ITO 2(1)(1), MUMBAI V. BAKHTAWAR CONST. CO. P. LTD, MUMBAI

ITA 3286/MUM/2010

• Counselvise Citation: [2011] 140 COUNSELVISE.COM (IT) 49207 (ITAT-MUMBAI)
• Duration Of Justice: 1 year(s) 2 month(s) 1 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 29-06-2011
• Appeal Filed By: Department
• Order Result: Dismissed
• Bench Allotted: H
• Next Hearing Date: 23-05-2011
• Assessment Year: 2006-2007
• Appeal Filed On: 27-04-2010
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Assessee Lawyers: AMO GH M GHAISAS
• Keywords: Share purchase agreement; Valuation report
• Section: 15

Judgement Text

1 ITA NO. 3286/MUM/2010 (ASST YEAR 2006-07 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 H HH H BENCH BENCH BENCH BENCH MUMBAI BENCHES, MUMBAI MUMBAI BENCHES, MUMBAI MUMBAI BENCHES, MUMBAI MUMBAI BENCHES, MUMBAI BEFORE SHRI BEFORE SHRI BEFORE SHRI BEFORE SHRI J SUDHAKAR REDDY, J SUDHAKAR REDDY, J SUDHAKAR REDDY, J SUDHAKAR REDDY, 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. 3286/MUM/2010 3286/MUM/2010 3286/MUM/2010 3286/MUM/2010 (ASST YEAR (ASST YEAR (ASST YEAR (ASST YEAR 2006 2006 2006 2006- -- -07 0707 07) )) ) THE INCOME TAX OFFICER WARD 2(1)(1) MUMBAI VS M/S BAKHTWAR CONSN.CO P LTD MEHER HOUSE 1 ST FLOOR, 15 CAWASJI PATEL STREET, FORT MUMBAI 400 001 ( (( ( APPELLANT APPELLANT APPELLANT APPELLANT ) )) ) (RESPONDENT) (RESPONDENT) (RESPONDENT) (RESPONDENT) PAN NO. PAN NO. PAN NO. PAN NO.AAACB4942P AAACB4942P AAACB4942P AAACB4942P A SSESSEE BY SHRI AMOGH M GHAISAS REVENUE BY SHRI GOLI SRINIWAS RAO PER PER PER PER VIJAY PAL VIJAY PAL VIJAY PAL VIJAY PAL RAO RAO RAO RAO, , , , JM JMJM JM THIS APPEAL FILED BY THE REVENUE IS DIRECTED AGAINS T THE ORDER DATED 2.2.2010 OF THE CIT(A) FOR THE AY 2006-07. 2 THE REVENUE HAS TAKEN THE FOLLOWING EFFECTIVE GRO UND IN THIS APPEAL: I) ON THE FACTS AND THE CIRCUMSTANCES OF THE CASE A ND IN LAW THE CIT(A) ERRED IN HOLDING THAT THE ENTIRE RECEIPT OF RS. 3,0 9,45,714/- IS A LONG TERM CAPITAL GAIN ON SALE OF SHARES. II) ON THE FACTS AND THE CIRCUMSTANCES OF THE CASE AND IN LAW, THE CIT(A) OUGHT TO HAVE HELD THE ASSESSING OFFICERS VIEWS TH AT THE RECEIPT IS AN INCOME GENERATED FROM OUT OF OTHER SOURCES AS THE RE WAS NO JUSTIFICATION FOR EVALUATING THE SHARES OF M/S ABDL AT A PRICE OF RS. 1714.28 WITHOUT HAVING CORRELATION WITH ITS BOOK ASSETS. 3 DURING THE COURSE OF ASSESSMENT PROCEEDINGS, THE ASSESSING OFFICER NOTED THAT DURING THE YEAR UNDER CONSIDERATION, THE ASSES SEE HAS SOLD 20000 SHARES OF ASSOCIATED BREWERIES & DISTILLERIES ( ABDL) AND SHO WN LONG TERM CAPITAL GAIN OF RS. 3.11 CRORES. THE ASSESSING OFFICER HAS NOTED T HAT UNITED BREWERIES (UB) HAS PURCHASED THE ENTIRE SHARE CAPITAL OF ABDL BY AN AG REEMENT, ACCORDING TO WHICH 65% SHARES OF THE ABDL WERE SOLD TO UB IN THE YEAR 2000 AND THE REMAINING 35% 2 ITA NO. 3286/MUM/2010 (ASST YEAR 2006-07 OF THE SHARES WERE TO BE SOLD BY THE PROMOTERS ON P UT-OPTION BASIS. THE PROMOTER COULD EXERCISE THEIR PUT-OPTION TO SELL TH ESE SHARES AT ANY TIME AFTER TWO YEARS FROM THE AGREEMENT. ACCORDINGLY, 35% OF THE SHARE CAPITAL OF ABDL WAS ACQUIRED BY UB FOR A TOTAL CONSIDERATION OF RS. 24 CRORES IN THE YEAR UNDER CONSIDERATION. THE ASSESSEE IS THE ONE OF THE PROM OTERS OF ABDL, AND THEREFORE, RECEIVED A SUM OF RS. 3.42 CRORES AGAINST THE SALE OF ITS SHARES OF 35%. THE ASSESSEE HAS ALSO CLAIMED EXEMPTION U/S 54EC AGAINS T THE LONG TERM CAPITAL GAINS ON THE GROUND THAT THE WHOLE CONSIDERATION WA S INVESTED IN NABAD BOND. THE ASSESSING OFFICER FURTHER NOTED THAT THE ASSES SEE FAILED TO FURNISH ANY VALUATION REPORT TO JUSTIFY THE VALUE OF THE SHARES SOLD DURING THE YEAR UNDER CONSIDERATION AS ALLEGED AT RS. 3,42,85,714/- FOR 2 0000 SHARES. THE ASSESSING OFFICER OBSERVED THAT IF THE FULL CONSIDERATION IS RECEIVED BY THE ASSESSEE IS ACCEPTED THEN THE VALUE PER SHARE WORKED OUT TO RS . 1714.28 PER SHARE, WHOSE PAID UP VALUE WAS RS. 100/- AND PARTICULARLY WHEN T HE NET WORTH OF THE ABDL HAS BEEN ERODED OWING TO CONTINUOUS LOSSES. THE ASSES SING OFFICER FURTHER HELD THAT THE VALUE OF THE LAND AND FACTORY BUILDING, AS PER STAMP DUTY VALUATION, HAS BEEN VALUED AT RS. 6,71,19,969/- . SINCE THERE WAS NO OT HER VALUABLE ASSET, THE ASSESSING OFFICER DIVIDED THE VALUE OF THE LAND AND FACTORY BY 4 LACS SHARES AND WORKED OUT THE VALUE OF SHARES AT RS. 167.79 PER SH ARE ON THE DATE OF TRANSFER OF THESE SHARES. ACCORDINGLY, THE ASSESSING OFFICER TOOK THE VALUE AT RS. 168/- PER SHARE AND THE REMAINING AMOUNT OF RS. 3,04,45,713 I S TREATED AS INCOME FROM OTHER SOURCES AND BROUGHT TO TAX ACCORDINGLY. SINC E THE CAPITAL GAIN WAS COMPUTED BY THE ASSESSING OFFICER AT RS. 86,091/-, THE EXEMPTION U/S 54EC WAS RESTRICTED TO THE SAID AMOUNT. 3 ITA NO. 3286/MUM/2010 (ASST YEAR 2006-07 3.1 THE ASSESSEE CHALLENGED THE ORDER BEFORE THE CI T(A) AND THE CIT(A) DELETED THE ADDITION MADE BY THE ASSESSING OFFICER WHILE PASSING THE IMPUGNED ORDER AND DIRECTED THE ASSESSING OFFICER TO ACCEPT THE INCOME DISCLOSED BY THE ASSESSEE AS LONG TERM CAPITAL GAINS ON SALE OF 20 000 SHARES AT RS. 3.11 CRORES AND THE DEDUCTION CLAIMED U/S 54EC WAS ALSO ACCORDI NGLY ALLOWED IN THE NORMAL COMPUTATION OF THE INCOME. 4 BEFORE US, THE LD DR HAS SUBMITTED THAT THE ASSES SEE HAS NOT PRODUCED ANY VALUATION REPORT REGARDING THE SHARES OF ABDL A ND WHEN THE NET WORTH OF THE ADBL WAS DETERRENT THEN THE CONSIDERATION RECEIVED BY THE ASSESSEE AGAINST THE SALE OF 20000 SHARES CANNOT BE ACCEPTED IN THE FACT S OF THE CASE. HE HAS SPECIFICALLY POINTED OUT THAT THE ABDL HAS NO OTHER ASSET THAN THE LAND AND FACTORY BUILDING AND THE ASSESSING OFFICER HAS VALU ED THE SAME AS PER THE LEASE DEED AND VALUED AS PER THE STAMP DUTY AUTHORITIES. DUE TO THE CONTINUOUS LOSSES SUFFERED BY THE ABDL AND NON EXISTENCE OF ANY OTHER VALUABLE ASSETS AT THE TIME OF TRANSFER OF THE SHARES, IT IS IMPOSSIBLE TO ACCE PT THE VALUE OF PER SHARE AT RS. 1714/- OF PAID UP VALUE OF RS. 100/-. THEREFORE, TH E ASSESSING OFFICER WAS JUSTIFIED IN WORKING OUT THE SALE VALUE AT RS. 168/- PER SHAR E FOR 20000 SHARES. HE HAS RELIED UPON THE ORDER OF THE ASSESSING OFFICER . 4.1 THE LD AR OF THE ASSESSEE, ON THE OTHER HAND S UBMITTED THAT THE VALUE OF THE SHARES WERE AGREED BETWEEN THE PARTIES AS PER T HE MEMORANDUM OF UNDERSTANDING ( MOU). HE HAS FURTHER SUBMITTED THAT THE UB PURCHASED THE ENTIRE SHARE CAPITAL OF ABDL FOR BRAND VALUE AND CO NSEQUENTLY THE PARTIES AGREED FOR TRANSFER OF THE SHARES AT A PARTICULAR RATE. TH E ENTIRE TRANSACTION WITH UB WAS 4 ITA NO. 3286/MUM/2010 (ASST YEAR 2006-07 AT ALP BEING, TRANSACTION WITH A THIRD PARTY. THE U B IS A LISTED COMPANY AND THE ASSESSEE HAD NO OTHER DIRECT BUSINESS CONNECTION WI TH UB. HE HAS FURTHER CONTENDED THAT THE RECEIPT OF THE ENTIRE CONSIDERAT ION HAS NOT BEEN DISPUTED BY THE ASSESSING OFFICER BUT THE ASSESSING OFFICER HAS TREATED THE VALUE OF THE SHARES LESS THAN THE CONSIDERATION RECEIVED BY THE ASSESSEE AND THE BALANCE HAS BEEN TREATED AS OTHER RECEIPT FROM THE UB. THE LD AR HAS REFERRED THE MOU BETWEEN THE ASSESSEE AND THE UB REGARDING THE TRANS FER OF THE SHARES OF THE ABDL. HE HAS THEN SUBMITTED THAT WHEN THE CONSIDERA TION OF SHARES HAS BEEN AGREED UPON BETWEEN THE PARTIES THEN THE ASSESSING OFFICER IS NOT JUSTIFIED IN NOT ACCEPTING THE SALE CONSIDERATION RECEIVED BY THE ASSESSEE AS PER THE AGREEMENT. MOREOVER, THE AMOUNT RECEIVED BY THE ASS ESSEE HAS NOT BEEN DOUBTED BY THE ASSESSING OFFICER THEN TREATING THE SAME OTHER THAN THE SALE CONSIDERATION OF THE SHARES IS WITHOUT ANY BASIS AN D BASED ONLY ON PRESUMPTION OF THE ASSESSING OFFICER. HE HAS SUPPORTED THE ORDE R OF THE CIT(A). 5 WE HAVE CONSIDERED THE RIVAL CONTENTIONS AND PERU SED THE RELEVANT MATERIAL ON RECORD. THE ASSESSEE AND UB ENTERED IN TO MOU ON 3.1.2000. AS PER THE MOU, 65% OF THE SHARE HOLDING OF ADBL WAS ACQUI RED BY THE UB AT RS. 1194.23 PER SHARE. THE PROMOTERS WERE HAVING TO TAL 4 LACS EQUITY SHARES AND OUT OF THIS, 2,60,000 SHARES I.E. 65% OF THE TOTAL CAPITAL OF ADBL WAS TRANSFERRED AT 119.23. THE BALANCE 35% WAS TO BE TRANSFERRED A S PER THE PUT OPTION CLAUSE OF THE MOU WHICH PROVIDES THAT THE PROMOTER GROUP R EPRESENTS 35% OF THE SHARES WAS FOR PUT OPTION WHICH SHALL BE EXERCISED AT ANY TIME AFTER A PERIOD OF 2 YEARS FROM THE CLOSING DATE. 5 ITA NO. 3286/MUM/2010 (ASST YEAR 2006-07 5.1 THE ASSESSEE EXERCISED ITS PUT OPTION ON 24.2.2 003 AS PER THE NOTICE PLACED AT PAGES 114, TO 116 OF THE PAPER BOOK. THE ASSESSEE GAVE THE NOTICE EXERCISING OF PUT OPTION IN ACCORDANCE WITH THE TER MS OF THE MOU AND SALE CONSIDERATION AT RS. 2,92,42,857/-. IT IS EVIDENT F ROM THE PUT OPTION CLAUSE OF THE MOU THAT 35% OF THE SHARES (1,40,000) SHALL BE TRAN SFERRED BY THE PROMOTER TO THE UB GROUP FOR AN AGGREGATE VALUE OF RS. 20.47 C RORES OR SUCH AMOUNT PER SHARE HAS BEEN DETERMINED AT THE RELEVANT TIME BY T HE INDEPENDENT FIRM OF CHARTERED ACCOUNTANTS WHICHEVER IS HIGHER. THE PUT OPTION CLAUSE IS REPRODUCED AS UNDER: THE PROMOTER GROUP SHALL HAVE A PUT OPTION IN RESP ECT OF THE BALANCE SHARES OF THE COMPANY REPRESENTING 35% OF THE SHARE S ISSUED AND OUTSTANDING OF THE COMPANY. THE PUT OPTION HALL BE EXERCISABLE AT ANY TIME AFTER A PERIOD OF 2 (TWO) YEARS FROM THE CLOSI NG DATE. CLOSING DATE SHALL BE THE DATE ON WHICH THE ACQUISITION SHARES S HALL BE TRANSFERRED BY THE PROMOTER GROUP TO THE UB GROUP. THE PUT OPTION EXERCISE PRICE (THE PO PRICE) SHALL BE AN AGGREGATE OF RS. 20.47 CRORES OR SUCH AMOUNT PER SHARE AS MAY BE DETERMINED AT THE RELEVANT TIME BY AN IND EPENDENT FIRM OF CHARTERED ACCOUNTANTS( BEING ONE OF THE BIG 5 ACCOU NTING FIRMS) WHICHEVER IS HIGHER. THE PUT OPTION MAY BE EXERCISE D IN FULL OR IN PART AS REQUIRED BY PROMOTER GROUP. THUS, IT IS CLEAR THAT THE PRICE OF TRANSFER OF 1,4 0,000 SHARES WAS AGREED BETWEEN THE PARTIES AT A MINIMUM OF RS. 20.47 CRORES O R THE VALUE AS DETERMINED BY THE INDEPENDENT FIRM OF CA AT THE RELEVANT TIME. S UBSEQUENTLY, THE PARTIES ENTERED INTO SHARE HOLDERS AGREEMENT AND CORPORAT E GUARANTEE AGREEMENT BOTH DATED 19.1.2001 AND ESCROW AGREEMENT DATED 28 .5.2005. A PER THE ESCROW AGREEMENT DATED 28.5.2005, THE PURCHASER AND THE PROMOTERS HAVE SETTLED THE ISSUE OF SALE AND PURCHASE OF THE SHARE S OF 140000 EQUITY SHARES AT A PRICE OF RS.1,714.28 PER SHARE AGGREGATE TO RS. 24 CRORES. CLAUSE (E) OF THE ESCROW AGREEMENT READS AS UNDER: 6 ITA NO. 3286/MUM/2010 (ASST YEAR 2006-07 E) THE PURCHASER AND THE PROMOTERS HAVE SINCE AMICA BLY SETTLED THE DISPUTES PERTAINING TO THE SALE AND TRANSFER OF THE SAID 140000 EQUITY HARES BY THE PROMOTERS TO THE PURCHASE AND IT IS NO W AGREED BETWEEN THE PROMOTERS AND THE PURCHASER THAT UPON THE PROMOTERS DOING AND EXECUTING AL ACTS AND DEEDS NECESSARY TO BE DONE AN D EXECUTED TO HAVE THE SAID LAND TRANSFERRED AND REGISTERED INTO THE N AME OF THE COMPANY IN THE RECORDS OF LAND REGISTRY AND MIDC (THE PURCHASE R UNDERTAKES TO ENSURE THAT THE COMPANY SHALL REIMBURSE THE STAMP D UTY TO THE PROMOTERS WHO SHALL INITIALLY PAY THE SAME), THE SALE AND TRA NSFER F THE SAID 140000 EQUITY SHARES IN THE COMPANY SHALL BE COMPLETED BY THE PURCHASER MAKING PAYMENT OF A PRICE OF RS. 1714.28 PER EQUITY HARE A GGREGATING TO RS. 24 CRORES TO THE PROMOTERS AND THE PROMOTER DELIVERING UP THE ORIGINAL SHARE CERTIFICATES ALONG WITH THE DULY EXECUTED TRANSFER FORMS IN RESPECT OF THE SAID 14000 EQUITY SHARES AND CONDITIONAL UPON THE S ALE AND TRANSFER F THE SAID SHARES IN FAVOUR OF THE PURCHASER AS HEREIN PR OVIDED. THEREFORE, WHEN THE PARTIES HAVE SUBSEQUENTLY AGREE D THROUGH THE ESCROW AGREEMENT FOR HIGHER PURCHASE AT RS. 1714.28 PER SH ARE WHAT WAS THE ORIGINALLY AGREED AT THE TIME OF MOU DT 3.11.2000 THEN THE SAL E PRICE OF 20000 SHARES OF THE ASSESSEE IS RS. 3,42,85,714/- 5.2 WHEN THE ASSESSING OFFICER HAS NOT DISPUTED AND RATHER ACCEPTED THE MOU AND OTHER AGREEMENTS BETWEEN THE PARTIES THEN THE S UBSTITUTION OF VALUATION OF THE SHARES BY THE ASSESSING OFFICER OTHER THAN THE MODE AS PROVIDED IN THE MOU AND THE PRICE AGREED BETWEEN THE PARTIES SUBSEQUENT LY IS NOT JUSTIFIED. IN VIEW OF THE ABOVE DISCUSSION, WE HOLD THAT THE FULL CONSIDE RATION OF THE SALE OF 20000 SHARES OF ABDL BELONGING TO THE ASSESSEE WOULD BE RS. 3,42,85,714/- AND HENCE, WE DO NOT FIND ANY ERROR OR ILLEGALITY IN TH E ORDER OF THE CIT(A). 6 IN THE RESULT, THE APPEAL OF THE REVENUE IS DISMI SSED ORDER PRONOUNCED ON THE 29 TH DAY OF JUNE 2011. SD/- SD/- ( (( ( J SUDHAKAR REDDY J SUDHAKAR REDDY J SUDHAKAR REDDY J SUDHAKAR REDDY ) )) ) ACCOUNTANT MEMBER ( (( ( VIJAY PAL RAO VIJAY PAL RAO VIJAY PAL RAO VIJAY PAL RAO ) )) ) JUDICIAL MEMBER PLACE: MUMBAI : DATED: 29 TH , JUNE 2011 RAJ* 7 ITA NO. 3286/MUM/2010 (ASST YEAR 2006-07 COPY FORWARDED TO: 1 APPELLANT 2 RESPONDENT 3 CIT 4 CIT(A) 5 DR /TRUE COPY/ BY ORDER DY /AR, ITAT, MUMBAI