P.S.Jagdish, CHENNAI V. DCIT, CHENNAI

ITA 1051/CHNY/2016

• Counselvise Citation: [2017] 128 COUNSELVISE.COM (IT) 4146 (ITAT-CHENNAI)
• Duration Of Justice: 1 year(s) 2 month(s) 11 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 30-06-2017
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: C
• Next Hearing Date: 27-04-2017
• Assessment Year: 2011-2012
• Appeal Filed On: 19-04-2016
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: A V SREEKANTH
• Assessee Lawyers: T N SEETHARAMAN
• Keywords: Business income; Share purchase agreement; Earning of tax free income
• Section: 143(3); 14A

Judgement Text

, , IN THE INCOME TAX APPELLATE TRIBUNAL , C B ENCH, CHENNAI . , ! ' . #$ , % & BEFORE SHRI A.MOHAN ALANKAMONY, ACCOUNTANT MEMBER AND SHRI DUVVURU RL REDDY, JUDICIAL MEMBER ./ I.T.A.NO.1051/MDS/2016 ( / ASSESSMENT YEAR: 2011-12) SHRI P.S. JAGADISH, C/O. SHRI T.N. SEETHARAMAN, ADVOCATE, 384, (OLD NO.196), LLOYDS ROAD, CHENNAI 86. VS THE DEPUTY COMMISSIONER OF INCOME TAX, COMPANY CIRCLE II(3), CHENNAI 34 PAN: AABPJ0532B ( /APPELLANT) ( /RESPONDENT) / APPELLANT BY : SHRI T.N. SEETHARAMAN, ADVOCATE /RESPONDENT BY : SHRI A.V. SREEKANTH, JCIT /DATE OF HEARING : 27.04.2017 ! /DATE OF PRONOUNCEMENT : 30.06.2017 / O R D E R PER A. MOHAN ALANKAMONY, AM:- THIS APPEAL BY THE ASSESSEE IS DIRECTED AGAINST THE ORDER PASSED BY THE LEARNED COMMISSIONER OF INCOME TAX (A PPEALS)-6, CHENNAI DATED 16.02.2016 IN ITA. NOS. 84/CIT(A)-6/2 014-15 FOR THE ASSESSMENT YEAR 2011-12 PASSED U/S.250(6) R.W.S . 143(3) OF THE ACT. 2 ITA NO.1051/MDS/2016 2. THE ASSESSEE HAS RAISED SEVERAL GROUNDS IN HIS A PPEAL; HOWEVER THE CRUXES OF THE ISSUES ARE AS FOLLOWS: (I) THE LD.CIT(A) HAS ERRED IN UPHOLDING THE ORDER OF THE LD.AO, WHO HAD ASSESSED THE LONG TERM CAPITAL GAIN OF RS.1,26,65,123/- UNDER THE HEAD BUSINESS INCOME BEING THE SALE CONSIDERATION OF THE SHARES HELD IN M/S. INDOTECH TRANSFORMERS PVT. LTD., WHICH WAS RECEIVED BY THE ASSESSEE UNDER A SEPARATE AGREEMENT FOR NON- COMPETE FEE COMPONENT. (II) THE LD.CIT(A) HAS ERRED IN CONFIRMING THE ORDE R OF THE LD.AO, WHO HAD DENIED DEDUCTION TOWARDS THE EXPENDITURE INCURRED FOR RS.2,84,181/- BEING THE FE ES PAID TO M/S. KPMG WITH RESPECT TO THE LONG TERM CAP ITAL GAIN TRANSACTION. (III) THE LD.CIT(A) HAS ERRED IN CONFIRMING THE ORD ER OF THE LD.AO, WHO HAD MADE ADDITION OF RS.9,15,490/- INVOK ING THE PROVISION OF SECTION 14A OF THE ACT. 3. THE BRIEF FACTS OF THE CASE ARE THAT THE ASSESS EE IS AN INDIVIDUAL HAVING INCOME FROM BUSINESS, INCOME FROM HOUSE PROPERTY, INCOME FROM OTHER SOURCES AND CAPITAL GAI NS FILED HIS 3 ITA NO.1051/MDS/2016 RETURN OF INCOME FOR THE ASSESSMENT YEAR 2011-12 ON 30.07.2011 ADMITTING INCOME OF RS.2,10,63,550/-. THEREAFTER TH E CASE WAS TAKEN UP FOR SCRUTINY AND THE ASSESSMENT WAS COMPLE TED ON 28.03.2014, WHEREIN THE LD.AO TREATED THE LONG TERM CAPITAL GAIN OF RS.1,26,65,123/- AS THE BUSINESS INCOME OF THE A SSESSEE, DISALLOWED THE CLAIM OF EXPENDITURE OF RS.2,84,181/ - TOWARDS THE TRANSFER OF ASSET AND FURTHER MADE DISALLOWANCE U/S .14A OF THE ACT. 4. GROUND NO.2 (I) & (II) : INCOME FROM LONG TERM C APITAL TREATED AS BUSINESS INCOME AND DISALLOWANCE OF EXPE NDITURE TOWARDS TRANSFER OF SHARES:- DURING THE COURSE OF ASSESSMENT PROCEEDINGS, IT WAS OBSERVED BY THE LD.AO THAT THE ASSESSEE HAD OFFERED RS.1,26,65,123/- AS LONG TERM CAPITAL GAINS WITH RE SPECT TO THE TRANSFER OF HIS SHAREHOLDING IN THE COMPANY M/S. IN DOTECH TRANSFORMERS PVT. LTD. THE ASSESSEE HAD FURTHER CL AIMED EXPENDITURE OF RS.2,84,181/- TOWARDS THE TRANSACTIO N. ON PERUSING THE NATURE OF TRANSACTION, THE LD.AO WAS O F THE VIEW THAT THE AMOUNT OF RS.1,26,65,123/- RECEIVED BY THE ASSESSEE WAS TOWARDS NON-COMPETE FEES AND NOT TOWARDS TRANSF ER OF 4 ITA NO.1051/MDS/2016 SHARES. THEREFORE THE LD.AO, CAME TO A CONCLUSION, THAT PROVISIONS OF SECTION 28(VA) WILL BE APPLICABLE IN THE CASE OF THE ASSESSEE AND ACCORDINGLY THE AMOUNT RECEIVED BY THE ASSESSEE HAS TO BE TREATED AS INCOME FROM BUSINESS AND NOT LONG TERM CAPITAL GAIN AS CLAIMED BY THE ASSESSEE. ACCORDING LY HE TREATED THE LONG TERM CAPITAL GAIN OF RS.1,26,65,123/- DECL ARED BY THE ASSESSEE AS INCOME FROM BUSINESS. FURTHER THE LD .AO DENIED THE BENEFIT OF DEDUCTION OF RS.2,84,181/- TOWARDS E XPENDITURE INCURRED FOR THE TRANSFER OF SHARES, SINCE THE ASSE SSEE COULD NOT SUBSTANTIATE THE SAME. 4.1 THE ASSESSEE CARRIED THE MATTER ON APPEAL BEFOR E THE LD.CIT(A). ON PERUSING THE FACTS OF THE CASE, THE LD.CIT(A) MADE THE FOLLOWING OBSERVATIONS:- 4.4 THE APPELLANT WAS A WHOLE TIME DIRECTOR IN M/S. INDO- TECH TRANSFORMERS LIMITED (HEREINAFTER REFERRED TO AS 'THE COMPANY'). THE COMPANY IS ENGAGED IN THE BUSINESS O F MANUFACTURING POWER AND DISTRIBUTION TRANSFORMERS. THE COMPANY HAD AN AUTHORISED SHARE CAPITAL OF RS.153,0 00,000/- (RUPEES ONE HUNDRED AND FIFTY THREE MILLION) DIVIDE D INTO 15,300,000 (FIFTEEN MILLION AND THREE HUNDRED THOUS AND) EQUITY SHARES, AND THE ISSUED AND PAID UP SHARE CAP ITAL OF THE COMPANY AS ON THE DATE OF SHARE PURCHASE AGREEMENT ON 04.12.2008 WAS RS.106,200,000/- (RUPEES ONE HUNDRED AND SIX MILLION) DIVIDED INTO 10,620,000/- (TEN MILLION AND SIX HUNDRED AND TWENTY THOUSAND) EQUITY SHARES WHICH AR E 5 ITA NO.1051/MDS/2016 LISTED ON THE BOMBAY STOCK EXCHANGE AND NATIONAL ST OCK EXCHANGE. 4.5 . THE APPELLANT AND HIS FAMILY MEMBERS AND HUF WERE THE PROMOTERS OF THE COMPANY HOLDING A TOTAL OF 5,771,6 25 FULLY PAID EQUITY SHARES OF RS.10/- EACH AS REGISTERED, L EGAL AND BENEFICIAL OWNER, CONSTITUTING 54.35% OF THE ISSUED , SUBSCRIBED AND PAID UP EQUITY SHARE CAPITAL OF THE COMPANY AS ON THE DATE OF THE AGREEMENT. THE APPELLANT WAS A W HOLE TIME DIRECTOR OF THE COMPANY, WITH HIS BROTHER SHRI P.S. SHEKAR BEING ANOTHER WHOLE TIME DIRECTOR AND, HIS FATHER S HRI P.E. SUBRAMANIAM BEING THE CHAIRMAN-CUM-MANAGING DIRECTO R OF THE COMPANY. THE APPELLANT WAS HOLDING 23.86% OF TH E SHARES OF THE COMPANY. 4.2 FURTHER, THE LD.CIT(A) OBSERVED AS FOLLOWS:- 4.1-0 THE TOTAL SHAREHOLDINGS, AND THE CONSIDERATIO N RECEIVED BY THE APPELLANT AS SUBMITTED DURING THIS APPEAL IS AS UNDER: PARTICULARS APPELLANTS' SHARE (IN RS.) NO. OF SHARES HELD 13,76,875 CONSIDERATION @ 406 (A) 55,90,11,250/- INTEREST ADDED FROM ESCROW (B) 2,92,62,629/- TOTAL A + B 58,82,73,874/- NON-COMPETE FEE @ RS.78/- PER SHARE 10,73,96,250/- NON-COMPETE FEE RECEIVED DURING A.Y.2011-12 1,26,65,123/- 4.3 THEREAFTER THE LD.CIT(A) ARRIVED AT THE FOLLOWI NG CONCLUSION:- 6 ITA NO.1051/MDS/2016 4.16 IN THE LIGHT OF THE AFOREMENTIONED JUDICIAL D ECISIONS, HERE ARE THE UNDISPUTED FACTS IN APPELLANT'S CASE: A) THE APPELLANT WAS A WHOLE TIME DIRECTOR OF THE C OMPANY. B) THE APPELLANT AND HIS FAMILY WERE THE PROMOTERS OF THE COMPANY HOLDING 53.6 PER CENT OF ISSUED AND PAID UP EQUITY SHARES. C) THE APPELLANT HIMSELF WAS HOLDING 23.86% OF EQUI TY SHARES. D) THE APPELLANT AND OTHER PROMOTERS ENTERED INTO A NON- CORPORATE AND NON SOLICITATION AGREEMENT WITH THE M EXICAN COMPANY. E) THE NON COMPETE FEE WAS DECIDED AT RS.78/- PER S HARE. 4.16.1 IN THE LIGHT OF THE DECISION OF HON'BLE SUPR EME COURT IN THE GUFFIC CHEMICALS (P) LTD. (SUPRA) ON THE APPLIC ABILITY OF SECTION 28(VA) FROM A.Y.2003-04 ONWARDS AND THE DEC ISIONS OF HON'BLE BOMBAY HIGH COURT IN ARUN TOSHNIWAL CASE (S UPRA) AND THAT OF LD. MUMBAI TRIBUNAL IN RAMESH D. TAINWA LA CASE (SUPRA) WHEREIN THE NON COMPETE FEES PAID TO PROMOT ERS WERE HELD TO BE TAXABLE UNDER SECTION 28(VA) OF THE ACT, I FIND NO INFIRMITY IN THE DECISION OF THE AO IN BRINGING THE IMPUGNED AMOUNT TO TAX UNDER SECTION 28(VA) OF THE ACT. AS S UCH, THE APPELLANT'S APPEAL ON THIS GROUND FAILS. 4.4 BEFORE US, THE LD.AR VEHEMENTLY ARGUED STATING THAT THE ASSESSEE HAD RECEIVED THE AMOUNT TOWARDS TRANSFER O F HIS SHARES AND THEREFORE THE AMOUNT RECEIVED SHOULD BE TREATED AS LONG TERM CAPITAL GAIN AND NOT INCOME FROM BUSINES S. HE FURTHER CLAIMED THAT IF THE BENCH IS IN NOT AGREEMENT WITH THE SUBMISSION 7 ITA NO.1051/MDS/2016 OF THE ASSESSEE, ONE MORE OPPORTUNITY MAY BE PROVID ED TO THE ASSESSEE TO ARGUE HIS CASE BEFORE THE LD.AO, SINCE THE LD. A.O HAD NOT EXAMINED THE ISSUE TAKING IN TO CONSIDERATI ON OF ALL THE DOCUMENTS / AGREEMENTS PRESENTED BEFORE HIM. THE L D.DR ON THE OTHER HAND, RELIED ON THE ORDERS OF THE REVENUE AUTHORITIES AND ARGUED IN SUPPORT OF THE SAME, AND FURTHER REQU ESTED FOR CONFIRMING THE ORDERS OF THE REVENUE. 4.5 FROM THE FACTS OF THE CASE WHICH ARE CLEARLY BR OUGHT OUT BY THE LD.CIT(A) IN HIS ORDER, IT APPEARS THAT THE ASS ESSEE HAVE RECEIVED NON-COMPETE FEE, THE YARDSTICK OF WHICH IS DETERMINED AT RS.78/- PER SHARE TRANSFERRED BY THE ASSESSEE AM OUNTING TO RS.1,26,65,123/. THE LD.CIT(A) FURTHER RELYING O N THE DECISION OF THE HONBLE APEX COURT AND HONBLE BOMBAY HIGH C OURT (SUPRA) CAME TO A CONCLUSION THAT IN SUCH TRANSACTI ON PROVISIONS OF SECTION 28(VA) OF THE ACT WOULD BE APPLICABLE AN D ACCORDINGLY HELD THE AMOUNT RECEIVED BY THE ASSESSEE AS BUSINES S INCOME. WE DO NOT FIND ANY INFIRMITY IN THE ORDER OF THE LD .CIT(A) IN THIS ISSUE. FROM THE FACTS AS BROUGHT OUT BY THE LD.CIT (A), IT IS CLEAR THAT THE ASSESSEE HAS RECEIVED NON-COMPETE FEE WHIC H IS DETERMINED AS RS.78/- PER SHARE. JUST BECAUSE THE YARDSTICK 8 ITA NO.1051/MDS/2016 WAS FIXED FOR COMPUTING THE NON-COMPETE FEE AT RS. 78 PER SHARE WOULD NOT MEAN THAT THE AMOUNT OF RS.78/- PER SHARE RECEIVED BY THE ASSESSEE ATTRIBUTES TOWARDS TRANSFER OF SHARES. IN FACT, AS RIGHTLY POINTED OUT BY THE REVENUE, IT ATTRIBUTES T OWARDS NON- COMPETE FEE ONLY. THEREFORE, THE ORDERS OF THE REV ENUE DO NOT CALL FOR ANY INTERFERENCE. HOWEVER, SINCE THE LD.A R HAS CLAIMED BEFORE US THAT THE LD.AO HAD NOT DISCUSSED THE FACT S OF THE CASE VIVIDLY IN HIS ORDER, THOUGH THE LD.CIT(A) HAS REFE RRED TO THE RELEVANT AGREEMENTS MADE BY THE ASSESSEE TOWARDS TH E TRANSFER OF SHARE, WHICH IS APPARENT FROM THEIR RESPECTIVE O RDERS, THE QUESTION ARISES WHETHER ALL THE DOCUMENTS REFERRED BY THE LD.CIT(A) IN HIS ORDER WAS BEFORE THE LD.AO FOR APP RECIATION OF FACTS AT THE TIME OF PASSING OF HIS ORDER. THEREFOR E, IN THE INTEREST OF JUSTICE, WE HEREBY REMIT BACK THE MATTER TO THE FILE OF LD.AO, THEREBY PROVIDING HIM WITH AN OPPORTUNITY TO EXAMIN E THE AGREEMENTS AND OTHER RELEVANT DOCUMENTS AND IF THE FACTS FOUND BY THE LD.CIT(A) DOES NOT CALL FOR A CHANGE, REINST ATE HIS EARLIER ORDER, OTHERWISE PASS APPROPRIATE ORDER AS PER MERI T AND LAW. 4.6 FURTHER ON PERUSING THE ORDER OF THE LD.CIT(A), WE FIND THAT THE ASSESSEE HAS NOT RAISED THE GROUND WITH RESPECT TO THE 9 ITA NO.1051/MDS/2016 DISALLOWANCE OF EXPENDITURE OF RS.2,84,181/-. HOWE VER, SINCE THE MAIN ISSUE IN THE APPEAL IS BEING REMITTED BACK , IN THE INTEREST OF JUSTICE, WE HEREBY REMIT THIS ISSUE ALS O BACK TO THE FILE OF LD.AO FOR FRESH CONSIDERATION. 5. GROUND NO. 2(III) : DISALLOWANCE U/S.14A OF THE ACT :- DURING THE COURSE OF SCRUTINY ASSESSMENT PROCEEDI NGS, IT WAS NOTICED BY THE LD.AO THAT THE ASSESSEE HAD CLAI MED EXPENDITURE OF RS.2,22,445/-, RS.2,49,886/-, RS.1,4 3,752/- AND RS.2,99,407/- WITH RESPECT TO THE INVESTMENTS MADE IN M/S. ASK INVESTMENT, M/S.TRUST CAPITAL, M/S. BNP AND M/S. IN G PVT. LTD., RESPECTIVELY. IT WAS FURTHER OBSERVED BY THE LD.AO THAT THE INVESTMENT MADE IN ALL THE ABOVE ENTITIES YIELDED I NCOME WHICH IS EXEMPT FROM TAX. THEREFORE, THE LD.AO INVOKING THE PROVISIONS OF SECTION 14A OF THE ACT DISALLOWED THE ABOVE MENT IONED EXPENDITURES. ON APPEAL, THE LD.CIT(A) CONFIRMED TH E ORDER OF THE LD.AO BY AGREEING WITH HIS VIEW. BEFORE US NO F RESH MATERIALS OR ARGUMENTS WERE ADVANCED BY THE LD.AR, OTHER THAN WHAT WAS PLACED BEFORE THE REVENUE ON THE EARLIER O CCASIONS. FURTHER FROM THE FACTS OF THE CASE, IT IS CLEAR THA T THE ASSESSEE HAD MADE INVESTMENTS FOR EARNING EXEMPT INCOME. TH EREFORE, 10 ITA NO.1051/MDS/201 6 THE PROVISIONS OF SECTION 14A OF THE ACT WOULD BE A PPLICABLE IN THE CASE OF THE ASSESSEE. ACCORDINGLY, THE EXPENDI TURE FOR MAKING SUCH INVESTMENT CANNOT BE ALLOWED AS DEDUCTI ON. HENCE, WE HEREBY CONFIRM THE ORDER OF THE LD.AO AND THE LD.CIT(A) ON THIS ISSUE. 6. IN THE RESULT, THE APPEAL OF THE ASSESSEE IS PAR TLY ALLOWED FOR STATISTICAL PURPOSES. ORDER PRONOUNCED ON THE 30 TH JUNE, 2017 AT CHENNAI. SD/- SD/- ( ! ' . #$ ) ( . ) ( DUVVURU RL REDDY ) ( A. MOHAN ALANKAMONY ) ' #$ /JUDICIAL MEMBER #$ / ACCOUNTANT MEMBER %' /CHENNAI, &# /DATED 30 TH JUNE, 2017 JR # () *) /COPY TO: 1. /APPELLANT 2. /RESPONDENT 3. - ( )/CIT(A) 4. - /CIT 5. )./ 0 /DR 6. /1 /GF