DCIT CIR. 2(2), MUMBAI V. M/s. KAIZEN COMMERCIAL P. LTD., MUMBAI

ITA 5974/MUM/2005

• Counselvise Citation: [2011] 140 COUNSELVISE.COM (IT) 49159 (ITAT-MUMBAI)
• Duration Of Justice: 5 year(s) 8 month(s) 3 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 10-06-2011
• Appeal Filed By: Department
• Order Result: Dismissed
• Bench Allotted: E
• Next Hearing Date: 22-01-2010
• Assessment Year: 2002-2003
• Appeal Filed On: 07-10-2005
• Result in Favour of: Assessee
• Court: TRIBUNAL

Judgement Text

1 ITA NO. 5974/MUM/2005 (ASST YEAR 2002-03 IN THE INCOME TAX APPELLATE TRIBUNAL IN THE INCOME TAX APPELLATE TRIBUNAL IN THE INCOME TAX APPELLATE TRIBUNAL IN THE INCOME TAX APPELLATE TRIBUNAL MUMBAI MUMBAI MUMBAI MUMBAI E EE E BENCH BENCH BENCH BENCH MUMBAI BENCHES, MUMBAI MUMBAI BENCHES, MUMBAI MUMBAI BENCHES, MUMBAI MUMBAI BENCHES, MUMBAI BEFORE SHRI BEFORE SHRI BEFORE SHRI BEFORE SHRI P M JAGTAP, P M JAGTAP, P M JAGTAP, P M JAGTAP, AM & AM & AM & AM & SHRI SHRI SHRI SHRI VIJAY PAL RAO, JM VIJAY PAL RAO, JM VIJAY PAL RAO, JM VIJAY PAL RAO, JM ITA NO. ITA NO. ITA NO. ITA NO. 5974/MUM/2005 5974/MUM/2005 5974/MUM/2005 5974/MUM/2005 (ASST YEAR (ASST YEAR (ASST YEAR (ASST YEAR 2002 2002 2002 2002- -- -03 0303 03) )) ) THE DY COMMR OF INCOME TAX CIR 2(2), MUMBAI VS M/S KAIZEN COMMERCIAL PVT LTD 29 SHARADS SADAN SA BRELI ROAD, FOR MUMBAI 400 001 ( (( (APPELLANT APPELLANT APPELLANT APPELLANT) )) ) (RESPONDENT) (RESPONDENT) (RESPONDENT) (RESPONDENT) PAN NO. PAN NO. PAN NO. PAN NO.AAACA7116L AAACA7116L AAACA7116L AAACA7116L A SSESSEE BY SHRI J D MISTRY REVENUE BY SHRI VIMAL GUPTA (SPECIAL COUNSEL) PER PER PER PER VIJAY PAL RAO VIJAY PAL RAO VIJAY PAL RAO VIJAY PAL RAO, , , , JM JMJM JM THIS APPEAL FILED BY THE REVENUE IS DIRECTED THE OR DER DATED 21.7.2005 OF THE CIT(A) RELATING TO AY 2002-03. 2 THE REVENUE HAS RAISED THE FOLLOWING GROUNDS: I) THE LD CIT(A) HAS ERRED IN DELETING THE ADDITIO N OF RS. 42 CRORES MADE U/S 28(IV). II) THE LD CIT(A) HAS ERRED IN HOLDING THAT NO BENE FIT AT ALL AROSE TO THE ASSESSEE WHEN IN FACT A HUGE BENEFIT HAS ARISEN WHI CH IS INDICATED BY THE EVER-SOARING VALUE OF THE RCPL SHARES. III) THE LD CIOT(A) HAS ERRED IN FAILING TO TAKE NO TE OF THE BUSINESS ACTIVITIES OF THE COMPANY AND ITS DIRECTOR, AND THE NEXUS BETW EEN ITS BUSINESS AND BENEFIT DERIVED. IV) THE LD CIT(A) HAS ERRED IN IGNORING HE FACT THA T THE RCPL SHARES WERE WORTH FOR MORE THAN THEIR FACE VALUE EVEN AT THE TI ME OF ALLOTMENT, IN VIEW OF THE GRAND VALUE AND THE INHERENT ECONOMIC STRENG TH OF THE RELIANCE GROUP. 2 ITA NO. 5974/MUM/2005 (ASST YEAR 2002-03 V) THE LD CIT(A) OUGHT TO HAVE APPRECIATED THE POSI TION THAT SEC. 28(IV) IS COUCHED IN THE BROADEST OF TERMS AND THAT WHAT ALL IT REQUIRES IS THAT SOME BENEFIT OR PERQUISITE SHOULD HAVE ARISEN FROM THE B USINESS. VI) THE LD CIT(A) SHOULD HAVE APPRECIATED THE POINT MADE BY THE ASSESSING OFFICER THAT THE ASSESSEE AND ITS DIRECTOR HAD BEE N ALL ALONG RENDERING SERVICES OF THE BUSINESS NATURE TO THE RELIANCE GRO UP AND THE ALLOTMENT OF RCPL SHARES AT FACE VALUE CANNOT BUT BE IN CONSIDER FOR THOSE SERVICES . 2.1 FROM THE GROUNDS RAISED BY THE REVENUE, THE ONL Y ISSUE ARISES FOR OUR CONSIDERATION AND ADJUDICATION IS WHETHER IN THE FA CTS AND CIRCUMSTANCES OF THE CASE, THE CIT(A) IS JUSTIFIED IN DELETING THE ADDIT ION OF RS. 42 CRORES MADE BY THE AO U/S 28(IV) OF THE IT ACT. 3 FACTS OF THE CASE ARE THAT FROM THE BALANCE SHEE T, IT HAS BEEN NOTICED BY THE ASSESSING OFFICER THAT THE ASSESSEE COMPANY H AS SHOWN RS. 3 CRORES INVESTMENT IN THE SHARES OF M/S RELIANCE COMMUNICAT IONS PVT LTD (IN SHORT RCPL). FROM THE DETAILS, IT HAS BEEN FOUND THAT T HE 3 CRORES SHARES OF FACE VALUE OF RE/ 1/- EACH WERE ALLOTTED TO THE ASSESSEE COMPA NY AT PAR BY M/S RCPL ON 2.4.2001. M/S RCPL IS NOW KNOWN AS RELIANCE INFORC OMN LTD (IN SHORT RICL)., THE COMPANY WHICH IS ENGAGED IN THE BUSINESS OF MO BILE TELECOM. THE ASSESSING OFFICER NOTICED THAT RCIL SUBSCRIBED TO A ND WAS ALSO ALLOTTED EQUITY SHARES OF THE COMPANY AS UNDER: A) 32.02 CRORES OF EQUITY SHARES ON 2.11.2002 AT A PRICE OF RS. 53.71 PER SHARE B) 18.65 CRORES OF EQUITY SHARES ON 9.9.2003 AT A P RICE OF RS. 50.4 PER SHARE C) 50.67 CRORES OF EQUITY SHARES ON 11.11.2003 AT PAR AGAINST WARRANTS. 3.1 ACCORDINGLY, THE RCIL ALLOTTED 101.34 CRORE OF EQUITY SHARES ON AN AVERAGE PRICE OF RS. 27.35 PER SHARE. THE AFORESAID ALLOTME NTS AT THE PREMIUMS MENTIONED ABOVE WERE AT ALL TIMES WITH THE APPROVAL OF THE BOARD OF DIRECTORS OF THE COMPANY. IT IS QUITE OBVIOUS FROM THE ABOVE FA CTS THAT EACH TIME THE 3 ITA NO. 5974/MUM/2005 (ASST YEAR 2002-03 COMPANY ISSUED SHARES, IT HAS BEEN DONE AFTER BOARD OF THE COMPANY TAKEN INTO ACCOUNT ALL THE FINANCIAL ASPECTS AND FACTORS RELEV ANT TO THE PRICING OF THE SHARES TO BE ISSUED TO THE SUBSCRIBER. THE MEMBERS OF THE COMPANY BOARD HAVE DONE IT WITH PROPER APPLICATION OF MIND AND VALUATIONS ARE APPROPRIATE CONSIDERING THE FACT AND CIRCUMSTANCES PREVAILING AT THE TIME OF IN SURANCE OF THE SHARES. THE ASSESSING OFFICER OBSERVED FROM THE DIRECTORS REPO RT FOR THE YEAR ENDED 31.3.2001 OF RCPL THAT SHRI MANOJ MODI, DIRECTOR O F THE ASSESSEE COMPANY IS ALSO A DIRECTOR IN RCPL. FROM THE SAID REPORT, IT W AS ALSO SEEN THAT THE FOLLOWING INFORMATION HAS BEEN FURNISHED: DURING THE YEAR, THE COMPANY APPLIED FOR LICENSES TO OPERATE BASIC TELEPHONE SERVICE IN 19 TELEPHONE CIRCLES COMPRISIN G 19 STATES AND 3 UNION TERRITORIES ACROSS THE COUNTRIES WHICH WILL COVER A BOUT 92.5 CRORES OF POPULATION (APPROXIMATELY 90%) AND 25.94 LACES SQ. KMS OF GEOGRAPHICAL AREA (APPROXIMATELY 84%) OF THE COUNTRY. THE COMPAN Y HAS ALREADY RECEIVED THE LICENSE TO PROVIDE THE SAID SERVICES I N 16 OUT OF THE 8 TELECOM CIRCLES. THE COMPANY EXPECTS TO RECEIVE THE LICENSE FOR THE TAMIL NADU TELECOM CIRCLE SHORTLY. THE LICENSE FOR THE JAMMU A ND KASHMIR TELECOM CIRCLE IS YET TO B ISSUED BY THE GOVT. THE COMPANY EXPECTS TO ROLL OUT THE BASIC TELEPHONE SERVICES DURING THE FY 2002-03 UTIL ISING THE STATE OF THE ART OPTIC FIBRE NETWORK CAPABLE TO TRANSMIT TERABIT CAPACITY. DURING THE YEAR, THE COMPANY HAD ALSO APPLIED FOR LICENSE FOR PROVIDING NATIONAL LONG DISTANCE SERVICE. PURSUANT THERETO, THE COMPANY AHS RECEIVED A LETTER OF INTENT (LOI) CONVEYING THE APPROVAL FOR AWARD OF LI CENSE SUBJECT TO COMPLIANCE OF CERTAIN TERMS AND CONDITIONS. THE COM PANY INTENDS TO COMPLY WITH THE CONDITIONS AND CONVERT THE LOI INTO A LICENSE DURING THE FY 2001-02. 3.2 IT WAS FURTHER OBSERVED BY THE ASSESSING OFFICE R THAT IN THE CASE OF THE ASSESSEE, THE SHARES HAVE BEEN ALLOTTED BY RICL AT PAR. FURTHER, IT WAS NOTED THAT IT WOULD APPEAR AN ELEMENT OF COMPENSATION IS EMBEDDED IN THE ALLOTMENT OF SHARES THAT THE COMPANY RECEIVED. FURTHER, SHRI MANON MODI IS A COMMON DIRECTOR IN BOTH THE COMPANIES. IT IS ALSO OBSERVED THAT THE ASSESSEE COMPANY HAS IN THE PAST RENDERED SERVICES TO M/S RELIANCE I NDUSTRIES LTD (RIL). ACCORDING 4 ITA NO. 5974/MUM/2005 (ASST YEAR 2002-03 TO THE ASSESSING OFFICER, THE TRANSACTIONS WOULD, A TTRACT THE PROVISIONS OF SEC 28(IV), WHICH IS REPRODUCED BELOW: THE FOLLOWING INCOME SHALL BE CHARGEABLE TO INCOME TAX UNDER THE HEAD PROFITS AND GAINS OF BUSINESS OR PROFESSION: IV) THE VALUE OF ANY BENEFIT OR PERQUISITE, WHETHER CONVERTIBLE INTO MONEY OR NOT, ARISING FROM BUSINESS OR THE EXE RCISE OF A PROFESSION. 3.3 THE ASSESSING OFFICER WAS OF THE VIEW THAT THE ASSESSEE COMPANY HAS BEEN PROVIDING SERVICES TO RELIANCE GROUP OF COMPAN IES IN THE EARLIER YEARS AND THEREFORE, TO BENEFIT THE ASSESSEE COMPANY, 3 CRORE S SHARES OF RCIL HAVE BEEN ALLOTTED AT THE FACE VALUE. FURTHER, SHRI MANOJ MOD I IS COMMON DIRECTOR IN THE ASSESSEE COMPANY AND RICL; SHRI MANOJ MODI WAS PRIV Y TO ALL THE EVENTS OCCURRING IN THE DEVELOPMENT OF RICL. FURTHER, TH E RCIL HAD ALREADY APPLIED FOR TELECOM LICENSES, HAD MUSTERED FUNDS AND WAS IN THE PROCESS OF COMPLETION OF MANY PROCEDURES FOR ESTABLISHING THE TELECOM BUSINE SS BEFORE THE DATE OF ALLOTMENT OF SHARES TO THE ASSESSEE COMPANY I.E. 2. 4.2001. IT WAS FURTHER OBSERVED THAT THE VALUE OF SHARES HAD ALREADY INCRE ASED BY VIRTUE OF COMPLETION OF VARIOUS PROCEDURES AND PASSAGE OF TIME. ACCO RDINGLY, THE ASSESSING OFFICER, TOOK THE FAIR VALUE OF THE SHARES OF RICL ON 2.4.20 01 AS RS 15/- PER SHARE AT PREMIUM OF RS. 14/- PER SHARE AND HELD THAT THE ASS ESSEE COMPANY HAS ACQUIRED BENEFIT OF RS. 42 CRORE ON ACCOUNT OF ALLOTMENT OF 3 CRORES SHARE OF RICL AND ADDED THE SAME TO THE TOTAL INCOME OF THE ASSESSEE. 4 ON APPEAL, THE CIT(A) DELETED THE ADDITION MADE B Y THE ASSESSING OFFICER AND HELD THAT IT IS NOT POSSIBLE TO HOLD THAT THE S HARES IN QUESTION COULD BE COMMANDING ANY PREMIUM AT ALL AS ON 2.4.2001. HE, T HEREFORE, CONCLUDED THAT 5 ITA NO. 5974/MUM/2005 (ASST YEAR 2002-03 THERE IS NO BENEFIT THAT AROSE TO THE ASSESSEE, MUC H LESS FROM BUSINESS CARRIED OUT BY THE ASSESSEE. 5 BEFORE US, THE LD SPECIAL COUNSEL FOR THE REVENUE HAS SUBMITTED THAT THE ASSESSEE RECEIVED BENEFIT IN THE SHAPE OF ALLOTMENT OF SHARES IN ITS FAVOUR AT PAR. THE SAID BENEFIT AROSE FROM THE BUSINESS. HE REFERR ED THE ASSESSMENT ORDER AND SUBMITTED THAT THE ASSESSEE COMPANY HAS BEEN PROVID ING SERVICES TO THE RELIANCE GROUP OF COMPANIES IN EARLIER YEARS AND TH EREFORE, TO BENEFIT THE ASSESSEE COMPANY, RS. 3 CRORES SHARES OF M/S RICL W ERE ALLOTTED AT FACE VALUE. THEREFORE, THE ASSESSEE RECEIVED THE BENEFIT OF ALL OTMENT OF THE SHARES AT PAR WITHOUT PAYING ANY PREMIUM. THE SPECIAL COUNSEL FO R THE REVENUE, THEN REFERRED THE ANNUAL REPORT OF RICL FOR THE FY 2000-01 AT PAG E 1 TO 15 OF THE PAPER BOOK AND SUBMITTED THAT THE DIRECTORS REPORT SHOW THAT T HE RCPL PRESENTLY KNOWN AS RICL APPLIED FOR LICENSES TO OPERATE BASIC TELEPHON E SERVICES IN 18 TELECOM CIRCLES COMPRISING 19 STATES AND 3 UNION TERRITORIE S ACROSS THE COUNTRY. IT IS ALSO STATED IN THE SAID REPORT THAT THE COMPANY HAS ALRE ADY RECEIVED THE LICENSE TO PROVIDE THE SAID SERVICES IN 16 OUT OF 18 TELEPHONE CIRCLES AND EXPECTED TO RECEIVE THE LICENSE FOR THE REMAINING TELECOM CIRCL ES SHORTLY. APART FROM THIS, THE DIRECTORS REPORT FURTHER STATES THAT DURING THE YE AR, THE COMPANY HAD APPLIED LICENSE FOR PROVIDING NATIONAL LONG DISTANCE SERVIC ES (NLDS). THE COMPANY HAS RECEIVED A LETTER OF INTENT (LOI). THEN, HE HAS S UBMITTED THAT THE DIRECTORS REPORT FOR THE YEAR ENDING 31.3.2001 CLEARLY INDICA TES THAT THE ASSESSEE COMPANY APPLIED FOR OPERATION OF BASIC TELEPHONE SERVICES A S WELL AS THE NATIONAL LONG DISTANCE SERVICES DURING THE YEAR AND RECEIVED LICE NSE FOR OPERATING THE BASIC TELEPHONE SERVICES IN 16 OUT OF 18 TELEPHONE CIRCLE S. THUS, HE HAS CONTENDED 6 ITA NO. 5974/MUM/2005 (ASST YEAR 2002-03 THAT THE VALUE OF THE SHARES HAD ALREADY INCREASED, WHICH IS ALSO CLEAR FROM THE VALUE OF THE SHARES BECAME RS. 27/- IN NOV 2002. 5.1 THE LD SPECIAL COUNSEL THEN REFERRED TO THE D IRECTORS REPORT PLACED AT PAGE 3 OF THE PAPER BOOK AND SUBMITTED THAT SHRI MA JOJ MODI WAS ONE OF THE DIRECTORS OF RCPL (CHANGED AS RICL), WHO IS ALSO A DIRECTOR OF ASSESSEE COMPANY HAVING MORE THAN 99% OF THE SHARES HOLDING. WHEN T HE COMPANY HAD A BUSINESS RELATION WITH RELIANCE GROUP OF COMPANIES AND RICL IS ONE OF THE RELIANCE GROUP COMPANIES, THEREFORE, THE CASE OF THE ASSESSEE CLEA RLY FALLS U/S 28(IV) OF THE I T ACT. HE REFERRED A DEBIT NOTE PLACED AT PAGE 33 OF THE PAPER BOOK AND SUBMITTED THAT THE ASSESSEE WAS WORKING WITH RIL AND RAISED A DEBIT NOTE IN RESPECT OF THE WORK EXECUTED BY THE ASSESSEE. THEREFORE, THE LD S PECIAL COUNSEL EMPHASIZED THAT THE ASSESSEE WAS HAVING BUSINESS RELATION AND DIRECT BUSINESS WITH RELIANCE GROUP OF COMPANIES. HE THEN REFERRED TO THE LETTE R DATED 9.1.2003 WRITTEN BY THE ASSESSEE TO THE ASSESSING OFFICER PLACED AT PA GE 29 TO 32 OF THE PAPER BOOK AND SUBMITTED THAT THE ASSESSEE HAS ADMITTED BEFORE THE ASSESSING OFFICER THAT THE ASSESSEE WAS DOING BUSINESS WITH RIL AS THE SER VICES OF THE ASSESSEE WERE HIRED. RICL SUBSEQUENTLY ALLOTTED THE SHARES @ 53. 71 PER SHARE ON 2.11.2002 AND THEREAFTER @ 50.94 PER SHARE ON 9.9.203. THEREF ORE, THE ASSESSING OFFICER TOOK THE AVERAGE PRICE OF THE SHARE AT RS. 27.35 PE R SHARE. HE HAS FURTHER CONTENDED THAT WHEN THESE SHARES WERE ALLOTTED ON 2 .4.2001 TO SEVEN PARTIES INCLUDING THE ASSESSEE, ALL THESE SEVEN PARTIES WER E RELATED TO THE RELIANCE GROUP OF COMPANIES; AND THEREFORE, THE SHARES WERE ALLOTTED AT PAR WITHOUT CHARGING ANY PREMIUM. SINCE THE SHARES WERE ISSUED ON DISCOUNT; THEREFORE, IT AMOUNTS TO THE BENEFIT RECEIVED BY THE ASSESSEE FOR BUSINESS. HE STRONGLY RELIED ON THE ORDER OF THE ASSESSING OFFICER. 7 ITA NO. 5974/MUM/2005 (ASST YEAR 2002-03 5.2 ON THE OTHER HAND, THE SR COUNSEL FOR THE ASSE SSEE HAS SUBMITTED THAT RCPL PRESENTLY KNOWN AS RICL ALLOTTED THE EQUITY SH ARES AT PAR ON 3 OCCASIONS PRIOR TO THE ALLOTMENT IN QUESTION ON 2.4.2001. HE HAS FURTHER CONTENDED THAT WHEN THE ENTIRE PAYMENT WAS MADE BY THE ALLOTTEE TH EN THERE IS NO QUESTION OF INVOKING PROVISIONS OF SEC. 28(IV) OF THE ACT. EVE N OTHERWISE, THERE WERE SEVEN ALLOTTEES IN THE SAID ALLOTMENT OF 65 CRORES EQUITY SHARES AT PAR AND THE ASSESSEE WAS ALLOTTED ONLY 3 CRORES OUT OF 65 CRORES ALLOT MENT ON THE SAME DAY. THE LD SR COUNSEL POINTED OUT THAT IN CASE OF OTHER SIX PA RTIES, THE PROVISIONS OF SEC. 28(IV) WAS NOT INVOKED AND HOW THE ASSESSING OFFICE R CAN BE ALLOWED TO PICK AND CHOOSE THE ASSESSEE ALONE FOR INVOKING THE PROVISIO NS OF SEC. 28(IV) OF THE ACT. HE HAS FURTHER SUBMITTED THAT THE ACTION OF THE ASS ESSING OFFICER WAS TOTALLY ARBITRARY, ILLEGAL UNJUSTIFIED AND NOT CALL FOR. H E HAS STRESSED THAT PRIOR TO THE PRESENT ALLOTMENT ON 2.4.2001, THE RCIL MADE THE AL LOTMENT ON 27.1.2001 AND 12.2.2001 AND BOTH THESE OCCASIONS, THE ALLOTMENT W AS AT PAR I.E. RS. 1/- PER SHARE. HE HAS FURTHER CONTENDED THAT THE RELIANCE P LACED BY THE SPECIAL COUNSEL FOR THE REVENUE ON THE DIRECTORS REPORT IS TOTALLY MISCONCEIVED BECAUSE THE DIRECTORS REPORT HAS GIVEN THE STATUS OF THE AFFAI RS UPTO THE DATE OF THE REPORT. HE HAS CONTENDED THAT ON 2.4.2001, AT THE TIME OF A LLOTMENT IN QUESTION, LICENSE OF OPERATING BASIC TELEPHONE SERVICES WAS NOT AT A LL IN THE PICTURE THOUGH, RCIL APPLIED FOR THE LICENSE OF BASIC TELEPHONE SERVICES BUT IT WAS NOT ALLOTTED. THEREFORE, THERE WAS NO QUESTION OF GIVING RISE TO THE VALUE OF SHARES OF THE COMPANY MERELY BY APPLYING THE LICENSE. THE SR COUN SEL THEN SUBMITTED THAT BY MERELY APPLYING FOR LICENSE WOULD NOT GIVE ANY VALU E ADDITION TO THE SHARES OF RCIL AND THE ALLOTMENT PRIOR TO THE GRANT OF LICENS E CANNOT BE BENEFITED OF ANY PREMIUM. HE HAS POINTED OUT THAT THE NET WORTH OF RCIL AS ON 31.3.2001 WAS NEGATIVE. HE HAS REFERRED TO THE BALANCE SHEET AT P AGE 8 OF THE PAPER BOOK AND 8 ITA NO. 5974/MUM/2005 (ASST YEAR 2002-03 SUBMITTED THAT RCIL WAS HAVING NEGATIVE NET WORTH AS ON 31.3.2001 AND THERE IS NO QUESTION OF PREMIUM ATTACHED TO THE SHARES OF TH E SAID COMPANY. HE HAS FURTHER SUBMITTED THAT THE ASSESSEE COMPANY WAS PRO VIDING THE SERVICES OF PETROCHEMICAL PROJECTS OF RIL. HE HAS CONTENDED THAT SINCE SHRI MANOJ MODI IS HAVING SKILLS IN FINANCIAL PLANNING AND COMMERCIAL NEGOTIATIONS AND HAS VAST AND IN-DEPTH BUSINESS KNOWLEDGE, RIL PROCURED THE ASSESSEES SERVICES AND PARTICULARLY BECAUSE THE TWO DIRECTORS MR MANOJ MO DI AND SHRI P M S PRASAD WERE HAVING EXPERTISE OF TECHNICAL AND COMMERCI AL EVALUATION OF THE PROJECTS. 5.3 HE HAS REFERRED THE PROVISIONS OF SEC. 28(IV) O F THE ACT AND SUBMITTED THAT THE ASSESSEE HAS NO BUSINESS RELATION WITH RCIL THE N THE PROVISIONS OF SEC. 28(IV) CANNOT BE APPLIED MERELY BECAUSE THE ASSESSEE WAS D OING SOME TECHNICAL SERVICES OF RIL, WHICH DOES NOT AMOUNT TO HAVE AN Y BUSINESS WITH M/S RCIL. 5.4 HE HAS RELIED UPON THE DECISION OF THE HONBLE JURISDICTIONAL HIGH COURT IN THE CASE OF SHRI PRASHANT S JOSHI & ORS VS ITO IN WRIT PETITION NO.2287 OF 2009 AND WRIT PETITION NO.59 OF 2010 AND SUBMITTED THAT BENEFIT MUST ARISE FROM BUSINESS TO INVOKE PROVISIONS OF SEC. 28(IV) OF THE ACT. THE LD SR COUNSEL FURTHER SUBMITTED THAT THE ASSESSEE COMPANY HAS NO BUSINESS OR PROFESSIONAL RELATIONSHIP WITH RCIL DURING THE YEAR UNDER CONSID ERATION OR IN PAST OR EVEN SUBSEQUENTLY. THEREFORE, IN THE ABSENCE OF SUCH REL ATIONSHIP, THE PROVISIONS OF SEC. 28(IV) CANNOT BE APPLIED. HE HAS SUBMITTED THA T THE ASSESSING OFFICER TOOK HYPOTHETICAL VIEW AND TOOK IN ACCOUNT FUTURE EVENT AND ADOPTED THE VALUE OF THE SHARES AT RS. 15/- PER SHARE. HE HAS EMPHASIZE D THAT THERE WAS NO BASIS FOR VALUING THE SHARES AT RS. 15/- PER SHARE AND THE AS SESSING OFFICER HAS ADOPTED 9 ITA NO. 5974/MUM/2005 (ASST YEAR 2002-03 THE SAID RATE AS PER HIS OWN PRESUMPTION AND ESTIMA TION. HE HAS RELIED UPON THE DECISION OF THE HONBLE SUPREME COURT IN THE CASE O F CIT VS SARABHAI HOLDINGS P LTD REPORTED IN 219 CIT 644 AND THE DECISION OF THE HONBLE GUJARAT HIGH COURT IN THE CASE OF CIT VS ALCHEMIC P LTD REPORTED IN 130 I TR 168 AND SUBMITTED THAT THE ACTION OF THE ASSESSING OFFICER IS NOT SUSTAINABL E AS IT WAS ONLY NOTIONAL ESTIMATED VALUE OF THE SHARES MADE BY THE ASSESSING OFFICER. THE ASSESSING OFFICER WAS INFLUENCED BY SOME FUTURE EVENTS, WHICH WAS NOT EVEN IN PICTURE AT THE TIME OF ALLOTMENT OF SHARES ON 2.4.2001. THE L ICENSES WERE ALLOTTED TO THE RICL ONLY IN THE MONTH OF JULY 2001 AND THEREFORE, IF ANY APPRECIATION DUE TO GRANT OF LICENSE OF TELEPHONE SERVICES, IT WAS SUBS EQUENT TO THE DATE OF ALLOTMENT AND NOT PRIOR TO THE DATE OF ALLOTMENT. 6 WE HAVE CONSIDERED THE RIVAL CONTENTIONS AND PERU SED THE RELEVANT MATERIAL ON RECORD. WHILE MAKING THE ADDITION OF TH E PREMIUM OF RS. 14/- PER SHARE, THE ASSESSING OFFICER HAS TAKEN INTO CONSIDE RATION THE DIRECTORS REPORT. THE SPECIAL COUNSEL HAS ALSO RELIED UPON THE DIRECT ORS REPORT WHICH TALKS ABOUT THE ALLOTMENT OF THE BASIC TELEPHONE SERVICES IN 16 OUT OF 18 CIRCLES APPLIED BY RICL. IT IS PERTINENT TO NOTE THAT THE DIRECTORS REPORT IS DATED 16.8.2001, WHICH IS CONSEQUENT TO THE GRANT OF LICENSE TO RICL FOR OPE RATING THE BASIC TELEPHONE SERVICES ON 20.7.2001. THUS, IT IS CLEAR THAT THE DIRECTORS REPORT REFERS TO THE EVENTS CONSEQUENT TO THE ALLOTMENT OF THE SHARES ON 2.4.2001 AND PARTICULARLY THE DEVELOPMENTS OF THE GRANT OF LICENSE OF 16 TELE PHONE CIRCLES. UNDISPUTEDLY, ONCE THE LICENSE FOR OPERATING THE BASIC TELEPHONE SERVICE IN 16 CIRCLES WAS GRANTED WHICH COVER THE MAJORITY OF THE STATES OF T HE COUNTRY; HENCE, WAS AN IMPORTANT DEVELOPMENT AND CERTAINLY IT HAS A POSITI VE EFFECT ON THE VALUE OF THE SHARES OF RICL. THEREFORE, REFERENCE OF GRANT OF L ICENSE IN THE DIRECTORS REPORT 10 ITA NO. 5974/MUM/2005 (ASST YEAR 2002-03 CANNOT SUPPORT THE ACTION OF THE ASSESSING OFFICER TO PRESUME THE VALUE OF THE SHARE OF RCIL AT RS. 15/- PER SHARE ON THE DATE OF ALLOTMENT I.E. 2.4.2001. 6.1 AS POINTED OUT BY THE SR COUNSEL FOR THE ASSESS EE THAT PRIOR TO 2.4.2001, RCIL HAVE ALREADY ISSUED THE SHARES THROUGH ALLOTME NT AT PAR I.E. RS. 1/- EACH IN THE MONTH OF JAN AND FEB 2001. ON BOTH THESE OCCASI ONS, THE SHARES WERE ALLOTTED AT RS. 1/- PER SHARE. SIMILARLY ON 2.4.200 1, 65 CRORES SHARES WERE AGAIN ALLOTTED BY RCIL TO SEVEN ALLOTTES AS PER THE DETAI LS OF THE ALLOTMENT REPRODUCED BY THE ASSESSING OFFICER AT PAGE 2 OF HIS ORDER AS UNDER: NAME OF THE ASSESSEE NAME OF THE ASSESSEE NAME OF THE ASSESSEE NAME OF THE ASSESSEE NO.OF HARES ALLOTTED NO.OF HARES ALLOTTED NO.OF HARES ALLOTTED NO.OF HARES ALLOTTED (IN CRORES) (IN CRORES) (IN CRORES) (IN CRORES) RELIANCE INDUSTRIES LTD 6.50 RELIANCE COMMN INFRASTRUCTURE LTD 20.50 OT OTOT OTHER BODIES CORPORATE: HER BODIES CORPORATE: HER BODIES CORPORATE: HER BODIES CORPORATE: GREENWICH CAPITAL P LTD 1.16 WARBURG CAPITAL P LTD 1.17 PERIGEE TRADING P LTD 1.17 KAIZN COMMERCIAL LTD 3.00 GANESH INFRASTRUCTURE CAPITAL FUND 31.50 TOTAL 65.00 6.2 THE ASSESSING OFFICER, WHILE ESTIMATING THE PRE MIUM HAS TAKEN INTO ACCOUNT THE SHARES ALLOTTED BY RCIL ON 2.11.202, 9. 9.2003 AND 11.11.2002. THE ASSESSING OFFICER HAS REPRODUCED THE DETAILS IN THE ASSESSMENT ORDER WHICH WE HAVE REPRODUCED IN THIS ORDER IN THE FOREGOING PARA GRAPH NO.5.1. THUS, IT IS EVENT THAT THE ASSESSING OFFICER HAS TAKEN INTO ACC OUNT THE ALLOTMENT PRICE OF THE SHARES OF RCIL ON 2.11.2002, 9.9.2003. IT IS TO BE NOTED THAT WHEN THE RCIL WAS ALLOTTED THE LICENSE FOR OPERATING THE BASIC TELEPH ONE SERVICES AND ALSO STARTED THE WORK FOR PROVIDING THE SERVICES, THE ALLOTMENT IN NOV 2002 AND SEPT 2003 WAS SUBSEQUENT TO THE SAID DEVELOPMENT AND THEREFO RE, THE APPRECIATION OF THE 11 ITA NO. 5974/MUM/2005 (ASST YEAR 2002-03 VALUE OF THE SHARES A NATURAL CONSEQUENCE OF GRANT OF LICENSE AND WORK EXECUTED BY RCIL FOR PROVIDING THE SERVICE. THEREFORE, THE FUTURE EVENT ON DEVELOPMENT OF GRANT OF LICENSE CANNOT BE A BASIS FOR VALUING THE SHARES ON THE DATE WHEN NO SUCH ALLOTMENT WAS IN SIGHT. MOREOVER, WHEN NET WOR TH OF RCIL WAS NEGATIVE AS ON 31.3.2001, THEN THE VALUATION OF THE SHARES ON 2 .4.2001 CANNOT BE SUPPOSED TO HIGHER THEN WHAT WAS IN THE MONTH OF JAN AND FEB 2001. HENCE, IN OUR CONSIDERED OPINION THAT THE ASSESSING OFFICER HA S MISGUIDED HIMSELF BY TAKING INTO ACCOUNT THE APPRECIATION OF THE SHARES OF RCIL ON ACCOUNT OF ALLOTMENT OF LICENSE AND WORK DONE BY RCIL FOR PROVIDING THE BA SIC TELEPHONE SERVICES IN PURSUANT TO THE LICENSE WHILE WORKING OUT THE VALUA TION PRIOR TO ALL THESE DEVELOPMENT. 6.3 FURTHER, WHEN THE ASSESSEE WAS NOT HAVING ANY D IRECT BUSINESS RELATION OR HAVING ANY BUSINESS OR CARRIED OUT ANY BUSINESS WIT H RCIL EITHER IN THE PAST OR DURING THE YEAR IN QUESTION OR IN SUBSEQUENT YEAR T HEN IT CANNOT BE SAID THAT THERE EXIST ANY BUSINESS OR PROFESSION RELATIONSHI P BETWEEN THE ASSESSEE AND RCIL. RCIL AND OTHER RELIANCE GROUP OF COMPANIES ARE INDEPENDENT ENTITIES AND EVEN FOR TAXATION PURPOSES, THEY ARE SEPARATE AND I NDEPENDENT PERSONS; THEREFORE, ANY BUSINESS OR PROFESSIONAL RELATIONSHI P OF THE ASSESSEE WITH THE RIL COULD NOT AUTOMATICALLY CREATE ANY BUSINESS OR PROF ESSIONAL RELATIONSHIP BETWEEN THE ASSESSEE AND RCIL. THEREFORE, PROVISIONS OF SEC TION 28(IV) CANNOT BE APPLIED IN THE CASE OF THE ASSESSEE. 7 IN VIEW OF THE ABOVE DISCUSSION, WE HOLD THAT THE VALUE ESTIMATED BY THE ASSESSING OFFICER OF THE SHARES OF RCIL ON 2.4.2001 @ RS. 15/- PER SHARE IS HIGHLY 12 ITA NO. 5974/MUM/2005 (ASST YEAR 2002-03 UNREALISTIC, ARBITRARY AND WITHOUT ANY ACCEPTABLE B ASIS BUT ON THE BASIS OF SOME FUTURE EVENTS, WHICH COULD NOT INFLUENCE THE VALUE OF THE SHARES PRIOR TO THE DATE OF SUCH DEVELOPMENT. ACCORDINGLY, WE DO NOT FIND AN Y ERROR OR ILLEGALITY IN THE ORDER OF THE LD CIT(A). 8 IN THE RESULT, THE APPEAL FILED BY THE REVENUE IS DISMISSED. ORDER PRONOUNCED ON THE 10 TH DAY OF JUNE 2011. SD/- SD/- ( (( ( P M JAGTAP P M JAGTAP P M JAGTAP P M JAGTAP ) )) ) ACCOUNTANT MEMBER ( (( ( VIJAY PAL RAO VIJAY PAL RAO VIJAY PAL RAO VIJAY PAL RAO ) )) ) JUDICIAL MEMBER PLACE: MUMBAI : DATED:10 TH , JUNE 2011 RAJ* COPY FORWARDED TO: 1 APPELLANT 2 RESPONDENT 3 CIT 4 CIT(A) 5 DR /TRUE COPY/ BY ORDER DY /AR, ITAT, MUMBAI