ADDL CIT 18(2), MUMBAI V. SHASHIKANT G. MANDHANA-HUF, MUMBAI

ITA 3908/MUM/2010

• Counselvise Citation: [2011] 119 COUNSELVISE.COM (IT) 7290 (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: Department
• Order Result: Dismissed
• Bench Allotted: E
• Assessment Year: 2006-2007
• Appeal Filed On: 13-05-2010
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: RAJAJ R VORA
• Keywords: Capital asset; Business income; Share purchase agreement
• Section: 143(3); 28; 2

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL, E BENCH, MUMBAI. BEFORE SHRI PRAMOD KUMAR, ACCOUNTANT MEMBER AND SHRI VIJAY PAL RAO, JUDICIAL MEMBER I.T.A NO.3908/ MUM/2010 ASSESSMENT YEAR: 2006-07 ADDL. CIT 18(2) .. APPELLANT PIRAMAL CHAMBERS, PAREL, MUMBAI,. VS SHASHIKANT G. MANDHANA, HUF .. RESPONDEN T 338 ,A TO Z INDL. ESTATE, GANPAT RAO KADAM MARG, LOWER PAREL, MUMBAI. PA NO.AADHM 6052 K APPEARANCES: G.P.TRIVEDI, FOR THE APPELLANT RAJAJ R VORA , FOR THE RESPONDENT DATE OF HEARING : 14.7.2011 DATE OF PRONOUNCEMENT : 7 -10-2011 O R D E R PER PRAMOD KUMAR: 1. BY WAY OF THIS APPEAL, THE ASSESSING OFFICER HAS CALLED INTO QUESTION CORRECTNESS OF CIT(A)S ORDER DATED 26 TH FEBRUARY, 2010, IN THE MATTER OF ASSESSMENT I.T.A NO.3908/ MUM/2010 ASSESSMENT YEAR: 2006-07 2 UNDER SECTION 143(3) OF THE INCOME TAX ACT, 1961, FOR THE ASSESSMENT YEAR 2006-07 ON THE FOLLOWING GROUNDS: 1. ON THE FACTS AND CIRCUMSTANCES OF THE CASE AND IN LAW, THE LD CIT(A) ERRED IN ADOPTING EARNING CAPITALIZATION METHOD FOR VALUA TION OF SHARES AS AGAINST THE METHOD ADOPTED BY THE AO OF SHARE VALUATION ME THOD AS PER WEALTH TAX ACT. 2) ON THE FACTS AND CIRCUMSTANCES OF THE CASE AND I N LAW, THE LD CIT(A) ERRED IN DIRECTING THE AO TO ADOPT SALE VALUE OF RS.529 P ER SHARE AS LONG TERM CAPITAL GAIN AS AGAINST RS.365 PER SHARE TAKEN BY T HE AO ANDRS.41 PER SHARE AS NON COMPETE FEES TREATED AS BUSINESS INCOME AS A GAINST RS.205 PER SHARE TAKEN BY THE AO. 3. LEARNED COUNSELS FAIRLY AGREE THAT WHATEVER IS D ECIDED IN THE CASE OF SAVITA N. MANDHANA IN ITA NO.3900 AND 3878/M/2010 FOR THE AS SESSMENT YEAR 2006-07 WILL APPLY MUTATIS-MUTANDIS HEREIN AS WELL. 4. VIDE OUR ORDER OF EVEN DATE; WE HAVE REJECTED TH E APPEAL OF THE REVENUE IN THE CASE OF SAVITA N MANDHANA (SUPRA), INTER ALIA, BY OBSERVING AS UNDER: 4. WE FIND THAT, EVEN IN THE CASE OF HAMI ASPI BA LSARA (SUPRA) THERE WAS A SPECIFIC NON COMPETE OBLIGATION AND YET THE COORD INATE BENCH WAS OF THE VIEW THAT NO PART OF THE SALE CONSIDERATION OF SHAR ES COULD BE ATTRIBUTED TO BE TAXED IN THE HANDS OF THE ASSESSEE AS BUSINESS I NCOME UNDER SECTION 28(VA) AS IS CLEARLY DISCERNABLE FROM THE FOLLOWIN G 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:- I.T.A NO.3908/ MUM/2010 ASSESSMENT YEAR: 2006-07 3 '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 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) I.T.A NO.3908/ MUM/2010 ASSESSMENT YEAR: 2006-07 4 ' (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 (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 I.T.A NO.3908/ MUM/2010 ASSESSMENT YEAR: 2006-07 5 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 T AXABLE AS CAPITAL GAINS AND NOT AS BUSINESS INCOME. TO THIS EXTENT, WE HOLD THAT THE ORDER OF THE CIT(A) IS INDEED VITIATED IN LAW, AND, TO THAT EXTE NT, THAT GRIEVANCE OF THE ASSESSEE MUST BE UPHELD. THERE IS NO DISPUTE THAT T HE ASSESSEE HAS ALREADY INCLUDED ENTIRE CONSIDERATION FOR SALE OF SHARES, I NCLUDING WHAT COULD BE ATTRIBUTED TO NON COMPETE OBLIGATIONS, AS CAPITAL G AINS. IN THIS VIEW OF THE MATTER, THE EXERCISE OF BIFURCATION BETWEEN CONSIDE RATION ATTRIBUTABLE TO SALE OF SHARES AND FOR NON COMPETE OBLIGATIONS IS R ENDERED ACADEMIC AND INFRUCTUOUS. WE MAY ALSO ADD THAT IT IS NOT EVEN I N DISPUTE THAT THE ASSESSEE BEFORE US WAS NOT ACTIVELY ENGAGED IN THE BUSINESS AND SO FAR AS THE ASSESSEE ACTIVELY ENGAGED IN THE BUSINESS IS CONCER NED, IT HAS BEEN STATED AT THE BAR THAT INCOME ATTRIBUTABLE TO NON COMPETE OBL IGATIONS 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 MATT ER ANY FURTHER. THE STAND OF THE ASSESSEE, IN TREATING ENTIRE CONSIDERA TION RECEIVED ON SALE OF SHARES AS TAXABLE UNDER THE HEAD CAPITAL GAINS MU ST THEREFORE BE UPHELD. I.T.A NO.3908/ MUM/2010 ASSESSMENT YEAR: 2006-07 6 6. FOR THE DETAILED REASONS SET OUT ABOVE, AND RES PECTFULLY FOLLOWING THE COORDINATE BENCH IN HOMI APSI BALSARAS CASE (SUPRA ), WE HOLD THAT THE ENTIRE CONSIDERATION HAS BEEN RIGHTLY OFFERED TO TA X UNDER THE HEAD CAPITAL GAINS. THE PARTIAL RELIEF GRANTED BY THE CIT(A), BY REDUCING THE QUANTUM OF AMOUNT ATTRIBUTABLE TO NON COMPETE OBLIGATIONS, IS THUS RENDERED ACADEMIC AND INFRUCTUOUS. THE GRIEVANCE AND THE STAND OF THE ASSESSEE, 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. 5. RESPECTFULLY FOLLOWING THE VIEW SO TAKEN IN THE CASE OF SAVITA MANDHANA (SUPRA), WE REJECT THE GRIEVANCE OF THE REVENUE AND UPHOLD THE ACTION OF THE CIT(A) AND DECLINE TO INTERFERE. 6. IN THE RESULT, APPEAL IS DISMISSED. PRONOUNCED IN THE OPEN COURT ON 7 TH OCTOBER, 2011 SD/- (VIJAY PAL RAO) JUDICIAL MEMBER SD/- (PRAMOD KUMAR) ACCOUNTANT MEMBER MUMBAI, DATED 7 TH OCTOBER, 2011 PARIDA COPY TO: 1. THE APPELLANT 2. THE RESPONDENT 3. COMMISSIONER OF INCOME TAX (APPEALS),29, MUMBAI 4. COMMISSIONER OF INCOME TAX, 18 , MUMBAI 5. DEPARTMENTAL REPRESENTATIVE, BENCH E MUMBAI //TRUE COPY// BY ORDER ASSTT. 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