ACIT 20(3), MUMBAI V. SANJAY UMESH VYAS, MUMBAI

ITA 3963/MUM/2011

• Counselvise Citation: [2016] 131 COUNSELVISE.COM (IT) 2937 (ITAT-MUMBAI)
• Duration Of Justice: 5 year(s) 4 month(s) 1 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 14-09-2016
• Appeal Filed By: Department
• Order Result: Dismissed
• Bench Allotted: E
• Next Hearing Date: 13-08-2015
• Assessment Year: 2007-2008
• Appeal Filed On: 13-05-2011
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: RAJN EESH K ARVIND
• Assessee Lawyers: JITENDRA SINGH
• Keywords: Capital asset; Business income

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL MUMBAI E BENCH , MUMBAI BEFORE SHRI SHAILEND RA K UMAR YADAV, JUDICIAL MEMBER, AND SHRI RAJESH KUMAR , ACCOUNTANT MEMBER . ITA. NO. 3963 / M UM /20 1 1 (ASSESSMENT YEAR: 2 0 0 7 - 0 8 ) ACIT, 20(3), PIRAMAL CHAMBERS, LALBAUG, PAREL, MUMBAI 400 012 APPELLANT VS. SHRI SANJAY UMESH VYAS E - 624/625, KAMLESH APARTMENT, SHERE PUNJAB COLONY, ANDHERI (E), MUMBAI - 400093 RESPONDENT PAN: AA APV5413G / BY APPELLANT : SHRI RAJNEESH K ARVIND , D .R. / BY RESPONDENT : SHRI JITENDRA SINGH , D .R. / DATE OF HEARING : 16 . 0 8 .201 6 / DATE OF PRONOUNCEMENT : 14.9 .201 6 ORDER PER SHAILENDRA KUMAR YADAV, J . M: THIS APPEAL HAS BEEN FILED BY REVENU E AGAINST THE ORDER OF COMMISSIONER OF INCOME - TAX (APPEALS) - 3 1 , MUMBAI , DATED 15 . 0 3 . 20 1 1 FOR A.Y. 20 0 7 - 0 8 ON FOLLOWING GROUND S : I T A NO . 3963 / M UM / 1 1 A.Y. 0 7 - 0 8 [ AC IT VS. SHRI SANJAY UMESH VYAS ) PAGE 2 1) THE L D CIT(A) ERRED IN TREATING THE CONSID ERATION OF RS.1,44,09,447/ - RECEIVED BY THE ASSESSEE, AS FULL VALUE OF CONSIDERATION U/S 48 OF THE INCOME - TAX ACT, 1961 AS AGAINST NON COMPETE FEES ASSESSED BY THE AO. 2. ASSESSEE IS AN INDIVIDUAL WHO IS A PROMOTER AND DIRECTOR IN A COMPANY CALLED OF M/S SYNERGETICS INFORMATION TECHNOLOGY SERVICES (INDIA) PVT LTD (AS SHORT SITSIPL), WHICH IS ENGAGED IN THE BUSINESS OF SOFTWARE TRAINING. ASSESSEE ALONGWITH SHRI AJAY KHANKHOJE WAS SHARE HOLDER OF SITSIPL HAVING 50% SHARE EACH. SITSIPL IS ENGAGED IN THE BUSINESS OF HIGH - END IT TRAINING WAS TAKEN OVER BY M/S APTECH LTD. VIDE SHARE PURCHASE AND SUBSCRIPTION AGREEMENT (SPSA) AND SHAREHOLDERS AGREEMENT (SHA) EXECUTED SEPARATELY. BY VIRTUE OF SPSA DATED 12.10.2007, ASSESSEE WAS TO TRANSFER 28,421 SHARES O F SITSIPL BEING 70% OF HIS TOTAL SHAREHOLDING TO M/S. APTECH LTD. OUT OF SAME, ASSESSEE SOLD 28421 SHARES BEING APPROXIMATELY 35% OF EXISTING PAID UP CAPITAL @ RS.615.75 PER SHARE FOR A NET CONSIDERATION OF RS.1,75,00,231/ - , WHEREAS SHRI AJAY SHARAD KHANK HOJE HAS SOLD 28420 SHARES BEING APPROXIMATELY 35% OF EXISTING PAID UP CAPITAL @ RS.615.75 PER SHARE FOR A NET SALE CONSIDERATION OF RS.1,74,99,615/ - TO APTECH LTD. ON THIS TRANSACTION OF SALE OF SHARES, ASSESSEE HAD DISCLOSED LONG TERM CAPITAL GAIN OF RS .41,85,050/ - IN HIS RETURN OF INCOME. HOWEVER, ASSESSING OFFICER CONSIDERED TO THE NON - COMPETE CLAUSE MENTIONED IN PARA 3.2 OF THE SPSA HAS HELD THAT THE SALE CONSIDERATION RECEIVED BY ASSESSEE MENTIONED ABOVE IS INCLUSIVE OF NON - COMPETE COMPENSATION ON T RANSFER OF BUSINESS AND ACCORDINGLY, THE SAME WAS SEPARATELY ASSESSED AS I T A NO . 3963 / M UM / 1 1 A.Y. 0 7 - 0 8 [ AC IT VS. SHRI SANJAY UMESH VYAS ) PAGE 3 HIS BUSINESS INCOME U/S.28(VA) OF THE ACT. AS AGAINST THE SAME, ACCORDI NG TO LEARNED AUTHORIZED R EPRESENTATIVE , THE ENTIRE SALE CONSIDERATION RECEIVED WA S TOWARDS SALE OF SHARES BASE D ON MUTUALLY NEGOTIABLE/ACCEPTABLE VALUATION AGREED UPON BY THE INTERESTED PARTIES, THEREFORE, THE ASSESSING OFFICER WA S NOT JUSTIFIED IN CONSIDERING A PART OF THE CONSIDERATION RECEIVED TOWARDS NON - COMPETE COMPENSATION. IT WAS ALSO SUBMITTED THAT NO SPE CIFIC AMOUNT ON THIS ACCOUNT IS RECORDED IN SPSA, ASSESSEE EVEN AFTER THE SALE OF MAJORITY OF HIS HOLDING REMAINED A MINORITY SHAREHOLDER AS WELL AS ACTIVELY ASSOCIATED WITH THE MANAGEMENT OF THE COMPANY, THEREFORE, THE N ON - COMPETE CLAUSE PLACED IN SPSA IS IN THE NATURE OF A STANDARD CLAUSE NOT RELATED TO THE SALE CONSIDERATION RECEIVED BY ASSESSEE. IT WAS FURTHER SUBMITTED THAT ASSESSEE WAS COMPENSATED ON ACCOUNT OF RESTRICTED COMMAN D ANT SEPARATELY BY WAY OF PAYMENT OF 'CONTINUITY INCENTIVE' AND 'ENGAGEME NT CONTRACT' SEPARATELY EXECUTED WHICH WAS COMPLETELY IGNORED BY ASSESSING OFFICER. TO STRENGTHEN HIS ARGUMENTS, LEARNED AUTHORIZED REPRESENTATIVE SUBMITTED THAT IN PURSUANCE OF CLAUSE 2.2 OF SPSA, THE APTECH LTD. INTRODUCED A SUM OF RS.5 C R OR E S BY SUBSCR IBING 81,202 ADDITIONAL SHARES @ RS.615.75 PER SHARE WHICH ESTABLISHED THAT THE SALE CONSIDERATION RECEIVED WITHOUT TAKING INTO NON - COMPETE COVENANT WAS OF RS.615.75 PER SHARE AS ON THE DATE OF TRANSFER OF SHARES. THEREFORE, THE STAND OF ASSESSEE HAS BEEN THAT UNDER THESE FACTS AND CIRCUMSTANCES OF THE CASE, THE UNILATERAL ACTION OF ASSESSING OFFICER TO CONSIDER A I T A NO . 3963 / M UM / 1 1 A.Y. 0 7 - 0 8 [ AC IT VS. SHRI SANJAY UMESH VYAS ) PAGE 4 PART OF SALES CONSIDERATION TOWARDS NON - COMPETE FEES WAS NOT JUSTIFIED AND SUSTAINABLE. 2 .1 ON ACCOUNT OF ABOVE NOTED FACTS BROUGHT ON RECORD, THE APTECH LTD. VIDE THIS OFFICE LETTER NO C I T (A) - 3 1/APPEAL/2010 - 11 DATED 22.10.2010 WAS ASKED TO CLARIFY THE FOLLOWING ISSUES EMANATING IN CASE OF ASSESSEE ; '(I) THE BASIS OF SALE PRICE OF RS.615.75 P ER SHARE WORKED OUT OF M/S. SYNERG ETICS INFORMATION TE C HNOLOG Y SERVICES (INDIA) PVT. LTD. , A T THE TIME OF ACQUISITION OF T HE SAID COMPANY BY M/S APTECH LTD. YOU ARE REQUESTED TO FURNISH COMPLETE DETAILS INCLUDING WORKING AND COMPUTATION OR VALUATION CARRIED FOR THIS PURPOSE. (II) FROM THE TERMS AND CONDITION S THE SHARES PURCHASE AND SUBSCRIPTION AGREEMENT AND SHAREHOLDERS AGREEMENT, THE PURCHASE CONSIDERATION PAID AGAINST THE PURCHASE OF SHARES HELD BY THE APPELLANT IN SYNERGETICS INFORMATION TECHNOLO GY SERVICES (INDIA) PVT. LTD., @ RS.615.75 PER SHARE APPEAR S TO BE CONSIDERATION PAID FOR THE ACQUISITION ON CLOSURE OF A PARTNERSHIP FIRM NAMED M/S. SYNERGETICS CONSULTANCY AS WELL AS COMPENSATION PAID AGAINST VARIOUS COVENANTS OF NON COMPETE RESTRICTIONS PLACED ON THE PROMOTERS OF M/S. SYNERG ETICS INFORMATION TE CHNO LO G Y SERVICES (INDIA) PVT. LTD., SINCE, NO OTHER CONSIDERATION IS PAID FOR THESE PURPOSES. (III) THEREFORE, IN VIEW OF THE ABOVE (II) YOU ARE REQUESTED TO FURN IS H THE CONSIDERATION OR COMPENSATION PAID OR AGREED UPON IN RESPECT TO THE CLOSURE OR ACQUI SITION OF THE FIRM AND COMPENSATION PAID AS WORKED OUT IN LIEU OF NON COMPETE RESTRICTIONS PLACED ON THE PROMOTERS. (IV) WHETHER THE COMPENSATION SO WORKED OUT OR PAID INCLUDES THE SHARE PRICE OF M/S. SYNERGETICS INFORMATION TECHNOLOGY SERVICES (INDIA) PV T. LTD., @ RS.615.75 PER SHARE PAID IN KIND OR IN CASH, IF SO, THE BREAK - UP THEREOF . I T A NO . 3963 / M UM / 1 1 A.Y. 0 7 - 0 8 [ AC IT VS. SHRI SANJAY UMESH VYAS ) PAGE 5 (V) WHETHER ANY OTHER AGREEMENTS OR DOCUMENT; OR TRANSACTIONS WERE UNDERTAKEN IN THIS REGARD, IF ANY WITH ANY OF THESE INTERESTED PARTIES, IF SO, A COPY THEREOF MAY BE FU RNISHED TO THIS OFFICE.' 2 .2. IN RESPONSE TO THE SAME, THE APTECH LTD. VIDE ITS LETTER DATED 09.11.2010 HAS SUBMITTED IN THIS REGARD AS UNDER: ' THE COMPANY HAS ACQUIRED 56,841 SHARES CONSTITUTING 70% EQUITY STAKE IN THE MUMBAI V BASED SYNERGETICS INFO RMATION TECHNOLOGY SERVICES INDIA PVT. LTD. (SYNERGETICS), A COMPANY ENGAGED IN HIGH - END IT TRAINING VERTICAL BUSINESS FOR RS.3,50,000/ - ON 12.10.2006. AS PER PARA 1.1 (X) AT PAGE 4 OF SHARE PURCHASE A ND SUBSCRIPTION AGREEMENT, SANJAY VYAS ( APPELLAN T) HAS TRANSFERRED 28421 SHARES OF HIS TOTAL HOLDING TO APTECH LTD (COMPANY) AT A NEGOTIATED PRICE OF RS.615.75 PER SHARE. ACCORDINGLY COMPANY HAS PAID THE CONSIDERATION OF RS.1,75,00,231/ - TO APPELLANT. OTHER THAN SHARE CONSIDERATION COMPANY HAS NOT PAI D ANY COMPENSATION TO APPELLANT DURING THE YEAR EITHER IN CASH OR IN KIND. THE COMPANY HAS MADE TWO TYPES OF AGREEMENT CALLED PURCHASE AND SUBSCRIPTION AGREEMENT AND SHAREHOLDERS AGREEMENT. THERE WAS NO OTHER AGREEMENTS WERE UNDERTAKEN FOR ACQUIRED SHA RES FROM SYNERGETICS INFORMATION TECHNOLOGY SERVICES INDIA PVT. LTD. THE SAID AGREEMENTS HAVE BEEN ATTACHED FOR YOUR KIND REFERENCE.' 2.3 THEREFORE, ON ACCOUNT OF ABOVE, AS WELL AS IN ABSENCE OF ANY SPECIFIC CLAUSE MENTIONING THE WORKING AND THE PA YMENT OF NON - COMPETE FEES IN SPSA, CIT(A) OBSERVED THAT ASSESSING OFFICER WA S NOT JUSTIFIED IN ARBITRARILY CONCLUDING THAT A PART OF SALE CONSIDERATION OF SHARES IS PERTAINING TO NON - COMP ETE FEES RECEIVED BY THE ASSESSEE. SI TS I L IS ENGAGED IN THE BUSINESS OF I T A NO . 3963 / M UM / 1 1 A.Y. 0 7 - 0 8 [ AC IT VS. SHRI SANJAY UMESH VYAS ) PAGE 6 HIGH END SOFTWARE TRAINI NG AND THE SALE VALUE AGREED FOR THE PURPOSE OF SALE OF SHARES WA S BASED ON THE FUTURE PROSPECTIVE PROFITS OR EARNINGS OF BUSINESS UNDER CONSIDERATION. THEREFORE, IN ABSENCE OF ANY SUCH DETAILS, QUANTIFICATION AND PAYMENTS THEREO F MADE IN THIS REGARD ON BEHALF OF ASSESSING OFFICER WA S NOT JUSTIFIED IN UNILATERALLY TREATING A PART OF THE CONSIDERATION RECEIVED TOWARDS NON - COMPETE FEES. THE BUYER OF SHARES I.E APTECH LTD., AS DISCUSSED ABOVE HAS CATEGORICALLY DENIED HAVING MADE ANY SUCH PAYMENTS TOWARDS NON - COMPETE FEES TO ASSESSEE . FURTHER, CIT(A) OBSERVED THAT ONLY A PART OF SHAREHOLDING WA S OFF ERED BY ASSESSEE AND A PART OF SHAR EHOLDING IN THE TARGET COMPANY WA S STILL OWNED BY ASSESSEE . ASSESSEE IS AC TI VELY ENGAGED IN THE DAY T O DAY AFFAIRS OF BUSINESS OF T HE SAID COMPANY FOR WHICH VIDE ENGAGEMENT CONTRACT SEPARATELY EXECUTED THE ASSESSEE IS ADEQUATEL Y COMPENSATED BY WAY OF CONTINUITY INCENTIVE PROVIDED THEREIN . CIT(A) FURTHER OBSERVED THAT THE BUYER ( APTECH LTD . ) TOO HAS INFUS ED ADDITIONAL SHARE CAPITAL IN THE TARGET COMPANY ON THE SAME TERMS AND CONDITIONS AMOUNTING TO RS.5 CRORES AS DISCUSSED ABOVE. THEREFORE, IT CANNO T BE HELD THAT A PART OF THE SALE CONSIDERATION RECEIVED BY ASSESSEE IS TOWARD S NON - COMPETE FEES. IN THIS B ACKGROUND, CIT(A) OBSERVED THAT SCRUTINY ASSESSMENT U/S . 143 (3) OF THE ACT IN CASE OF SHRI AJAY SHARAD KHANKHOJE, SECOND SHAREHOLDER IS COMPLETED WITHOUT MAKING ANY SUCH ADDITION ON THIS ACCOUNT . ON THE OTHER HAND, ON IDENTICAL FACTS ASSESSING OFFICER HAS ACCEPTED SALE VALUE OF I T A NO . 3963 / M UM / 1 1 A.Y. 0 7 - 0 8 [ AC IT VS. SHRI SANJAY UMESH VYAS ) PAGE 7 SHARES WITHOUT APPORTIONING A PART THEREOF TOWARDS NON - COMPETE FEES IN SAID CASE. 2.4 AS PER THE PROVISIONS OF SECTION 48 OF THE ACT TE TERM FULL VALUE OF CONSIDERATION RECEIVED OR ACCRUED IMPLIES THAT IT IS THE FULL CONSIDERATIO N FOR THE TRANSFER OF CAPITAL ASSET RECEIVED BY THE TRANSFEROR IN LIEU OF PARTING WITH ASSET I.E. THE PRICE BARGAINED FOR BY THE TRANSFEROR AND TRANSFEREE. AS SUCH , THERE CAN BE NO QUESTION OF APPLYING A LOWER MARKET PRICE TO DETERMINE SALE CON S IDERATION. CIT(A) FURTHER OBSERVED THAT THE NON - COMPE TE COMPENSATION REFERRED TO IN S ECTION 28(VA) OF THE ACT, APPLIES TO ANY SUM RECEIVED FOR NOT CARRYING OUT ANY ACTIVITY IN RELATION TO ANY BUSINESS OR FOR NOT SHARING ANY INTELLECTUAL PROPERTY RELATING TO THE BUSINESS SOLD OR TRANSFERRED. HOWEVER, IN THE INSTANT CASE, ASSESSEE IS NOT RESTRICTED FROM CARRYING OUT ANY ACTIVITY OR FROM SHARING ANY INTELLECTUAL PROPERTY. RATHER, ASSESSEE IS STILL ACTIVELY PARTICIPATING IN DAY TO DAY AFFAIRS OF BUSIN ESS FOR WHICH HE WA S ADEQUATELY COMPENSATED. IN VIEW OF ABOVE, CIT(A) WAS JUSTIFIED IN OBSERVING THAT CLAUSE 6.8 WA S IN THE NATURE OF A STANDARD NON - COMPETE CONDITION OR CLAUSE O F ANY EMPLOYMENT CONTRACT AND WHICH CANNOT FORM THE BASIS OF ALLOCATION OF A PART OF THE CONSIDERATION TOWARDS NON - COMPETE AS ASSESSEE HAS BEEN PAID SALARY FOR HIS SERVICE DURING THE PERIOD OF EMPLOYMENT. IN VIEW OF ABOVE DISCUSSION, CIT(A) RIGHTLY HELD THAT TOT A L CONSIDERATION RECEIVED BY ASSESSEE FROM SALE OF SHARES SHOULD BE CONSIDERED AS HIS FULL VALUE OF CONSIDERATION U/S.48 OF THE ACT AND NO PART OF THE SAID CONSIDERATION CAN BE ATTRIBUTED TOWARDS NON - I T A NO . 3963 / M UM / 1 1 A.Y. 0 7 - 0 8 [ AC IT VS. SHRI SANJAY UMESH VYAS ) PAGE 8 COMPETE FEES. ACCORDINGLY, RELIEF WAS RIGHTLY GRANTED TO ASSESSEE. THIS REASONED FACTUAL FINDING OF CIT(A) NEEDS NO INTERFERENCE FRO M OUR SIDE. WE UPHOLD THE SAME. 3. IN THE RESULT, THE APPEAL FILED BY REVENU E IS DISMISSED . PRONOUNCED IN THE OPEN COURT ON THIS THE 14TH DAY OF SEPT , 201 6 . SD SD ( RAJESH KUMAR ) (SHAILENDRA KUMAR YADAV) ACCOUNTANT MEMBER JUDICIAL MEMBER MUMBAI : DATED 14.9. 201 6 S.K.SINHA / COPY OF ORDER FORWARDED TO: - 1 . / REVENUE 2 . / ASSESSEE 3 . / CONCERNED CIT 4. - / CIT (A) 5 . , , / DR, ITAT, MUMBAI 6 . / GUARD FILE. BY ORDER / , TRUE COPY / , ,