. PABLO FERNANDEZ FOR THE YEAR 2010 (PG.884 OF PAPER BOOK) AND AS PER ITA NO.1942/M/2015 M/S. AARADHANA REALITIES LTD. (FORMERLY KNOWN AS ESSAR INVESTMENTS LTD.) 30 THAT STUDY, MARKET RISK PREMIUM FOR INDIA STOOD AT 6.1% (PG. 891 OF PAPER BOOK) WHICH IS IN LINE WITH THE MARKET RISK PREMIUM OF 6% CONSIDERED BY THE VALUER. IT IS SUBMITTED THAT TP0'S ERRED IN CONSIDER ING DATA FOR YEAR 2008 AS THE SHARES WERE ALLOTTED ON 1 7 FEBRUARY 2010 AND HENCE THE MARKET RISK PREMIUM DATA PUBLISHED FOR THE YEAR 2010 WILL BE CORRECT DA TA TO BE USED, RATHER THAN MARKET RISK PREMIUM DATA WHICH IS 2 YEARS OLD AND DOES NOT PERTAIN TO THE YE AR UNDER CONSIDERATION. THEREFORE, THE TPO ERRED IN TAKING THE MARKET RISK PREMIUM OF 10.5% RELYING ON AN INCORRECT DOCUMENT. INSOFAR AS THE 'BETA' (VIZ. THE INDUSTRY RISK PREMI UM) IS CONCERNED A) THE APPELLANT'S VALUER HAS TAKEN THE 'INDUSTRY RISK PREMIUM' AT '1' WHEREAS THE TPO HAS TAKEN INDUSTRY RISK PREMIUM' AT '1.27'. (SEE PARA (II) ON PAGE 9 O F THE TP0'S ORDER) B) TPO RELIES ON BETA INFORMATION PUBLISHED BY PROF. A . DAMODARAN ON HIS WEBSITE AND HAS CONSIDERED THE UNLEVERED BETA OF 'INVESTMENT CO. (FOREIGN)' WHICH STOOD AT 1.27 (PG. 911 OF PAPER BOOK). IT IS SUBMIT TED THAT THE TPO FAILED TO APPRECIATE THAT HYBRID CAPIT AL CARRIED ON THE BUSINESS OF LENDING AND FINANCING AS ALSO HELD BY DRP AT PARA (XI) PG. 10 OF DRP ORDER). THEREFORE, BETA OF INVESTMENT COMPANIES COULD NOT B E TAKEN FOR THE PURPOSE OF VALUATION. GIVEN THE BUSINESS OF HYBRID CAPITAL, BETA OF BANKS AND ITA NO.1942/M/2015 M/S. AARADHANA REALITIES LTD. (FORMERLY KNOWN AS ESSAR INVESTMENTS LTD.) 31 FINANCIAL SERVICES INDUSTRY IS APPROPRIATE AND OUGH T TO BE CONSIDERED FOR THE PURPOSE OF VALUATION. THE BETA OF BANKS AND FINANCIAL SERVICES INDUSTRY WORKS OUT TO AVERAGE BETA OF 0.99 (ROUNDED OFF TO 1.00 IN VALUATION REPORT). IN FACT THE UNLEVERED BETA OF BANKS AND FINANCIAL SERVICES INDUSTRY OF 0.49 (PG.913 OF PAPER BOOK) AND IF THAT IS CONSIDERED TH E VALUE OF THE SHARES WOULD INCREASE EVEN FURTHER. HOWEVER, ON A CONSERVATIVE BASIS THE LEVERED BETA O F BANKS AND FINANCIAL SERVICES INDUSTRY MAY BE CONSIDERED WHICH IS '1.00'. IT IS IN THESE CIRCUMSTANCES SUBMITTED THAT BETA OF 1.27' ADOPTED BY THE TPO IS INCORRECT. WITHOUT PREJUDICE TO FOREGOING, IT IS SUBMITTED THAT EVEN IF BETA OF 'INVESTMENT COMPANIES (FOREIGN)' IS INCLUDED ALONG WITH THE BETA OF BANKS AND FINANCIAL SERVICES INDUSTRY, THE AVERAGE BETA FOR ALL THE 3 INDUSTRIES WORKS OUT TO 1.02 AND UNLEVERED BETA WORKS OUT TO 0.62 (PG.9 13 OF PAPER BOOK). IT IS THEREFORE SUBMI TTED THAT THE ALTERATION BY THE TPO OF THE BETA IS WHOLL Y INCORRECT AND IRRATIONAL AND SHOULD NOT BE ACCEPTED . 8.8 SUBMITTING ON THE SEVENTH PROPOSITION, THE LD A R ARGUED THAT CUP METHOD CANNOT BE CONSIDERED FOR THE PURPOS E OF BENCHMARKING THE INTERNATIONAL TRANSACTION BETWEEN THE ASSESSEE AND ITS FOREIGN SUBSIDIARY. IT IS SUBMITTE D THAT IN THE VALUATION REPORT THE VALUER HAS VALUED THE SHARES O F HYBRID CAPITAL USING DCF METHOD AS IS CLEAR FROM PG.35 OF PAPER BOOK. THE TPO HAS ALSO COMPUTED THE VALUE OF HYBRID ITA NO.1942/M/2015 M/S. AARADHANA REALITIES LTD. (FORMERLY KNOWN AS ESSAR INVESTMENTS LTD.) 32 CAPITAL'S SHARES USING DCF METHOD AT PG. 11 OF TPO' S ORDER AND THEREFORE, ONCE IT IS ACCEPTED THAT THE CORRECT MET HOD TO DETERMINE VALUE OF HYBRID'S SHARES IS DCF METHOD AN D THERE IS NO DISPUTE ON THE SAME, IT IS INCORRECT TO DETERMIN E VALUE OF HYBRID'S SHARES USING ANOTHER METHOD (I.E. CUP METH OD). THE TPO HAS NOT GIVEN ANY REASONS FOR USING CUP METHOD WHEN HE HIMSELF HAS ACCEPTED DCF METHOD AS THE MOST APPR OPRIATE METHOD FOR VALUATION OF SHARES. THEREFORE, IN THE A BSENCE ANY REASONS GIVEN, THE CUP METHOD CANNOT BE USED FOR TH E PURPOSE OF VALUATION OF SHARES. WITHOUT PREJUDICE TO ABOVE, IT IS SUBMITTED THAT THE TPO AND DRP APPLYING CUP METHOD, HAVE TAKEN THE VALUE AT RS. I 6,594/SHARE I.E. THE RATE AT WHICH THE SHARES WERE SOLD TO ARYA INFRASTRUCTURE. BOTH T HE AUTHORITIES HAVE FAILED TO APPRECIATE THAT SINCE TH E TRANSACTION OF PURCHASE / SUBSCRIPTION AND SALE OF HYBRID CAPIT AL WAS CARRIED OUT IN FOREIGN CURRENCY I.E. USD THEREFORE, FOR THE PURPOSE OF CUP METHOD THE RATE SHOULD BE CONSIDERED IN USD TERMS WITHOUT CONVERTING INTO INDIAN RUPEES. AS, TH E CONVERSION OF USD INTO INR WOULD AUTOMATICALLY FACTOR IN THE FOREIGN EXCHANGE FLUCTUATION THEREFORE, TO NULLIFY THE IMPA CT FOREIGN EXCHANGE FLUCTUATION THE PRICE PER SHARE SHOULD BE CONSIDERED IN USD TERMS. IN THIS REGARD, RELIANCE IS PLACED ON THE DECISION OF HIGH COURTS AND TRIBUNAL WHEREIN IT HAS BEEN HELD THAT FOR BENCHMARKING INTEREST RATE ON LOAN GIVEN I N FOREIGN CURRENCY, INTEREST RATE LINKED WITH SUCH FOREIGN CU RRENCY SHOULD BE CONSIDERED: A) CIT VS. TATA AUTOCOMP SYSTEMS LTD. (374 ITR 51 6) (BOM.) B) CIT VS. COTTON NATURAL (I)(P.) LTD. (23 1 TAXMAN 401) ITA NO.1942/M/2015 M/S. AARADHANA REALITIES LTD. (FORMERLY KNOWN AS ESSAR INVESTMENTS LTD.) 33 (DEL.) ACCORDINGLY, IF PRICE PER SHARE IS CONSIDERED IN USD TERMS, THE SALE PRICE PER SHARE RECEIVED IS USD 358.33 (I.E. U SD 215,000,000 / 600,000) WHEREAS THE AVERAGE COST PRI CE PER SHARE IS USD 354.89 [I.E. (USD 100,000 + USD 212,83 6,000) / 600,000]. THEREFORE, NO TRANSFER PRICING ADJUSTME NT CAN BE MADE AS THE SALE PRICE OF SHARES IS HIGHER THAN THE AVERAGE COST PER SHARE. WITHOUT PREJUDICE TO THE FOREGOING IT IS SUBMITTED THAT THE VALUE OF SHARES SOLD TO ARYA INFRASTRUCTUR E CANNOT BE COMPARED TO THE VALUE OF THE SHARES WHEN MONIES WERE INFUSED AS THE BIGGEST INCOME GENERATING ASSET VIZ. THE LOAN TO ARYA INFRASTRUCTURE GENERATING APPROXIMATELY 12% IN COME WILL NO LONGER BE AVAILABLE, INASMUCH AS THE LOAN BY HYB RID CAPITAL WAS TO ARYA INFRASTRUCTURE ITSELF AND THE PURCHASER IS ALSO ARYA INFRASTRUCTURE, HENCE IT WOULD BE ABSURD TO EXPECT THE ARYA INFRASTRUCTURE WILL PAY TO ITS WHOLLY OWNED SUBSIDI ARY INTEREST @ 12%. IT IS CONSEQUENTLY ABSURD TO SUGGEST THAT TH E VALUE OF SHARES IN THE ABSENCE OF SUCH A SOURCE OF INCOME CO NTINUING, CAN BE COMPARED TO THE VALUE OF SHARES WHICH HAVE B EEN ARRIVED AT TAKING INTO CONSIDERATION THE SOURCE OF INCOME BY APPLYING THE DCF METHOD. 8.9. EIGHTH PROPOSITION OF THE LD AR IS THAT THE A LLEGATION OF DRP THAT THE TRANSACTION IS SHAM IS PERVERSE AND UNSU STAINABLE IN LAW. THE DRP HAS HELD THAT THE TRANSACTIONS OF SUBS CRIPTION TO 5,00,000 SHARES OF HYBRID AND SALE OF ALL 6,00,000 SHARES WERE UNDERTAKEN DURING AY 2010-11 IN ORDER TO CREATE AN ARTIFICIAL LOSS, WHICH COULD BE SET OFF AGAINST THE LONG TERM CAPITAL GAINS OF RS 162,56,53,077 EARNED ON ORIGINAL 1,00,0 00 ITA NO.1942/M/2015 M/S. AARADHANA REALITIES LTD. (FORMERLY KNOWN AS ESSAR INVESTMENTS LTD.) 34 SHARES HELD BY APPELLANT IN HYBRID CAPITAL. WHILE D RAWING SUCH A BASELESS CONCLUSION, THE DRP HAS COMPLETELY DISREGARDED THE FACT THAT THE LONG TERM CAPITAL GAI N OF RS 162,56,53,077 ON 1,00,000 SHARES HAS ARISEN ONLY ON ACCOUNT OF MONEY INFUSED BY APPELLANT INTO HYBRID CAPITAL D URING A.Y. 2010-11 ITSELF, WHICH HAS RESULTED IN AN INCREASE I N THE NET WORTH OF HYBRID. THEREFORE, WITHOUT THE INFUSION OF MONEY DURING THE YEAR, THE GAIN OF RS. 162,56,53,077 ON SALE OF 1,00,000 SHARES WOULD HAVE NEVER ARISEN. THEREFORE, THE FINDING OF THE DRP THAT TRANSACTION OF SALE AND PUR CHASE / SUBSCRIPTION WERE CARRIED OUT TO CREATE AN ARTIFICI AL LOSS IS UNSUSTAINABLE AND BAD IN LAW. IF INFUSION OF RS. 99 8,79,87,374 WAS NOT MADE THE SALE VALUE OF 1,00,000 SHARES OF H YBRID CAPITAL WOULD BE RS 6,98,56,577 AND THE GAIN ON SAL E OF 1,00,000 SHARES WOULD HAVE BEEN RS 6,40,39,824 AFTE R CONSIDERING INDEXED COST OF ACQUISITION. SEPARATELY FOR THE YEAR UNDER CONSIDERATION (I.E. DURING AY 2010-11), THE A PPELLANT HAD INCURRED A BUSINESS LOSS OF RS 196,63,08,552 AN D THESE LOSSES WERE SUFFICIENT IN ORDER TO ABSORB THE GAIN OF RS. 6,40,39,824 THAT COULD HAVE ARISEN TO APPELLANT ON SALE OF 1,00,000 SHARES OF HYBRID CAPITAL WITHOUT THE INFUS ION. MOREOVER, THE APPELLANT HAD BROUGHT FORWARD LOSSES OF RS 1,56,11,02,680 (COMPRISING OF BUSINESS LOSSES OF RS . 1,522,063,935 AND UNABSORBED DEPRECIATION OF RS. 3,90,38,745) FROM EARLIER AYS (PG. 269-270 OF PAPER BOOK). THEREFORE, THE FINDING OF THE DRP IS EX FACIE ABSUR D. IT IS ALSO SUBMITTED THAT DRP CANNOT, ON ONE HAND, HOLD THAT T HE ENTIRE TRANSACTION AS SHAM, BUT ON THE OTHER HAND, CONSIDE R THE SAME TRANSACTION FOR THE PURPOSE OF BENCHMARKING UNDER C UP METHOD ITA NO.1942/M/2015 M/S. AARADHANA REALITIES LTD. (FORMERLY KNOWN AS ESSAR INVESTMENTS LTD.) 35 FAILING TO APPRECIATE THAT 1,00,000 SHARES COULD HA VE NEVER FETCHED A PRICE RESULTING IN A LONG TERM CAPITAL GA IN OF RS 162,56,53,077 IF THE INFUSION OF FUNDS OF USD 212,8 36,000 WAS NOT MADE DURING THE YEAR BY APPELLANT. AS ALREADY S UBMITTED ABOVE, APPELLANT HAS FINALLY MADE A PROFIT OF USD 2 ,064,000 ON SALE OF ALL 6,00,000 SHARES IN HYBRID TO ARYA IN US D TERMS. THE NET SHORT TERM CAPITAL LOSS OF RS 20,49,85,151 ON SALE OF 6,00,000 SHARES OF HYBRID HAS ARISEN PRIMARILY ON A CCOUNT OF FLUCTUATION OF FOREIGN EXCHANGE RATE BETWEEN THE TIME OF INFUSION OF FUNDS INTO HYBRID AND RECEIPT OF FUNDS FROM ARYA UPON SALE OF SHARES BY APPELLANT DURING A.Y. 2010-1 1. THE SAME IS EVIDENT FROM THE BANK STATEMENTS OF APPELLA NT EVIDENCING PAYMENTS ON ACCOUNT OF INFUSION INTO HYB RID (PG.179 TO PG.204 OF PAPER BOOK) AND RECEIPT OF FUNDS ON SA LE OF HYBRID'S SHARES (PG.205 OF PAPER BOOK). SUCH FOREIGN EXCHANG E FLUCTUATION IS BEYOND THE CONTROL OF APPELLANT AND THEREFORE, THE FINDING OF THE DRP IS PERVERSE AND UNSUSTAINABLE IN LAW. FURTHER, THE DRP HAS ALSO OBSERVED THAT APPELLANT H AS NOT PRODUCED ANY EVIDENCE TO JUSTIFY THAT ARYA IS NOT A N AE OF THE APPELLANT. IT IS SUBMITTED THAT THE APPELLANT HAS T IME AND AGAIN SUBMITTED THAT THE HYBRID CAPITAL AND ARYA INFRASTR UCTURE ARE NOT AES WITHIN THE MEANING OF SECTION 92A OF THE AC T (PARA 6.5 PG. 12 OF TPO'S ORDER AND PARA 4.27 (D) PG. 26 OF D RP'S ORDER). THE APPELLANT CANNOT BE ASKED TO PROVE THE NEGATIVE AND THE BURDEN IS ON THE REVENUE TO PROVE OTHERWISE BY ADDUCING MATERIAL TO SHOW THAT THE PROVISIONS OF SE CTION 92A ARE APPLICABLE. HOWEVER, THE TPO AND DRP HAVE NOT B ROUGHT ANY MATERIAL ON RECORD TO SHOW THAT THE APPELLANT A ND ARYA INFRASTRUCTURE ARE RELATED ENTITIES. ON THE CONTRAR Y, THE TPO AND ITA NO.1942/M/2015 M/S. AARADHANA REALITIES LTD. (FORMERLY KNOWN AS ESSAR INVESTMENTS LTD.) 36 DRP BOTH HAVE CONSIDERED THE SALE OF SHARES TO ARYA INFRASTRUCTURE AS COMPARABLE TRANSACTION UNDER CUP METHOD (PARA 6.5 PG. 12 OF TP0'S ORDER), THIS COULD HAVE B EEN DONE ONLY ON THE FOOTING THAT ARYA INFRASTRUCTURE IS NOT AN A E OF THE APPELLANT AS RULE 10(A)(AB) DOES NOT ALLOW TRANSACT ION BETWEEN AES TO BE TAKEN FOR THE PURPOSE OF BENCHMARKING. TH EREFORE, EVEN THE DRP AND TPO HAVE ACCEPTED THAT ARYA INFRAS TRUCTURE WAS NOT THE AE OF THE APPELLANT. IT IS SUBMITTED TH AT THE BURDEN TO PROVE THAT THE TRANSACTION IS 'SHAM' IS ON THE R EVENUE AS HELD BY SUPREME COURT IN THE FOLLOWING JUDGMENTS: A) VODAFONE INTERNATIONAL HOLDINGS B.V. VS. U01 (341 I TR 1) (PARA 46 & 48 PG.652-653 OF PAPER BOOK); B) JAYDAYAL PODDAR VS. BIBI HAZRA (AIR 1974 SC 171) (P ARA 6 PG.690 OF PAPER BOOK). IT IS SUBMITTED THAT AS DEMONSTRATED ABOVE, THE DRP , FAR FROM HAVING DISCHARGED ITS BURDEN, HAS NOT BEEN ABL E TO PUT FORTH EVEN A COMPREHENSIBLE STORY. THE DRP FURTHER OBSERVED THAT WHEN THE PRICE AS PER THE INDEPENDENT VALUER'S REPORT WAS RS 20,550 PER SHARE , THERE WAS NO REASON TO SELL THE SHARES TO ARYA INFRASTRUC TURE AT RS 16,514 PER SHARE. AS EXPLAINED EARLIER, HYBRID CAPI TALS' SHARES WERE BEING BOUGHT BY ARYA INFRASTRUCTURE (FR OM WHOM HYBRID GENERATED INTEREST INCOME). THUS, SUCH SHARE S COULD NEVER HAVE BEEN SOLD BASED ON A DCF VALUATION SINCE THE BASIS OF THE DCF PROJECTIONS ITSELF WAS THE POTENTIAL INT EREST INCOME THAT HYBRID CAPITAL WAS EXPECTED TO EARN FROM ARYA INFRASTRUCTURE AND WHICH WOULD NOT BE EARNED BY HYB RID CAPITAL AFTER TRANSFER OF SHARES. FURTHER, ARYA INF RASTRUCTURE WOULD NOT AGREE TO PURCHASE HYBRID CAPITAL ON A DCF VALUE WHICH IS BASED ON THE POTENTIAL INCOME THAT HYBRID CAPITAL ITA NO.1942/M/2015 M/S. AARADHANA REALITIES LTD. (FORMERLY KNOWN AS ESSAR INVESTMENTS LTD.) 37 EARNS FROM ARYA INFRASTRUCTURE ITSELF. THEREFORE, N ET ASSET VALUE WAS THE MOST APPROPRIATE METHOD TO BE ADOPTED AT TH E TIME OF SALE OF SHARES TO ARYA INFRASTRUCTURE. 8.10. ONLY TO ALLAY THE BASELESS ALLEGATION PUT FOR TH BY THE DRP, THE APPELLANT HAD FILED AN AFFIDAVIT OF MR. SU RESH SUNDARAM, THE DIRECTOR OF THE APPELLANT AT THE RELE VANT POINT IN TIME. THIS WAS FILED VIDE APPLICATION FOR ADMISS ION OF ADDITIONAL EVIDENCE DATED 13.08.2019. THE DR HAS ON 22 AUGUST 2019 TAKEN TIME TO SEEK COMMENTS OF THE REVE NUE ON THE SAID AFFIDAVIT. NOT DURING THE COURSE OF THE HE ARING ON 11 DECEMBER 2020 (I.E. AFTER HAVING SUFFICIENT TIME TO PERUSE AND CONSIDER THE AFFIDAVIT) THE DR HAS NOT RAISED ANY O BJECTIONS ON THE ADMISSIBILITY AS ALSO THE CORRECTNESS OF THE AV ERMENTS MADE THEREIN. THE APPELLANT THEREFORE SUBMITS THAT THAT THE FACTS AND CIRCUMSTANCES AVERRED IN THE SAID AFFIDAVIT AS SUPP ORTED BY THE DOCUMENTS ANNEXED IS A COMPLETE AND FULL ANSWER TO THE WILD ALLEGATIONS MADE BY THE DRP. IN SUMMARY, VIDE THE A FFIDAVIT, APPELLANT HAS SUBMITTED THE FOLLOWING: A) COPY OF BOARD MINUTES WHEREIN DECISION TO INFUSE FU NDS INTO HYBRID WAS UNDERTAKEN: B) INTENTION OF INFUSING APPROX. RS 1,000 CRORE INTO H YRBID DURING AY 2010-11 APPELLANT SPOTTED AN OPPORTUNITY OF LENDING MONEY T O ARYA; C) REASON AS TO WHY THE MONEY COULD NOT BE LENT DIRECT LY BY APPELLANT TO ARYA; D) WORKING FOR AMOUNT AND RATE OF INTEREST EARNED BY H YBRID FROM FUNDS LENT TO ARYA; E) REASONS AS TO WHY FUNDS WERE NEEDED BY APPELLANT AN D THE URGENT REQUIREMENT TO SELL STAKE IN HYBRID FOR WHICH NEGOT IATIONS WERE UNDERTAKEN WITH ARYA; F) F) COPY OF BOARD MINUTES WHEREIN DECISION TO SELL H YBRID'S 100% SHARES WAS TAKEN AND HOW THOSE FUNDS WERE APPLIED BY APPELLANT IN VI EW OF THE URGENT REQUIREMENT. 9. PER CONTRA, THE LD DR SUBMITTED THAT THE WHOLE ARRANGEMENT WAS ORCHESTRATED AND ENGINEERED TO INFU SE THE ITA NO.1942/M/2015 M/S. AARADHANA REALITIES LTD. (FORMERLY KNOWN AS ESSAR INVESTMENTS LTD.) 38 FUNDS INTO FOREIGN SUBSIDIARY AND SELLING THE SAME AT LOSS IS NOTHING BUT SHAM TRANSACTIONS. 10. IN THE REJOINDER, THE LD AR SUBMITTED THAT THE DR HAS NOT DISPUTED THE PROPOSITIONS 1,2,4,5,6 AND 7 MADE BY T HE APPELLANT. WITH RESPECT TO THIRD PROPOSITION ,THE D R HAS SUBMITTED THAT SINCE THE GAINS COMPUTED ON SALE OF SHARES INVOLVE TAKING INTO CONSIDERATION THE COST OF ACQUI SITION, HENCE THE BENCH MARKING OF COST OF ACQUISITION IS NECESSA RY. IN REPLY, THE APPELLANT HAS EXPLAINED AS UNDER: INCOME ARISES FROM SALE AND NOT FROM SUBSCRIPTION. THE TWO TRANSACTIONS ARE DIFFERENT. THE 'INTERNATIONAL TRANSACTION' TO WHICH CHAPTER X IS SOUGHT TO BE APPLIED IS THE TRANSACTION OF SUBSCRIPTION / PURCHA SE OF SHARES AND NOT SALE. IT IS CLARIFIED THAT THE TRANSACTION OF SALE OF SHARES IS NOT AN INTERNATIONAL TRANSACTION SINCE THE SALE IS TO A PE RSON WHO IS NOT AN 'ASSOCIATED ENTERPRISE'. EXPLANATION TO SECTION 92B OF THE ACT DOES NOT APPL Y INASMUCH AS IT COVERS ALLOWANCES OR COSTS THAT ARE IMPLICIT IN THE INTERN ATIONAL TRANSACTION FOR E.G. RELIANCE IS PLACED ON THE JUDGMENT OF BOMBAY H IGH COURT IN CASE OF VODAFONE INDIA (SUPRA) WHEREIN THE HIGH COURT HAS H ELD AS UNDER: '31. SIMILARLY, THE RELIANCE BY THE REVENUE UPON TH E DEFINITION OF INTERNATIONAL TAXATION IN THE SUB CLAUSE (C) AND (E ) OF EXPLANATION (I) TO SECTION 92B OF THE ACT TO CONCLUDE THAT INCOME HAS TO BE GIVEN A BROADER MEANING TO INCLUDE NOTIONAL INCOME, AS OTHERWISE CH APTER X OF THE ACT WOULD BE RENDERED OTIOSE IS FAR FETCHED. THE ISSUE OF SHARES AT A PREMIUM DOES NOT EXHAUST THE UNIVERSE OF APPLICABILITY OF C HAPTER X OF THE ACT. THERE ARE TRANSACTIONS WHICH WOULD OTHERWISE QUALIFY TO B E COVERED BY THE DEFINITION OF INTERNATIONAL TRANSACTION. THE TRANSACTION ON CA PITAL ACCOUNT OR ON ACCOUNT OF RESTRUCTURING WOULD BECOME TAXABLE TO TH E EXTENT IT IMPACTS INCOME I.E. UNDER REPORTING OF INTEREST OR OVER REP ORTING OF INTEREST PAID OR CLAIMING OF DEPRECIATION ETC. IT IS THAT INCOME WHICH IS TO BE ADJUSTED TO THE ALP PRICE. IT IS NOT A TAX ON THE CAPITAL RECEI PTS. THIS ASPECT APPEARS TO HAVE BEEN COMPLETELY LOST SIGHT OF IN THE IMPUGNED ORDER.' THE DR SPENT CONSIDERABLE TIME IN READING THE ALLEG ATION OF SHAM BY THE DRP, HOWEVER DID NOT COUNTER ANY OF THE EXPLANATION PUT FORTH BY THE APPELLANT DURING THE C OURSE OF THE HEARING. SINCE THE FINDINGS OF THE DRP ON SHAM HAVE ALREADY ITA NO.1942/M/2015 M/S. AARADHANA REALITIES LTD. (FORMERLY KNOWN AS ESSAR INVESTMENTS LTD.) 39 BEEN EXPLAINED ABOVE, THE APPELLANT DOES NOT SUBMIT ANYTHING FURTHER, SAVE AND EXPECT TO REPEAT AND LD. DR ON TH E OBSERVATIONS/FINDINGS OF THE DRP. 11. WE HAVE HEARD THE RIVAL CONTENTIONS AND PERUSED THE MATERIALS ON RECORDS. THE UNDISPUTED FACTS ARE THAT THE ASSESSEE HAS A WHOLLY OWNED FOREIGN SUBSIDIARY HYBR ID CAPITAL IN BRITISH VIRGIN ISLANDS. THE APPELLANT HAD INVEST ED USD 1,00,000 EQUIVALENT TO RS. 45,74,740/- (1 USD = RS 45.74) IN HYBRID CAPITAL, ON 18 NOVEMBER 2005. HYBRID CAPITAL WAS INCORPORATED TO CARRY ON THE BUSINESS OF FINANCING AND LENDING OUTSIDE INDIA. RIGHT FROM INCEPTION, HYBRID CAPITAL CARRIED ON THE BUSINESS OF LENDING AND FINANCING. THE SAID SU BSIDIARY HAS EARNED INTEREST INCOME DURING F.Y. 2006-07 OF RS. 124.69 CRORE AND DURING F.Y. 2007-08, OF RS. 78.10 LAKH S. DURING F.Y. 2009-10, THE APPELLANT ASSESSEE IN ORDER TO L END MONEY TO AN OVERSEAS BORROWER, ARYA INFRASTRUCTURE, INFUSED AND INVESTED A SUM OF USD 212,836,000 EQUIVALENT TO R S. 998,79,87,374 IN THE SHARE CAPITAL. THE INVESTMENT IN THE SUBSIDIARY WAS MADE SOLELY WITH THE OBJECTIVE THAT THE FUNDS COULD BE LENT FURTHER TO OVERSEAS BORROWER, ARYA INFRASTRUCTURE AS THE ASSESSEE COULD NOT HAVE LENT MONEY DIRECTLY TO OVERSEAS BORROWER DUE TO IMBARGO PLACE D BY SECTION 6(3)(D) OF FOREIGN EXCHANGE MANAGEMENT ACT, 1999 ('FEMA') READ WITH REGULATION 5 OF BORROWING OR L ENDING IN FOREIGN EXCHANGE REGULATIONS, 2000 WHICH PROHIBI TS AN INDIAN RESIDENT TO LEND DIRECTLY IN FOREIGN EXCHANG E TO A PERSON OUTSIDE INDIA. PERTINENT TO NOTE THAT HYBRID CAPIT AL WAS IN THE BUSINESS OF MONEY LENDING. THE SAID INVESTMENT WAS MADE BY THE ASSESSEE BETWEEN JUNE 2009 TO JANUARY 2 010 ITA NO.1942/M/2015 M/S. AARADHANA REALITIES LTD. (FORMERLY KNOWN AS ESSAR INVESTMENTS LTD.) 40 BY WAY OF EQUITY CONTRIBUTION IN ACCORDANCE WITH TH E PROVISIONS OF FEMA. IN ORDER TO COMPLY WITH THE REQ UIREMENT UNDER FEMA, THE SHARES WERE VALUED ON THE BASIS OF THE DISCOUNTED CASH FLOW METHOD ('DCF METHOD') TAKING I NTO CONSIDERATION THE FUTURE EARNINGS AFTER INFUSION OF THE FRESH CAPITAL OF USD 212,836,000. AS PER THE VALUATION RE PORT DATED 12 FEBRUARY 2010, THE VALUE PER EQUITY SHARE OF HYBRID CAPITAL WAS RS. 20,550. CONSEQUENTLY 5,0 0,000 EQUITY SHARES AGAINST THIS INFUSIONS AND INVESTMENT OF USD 212,836,000 EQUIVALENT TO RS. 998,79,87,374/- W ERE ALLOTTED BY HYBRID CAPITAL TO APPELLANT ON 17 FEB 2 010 AT FACE VALUE OF USD 1 AT A PREMIUM OF USD 424.67 AND IN TERMS OF INDIAN RUPEES AT RS. 19,975 PER SHARES. HYBRID CAPITAL CONTINUED TO BE A 100% SUBSIDIARY OF THE APPELLANT EVEN POST INFUSION. HYBRID CAPITAL, IN TU RN, LENT MONIES TO ARYA INFRASTRUCTURE. DURING THE YEAR, HYB RID CAPITAL EARNED AN INTEREST FROM ARYA INFRASTRUCTURE OF USD 9,101,781 EQUIVALENT TO RS. 43,13,94,079/- WHICH CO MES TO 12% P.A. THE ABOVE INTEREST INCOME IS DULY REFLECT ED IN THE PROFIT & LOSS ACCOUNT FOR THE YEAR IN THE FINANCIAL STATEMENTS OF HYBRID CAPITAL. WE ALSO NOTE THAT OUT OF THE INTERE ST EARNED OF USD 9,101,781, HYBRID CAPITAL PAID A DIVIDEND OF US D 6,000,000 EQUIVALENT TO RS. 28,43,80,000 TO THE APP ELLANT AND THE DIVIDEND WAS OFFERED TO TAX BY APPELLANT IN ITS RETURN OF INCOME. ON 17 MARCH 2010, APPELLANT SOLD ITS ENTIRE STAKE (I.E. 100% SHARES) IN HYBRID CAPITAL TO ARYA INFRASTRUCTU RE AT A VALUE OF USD 215,000,000 TAKING INTO CONSIDERATION THE NET ASSET VALUE OF HYBRID CAPITAL AS ON 15 MARCH 2010. THE APPELLANT HAD MADE A GAIN OF USD 2,064,000 ON THE S ALE OF ITA NO.1942/M/2015 M/S. AARADHANA REALITIES LTD. (FORMERLY KNOWN AS ESSAR INVESTMENTS LTD.) 41 SHARES BUT UPON CONVERSION REPORTED A CAPITAL LOSS IN ITS RETURN OF INCOME DUE TO FOREIGN EXCHANGE FLUCTUATI ON. IN OTHER WORDS ON CONVERSION OF THE INVESTMENT AND SALE IN TO INR, THERE WAS SHORT TERM CAPITAL LOSS WHICH HAS RESULTE D DUE TO EXCHANGE RATE FLUCTUATION. ON SALE OF SHARES OF HYB RID CAPITAL, THE APPELLANT MADE A GAIN OF USD 2,064,000 (USD 215,000,000 USD 212,936,000) WHICH IS EQUIVALENT T O RS. 9.39 CRORES (1USD = RS. 45.53 INR).HOWEVER, THE APP ELLANT REPORTED A RS.20.49 CRORES LOSS IN ITS RETURN OF IN COME. THE APPELLANT SUBMITS THAT A GAIN OF RS. 9.39 CRORES CO NVERTED TO A LOSS OF RS.20.49 CRORES ONLY ON ACCOUNT FOREIGN E XCHANGE FLUCTUATION, I.E. BECAUSE RE. APPRECIATED VIS--VIS . THE DOLLAR BY RS. 1.40 BETWEEN THE DATE OF INVESTMENT AND THE DATE OF SALE. 11.1. ON THE FIRST PROPOSITION, THE MAIN ARGUMENT O F THE LEARNED AR FOR THE ASSESSEE WAS THAT INFUSION OF US D 212,836,000 IN THE WHOLLY OWNED SUBSIDIARY HYBRID CAPITAL ARE NOT COVERED BY THE PROVISIONS OF CHAPTER-X OF T HE ACT. SINCE THE DETERMINATION OF ARMS LENGTH PRICE FOR S UCH A TRANSACTION WOULD ONLY RESULT IN CHANGE IN NUMBER O F SHARES TO BE ISSUED BY THE WHOLLY OWNED SUBSIDIARY TO THE HOLDING COMPANY WHICH APPEARS TO BE OTIOSE, AS THE HOLDING COMPANY WOULD CONTINUE TO BE HOLDING 100% SHARE IN THE SUBS IDIARY COMPANY BEFORE AND AFTER INFUSION OF MONEY. WE NOT E THAT IF THE SHARES WERE TO BE ISSUED AT A PRICE OF RS. 13,5 49/- AS DETERMINED BY THE TPO, THEN IT WOULD HAVE RESULTED INTO 7,37,175 SHARES BEING ISSUED TO THE ASSESSEE AND AS A RESULT , THE ASSESSEE WOULD HAVE SOLD HIGHER NUMBER OF SHARE S TO ARYA INFRASTRUCTURE AT USD 215,00,000 AND INCURRED THE S AME ITA NO.1942/M/2015 M/S. AARADHANA REALITIES LTD. (FORMERLY KNOWN AS ESSAR INVESTMENTS LTD.) 42 AMOUNT CAPITAL LOSS OF RS. 20.49 CR. LIKEWISE , HAD THE ASSESSEE BEEN ISSUED SHARES BY THE HYBRID CAPITAL A T ALTERNATE VALUE OF RS. 16,314/- AS DETERMINED BY THE TPO, THE FOREIGN SUBSIDIARY WOULD HAVE ISSUED 6,12,208 SHARES AND TH E SALE OF THESE SHARES TO ARYA INFRASTRUCTURE WOULD HAVE RESU LTED INTO THE SAME AMOUNT OF CAPITAL LOSS. THUS THE DETERMINA TION OF ARMS LENGTH PRICE IS WHOLLY IRRELEVANT TO THE TRAN SACTION AND THE PROVISIONS OF CHAPTER X DO NOT APPLY TO THE AFO RESAID TRANSACTION BETWEEN THE ASSESSEE AND HYBRID CAPITA L. IN THIS CASE WE NOTE THAT THE ASSESSEE HAS INFUSED USD 212, 836,000 IN HYBRID CAPITAL SOLELY AND PRIMARILY FOR THE PROP OSE OF LENDING OUT TO ARYA INFRASTRUCTURE AND, THEREFORE, VALUE OF SHARES AND NUMBER OF SHARES TO BE ISSUED BY HYBRID CAPITAL IS COMPLETELY IRRELEVANT. THUS, WE FIND MERIT IN THE CONTENTIONS OF THE LEARNED AR THAT THE PROVISIONS OF CHAPTER X RELATING TO DETERMINATION OF ARMS LENGTH PRICE DO NOT APPLY TO INFUSION OF MONEY IN THE WHOLLY OWNED SUBSIDIARY COMPANY. THE CASE OF THE ASSESSEE FINDS SUPPORT FROM THE DECISION OF CO- ORDINATE BENCH IN THE CASE OF INCOME TAX OFFICER VS. STERLIN G OIL RESOURCES (P.) LTD. (SUPRA), WHEREIN IT HAS BEEN HE LD THAT NO TRANSFER PRICING ADJUSTMENT CAN BE MADE WHEN HOLDIN G COMPANY GIVES MONEY TO THE WHOLLY OWNED SUBSIDIARY AS THE ISSUE OF SHARES IS ENTIRELY IRRELEVANT TO THE TRANS ACTION, THE OPERATION PART OF THE ORDER IS AS UNDER: 9... WHAT THE TPO AND DRP HAVE OVERLOOKED IS THAT SINCE THE ASSESSEE WAS ONLY SHAREHOLDER OF THE SUBSIDIARY COMPANY, THE FRUITS O F THIS INVESTMENT BELONG TO THE ASSESSE ONLY AND IN ENTIRETY. ON GIVING THUS MONEY TO THE SUBSIDIARY AND ON USE OF THIS MONEY BY THE SUBSIDIARY, THE ASSESSEE, IN ITS CAPAC ITY AS SOLE OWNER OF THE SUBSIDIARY, IS BENEFICIARY OF ALL THE GAINS OF THE SUBSIDIARY COMPANY. WHETHER THE ASSESSEE WAS ALLOTTED THESE SHARES OR NOT, THE ASSE SSEE WAS THE ONLY SHAREHOLDER OF THE SUBSIDIARY COMPANY AND BENEFICIAL OWNER OF ALL THE EARNINGS AND ALL THE ASSETS OF THE COMPANY. NON ALLOTMENT OF THESE SHARES, DURI NG THE PERIOD OF PAYMENT OF ITA NO.1942/M/2015 M/S. AARADHANA REALITIES LTD. (FORMERLY KNOWN AS ESSAR INVESTMENTS LTD.) 43 SHARE APPLICATION MONEY TILL THE ACTUAL DATE OF ALL OTMENT, DID NOT, THEREFORE, PREJUDICE ASSESSEE'S POSITION ANYWAY. ALL THE EARNI NGS OF THE SUBSIDIARY COMPANY BELONGED TO THE ASSESSEE IN ANY SITUATION. FOR EXAMPLE, IF THE FLUIDS AVAILABLE PR DIVIDEND DISTRIBUTION FOR THIS YEAR WERE SAY RS 1,0 0,000 AND THE ASSESSEE HAD 100 SHARES BEFORE NEW ALLOTMENT OF SHA RES AND 1000 SHARES AFTER THE ALLOTMENT, THE ASSESSEE WOULD BE ENTITLED TO RS 1,00,000 ONLY THE EITHER WAY- WHETHER AS RS 1,000 PER SHARE FIN- 100 IN PRE NEW A LLOTMENT SITUATION OR WHETHER AS RS 100 PER SHARE FIR 1,000 SHARES IN POST NEW ALLOT MENT SITUATION. IN ABSOLUTE TERMS, THE DIVIDENDS REMAIN THE SAME. WHETHER THE A SSESSEE IS ALLOTTED MORE SHARES OR NOT IS WHOLLY ACADEMIC AS THE ASSESSEE IS A SINGLE SHAREHOLDER OF THE SUBSIDIARY CONWANY AND THE FACE VALUE OF SHARES DOE S NOT AFFECT THE ACTUAL BENEFITS OF THE ASSESSEE, THE PERCENTAGE OF OWNERSHIP IS THE ONLY MATERIAL FACTOR- WHICH REMAINS AT 100% PRE NEW ALLOTMENT AS ALSO POST NEW ALLOTMENT...' WE ALSO NOTE THAT THE AFORESAID DECISION OF THE T RIBUNAL HAS BEEN AFFIRMED BY THE HONBLE BOMBAY HIGH COURT IN PCIT VS. STERLING OIL RESOURCES (P.) LTD. (SUPRA). THUS, TH E DECISION OF HONBLE HIGH COURT ON THIS POINT IS BINDING ON US A S HAS BEEN LAID DOWN BY HONBLE GUJARAT HIGH COURT IN THE CASE OF NIRMA INDUSTRIES LTD VS. DCIT (SUPRA), WHEREIN IT HAS BEE N HELD THAT DISMISSAL OF APPEAL RESULTS INTO MERGER OF THE ORDE R OF THE TRIBUNAL WITH THE ORDER OF THE HIGH COURT. THE CAS E OF THE ASSESSEE IS ALSO SUPPORTED BY THE DECISION OF CHENN AI BENCHES OF THE TRIBUNAL IN THE CASE OF UCAL FUEL SYSTEMS LT D. VS. ACIT (SUPRA), WHEREIN THE TRIBUNAL HAS HELD THAT THE TRA NSACTION BETWEEN ASSESSEE AND ITS WHOLLY OWNED SUBSIDIARY CO ULD NOT BE SUBJECTED TO THE PROCESS OF BENCHMARKING UNDER CHAP TER X OF THE ACT WHEREIN AGAIN THE TRIBUNAL HAS HELD THAT TH E TRANSACTION BETWEEN ASSESSEE AND ITS WHOLLY OWNED SUBSIDIARY COULD NOT BE SUBJECTED TO THE PROCESS OF BENCHMARKING UNDER CHAPTER X OF THE ACT. THE RELE VANT PORTION OF THE ORDER IS EXTRACTED AS UNDER: '46... HOWEVER, THE PARTY TO WHICH LOAN WAS ADVANCE D BY THE ASSESSEE HERE WAS NOT ONLY A SUBSIDIARY BUT ALSO ONE WHOSE CAPITAL ST OOD COMPLETELY ERODED, AND WHICH WAS SUFFERING CONTINUOUS LOSSES. NO BANKER WO ULD HAVE ADVANCED ANY SUMS TO SUCH A COMPANY SINCE THE RISK WOULD HAVE BE EN TOO MUCH. THUS THE ONLY ITA NO.1942/M/2015 M/S. AARADHANA REALITIES LTD. (FORMERLY KNOWN AS ESSAR INVESTMENTS LTD.) 44 SOURCE FOR SUCH A SUBSIDIARY TO RAISE ANY FUNDS WAS ITS PRINCIPAL ALONE. IT IS AN ACCEPTED POSITION THAT THE SUBSIDIARY COMPANY OF TH E ASSESSEE TO WHICH THE ADVANCES WERE MADE WAS SICK. THUS, FINDING A COMPAR ABLE UNCONTROLLED TRANSACTION, WHERE A LOAN WAS GIVEN TO AN ENTITY WHICH WAS SUBSI DIARY TO THE TESTED PARTY, AND WHOSE CAPITAL STOOD COMPLETELY ERODED DUE TO LOSS W AS NOT PRACTICAL OR . FEASIBLE. THE SIMPLE REASON IS THAT NO OTHER PERSON WOULD HAV E GIVEN ANY LOAN TO SUCH AN ENTITY, WHATEVER MIGHT HE THE INTEREST RATE SINCE T HE CHANCES OF RECOVERY WAS NEGLIGIBLE. IN SUCH A SITUATION, WHEN THERE COULD H AVE BEEN NO REASONABLY IDENTIFIABLE COMPARABLE UNCONTROLLED TRANSACTION, C OMPUTATION OF COMPARABLE UNCONTROLLED PRICE BY APPLYING OF RULE 10B( I), FEL L AT THE THRESHOLD. SECTION 92C(1) PRESCRIBES COMPUTATION OF ALP BY COMPARABLE UNCONTR OLLED PRICE METHOD, RESALE PRICE METHOD, COST PLUS METHOD, PROFIT SPLIT METHOD , TRANSACTIONAL NET MARGIN METHOD AND ANY OTHER METHOD PRESCRIBED BY THE BOARD COULD HAVE BEEN APPLIED. IN OUR OPINION, THE QUESTION OF BENCHMARKING THE T RANSACTION OF THE NATURE MENTIONED, APPLYING ANY OF THE METHODOLOGY PRESCRIB ED IN SEC .92C(1) DID NOT ARISE AT ALL DUE TO THE PARTICULAR FACTS AND CIRCUMSTANCE S. ACCORDING TO US, FASTENING OF AN INTEREST RATE ON THE ASSESSEE WHEN THERE WAS NO COM PARABLE UNCONTROLLED RATE THAT COULD HAVE BEEN IDENTIFIABLE WAS INCORRECT. WE, THE REFORE, HAVE NO HESITATION IN DELETING THE ADDITION MADE BY THE ASSESSING OFFICER /TPO IN THIS REGARD. GROUND NOS. 2 TO 4 ARE ALLOWED.' IN VIEW OF THE ABOVE FACTS OF THE ASSESSEES CASE VIZ-A-VIZ THE RATIO LAID DOWN BY THE VARIOUS JUDICIAL FORUMS AS DISCUSSED ABOVE, WE ARE INCLINED TO ACCEPT THE CONTENTIONS OF THE LEARNED AR FOR THE ASSESSEE THAT CHAPTER X DOES NOT APPLY T O THE TRANSACTION OF INFUSION OF FUNDS BY THE ASSESSEE IN TO ITS WHOLLY OWNED SUBSIDIARY COMPANY- HYBRID CAPITAL AND, CONSE QUENTLY, THE TRANSFER PRICING ADJUSTMENT OF RS 321,30,00,000 MADE BY THE TPO CANNOT BE SUSTAINED. SO ON THIS PROPOSITIO N THE ORDER OF THE DRP HAS TO BE SET ASIDE AND THE ADDITION H AS TO DELETED. 11.2. ON THE SECOND PROPOSITION, WE FIND THAT THE T PO HAS ASSUMED THE JURISDICTION OF BENCHMARKING THE TRANSA CTION OF INVESTMENT IN THE WHOLLY OWNED SUBSIDIARY COMPANY O N THE BASIS OF DEFECTS IN THE VALUATION OF SHARES, WHICH ACCORDING TO THE TPO COMES TO RS 13,549/-, WHICH IS MUCH LOWER T O THE VALUE OF RS 20,550 AS PER THE VALUATION REPORT GIVEN BY T HE VALUATION EXPERT UNDER DCF METHOD. ACCORDING TO THE TPO IF T HE VALUATION ITA NO.1942/M/2015 M/S. AARADHANA REALITIES LTD. (FORMERLY KNOWN AS ESSAR INVESTMENTS LTD.) 45 REPORT IS CORRECTED THEN THE EQUITY INFUSION INTO T HE SUBSIDIARY COMPANY SHOULD HAVE BEEN DONE AT RS 812.95 CRORE AS AGAINST THE ACTUAL INVESTMENT OF RS 998.75 CRORES. WE NOTE THAT THE TPO CALCULATED THE TRANSFER PRICING ADJUSTMENT BY A PPLYING THE RATE OF RS 13,549 PER SHARE TO 5 LAC EQUITY SHARES AND, THUS THE ARMS LENGTH PRICE FOR INVESTMENT WAS WORKED OUT AT RS 677,45,00,000/-. BY DOING SO THE TPO HAS EXCEEDED H IS JURISDICTION IN COMING TO THE CONCLUSION THAT A PAR TICULAR SUM SHOULD HAVE BEEN INVESTED BY THE ASSESSEE IN THE WH OLLY OWNED SUBSIDIARY COMPANY BY ISSUING THE SHARES AT RS. 13, 549/-. IN OUR CONSIDERED OPINION, THE TPO CANNOT DICTATE THE ASSESSEE WHAT AMOUNT IT SHOULD HAVE INVESTED IN ITS FOREIGN SUBSIDIARY AND, THEREFORE, WE ARE NOT IN AGREEMENT WITH THE FI NDINGS AND CONCLUSION OF THE TPO THAT THE ASSESSEE SHOULD HAV E INVESTED RS 677,45,00,000/- WHICH IS NOT THE JURISDICTION O F THE TPO. IN THIS CASE, WE NOTE THAT THE ASSESSEE HAS FOUND AN O PPORTUNITY TO INVEST IN THE FOREIGN COUNTRY TO LEND MONEY TO ARYA INFRASTRUCTURE THROUGH ITS WHOLLY OWNED FOREIGN SUB SIDIARY HYBRID CAPITAL AND ONLY WITH THAT PURPOSE THE ASSES SEE INFUSED A SUM OF ISD 212,836,000 WHICH IS EQUIVALENT TO 998 ,75,00,000. WE ALSO NOTE THAT THE SUBSIDIARY HYBRID CAPITAL HAS ADVANCED MONEY TO ARYA INFRASTRUCTURE IMMEDIATELY AFTER THE ASSESSEE INFUSED THE MONEY IN THE FOREIGN SUBSIDIARY. THE A SSESSEE RESORTED TO THE ROUTE OF INVESTMENT IN THE SUBSIDIA RY AND GOT MONEY LENT TO ARYA INFRASTRUCTURE IN VIEW OF THE RE STRICTION IMPOSED BY SECTION 6 (3)(D) OF FOREIGN EXCHANGE MAN AGEMENT ACT, 1999 READ WITH REGULATION 5 OF BORROWING OR LE NDING IN FOREIGN EXCHANGE REGULATION, WHICH PROHIBITS INDIAN RESIDENTS TO LEND DIRECTLY IN FOREIGN EXCHANGE TO A PERSON OU TSIDE INDIA. ITA NO.1942/M/2015 M/S. AARADHANA REALITIES LTD. (FORMERLY KNOWN AS ESSAR INVESTMENTS LTD.) 46 HAD THE ASSESSEE INVESTED RS 677,45,00,000 AS PER T POS VERSION, THEN THE SUBSIDIARY COULD HAVE ONLY LEND T O ARYA INFRASTRUCTURE MONEY TO THAT EXTENT ONLY. WE ALSO NOTE THAT THE NET ASSETS OF THE SUBSIDIARY HYBRID CAPITAL WERE 6. 98 CRORES, WHICH BECAME 990 CRORES AFTER INFUSION OF MONEY. S O ON THIS PROPOSITION ALSO WE FIND MERIT IN THE CONTENTION OF THE LEARNED AR FOR THE ASSESSEE AND CONSEQUENTLY, THE TRANSFER PRICING ADJUSTMENT MADE BY THE TPO CANNOT BE SUSTAINED. 11.3. ON THE THIRD PROPOSITION, ASSESSEES CONTENTI ON IS THAT UNDER THE PROVISIONS OF SECTION 92 ANY INCOME ARISI NG FROM AN INTERNATIONAL TRANSACTION SHALL BE COMPUTED HAVING REGARD TO THE ARMS LENGTH PRICE. WE NOTE THAT THE ASSESSEE HAD SUBSCRIBED TO THE SHARES OF HYBRID CAPITAL AND OUT OF THIS TRANSA CTION NO INCOME HAS OR ARISEN OR ACCRUED TO THE ASSESSEE. T HEREFORE, WE FIND MERIT IN THE CONTENTIONS OF THE LEARNED AR THA T PROVISIONS OF CHAPTER X OF THE ACT QUA TRANSFER PRICING CANNOT BE APPLIED TO THIS TRANSACTION. WE FURTHER NOTE THAT PROVISIONS OF SECTION 56(2)(VIIB) READ WITH SECTION 2(24)(XVI) WERE BROUG HT ON THE STATUTE BOOK TO BRING TO TAX THE EXCESS PREMIUM REC EIVED BY A COMPANY ON ISSUE OF SHARES. HOWEVER, SUCH PROVISIO N IS NOT APPLICABLE TO YEAR UNDER CONSIDERATION AS THE SAME IS EFFECTIVE PROSPECTIVELY AND WERE APPLICABLE FROM A.Y. 2013-14 . THEREFORE ON THIS COUNT ALSO PROVISIONS OF CHAPTER X CANNOT B E INVOKED TO DETERMINE THE ARMS LENGTH PRICE OF TRANSACTION WHI CH INVOLVED INVESTMENT INTO A FOREIGN SUBSIDIARY. THE CASE OF THE ASSESSEE FINDS SUPPORT FROM THE DECISION OF JURISDICTIONAL H IGH COURT IN THE CASE OF VODAFONE INDIA SERVICES P. LTD. VS. UOI (SUPRA), WHEREIN IT HAS BEEN HELD THAT UNLESS ANY INCOME CHA RGEABLE TO ITA NO.1942/M/2015 M/S. AARADHANA REALITIES LTD. (FORMERLY KNOWN AS ESSAR INVESTMENTS LTD.) 47 TAX ARISES ON ACCOUNT OF INTERNATIONAL TRANSACTIONS , THE PROVISIONS OF CHAPTER X BEING MACHINERY PROVISION S DO NOT APPLY IN THE ABSENCE OF INCOME. (PARA 24 & 25 PG. 3 83-384. SIMILAR VIEW HAS BEEN TAKEN BY HONBLE BOMBAY HIGH COURT IN THE CASE OF SHELL INDIA MARKETS (P.) LTD. VS. ACIT (SUPRA). THIS ISSUE HAS FURTHER BEEN DECIDED BY CO-ORDINATE BENCH IN THE CASE OF TOPS GROUP ELECTRONIC SYSTEMS LTD. VS. ITO (SUPR A), WHEREIN THE BENCH FOLLOWING THE DECISIONS OF THE HONBLE BO MBAY HIGH COURT IN THE CASE OF VODAFONE INDIA SERVICES P. LTD. VS. UOI AND SHELL INDIA MARKETS (P.) LTD. VS. ACIT HAS HELD THA T PROVISIONS AS CONTAINED IN CHAPTER X CANNOT BE APPLIED TO OUTBOUN D INVESTMENT IN A SUBSIDIARY COMPANY OUTSIDE INDIA. THIS DECISION OF THE TRIBUNAL HAS BEEN AFFIRMED BY HONB LE BOMBAY HIGH COURT IN THE CASE OF PCIT VS. TOPS GROUP ELECT RONICS SYSTEMS (SUPRA). WE FURTHER NOTE THAT CO-ORDINATE BENCHES IN THE CASE OF VIJAI ELECTRICALS VS. ADDL. CIT (SUPRA) AND HILL COUNTRY PROPERTIES LTD. VS. ADDL CIT (SUPRA) HAVE T AKEN A VIEW THAT PROVISIONS OF SECTION 92B OF THE ACT DO NOT CO VER THE TRANSACTION OF SUBSCRIPTION OF SHARES IN THE ASSOCI ATE ENTERPRISE EVEN PRIOR TO THE DECISION OF BOMBAY HIGH COURT IN THE CASE OF VODAFONE INDIA SERVICES P. LTD. VS. UOI (SUPRA) AND SHELL INDIA MARKETS (P.) LTD. VS. ACIT (SUPRA). WE FURTHER, NO TE THAT THE PROVISION OF SECTION 92B OF THE ACT WERE AMENDED BY THE FINANCE ACT, 2012 BROADENING THE SCOPE OF MEANING OF INT ERNATIONAL TRANSACTION BY INSERTING AN EXPLANATION, WHICH HAS INCLUDED THE TRANSACTION OF PURCHASE OF SHARES AS AN INTERNATION AL TRANSACTION. HOWEVER, THE SAID AMENDMENT TO SECTIO N 92B IS APPLICABLE PROSPECTIVELY FROM A.Y. 2013-14 ONWARDS AND THUS THE ASSESSEE WILL BE GOVERNED BY THE ERSTWHILE PROV ISIONS AS ITA NO.1942/M/2015 M/S. AARADHANA REALITIES LTD. (FORMERLY KNOWN AS ESSAR INVESTMENTS LTD.) 48 INTERPRETED BY VIJAI ELECTRICALS VS. ADDL. CIT (SUP RA) AND HILL COUNTRY PROPERTIES LTD. VS. ADDL CIT (SUPRA). WE N OTE THAT THE CO-ORDINATE BENCHES HAVE ALSO TAKEN A VIEW THAT THE AMENDMENT TO SECTION 92B IS NOT APPLICABLE TO THE YEARS PRIOR TO A.Y. 2013- 14 IN THE CASES OF SIRO CLINPHARM (P) LTD. VS. DCIT (SUPRA) AND JINDAL STEEL & POWER LTD. VS. ACIT (SUPRA).IN VIEW OF THE ABOVE FACTS AND CIRCUMSTANCES AND THE RATIO LAID DOWN BY VARIOUS CO- ORDINATE BENCHES, WE ARE INCLINED TO SET ASIDE THE DIRECTIONS OF THE DRP BY HOLDING THAT THE PROVISIONS OF SECTION 9 2B AS AMENDED BY THE FINANCE ACT, 2012 ARE NOT APPLICABLE AND, CONSEQUENTLY, THE TRANSFER PRICING PROVISION CANNOT BE APPLIED TO THE TRANSACTION OF SUBSCRIPTION OF SHARES BY THE AS SESSEE IN ITS WHOLLY OWNED FOREIGN SUBSIDIARY COMPANY HYBRID CAPI TAL EVEN IF ASSESSEE HAS REPORTED THE TRANSACTION AS INTERNATIO NAL TRANSACTION IN FORM 3CEB. THE MERE REPORTING OF TR ANSACTION AS INTERNATIONAL TRANSACTION IN FORM 3CEB WILL NOT IPS O FACTO MAKE THE PROVISIONS OF CHAPTER- X APPLICABLE. WE NOTE TH AT THIS CONTENTION OF THE REVENUE HAS BEEN REJECTED BY HON BLE BOMBAY HIGH COURT IN THE CASE OF VODAFONE INDIA SERVICES P. LTD. VS. UOI (SUPRA). 11.4. THE FOURTH PROPOSITION THE LEARNED COUNSEL F OR THE ASSESSEE WAS THAT THERE IS NO SHIFTING OF PROFITS O UTSIDE INDIA AS THE ASSESSEE HAS ONLY MADE INVESTMENT IN THE FOREIG N SUBSIDIARY. WE HAVE PERUSED PARA 55.5A OF CIRCULAR NO.14/2001 ISSUED BY CENTRAL BOARD OF DIRECT TAXES, WHICH CLARIFIES THAT THE BASIC INTENTION OF INTRODUCING T RANSFER PRICING PROVISIONS IN INDIA WAS TO ENSURE THAT PROFITS TAXA BLE IN INDIA ARE NOT UNDERSTATED AND THERE IS NO SHIFTING OF PRO FITS OUTSIDE ITA NO.1942/M/2015 M/S. AARADHANA REALITIES LTD. (FORMERLY KNOWN AS ESSAR INVESTMENTS LTD.) 49 THE COUNTRY. IN THE PRESENT CASE, THERE IS NO SHIF TING OF PROFITS OUTSIDE INDIA BUT A TRANSACTION OF INFUSION OF FUND S WAS MADE BY THE ASSESSEE INTO ITS WHOLLY OWNED SUBSIDIARY COMPA NY SO THAT THE SAME COULD BE LENT TO A THIRD ENTITY. WE ALSO NOTE THAT THE FOREIGN SUBSIDIARY EARNED INTEREST ON THE SAID MONE Y ADVANCED TO ARYA INFRASTRUCTURE AND OUT OF THIS EARNING THE ASSESSEE RECEIVED DIVIDEND OF USD 60 LACS I.E. RS 28,43,80,0 00/- FROM THE FOREIGN SUBSIDIARY, WHICH WAS OFFERED TO TAXATION B Y THE ASSESSEE IN ITS RETURN OF INCOME. SUCH DIVIDEND WORKED OUT A N EFFECTIVE RETURN OF 7.91% ON THE MONIES INFUSED BY THE ASSESSEE IN THE FOREIGN SUBSIDIARY WHICH IS MORE THAN THE ARMS LEN GTH INTEREST RATE OF 4% TO 5% DETERMINED BY THE TRIBUNAL BASED O N LIBOR RATES IN THE CASE OF CIT VS. ADANI PORTS (104 TAXMA NN.COM 368) AND VIDEOCON INDUSTRIES LTD. VS. ADDL. CIT (55 TAXM ANN.COM 263). FURTHER THE ASSESSEE HAS ALSO MADE PROFIT O F USD 20,64,000 ON SALE OF 100% SHARES OF HYBRID CAPITAL TO ARYA INFRASTRUCTURE WHICH HAS RESULTED INTO NET SHORT TERM CAPITAL LOSS OF RS 20.49 CRORE WHEN CONVERTED INTO INDIAN C URRENCY DUE TO FOREIGN EXCHANGE FLUCTUATIONS. SO ON THIS GROUN D ALSO THE ADJUSTMENT MADE BY THE TPO AND CONFIRMED BY THE DRP IS HELD TO BE ERRONEOUS AND AGAINST THE PROVISIONS OF THE A CT. 11.5. ON THE FIFTH PROPOSITION, THE LEARNED AR HAS OBJECTED TO THE ACTION OF THE TPO IN REJECTING THE VALUATION RE PORT SUBMITTED BY THE ASSESSEE. WE NOTE THAT THE ASSESSEE GOT THE SHARES VALUED BY THE REPORT DATED 12.02.2010, WHEREBY THE VALUE OF SHARES WERE DETERMINED AT RS 20,550 AND THE SHARES WERE ISSUED AT RS 19,975 WHEREAS THE TPO DETERMINED THE VALUE OF SHARE AT RS 13,539 AFTER MAKING CHANGES TO THE MARK ET RISK ITA NO.1942/M/2015 M/S. AARADHANA REALITIES LTD. (FORMERLY KNOWN AS ESSAR INVESTMENTS LTD.) 50 PREMIUM AND BETA USED TO ARRIVE AT THE COST OF EQUI TY. THE TPO HAS TAKEN THE MARKET RISK PREMIUM AT 10.5 AS AGAIN ST 6 TAKEN BY THE ASSESSEES VALUER. WE NOTE THAT THE TPO HAS T AKEN THE MARKET RISK PREMIUM 10.5 ON THE BASIS OF STUDY ON T HE SUBJECT PUBLISHED BY DR PABLO FERNANDEZ FOR THE YEAR 2008 W HEREAS THE ASSESSEES VALUER RELIES ON THE SIMILAR STUDY ON MA RKET RISK PREMIUM BY DR PABLO FERNANDEZ FOR 2010 WHERE THE MA RKET RISK PREMIUM WAS 6. SINCE THE ASSESSEE WAS ALLOTTED SHA RES ON 17.02.2010, THE VALUER TOOK THE MARKET RISK PREMIUM AT 6 WHICH IS CORRECT FOR THE SIMPLE REASON THAT WHEN TH E SHARES WERE ALLOTTED IN 2010 , THE MARKET RISK PREMIUM HAS TO BE TAKEN FOR 2010.THUS ADOPTION OF MARKET RISK PREMIUM AT 10.5 I S WRONG. SO FAR AS THE BETA I.E. INDUSTRY RISK PREMIUM IS CO NCERNED, THE ASSESSEES VALUER TOOK IT AT 1 WHEREAS THE TPO ADOP TED 1.27. WE NOTE THAT THE TPO ADOPTED THE UNLEVERED BETA AT 1.2 7 AS PER THE PAPER PUBLISHED BY DR DAMODARAN ON HIS WEBSITE IN RESPECT OF INVESTMENT CO(FOREIGN) BY IGNORING THE FACT THAT AS SESSEES FOREIGN SUBSIDIARY IS ENGAGED IN THE BUSINESS OF L ENDING AND FINANCING. THUS CONSIDERING THE LINE OF BUSINESS OF THE HYBRID CAPITAL THE BETA OF BANKS AND FINANCIAL SERVICES WH ICH 0.99 IS APPROPRIATE AND SHOULD HAVE BEEN CONSIDERED BY THE TPO. THE ASSESSEES VALUER CONSIDERED BETA AT 1 BASED ON ALL THESE RELEVANT INFORMATION AVAILABLE WHICH APPEARS TO BE CORRECT AND GERMANE. WE FIND MERIT IN THE SUBMISSIONS OF THE AR THAT TPO IS NOT AN EXPERT TO VALUE THE SHARES WHEREAS THE VA LUATION REPORT BY THE ASSESSEE WAS PREPARED BY A CHARTERED ACCOUNT ANT, WHO IS AN EXPERT IN THE FIELD OF VALUATION OF SHARES. MOR EOVER, WE FIND THE TPO HAS NOT BROUGHT ANY MATERIAL ON RECORD TO P ROVE THE VALUATION REPORT SUBMITTED BY THE ASSESSEE WAS WRON G. WE ALSO ITA NO.1942/M/2015 M/S. AARADHANA REALITIES LTD. (FORMERLY KNOWN AS ESSAR INVESTMENTS LTD.) 51 NOTE THAT THE TPO HAS USED THE SAME CASH FLOW PROJE CTIONS AND VALUATION METHOD AS RELIED UPON BY THE CHARTERED A CCOUNTANT IN THE REPORT DATED 12.02.2010. IT IS ALSO SEEN TH AT THE TPO HAS NOT MADE ANY REFERENCE TO THE VALUATION OFFICER OF THE DEPARTMENT BEFORE REJECTING THE VALUATION REPORT SU BMITTED BY THE ASSESSEE WHICH IN OUR OPINION IS WRONG AND AGAI NST THE PROVISIONS OF THE ACT. THE CASE OF THE ASSESSEE FI NDS SUPPORT BY THE DECISION OF THE CO-ORDINATE BENCHES IN THE CASE OF ACIT VS. KOCH CHEMICAL TECHNOLOGY GROUP (I) LTD. (SUPRA) AND GKN SINTER METALS P. LTD. VS. ACIT (SUPRA), WHEREIN IT HAS BEEN HELD THAT TPO CANNOT REJECT THE VALUATION REPORT PREPARED BY AN EXPERT WITHOUT MAKING A REFERENCE TO THE DEPARTMENT VALUATION OFFICER. ON THIS COUNT ALSO THE TRANSFER PRICING A DJUSTMENT MADE BY THE TPO CANNOT BE SUSTAINED. BESIDES WE NOTE TH AT THE ASSUMPTION MADE BY THE TPO WHILE REJECTING THE REPO RT WERE ALSO WRONG. WHILE REJECTING THE REPORT, HE HELD IT TO BE INCORRECT ON THE GROUND THAT TO ARRIVE AT THE CORRECT VALUE O F SHARES, THE AMOUNT INVESTED IN THE FOREIGN SUBSIDY AMOUNTING TO RS 998,78,87,374 SHOULD NOT HAVE BEEN CONSIDERED. BUT IN VIEW THE VALUATION COULD ONLY BE DETERMINED AFTER TAKING INTO ACCOUNT THE INCOME WHICH COULD BE EARNED BY THE FOREIGN SUB SIDIARY AFTER INFUSING OF FUNDS. IN OUR OPINION, THE VALUATION W ITHOUT CONSIDERING SUCH INVESTMENTS WOULD GIVE A MISLEADIN G AND FALLACIOUS VALUATION OF SHARES. THE TPO HAS HIMSEL F VALUED THE SHARES AFTER CONSIDERING THE INFUSED MONEY AND RESU LTANT INCOME FROM SUCH INFUSION. THIS CONTENTION OF THE ASSESSEE FINDS SUPPORT FROM THE DECISION OF HONBLE SUPREME COURT IN THE CASE OF REVA INVESTMENT P. LTD. ( 249 ITR 337), WHEREIN IT HAS BEEN HELD THAT FOR DETERMINING THE CORRECT VALUE OF SHARES, IT ITA NO.1942/M/2015 M/S. AARADHANA REALITIES LTD. (FORMERLY KNOWN AS ESSAR INVESTMENTS LTD.) 52 MUST BE VALUED AFTER CONSIDERING THE INFUSION OF CA PITAL. ON THIS SCORE THE REASONING OF THE TPO IN REJECTING THE VAL UATION REPORT CANNOT BE SUSTAINED. 11.6. WE ALSO NOTE THAT IN THE VALUATION REPORT, TH E SHARES WERE VALUED BY FOLLOWING DCF METHOD. THE TPO ALSO FOLLOW ED THE SAME METHOD OF DCF IN VALUING THE SHARES. IN OTHER WORDS BOTH THE VALUER AND TPO USED THE DCF METHOD FOR VALUING T HE SHARES AND THUS AGREED THAT DCF METHOD IS THE CORRECT METH OD TO VALUE THE SHARES. THEN CERTAINLY IT IS NOT CORRECT TO USE CUP METHOD TO VALUE THE SHARES OF HYBRID CAPITAL FOR WHICH THE TP O HAS NOT GIVEN ANY REASONS OR JUSTIFICATION. WE ALSO FIND M ERIT IN THE WITHOUT PREJUDICE CONTENTIONS OF THE ASSESSEE THAT BOTH TPO AND DRP HAVE TAKEN THE VALUE OF SHARES AT RS. 16,594/- AT WHICH THE SHARES WERE SOLD TO ARYA INFRASTRUCTURE THEREBY NOT APPRECIATING THE FACT THAT WHEN THE TRANSACTION OF PURCHASE AND SALES ARE MADE IN FOREIGN CURRENCY I.E. USD, THEN FOR APPLYIN G THE CUP METHOD , THE RATE HAS TO BE CONSIDERED IN FOREIGN C URRENCY I.E. USD AND NOT AFTER CONVERTING INTO INDIAN CURRENCY. THE PLEA OF THE ASSESSEE FINDS SUPPORT FROM THE DECISION OF THE JURISDICTIONAL HIGH COURT IN THE CASE OF CIT VS TATA AUTOCOMP SYST EM LTD(SUPRA) WHEREIN IT HAS BEEN HELD THAT IN ORDER T O BENCHMARK THE INTEREST RATE ON LOAN IN FOREIGN CURRENCY, INTE REST RATE LINKED WITH FOREIGN CURRENCY SHOULD BE CONSIDERED. SIMILAR RATIO HAS BEEN LAID DOWN BY THE HONBLE DELHI HIGH COURT IN T HE CASE OF CIT VS COTTON NATURAL (I) (P) LTD.(SUPRA). 11.7. WE FURTHER NOTE THAT BOTH THE AUTHORITIES BEL OW NAMELY THE TPO AND DRP HAVE HELD THE TRANSACTION OF SUBSCRIPTI ON OF 5,00,000 SHARES OF HYBRID CAPITAL AND SALE OF 6,00 ,000 SHARES ITA NO.1942/M/2015 M/S. AARADHANA REALITIES LTD. (FORMERLY KNOWN AS ESSAR INVESTMENTS LTD.) 53 TO ARYA INFRASTRUCTURE IN AY 2010-11 AS SHAM TRANSA CTIONS FOR THE REASONS THAT THE ALLOTMENT OF SHARES WAS MADE T O FOREIGN SUBSIDIARY PRIMARILY TO SET OFF THE LONG TERM CAPIT AL ON SALE OF 1,00,000 SHARES RS. 162,56,53,077/- AGAINST THE SHO RT TERM CAPITAL GAIN RESULTING FROM SALE OF 5,00,000 SHARES . BUT THE CONCLUSION DRAWN BY THE BOTH THE AUTHORITIES IS DEV OID OF ANY MERIT AS BOTH OF THEM HAVE OVERLOOKED THE FACT THAT LONG TERM CAPITAL GAIN ON 1,00,000 SHARES HAVE ARISEN ONLY BE CAUSE OF INFUSION OF FUNDS BY THE ASSESSEE IN ITS SUBSIDIARY HYBRID CAPITAL IN CONSIDERATION OF WHICH IT GOT THE ALLOTM ENT OF 5,00,000 SHARES IN THE ASSESSMENT YEAR 2010-11. HAD THIS INF USION OF FUNDS NOT MADE BY THE ASSESSEE, THIS LONG TERM CAPI TAL GAIN WOULD HAVE NEVER ARISEN. THEREFORE ON THIS PROPOSIT ION, WE FIND MERIT THAT THE CONCLUSION OF BOTH THE AUTHORITIES TO THE EFFECT THAT BOTH SUBSCRIPTION AND SALE OF SHARES WERE UNDE RTAKEN TO CREATE ARTIFICIAL SHORT TERM CAPITAL LOSS CAN NOT B E SUSTAINED. 11.8. ACCORDINGLY, GROUND NOS. 1 TO 10 ARE ALLOWED . 12. GROUND NO.11 READS AS UNDER: THE AO HAS ERRED IN ADDING THE AMOUNT OF TP ADJUST MENTOF RS. 2,33,000/-ON THE VALUE OF PURCHASE OF SHARESTO THE TAXABLE INCOME CO NTRARY TO THE DIRECTIONS OF DRP. 12.1. THE ISSUE RAISED IN THIS GROUND IS QUA THE TR ANSFER PRICING ADJUSTMENT OF RS 2,33,000 IN RESPECT OF PURCHASE OF SHARES OF ESSAR STEEL KARNATAKA LTD. THE FACTS IN BRIEF ARE T HAT THE TPO MADE AN ADJUSTMENT OF RS 2,33,000 WITH RESPECT TO 1 00% SHARES OF ESSAR STEEL KARNATAKA LTD. PURCHASED BY THE ASSE SSEE FROM ITS AE. THE DRP DIRECTED THE TPO TO DELETE THE ADJ USTMENT OF RS 2,33,000 HOWEVER, EVEN AFTER THE DIRECTION BY THE D RP TO DELETE ITA NO.1942/M/2015 M/S. AARADHANA REALITIES LTD. (FORMERLY KNOWN AS ESSAR INVESTMENTS LTD.) 54 ADJUSTMENT , THE AO IN THE FINAL ASSESSMENT ORDER S USTAINED THE ADJUSTMENT OF RS 2,33,000/- 12.2. THE LD AR SUBMITS THAT ALL THE ARGUMENTS AS M ADE IN SUPPORT OF GROUND NO. 1-10 ARE APPLICABLE TO THIS GROUND ALSO. THEREFORE, LD AR SUBMITS THAT THE ADJUSTMENT MADE B Y THE TPO IS LIABLE TO BE DELETED. THE LD AR SUBMITS THAT IN ANY CASE, THE DRP HAS DIRECTED THE AO TO DELETE THE ADJUSTMENT HO WEVER, THE AO HAS INCORRECTLY SUSTAINED IT THEREFORE, THE TP ADJUSTMENT OF RS.2,33,000 DESERVES TO BE DELETED AND A DIRECTION MAY KINDLY BE ISSUED. THE LD DR ON THE OTHER HAND FAIRLY CONC EDED THAT DRP HAS ALREADY DIRECTED TO DELETE THE TP ADDITION OF R S. 2,33,000/-. 12.3. AFTER HEARING BOTH THE PARTIES AND PERUSING T HE DIRECTIONS OF THE DRP, WE FIND THAT THE ADDITION OF RS 2,33,00 0 HAS BEEN DELETED BY THE DRP, HOWEVER, THE AO HAS NOT DELETED THE SAME IN THE FINAL ASSESSMENT ORDER. WE DIRECT THE AO TO DE LETE THE SAID TRANSFER PRICING ADJUSTMENT OF RS 2,33,000/-. WE H AVE ALSO DEALT WITH IDENTICAL ISSUE WHILE DISPOSING OF GROUN D NOS. 1 TO 10 ABOVE WHERE WE HAVE DIRECTED THE DELETION OF TP ADJ USTMENT. THEREFORE WE DIRECT THE AO TO DELETE THE ADDITION O F RS. 2,33,000/-. CONSEQUENTLY GROUND NO. 11 IS ALLOWED. 13. GROUND NO.12 READS AS UNDER: THE AO HAS ERRED IN COMPUTING THE LONG TERM CAPITA L GAINAT RS. 1,62,56,53,076/- AS AGAINST A SUM OF RS. 1,62,06,09,906/-AS PER THE RET URN OF INCOME AND AS ACCEPTED IN THE DRAFT ASSESSMENT ORDER. 13.1. THE ISSUE RELATES TO ERRONEOUS COMPUTATION OF LONG TERM CAPITAL GAINS. THE FACTS IN BRIEF ARE THAT THE ASSE SSEE FILED ITS RETURN OF INCOME SHOWING TOTAL LONG TERM CAPITAL GA IN OF RS 162,05,20,414/- AND AFTER SETTING OFF OTHER SHORT T ERM CAPITAL ITA NO.1942/M/2015 M/S. AARADHANA REALITIES LTD. (FORMERLY KNOWN AS ESSAR INVESTMENTS LTD.) 55 LOSS OF RS 792,174,181, THE NET TOTAL LONG TERM CAP ITAL GAIN WAS SHOWN AT RS 82,84,35,725/- HOWEVER, THE AO IN THE F INAL ASSESSMENT ORDER PASSED U/S. 143(3) HAS INCORRECTLY COMPUTED THE TOTAL LONG TERM CAPITAL GAINS AT RS 162,56,53,0 76 AT PAGE 14 OF THE FINAL ASSESSMENT ORDER. 13.2. AFTER HEARING THE RIVAL SUBMISSIONS AND PERU SING THE MATERIAL ON RECORD, WE OBSERVED THAT IN THE DRAFT A SSESSMENT ORDER DATED 27 TH MARCH, 2014, THE AO HAD CORRECTLY CALCULATED THE NET LONG TERM CAPITAL GAIN AT RS 82,84,35,725/- . HOWEVER, WHILE FRAMING THE FINAL ASSESSMENT ORDER, THE AO HA S WRONGLY CALCULATED THE LONG TERM CAPITAL GAIN AT RS. 162,56 ,53,076/-AND NOT CONSIDERED THE CAPITAL LOSSES INCURRED FROM OTH ER TRANSACTIONS. THEREFORE, CONSIDERING THE FACTS AND CIRCUMSTANCES OF THE CASE, WE FIND THAT THIS IS A MISTAKE ON THE PART OF THE AO WHILE PASSING THE FINAL ASSESSMENT ORDER. ACCORDIN GLY, WE DIRECT THE AO TO COMPUTE THE CAPITAL GAIN IN CONSONANCE WI TH THE DRAFT ASSESSMENT ORDER DATED 27 TH MARCH 2014. THE GROUND NO. 12 IS ALLOWED. 14. GROUND NO.13 READS AS UNDER: THE AO, UNDER THE DIRECTION OF DRP,HAS ERRED IN MA KING A DISALLOWANCE OF THE EXPENDITURE ON LEAVE ENCASHMENT OF RS. 1,44,60,288/ - U/S 43B OF THE ACT. 14.1. THE GRIEVANCE OF THE ASSESSEE IN THIS GROUND RELATES TO THE DISALLOWANCE U/S. 43B OF THE ACT. THE FACTS IN BRIE F ARE THAT DURING THE YEAR UNDER CONSIDERATION, THE ASSESSEE H AD CLAIMED A DEDUCTION PERTAINING TO PROVISIONS CREATED FOR LEA VE ENCASHMENT AMOUNTING TO RS. 3,21,62,602/- AS PER THE RATIO LAI D DOWN BY THE HON'BLE CALCUTTA HIGH COURT IN THE CASE OF EXID E INDUSTRIES LIMITED VS. UNION OF INDIA (292 ITR 470) WHEREIN IT HAS BEEN ITA NO.1942/M/2015 M/S. AARADHANA REALITIES LTD. (FORMERLY KNOWN AS ESSAR INVESTMENTS LTD.) 56 HELD THE PROVISIONS OF SECTION 43B(F) TO BE UNCONST ITUTIONAL. DURING THE ASSESSMENT PROCEEDINGS, THE ASSESSING OF FICER WAS NOT CONVINCED WITH THE CONTENTION OF THE ASSESSEE A ND, ACCORDINGLY, ADDED THE PROVISION FOR LEAVE ENCASHME NT TO THE INCOME OF THE ASSESSEE BY DISALLOWING THE SAME U/S. 43B ON THE GROUND THAT THE SAME WAS NOT ACTUALLY PAID. 14.2. WE HAVE HEARD BOTH THE PARTIES AND PERUSED TH E MATERIAL AVAILABLE ON RECORD INCLUDING THE JUDGMENT OF APEX COURT IN THE CASE OF UOI VS. EXIDE INDUSTRIES LIMITED (425 ITR 1 ) (SC), WHICH HAS REVERSED THE JUDGMENT OF CALCUTTA HIGH COURT AN D HAS HELD THAT LIABILITY TOWARDS LEAVE ENCASHMENT WOULD BE AL LOWED UNDER SECTION 43 B OF THE ACT ONLY IN THE YEAR IN WHICH T HE PAYMENT HAS BEEN MADE. THUS, WE FIND MERIT IN THE CONTENTI ON OF THE LEARNED AR OF THE ASSESSEE THAT DIRECTION MAY BE IS SUED TO THE ASSESSING OFFICER TO ALLOW DEDUCTION ON ACCOUNT OF LEAVE ENCASHMENT IN THE YEAR OF PAYMENT. ACCORDINGLY, WE DIRECT THE ASSESSING OFFICER TO ALLOW DEDUCTION IN RESPECT OF LEAVE ENCASHMENT PAID IN RESPECT OF PRIOR YEARS AS TO BE ALLOWED IN THE YEAR OF PAYMENT. THE GROUND NO. 13 IS ALLOWED. 15. THE GROUND NO.14 IS REPRODUCED AS UNDER: THE AO HAS ERRED IN NOT GIVING SET OFF OF BROUGHT FORWARD LOSSES/UNABSORBED DEPRECIATION OF EARLIER YEARS AGAINST THE INCOME CO MPUTED FOR THE YEAR. 15.1. THIS GROUND RELATES TO NON-GRANT OF SET-OFF OF BROU GHT FORWARD LOSSES/ UNABSORBED DEPRECIATION. BRIEFLY, T HE FACTS OF THE CASE ARE THAT DURING THE YEAR UNDER CONSIDERATION, THE APPELLANT HAD CARRIED FORWARD UNABSORBED DEPRECIATION AND LOS SES FROM THE EARLIER YEARS. HOWEVER, THE ASSESSING OFFICER W HILE PASSING ITA NO.1942/M/2015 M/S. AARADHANA REALITIES LTD. (FORMERLY KNOWN AS ESSAR INVESTMENTS LTD.) 57 THE FINAL ASSESSMENT ORDER HAS NOT GRANTED THE SET OFF OF THE BROUGHT FORWARD LOSSES/ UNABSORBED DEPRECIATION CLA IMED BY THE ASSESSEE. 15.2. AFTER HEARING THE CONTENTIONS OF BOTH THE SID ES AND PERUSING THE PROVISIONS OF SECTION 72 OF THE ACT, W E FIND THAT THE ASSESSEE IS ENTITLED TO CLAIM THE SET OFF THE BROUG HT FORWARDED LOSSES AND UNABSORBED DEPRECIATION AGAINST THE INCO ME OF THE CURRENT YEAR. THUS, THE ASSESSING OFFICERS ACTION IN NOT ALLOWING SET OFF OF BROUGHT FORWARDED LOSSES AND UNABSORBED DEPRECIATION IS WRONG AND AGAINST THE PROVISIONS OF THE ACT. WE , ACCORDINGLY, DIRECT THE AO TO ALLOW SET-OFF OF LOSSES AND UNABSO RBED DEPRECIATION IN ACCORDANCE WITH PROVISIONS OF THE I T ACT. THE GROUND NO. 14 IS ALLOWED. 16. THE GROUND NO. 15 AND 16 ARE REPRODUCED AS UNDE R: 15.THE AO HAS ERRED IN ADDING A SUM OF RS. 321,3 2,33,000/-TOWARDS TP ADJUSTMENTS AND ANOTHER SUM OF RS. 3,21,62,602/- TO WARDS PROVISIONS LEAVE ENCASHMENT TO THE NET PROFIT OF THE APPELLANT FOR W ORKING OUT THE BOOK PROFIT U/S 115JB OF THE ACT. 16.THE AO HAS ERRED IN ADDING A SUM OF RS.183, 01,50,853/-TOWARDS TP ADJUSTMENTS AND ANOTHER SUM OF RS. RS. 3,21,62,602 /- TOWARDS PROVISIONS LEAVE ENCASHMENT TO THE NET PROFIT OF THE APPELLANT FOR W ORKING OUT THE BOOK PROFIT U/S 115JB OF THE ACT UNDER THE ALTERNATIVE COMPUTATION OF INCOME ON PROTECTIVE BASIS. 16.1. THE ISSUE IN THESE GROUNDS RELATE TO ADJUSTME NTS IN THE COMPUTATION OF BOOK PROFITS UNDER SECTION 115JB OF THE ACT. BRIEFLY, THE FACTS OF THE CASE ARE THAT DURING THE YEAR UNDER CONSIDERATION, THE ASSESSEE HAD DECLARED A LOSS UND ER THE NORMAL PROVISIONS OF THE ACT AS WELL AS A BOOK LOSS UNDER SECTION 115JB OF THE ACT. THE ASSESSING OFFICER WHILE CO MPUTING THE INCOME CHARGEABLE TO TAX UNDER THE NORMAL PROVISION S OF THE ACT ITA NO.1942/M/2015 M/S. AARADHANA REALITIES LTD. (FORMERLY KNOWN AS ESSAR INVESTMENTS LTD.) 58 COMPUTED ASSESSED INCOME AFTER TAKING INTO CONSIDER ATION THE AFOREMENTIONED TP ADJUSTMENT, DISALLOWANCE UNDER SE CTION 43B OF THE ACT AND DISALLOWANCE UNDER SECTION 14A OF TH E ACT READ WITH RULE 8D. WHILE COMPUTING BOOK PROFIT UNDER SEC TION 115JB OF THE ACT, THE ASSESSING OFFICER ADDED DISALLOWANC E UNDER SECTION 14A R.W. RULE 8D. HOWEVER, WHILE PASSIN G THE FINAL ASSESSMENT ORDER, THE ASSESSING OFFICER ADDED TRANS FER PRICING ADJUSTMENT OF RS. 321,32,33,000 AND PROVISION FOR L EAVE ENCASHMENT RS. 3,21,62,602 TO THE BOOK PROFIT. 16.2. THE LEARNED AR SUBMITTED THAT ADDITION MADE BY THE ASSESSING OFFICER DIRECTLY IN THE FINAL ASSESSMENT ORDER UNDER SECTION 115JB WITH RESPECT TO TRANSFER PRICING ADJU STMENT OF RS. 321,32,33,000 AND PROVISION FOR LEAVE ENCASHMENT OF RS. 3,21,62,602 IS CONTRARY TO THE PROVISIONS OF SECTIO N 144C OF THE ACT. HE FURTHER SUBMITTED THAT THE ASSESSING OFFICE R CANNOT MAKE A DISALLOWANCE WHICH WAS NOT MADE IN THE DRAFT ORDER PASSED UNDER SECTION 144C(1) OF THE ACT. IN THIS RE GARD, THE LEARNED AR RELIED ON THE FOLLOWING DECISIONS OF TAT A MOTORS LTD. VS. DCIT (105 TAXMANN.COM 7) AND PCIT VS. WOCO MOTH ERSON (406 ITR 375).THE LEARNED AR, WITHOUT PREJUDICE TO THE ABOVE, ALSO SUBMITTED THAT TRANSFER PRICING ADJUSTMENT MAD E UNDER SECTION 92CA OF THE ACT CANNOT BE ADDED WHILE COMPU TING BOOK PROFITS UNDER SECTION 115JB OF THE ACT AS THE EXPLA NATION - 1 TO SECTION 115JB DOES NOT PROVIDE FOR IT. IN SUPPORT O F HIS ARGUMENTS, THE LEARNED AR RELIED ON THE ORDERS OF T HE TRIBUNAL IN THE CASE OF OWENS CORNING (INDIA) P. LTD. VS. DC IT (70 TAXMANN.COM 395), WHEREIN A SIMILAR VIEW HAS BEEN T AKEN. THE LEARNED AR FURTHER SUBMITTED THAT THE PROVISION FOR LEAVE ITA NO.1942/M/2015 M/S. AARADHANA REALITIES LTD. (FORMERLY KNOWN AS ESSAR INVESTMENTS LTD.) 59 ENCASHMENT CANNOT BE DISALLOWED UNDER SECTION 115JB OF THE ACT AS IT IS NOT IN THE NATURE OF UNASCERTAINED LIA BILITY. IN SUPPORT OF THIS HE PLACED RELIANCE ON THE DECISION OF THE TRIBUNAL IN THE CASE OF CIT VS. KIRLOSKAR SYSTEMS LTD. (220 TAXMAN 1) (KAR.); CAPRIHANS INDIA LTD. VS. DCIT (114 TAXMANN. COM 538) AND TORM SHIPPING INDIA PVT LTD. VS. ITO (88 TAXMAN N.COM 859). THE LD AR THEREFORE PRAYED THAT THE GROUNDS RAISED BY THE ASSESSEE MAY KINDLY BE ALLOWED. 16.3. THE LEARNED DR RELIED ON THE ORDERS OF THE AU THORITIES BELOW. 16.4. WE HAVE HEARD BOTH THE PARTIES AND PERUSED TH E FACTS ON RECORD. WE FIND THAT IN THIS CASE THE TPO HAS MAD E ADJUSTMENT WITH RESPECT TO TRANSFER PRICING AND PROVISION FOR LEAVE ENCASHMENT DIRECTLY IN THE FINAL ASSESSMENT ORDER. WE NOTE THAT THE ASSESSING OFFICER HAS NOT MADE ANY DISALLOWANCE IN THE DRAFT ASSESSMENT ORDER PASSED U/S. 144C(1) OF THE ACT. W E, THEREFORE, FIND MERIT IN THE CONTENTIONS OF THE LEARNED AR THA T THE ADDITIONS/ADJUSTMENTS WHICH ARE NOT MADE IN THE DRA FT ASSESSMENT ORDER CANNOT BE MADE IN THE FINAL ASSESS MENT ORDER. THE CASE OF THE ASSESSEE FINDS SUPPORT FROM THE DEC ISIONS IN THE CASE OF TATA MOTORS LTD. VS. DCIT (SUPRA) AND PCIT VS. WOCO MOTHERSON (SUPRA). IN VIEW OF THE ABOVE FACTS AND THE RATIO LAID DOWN BY THE CO-ORDINATE BENCH, WE DIRECT THE ASSESS ING OFFICER TO DELETE THE ADJUSTMENTS MADE IN RESPECT OF TRANSF ER PRICING ADJUSTMENT OF RS. 321,32,33,000 AND PROVISION FOR L EAVE ENCASHMENT RS. 3,21,62,602. EVEN SUCH ADDITIONS CA N NOT BE MADE U/S 115 JB OFV THE ACT AS THE SAME DO NOT FALL UNDER THE EXPLANATION 1 TO THAT SECTION. WE ARE THEREFORE INC LINED TO ALLOW ITA NO.1942/M/2015 M/S. AARADHANA REALITIES LTD. (FORMERLY KNOWN AS ESSAR INVESTMENTS LTD.) 60 THE GROUNDS RAISED BY THE ASSESSEE. GROUND NO. 15 A ND 16 ARE ALLOWED. 17. THE ASSESSEE HAS ALSO RAISED ADDITIONAL GROUND UNDER RULE 29 OF INCOME TAX APPELLATE TRIBUNAL RULES, 1963 WHI CH AS UNDER: 1. THE LEARNED ASSESSING OFFICER (AO) ERRED IN MAK ING DISALLOWANCE UNDER SECTION 14A OF THE ACT AMOUNTING TO RS.10,89,38,861 /- UNDER THE NORMAL PROVISIONS AS WELL AS UNDER SECTION 115JB OF THE ACT. 2. WITHOUT PREJUDICE TO THE ABOVE, THE LD. AO ERRED IN MAKING DISALLOWANCE UNDER SECTION 14A OF THE ACT IN EXCESS OF EXEMPT IN COME I.E. DIVIDEND RECEIVED DURING THE YEAR UNDER APPEAL. 17.1 BRIEFLY, THE FACTS OF THE CASE ARE THAT THE AS SESSEE HAD EARNED DIVIDEND INCOME OF RS 29,84,73,040, OUT OF W HICH AMOUNT OF RS 2,53,70,047 HAS BEEN CLAIMED AS EXEMPT UNDER SECTION 10 OF THE ACT AND REST WAS OFFERED TO TAX A S DIVIDEND RECEIVED FROM FOREIGN SUBSIDIARY. THE ASSESSING OF FICER DURING THE COURSE OF THE ASSESSMENT PROCEEDINGS INVOKED PR OVISION OF SECTION 14A R.W. RULE 8D AND MADE A DISALLOWANCE OF RS.10,89,38,861 UNDER NORMAL COMPUTATION AS WELL AS UNDER SECTION 115JB OF THE ACT. THUS, THE DISALLOWANCE MA DE BY THE ASSESSING OFFICER HAS EXCEEDED THE EXEMPT INCOME OF RS. 2,53,70,407. 17.2 THE LEARNED AR SUBMITTED BEFORE US THAT THE IS SUE RAISED IN THE ADDITIONAL GROUND IS ARISING OUT OF THE ASSESSM ENT RECORD AND DOES NOT REQUIRE ANY FURTHER VERIFICATION OF FA CTS AND, ACCORDINGLY MAY BE ADMITTED. IN DEFENCE, HE RELIED ON THE DECISION OF HONBLE APEX COURT IN THE CASE OF NATIO NAL THERMAL POWER CO. VS CIT (2291TR 383) WHEREIN IT HAS BEEN H ELD THAT ITA NO.1942/M/2015 M/S. AARADHANA REALITIES LTD. (FORMERLY KNOWN AS ESSAR INVESTMENTS LTD.) 61 GROUND NOT RAISED BEFORE THE LOWER AUTHORITIES CAN BE RAISED FOR THE FIRST TIME BEFORE THE TRIBUNAL. 17.3 THE LEARNED DR, ON THE OTHER HAND, STRONGLY OB JECTED TO THE ADMISSION OF ADDITIONAL GROUND. 17.4 AFTER HEARING BOTH THE PARTIES WE FIND THAT TH E ISSUE IS EMANATING OUT OF THE ASSESSMENT RECORD AND, THEREFO RE, WE ARE INCLINED TO ADMIT THE SAME FOR ADJUDICATION I VIEW OF THE RATIO LAID DOWN BY THE HONBLE APEX COURT IN THE CASE OF NATIONAL THERMAL POWER CO. VS CIT (SUPRA). 17.5 WE HAVE HEARD THE PARTIES AND HAVE PERUSED THE MATERIAL ON RECORD. WE OBSERVE THAT IN THIS CASE THE EXEMPT INCOME IS RS 2,53,70,407 WHEREAS THE DISALLOWANCE MADE BY THE AS SESSING OFFICER IS RS. 10,89,38,861 UNDER THE NORMAL PROVIS IONS OF THE ACT AS WELL AS U/S. 115JB. IN OUR OPINION, THE AMO UNT OF DISALLOWANCE CANNOT EXCEED THE EXEMPT INCOME AS HAS BEEN HELD BY HONBLE SUPREME COURT IN THE CASE OF MAXOPP INVESTMENT PVT. LTD. VS. CIT (2018) 91 TAXMAN .COM 154 SC. BESIDES, THE DISALLOWANCE MADE U/S. 14A CAN NOT BE ADDED TO THE BOOK PROFIT AS COMPUTED U/S. 115JB OF THE ACT AS HAS BEEN HELD IN THE CASE OF TATA MOTORS LTD. VS. DCIT (105 TAXMANN.COM 7) AND DCIT VS. EDELWEISS COMMODITIES ( 121 TAXMANN.COM 223). ACCORDINGLY, WE DIRECT THE ASSES SING OFFICER TO RESTRICT THE DISALLOWANCE U/S. 14A TO RS 2,53,70 ,407 UNDER THE NORMAL PROVISIONS OF THE ACT AND FURTHER DIRECT ED THE ASSESSING OFFICER NOT TO MAKE ANY ADDITION U/S. 115 JB OF THE ACT WHILE COMPUTING BOOK PROFIT. IN THE RESULT, AD DITIONAL GROUND NO.1 IS ALLOWED. SINCE WE HAVE ALLOWED THE ADDITIONAL ITA NO.1942/M/2015 M/S. AARADHANA REALITIES LTD. (FORMERLY KNOWN AS ESSAR INVESTMENTS LTD.) 62 GROUND NO.1 IN FAVOUR OF THE ASSESSEE, THE ADDITION AL GROUND NO.2 DOES NOT REQUIRE ANY ADJUDICATION. 18. IN THE RESULT, THE APPEAL OF THE ASSESSEE IS AL LOWED. ORDER PRONOUNCED IN THE OPEN COURT ON 08.01.2021. SD/- SD/- ( RAM LAL NEGI) (RAJESH KUMAR) JUDICIAL MEMBER ACCOUNTANT MEMBER MUMBAI, DATED: 08.01.2021. * KISHORE, SR. P.S. COPY TO: THE APPELLANT THE RESPONDENT THE CIT, CONCERNED, MUMBAI THE CIT (A) CONCERNED, MUMBAI THE DR CONCERNED BENCH //TRUE COPY// [ BY ORDER DY/ASS TT. REGISTRAR, ITAT, MUMBAI.