SAVITA MANDHANA, MUMBAI V. ACIT RG 18(1), MUMBAI

ITA 3878/MUM/2010

• Counselvise Citation: [2011] 119 COUNSELVISE.COM (IT) 7289 (ITAT-MUMBAI)
• Duration Of Justice: 1 year(s) 4 month(s) 24 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 07-10-2011
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: E
• Assessment Year: 2006-2007
• Appeal Filed On: 13-05-2010
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Assessee Lawyers: G P TRIVEDI
• Keywords: Capital asset; Business income; Share purchase agreement
• Section: 143(3); 28

Judgement Text

ITA NO. 39 00 AND 3878 / MUM/2010 ASSESSMENT YEAR: 2006-07 PAGE 1 OF 6 IN THE INCOME TAX APPELLATE TRIBUNAL MUMBAI E BENCH, MUMBAI [CORAM: SHRI PRAMOD KUMAR AM AND SHRI VIJAY PAL RAO JM] ITA NO. 3900/MUM/2010 ASSESSMENT YEAR: 2006-07 ASSISTANT COMMISSIONER OF INCOME TAX CIRCLE 18(4), MUMBAI ....APPELLANT VS. SAVITA N MANDHANA RESPONDENT 12A, LOTUS COURT, 5 TH FLOOR DR ANNIE BESANT ROAD, WORLI MUMBAI 400 018 [ PAN AFEPM7717B] ITA NO. 3878/MUM/2010 ASSESSMENT YEAR: 2006-07 SAVITA N MANDHANA ....APPELLANT 12A, LOTUS COURT, 5 TH FLOOR DR ANNIE BESANT ROAD, WORLI MUMBAI 400 018 [ PAN AFEPM7717B] VS. ASSISTANT COMMISSIONER OF INCOME TAX RESPO NDENT CIRCLE 18(4), MUMBAI APPEARANCES: RAJAN VORA , A/W MIRAL SANGHARAJKA , FOR THE APPELLANT G P TRIVEDI , FOR THE RESPONDENT ORDER RESERVED ON : JULY 14, 2011 ORDER PRONOUNCED ON : OCTOBER 7 , 2011 O R D E R PER PRAMOD KUMAR: 1. THESE CROSS APPEALS CALL INTO QUESTION CORRECTNE SS OF THE SAME ORDER DATED 26 TH FEBRUARY 2010 PASSED BY THE CIT(A) IN THE MATTER O F ASSESSMENT UNDER SECTION 143(3) OF THE INCOME TAX ACT. 1961, FOR THE ASSESSMENT YEAR 2006-07, INVOLVE INTERCONNECTED ISSUES AND WERE HEARD TOGETH ER. AS A MATTER OF CONVENIENCE, THEREFORE, BOTH OF THESE APPEALS ARE B EING DISPOSED OF BY WAY OF ITA NO. 39 00 AND 3878 / MUM/2010 ASSESSMENT YEAR: 2006-07 PAGE 2 OF 6 THIS CONSOLIDATED ORDER. 2. TO ADJUDICATE ON THESE APPEALS, ONLY A FEW MATER IAL FACTS NEED TO BE TAKEN NOTE OF. THE ASSESSEE BEFORE US WAS A SHAREHOLDER I N MANDHANA EXPORTS PVT LTD A CLOSELY HELD COMPANY OWNED AND MANAGED BY MANDH ANA FAMILY FOR A NUMBER OF YEARS. IN THE YEAR 1996, THE ASSESSEE COM PANY ENTERED INTO A JOINT VENTURE ARRANGEMENT WITH BORNEMANN AND BICK GMBH, G ERMANY, UNDER WHICH 50% OF THE 50% OF EQUITY SHARES WERE ALLOTTED TO TH IS GERMAN COMPANY AND THE NAME OF THE COMPANY WAS CHANGED TO MANDHANA BOR EMANN INDUSTRIES PVT LTD (MANDHANA BOREMANN, IN SHORT) . AS THIS GERM AN COMPANY WAS ACQUIRED BY A DUTCH COMPANY BY THE NAME OF PAXAR BV, THE SHA REHOLDINGS IN MANDHANA BOREMANN WERE TRANSFERRED TO PAXAR BV. IN THE RELEV ANT PREVIOUS YEAR, PAXAR BV ACQUIRED ALL THE SHARES HELD BY MANDHANA FAMILY FOR A CONSIDERATION OF RS 570 PER SHARE WHICH WORKED OUT TO RS 45.60 CRORES F OR THE SHARES HELD BY MANDHANA FAMILY. ALL THE SHAREHOLDERS IN MANDHANA F AMILY ENTERED INTO AN AGREEMENT WITH PAXAR BV FOR THE PURPOSE OF THIS TR ANSFER OF SHARES, AND ONE OF THE CLAUSES IN THE AGREEMENT ALSO PROVIDED THAT THE TRANSFEROR SHALL NOT CARRY ON, OR BE INTERESTED IN, ANY BUSINESS WHICH COMPETE S WITH THE BUSINESS OF MANDHANA BOREMANN. ON THESE FACTS, THE ASSESSING O FFICER HELD THAT A PART OF THE SALE CONSIDERATION OF RS 570, A PART OF THE CON SIDERATION IS ATTRIBUTABLE TO THE NON COMPETE CONSIDERATION WHICH IS LIABLE TO BE TAXED IN THE HANDS OF THE ASSESSEE UNDER SECTION 28(VA) OF THE ACT. THE ASSES SING OFFICER COMPUTED THE VALUE OF SHARES, BY BREAK UP METHOD, AT RS 365. ACC ORDINGLY, THE BALANCE AMOUNT OF RS 205 PER SHARE WAS TREATED AS TOWARDS N ON COMPETE FEE AND BROUGHT TO TAX AS BUSINESS INCOME UNDER SECTION 28( VA) IN THE HANDS OF THE ASSESSEE. AGGRIEVED, ASSESSEE CARRIED THE MATTER IN APPEAL BEFORE THE CIT(A) BUT WITHOUT COMPLETE SUCCESS. LEARNED CIT(A) UPHELD THE ACTION OF THE AO IN PRINCIPLE, BUT HELD THAT ONLY RS 41 PER SHARE CAN BE ATTRIBUTED TO NON COMPETE FEES. THE CIT(A) FURTHER HELD THAT DECISION OF A CO ORDINATE BENCH IN THE CASE OF HAMI ASPI BALSARA VS ACIT (30 DTR 576) DOES NOT HEL P THE ASSESSEE AS THERE IS SPECIFIC MENTION OF THE NON COMPETE OBLIGATIONS IN THE SHARE SALE AGREEMENT, AND, THEREFORE, A PART OF THE SALE CONSIDERATION IS TO BE ATTRIBUTED TO THE NON ITA NO. 39 00 AND 3878 / MUM/2010 ASSESSMENT YEAR: 2006-07 PAGE 3 OF 6 COMPETE OBLIGATIONS. NONE OF THE PARTIES IS SATISFI ED. WHILE THE ASSESSING OFFICER IS AGGRIEVED OF THE PARTIAL RELIEF GIVEN BY THE CIT(A), THE ASSESSEE STILL MAINTAINS THAT NO PART OF THE CONSIDERATION CAN BE ATTRIBUTED TO THE NON COMPETE FEES. 3. WE HAVE HEARD THE RIVAL CONTENTIONS, PERUSED THE MATERIAL ON RECORD AND DULY CONSIDERED FACTUAL MATRIX OF THE CASE AS ALSO THE APPLICABLE LEGAL POSITION. 4. WE FIND THAT, EVEN IN THE CASE OF HAMI ASPI BALS ARA (SUPRA) THERE WAS A SPECIFIC NON COMPETE OBLIGATION AND YET THE COORDIN ATE BENCH WAS OF THE VIEW THAT NO PART OF THE SALE CONSIDERATION OF SHARES CO ULD BE ATTRIBUTED TO BE TAXED IN THE HANDS OF THE ASSESSEE AS BUSINESS INCOME UND ER SECTION 28(VA) AS IS CLEARLY DISCERNABLE FROM THE FOLLOWING OBSERVATIONS MADE BY THE COORDINATE BENCH: THE A.O HAS DETERMINED THE BOOK VALUE OF SHARES AND HAS TREATED THE DIFFERENCE BETWEEN THE SALE PRICE OF SHARES AND ITS BOOK VALUE AS CONSIDERATION TOWARDS NON-COMPETE FEES. ADMITTEDLY, IN THE SHARE PURCHASE AGREEMENT NO CONSIDERATION WAS ASSIGNED TO WARDS NON- COMPETE FEES AND THE PARTIES HAD ENTERED INTO THE S HARE PURCHASE AGREEMENT AFTER MUTUALLY SETTLING THE PRICE OF SHAR ES. THE A.O. HAS PRIMARILY RELIED ON ARTICLE 11.1 OF THE SHARE PURCH ASE AGREEMENT TO INFER THAT ASSESSEE HAD PAID AMOUNT TOWARDS NON-COM PETE FEES. ARTICLE 11.1 READS AS UNDER:- 'IN CONSIDERATION OF THE PURCHASE PRICE RECEIVED BY THE SELLERS UNDER THIS AGREEMENT, THE SUFFICIENCY OF WHICH IS HEREBY ACKNOWLEDGED, THE SELLERS AGREE THAT FOR A PERIOD OF 5 YEARS FROM COM PLETION, THE SELLERS SHALL NOT BE ENGAGED IN ANY OF THE RESTRICTED BUSIN ESS IN INDIA.' THIS CLAUSE CLEARLY SHOWS THAT IN THE PURCHASE PRIC E OF SHARES, CONSIDERATION TOWARDS RESTRAINT CLAUSE WAS EMBEDDED . BUT THE SAME WAS NOT SPECIFICALLY MENTIONED IN THE SHARE PURCHAS E AGREEMENT, AS RIGHTLY POINTED BY THE LD. COUNSEL FOR THE ASSESSEE , NON-COMPETE FEES ITA NO. 39 00 AND 3878 / MUM/2010 ASSESSMENT YEAR: 2006-07 PAGE 4 OF 6 COULD BE PAYABLE PRIMARILY WITH RESPECT TO MANUFACT URING COMPANY VIZ. BALASARA HOME PRODUCTS. AS REGARDS OTHER TWO I PR COMPANIES VIZ. BALASARA HYGIENE PRODUCTS AND BESTA COSMETICS, SINC E VALUE OF IPR WAS NOT REFLECTED IN THE BALANCE SHEET, WHICH CONST ITUTED MAJOR PART OF THE SHARE PRICE, THE SAME HAD TO BE DETERMINED B EFORE ARRIVING AT THE TRUE BOOK VALUE OF SHARE OF THESE TWO COMPANIES . THE A.O. HAS COMPUTED APPROXIMATELY 80% OF THE CONSIDERATION TOW ARDS NON- COMPETE FEES WHICH, IN ANY CASE, IS NOT IN CONFORMI TY WITH THE SETTLED PRINCIPLES OF VALUATION OF SHARES. THEREFORE, WE AR E OF THE OPINION THAT THE BASIS ADOPTED FOR ASSIGNING CONSIDERATION TOWAR DS NON-COMPETE FEES WAS NOT CORRECT. NOW THE QUESTION WOULD BE HOW TO ASSIGN THE CONSIDERATION TOWARDS NON-COMPETE FEES. WE REALLY D O NOT NEED TO ENTER THIS AREA PARTICULARLY BECAUSE THE DIFFERENCE , BETWEEN THE SALE PRICE OF SHARE AND THE TRUE BOOK VALUE OF THE SHARE , IF ALLOCATED TOWARDS NON-COMPETE FEES, WAS TO BE COMPUTED U/S.55 (2)(A). THIS WOULD BE CLEAR FROM SUBSEQUENT DISCUSSIONS. ADMITTE DLY, ASSESSEE ON HER OWN WAS NOT CARRYING ON BUSINESS AND IT WAS THE COMPANY IN WHICH SHE WAS SHARE HOLDER WAS CARRYING ON THE BUSI NESS. SECTION 55 2(A) READS AS UNDER:- 'SECTION 55(2)(A) ' (A) IN RELATION TO A CAPITAL ASSET, BEING GOODWIL L OF A BUSINESS [OR A TRADE MARK OR BRAND NAME ASSOCIATED WITH A BUSINESS ] [OR A RIGHT TO MANUFACTURE, PRODUCE OR PROCESS ANY ARTICLE OR THIN G] [OR RIGHT TO CARRY ON ANY BUSINESS], TENANCY RIGHTS, STAGE CARRI AGE PERMITS OR LOOK HOURS, -' THUS, IT IS EVIDENT THAT WHERE CAPITAL ASSET IS IN THE NATURE OF RIGHT TO CARRY ON BUSINESS, THEN THE SAME WILL COME WITHIN T HE AMBIT OF CAPITAL GAIN TAX. SECTION 28 (VA) READS AS UNDER:- SECTION 28 (VA) 'ANY SUM, WHETHER RECEIVED OR RECEIVABLE, IN CASH O R KIND, UNDER AN AGREEMENT FOR - (A) NOT CARRYING OUT ANY ACTIVITY IN RELATION TO AN Y BUSINESS; OR ITA NO. 39 00 AND 3878 / MUM/2010 ASSESSMENT YEAR: 2006-07 PAGE 5 OF 6 (B) NOT SHARING ANY KNOW-HOW, PATENT, COPY RIGHT, T RADE-MARK, LICENCE, FRANCHISE OR ANY OTHER BUSINESS OR COMMERC IAL RIGHT OF SIMILAR NATURE OR INFORMATION OR TECHNIQUE LIKELY T O ASSIST IN THE MANUFACTURE OR PROCESSING OF GOODS OR PROVISION FOR SERVICES. PROVIDED THAT SUB-CLAUSE (A) SHALL NOT APPLY TO - (I) ANY SUM, WHETHER RECEIVED OR RECEIVABLE, IN CAS H OR KIND, ON ACCOUNT OF TRANSFER OF THE RIGHT TO MANUFACTURE, PR ODUCE OR PROCESS ANY ARTICLE OR THING OR RIGHT TO CARRY ON ANY BUSIN ESS, WHICH IS CHARGEABLE UNDER THE HEAD 'CAPITAL GAINS', THUS, SECTION 28 (VA) WOULD BE ATTRACTED WHERE THE ASSESSEE WAS CARRYING ON BUSINESS AND NOT WHERE ASSESSEE ONLY HA D RIGHT TO CARRY ON BUSINESS IN THE FORM OF CAPITAL ASSET. FURTHER A S PER CIRCULAR NO. 763 DATED 18/2/1998 BY FINANCE ACT, 1997 THE AMENDM ENTS WERE MADE IN SECTION 55(2)(A) OF THE ACT TO BRING EXTING UISHMENT OF RIGHT TO MANUFACTURE, PRODUCE OR PROCESS ANY ARTICLE OR THIN G OR RIGHT TO CARRY ON ANY BUSINESS WITHIN THE AMBIT OF CAPITAL GAIN TA X. SIMILARLY CIRCULAR NO.8 OF 2002 DATED 27/8/2002 EXPLAINING TH E PROVISIONS OF FINANCE ACT, 2002 BY WHICH CLAUSE (VA) WAS INSERTED IN SECTION 28 OF THE ACT, CLARIFIES THAT RECEIPTS FOR TRANSFER OF RI GHTS TO MANUFACTURE, PRODUCE OR PROCESS ANY ARTICLE OR THING OR RIGHT TO CARRY ON ANY BUSINESS, WHICH ARE CHARGEABLE TO TAX UNDER THE HEA D CAPITAL GAIN WOULD NOT BE TAXABLE AS PROFITS AND GAINS OF BUSINE SS. THUS, THE DIFFERENCE BETWEEN THE SALE CONSIDERATION AND TRUE VALUE OF SHARES WAS CHARGEABLE AS CAPITAL GAINS. 5. RESPECTFULLY FOLLOWING THE ESTEEMED VIEWS OF THE COORDINATE BENCH, WITH WHICH WE ARE IN RESPECTFUL AGREEMENT, WE HOLD THAT THE AMOUNTS HELD TO BE ATTRIBUTABLE TO NON COMPETE OBLIGATIONS ARE TAXABLE AS CAPITAL GAINS AND NOT AS BUSINESS INCOME. TO THIS EXTENT, WE HOLD THAT THE O RDER OF THE CIT(A) IS INDEED VITIATED IN LAW, AND, TO THAT EXTENT, THAT GRIEVANC E OF THE ASSESSEE MUST BE UPHELD. THERE IS NO DISPUTE THAT THE ASSESSEE HAS A LREADY INCLUDED ENTIRE CONSIDERATION FOR SALE OF SHARES, INCLUDING WHAT CO ULD BE ATTRIBUTED TO NON COMPETE OBLIGATIONS, AS CAPITAL GAINS. IN THIS VIEW OF THE MATTER, THE EXERCISE OF BIFURCATION BETWEEN CONSIDERATION ATTRIBUTABLE TO S ALE OF SHARES AND FOR NON COMPETE OBLIGATIONS IS RENDERED ACADEMIC AND INFRUC TUOUS. WE MAY ALSO ADD THAT IT IS NOT EVEN IN DISPUTE THAT THE ASSESSEE BE FORE US WAS NOT ACTIVELY ITA NO. 39 00 AND 3878 / MUM/2010 ASSESSMENT YEAR: 2006-07 PAGE 6 OF 6 ENGAGED IN THE BUSINESS AND SO FAR AS THE ASSESSEE ACTIVELY ENGAGED IN THE BUSINESS IS CONCERNED, IT HAS BEEN STATED AT THE BA R THAT INCOME ATTRIBUTABLE TO NON COMPETE OBLIGATIONS HAS BEEN OFFERED TO TAX AS BUSINESS INCOME, BUT THEN, GIVEN THE UNCONTROVERTED POSITION THAT THE ASSESSEE WAS NOT ACTIVELY ENGAGED IN BUSINESS, IT IS NOT REALLY NECESSARY TO EXAMINE THAT ASPECT OF THE MATTER ANY FURTHER. THE STAND OF THE ASSESSEE, IN TREATING ENT IRE CONSIDERATION RECEIVED ON SALE OF SHARES AS TAXABLE UNDER THE HEAD CAPITAL G AINS MUST THEREFORE BE UPHELD. 6. FOR THE DETAILED REASONS SET OUT ABOVE, AND RESP ECTFULLY FOLLOWING THE COORDINATE BENCH IN HOMI APSI BALSARAS CASE (SUPRA ), WE HOLD THAT THE ENTIRE CONSIDERATION HAS BEEN RIGHTLY OFFERED TO TAX UNDER THE HEAD CAPITAL GAINS. THE PARTIAL RELIEF GRANTED BY THE CIT(A), BY REDUCING T HE QUANTUM OF AMOUNT ATTRIBUTABLE TO NON COMPETE OBLIGATIONS, IS THUS RE NDERED ACADEMIC AND INFRUCTUOUS. THE GRIEVANCE AND THE STAND OF THE ASS ESSEE, ON THE OTHER HAND, IS UPHELD. 7. IN THE RESULT, WHILE APPEAL OF THE ASSESSEE IS A LLOWED IN THE TERMS INDICATED ABOVE, APPEAL OF THE REVENUE IS DISMISSED AS INFRUCTUOUS. PRONOUNCED IN THE OPEN COURT TODAY ON 7 TH DAY OF OCTOBER, 2011. SD/- SD/- (VIJAY PAL RAO ) (PRAMOD KUMAR) JUDICIAL MEMBER ACCOUNTANT MEMBER MUMBAI; 7 TH DAY OF OCTOBER, 2011 . COPY FORWARDED 1. THE APPELLANT, 2. THE RESPONDENT 3. COMMISSIONER , MUMBAI 4. DEPARTMENTAL REPRESENTATIVE, E BENCH, MUMBAI 5. GUARD FILE TRUE COP Y BY ORDER ETC. ASSISTANT REGISTRAR INCOME TAX APPELLATE TRIBUNAL MUMBAI BENCHES, MUMBAI