ASST CIT 25(2), MUMBAI V. KIRAN M SHAH, MUMBAI

ITA 5294/MUM/2013

• Counselvise Citation: [2019] 112 COUNSELVISE.COM (IT) 6146 (ITAT-MUMBAI)
• Duration Of Justice: 5 year(s) 5 month(s) 15 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 15-01-2019
• Appeal Filed By: Department
• Order Result: Dismissed
• Bench Allotted: A
• Next Hearing Date: 21-05-2015
• Assessment Year: 2010-2011
• Appeal Filed On: 31-07-2013
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Assessee Lawyers: DR K SHIVRAM
• Keywords: Capital asset; Business income; Share purchase agreement; Set aside; Capital Gains
• Section: 143(3); 54F; 2(14); 142(1); 191; 54EC

Judgement Text

, ,, , IN THE INCOME TAX APPELLATE TRIBUNAL H BENCH, MUM BAI BEFORE SHRI RAJESH KUMAR, ACCOUNTANT MEMBER & SHRI RAM LAL NEGI, JUDICIAL MEMBER ./ ITA NO.5294/MUM/2013 ( / ASSESSMENT YEAR :2010-2011) ACIT-25(2), R.NO.108, 1 ST FLOOR, BLDG. NO.C- 11, PRATYAKSHKAR BHAVAN, BANDRA KURLA COMPLEX, BANDRA(E), MUMBAI-400051 VS. KIRAN M. SHAH, B-802/803, PARK SIDE 2 CHS LTD., RAHEJA ESTATE, KULUPWADI, BORIVALI(EAST), MUMBAI-400066 ./PAN NO. : AAHPS 6652 D ( /APPELLANT ) .. ( / RESPONDENT ) /REVENUE BY : SHRI MANOJ KUMAR SINGH, CITDR /ASSESSEE BY : DR. K. SHIVRAM & SHASHANK DUNDU, AR / DATE OF HEARING : 03/01/2019 /DATE OF PRONOUNCEMENT 15/01/2019 / O R D E R PER SHRI RAJESH KUMAR, AM : THIS APPEAL BY REVENUE ARISES OUT OF THE ORDER OF T HE CIT(A) 35, MUMBAI, DATED 03.05.2013, WHICH IN TURN HAS ARISEN OUT OF THE ORDER PASSED BY THE ASSESSING OFFICER U/S. 143(3) OF THE INCOME TAX ACT, 1961 (HEREINAFTER REFERRED TO AS THE ACT) RELATING TO A.Y. 2010-2011 . 2. THE REVENUE HAS RAISED THE FOLLOWING GROUNDS OF APPEAL :- 1. 'ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CA SE AND IN LAW, THE ID.CIT (A) ERRED IN TREATING THE ENTIRE SA LE OF EQUITY SHARES OF RS.4,26,00,000/-, AS CAPITAL GAIN WHILE THE SAME WAS BUSINESS INCOME AS PER PROVISION OF SECTION 28( VA) OF THE INCOME TAX ACT AS THERE WAS NON COMPETITION CLA USE IN SHARE PURCHASE AGREEMENT ENTERED BETWEEN CAVINKARE PVT. LTD. IN WHICH THE ASSESSEE IS A SHAREHOLDER AN D M/S GNPL.' 2. 'ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CA SE AND IN LAW, THE ID.CIT(A) ERRED IN RELYING UPON JUDGMENT O F HON'BLE ITAT, MUMBAI, IN THE CASE OF DY. CIT RANGE - 18(2) VS ITA NO.5294/17 2 GOVINDLAL MANDHANA WITHOUT APPRECIATING THAT THE FA CTS INVOLVED IN APPELLANT'S CASE ARE DIFFERENT FROM THE FACTS OF THE ABOVE CASE.' 3. 'ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CA SE AND IN LAW, THE ID. CIT(A) ERRED IN ALLOWING DEDUCTION U/S 54EC AND 54F OF THE INCOME TAX ACT, AGAINST THE SALE OF SHAR ES WHICH WERE BUSINESS ASSETS AND TAXABLE AS BUSINESS INCOME AS PER PROVISION OF SECTION 28(VA) OF THE I.T.ACT AS T HE SAME WAS ALLOWABLE AGAINST INCOME UNDER THE HEAD CAPITAL GAINS.' 4. 'THE APPELLANT PRAYS THAT THE ORDER OF THE LD.C LT(A) ON THE ABOVE GROUNDS BE SET ASIDE AND THAT OF THE A.O BE R ESTORED.' 5. 'THE APPELLANT CRAVES LEAVE TO AMEND OR ALTER ANY GROUND OR ADD A NEW GROUND.' 3. FACTS IN BRIEF ARE THAT DURING THE YEAR THE ASSE SSEE FILED HIS RETURN OF INCOME ELECTRONICALLY ON 21.09.2010 DISCLOSING T OTAL INCOME AT RS.49,45,215/-, WHICH WAS PROCESSED U/S.143(1) OF T HE ACT. THEREAFTER THE CASE OF THE ASSESSEE WAS SELECTED FOR SCRUTINY UNDE R CASS AND NOTICE U/S.143(2) & 142(1) OF THE ACT ALONG WITH QUESTIONN AIRE WERE ISSUED AND DULY SERVED UPON THE ASSESSEE. THE AO FOUND RS. 4,2 6,00,000/- RECEIVED BY THE ASSESSEE FROM SALE OF SHARES IS IN FACT FOR NON COMPETING AND SHOULD NOT BE TREATED AS CAPITAL GAIN IN THE ABSENC E OF ANY CONCLUSIVE PROOF THAT THEY WERE HELD FOR THE PURPOSES OF INVES TMENT. FURTHER THE AO STATED THAT THERE IS NO EVIDENCE TO SHOW THAT HE RE CEIVED ANY DIVIDEND OR BONUS SHARES AND SUCH INVESTMENT WAS IN THE BUSINES S CARRIED ON BY THE ASSESSEE, AND NOT ON SHARES HELD BY HIM. THEREFORE, THE TRANSFER OF SHARES BY THE ASSESSEE TO COMPANY 'CAVINKARE PVT. L TD.' WAS NOT THE TRANSFER OF CAPITAL ASSET WITHIN THE MEANIN G OF SECTION 2(14) OF THE ACT BUT WAS IN FACT A TRANSFER/RENUNCI ATION OF CONTROL OVER THE COMPANY 'GARDEN NAMKCEN PVT, LTD. IN FAVOUR OF THE PURCHASER CAVINKARE PVT. LTD. THE AO FURTHER STATED THAT T HE ENTIRE CONSIDERATION ITA NO.5294/17 3 RECEIVED BY THE ASSESSEE IS FOR THE NEGATIVE COVENA NT OF NON-COMPETING AND NON-SOLICITING, THEREFORE, THE AO APPLIED THE P ROVISIONS OF SECTION 28(VA) OF THE ACT IN THE CASE OF THE ASSESSEE AND M ADE ADDITION OF RS.4,26,00,000/- AND REJECTED THE LONG TERM CAPITAL GAIN RESULTING FROM THE SAID SHARES AND CONSEQUENTLY DISALLOWING THE CLAIM OF DEDUCTIONS U/S.54EC AND 54F IN THE ASSESSMENT FRAMED U/S.143( 3) OF THE ACT, VIDE ORDER DATED 28.12.2012 4. IN THE APPELLATE PROCEEDINGS, THE CIT(A) ALLOWED THE APPEAL OF THE ASSESSEE RELYING ON THE DECISION OF ITAT MUMBAI BEN CH OF THE TRIBUNAL IN THE CASE OF RAMESH D. TAINWALA, IN ITA NO.3853/2010 AND IN THE CASE OF GOVINDLAL MANDHANA. THE OBSERVATIONS OF THE CIT(A) IN THIS REGARD ARE AS UNDER :- 8.3 I HAVE CAREFULLY CONSIDERED THE OBSERVATIONS O F THE AO AND THE SUBMISSIONS MADE BY THE AR OF THE APPELLANT. FR OM THE FOREGOING DISCUSSIONS IT IS FOUND THAT THE FACTS OF THIS CASE ARE DISTINGUISHABLE FROM THOSE OF THE DECISIONS RELIED BY THE AO DECIDED BY MUMBAI ITAT IN THE CASE OF RARNESH D. TA INWALA (SUPRA) AND NAYAN C SHAH ( SUPRA), WHEREIN NON COMP ETE FEES WAS SEPARATELY RECEIVED VIDE A NON COMPETE AGREEMENT. T HE HON'BLE ITAT 'G' BENCH MUMBAI WHILE DECIDING IN THE CASE OF GOVINDLAL MANDHANA (SUPRA), OBSERVED THAT THE CO-ORDINATE BEN CH IN THE CASE OF HOMI ASPI BALSARA HAD FOUND THAT THERE WAS NONCO MPETE COVENANT EMBEDDED IN THE SHARE PURCHASE AGREEMENT. IN THAT CASE ALSO IT WAS HELD THAT THE DIFFERENCE BETWEEN T HE SALE PRICE OF THE SHARES AND THE TRUE BOOK VALUE OF THE SHARES, I F ALLOCATED TOWARDS NON COMPETE FEES, WAS TO BE COMPUTED U/S55( 2)(A) OF THE ACT. THEREFORE, I AM UNABLE TO AGREE WITH THE DECISION O F THE AO AND RESPECTFULLY FOLLOWING THE DECISION OF THE MUMBAI I TAT IN THE CASE OF GOVINDLAL MANDHANA (SUPRA), THE CONTENTIONS OF T HE APPELLANT ARE UPHELD, AND ACCORDINGLY THE ENTIRE AMOUNT OF RS.4,26,00,000/- AS SALE CONSIDERATION TOWARDS SALE OF SHARES UNDER THE HEAD CAPITA! GAINS ONLY. 5. LD. DR BEFORE US RELIED ON THE DECISION OF LD. C IT(A) AND BY SUBMITTING THAT THE CONSIDERATION RECEIVED BY THE A SSESSEE HAS RIGHTLY ITA NO.5294/17 4 ASSESSED U/S.28(VA) OF THE ACT. THE LD ALSO REFERRE D TO SHARES PURCHASE / SALE AGREEMENT AND VARIOUS CLAUSES THEREOF TO PROV E HIS CONTENTIONS AND, FINALLY PRAYED THAT THE ORDER OF THE CIT(A) NEEDS TO BE UPHELD. 6. LD.AR, ON THE OTHER HAND, VEHEMENTLY SUBMITTED B EFORE US THAT THE ASSESSEE SOLD THE SHARES HELD BY THE ASSESSEE AS IN VESTMENT TILL 20 TH AUGUST, 2009 AND THE SELLING THE SAME VIDE SHARE PU RCHASE/SALE AGREEMENT , A COPY OF WHICH IS PLACED AT PAGES 21 T O 105 OF THE PAPER BOOK. THE ASSESSEE SUBMITTED THAT THE ASSESSEE EARN ED LONG TERM CAPITAL GAIN OF RS.4,04,02,470/- AFTER INDEXING THE COST AN D INVESTED THE CAPITAL GAIN U/S.54F AND 54EC OF THE ACT AND NOT RECEIVED A MOUNT OF RS.4,26,00,000/- AS NOT COMPETE FEE AS HELD BY THE AO. LD. AR ALSO REFERRED TO THE SHAREHOLDER AGREEMENT. LD. AR ALSO SUBMITTED THAT SINCE THE ASSESSEE HAS NOT RECEIVED ANY MONEY TOWARDS NON -COMPETE FEE AND, THEREFORE, THE CIT(A) RIGHTLY DELETED THE ADDITION MADE BY THE AO U/S.28(VA) OF THE ACT. THE ASSESSEE ON HIS OWN WAS NOT CARRYING ON BUSINESS, IT WAS A COMPANY WHOSE SHARES SHE WAS HO LDING. MOREOVER, IN THIS PURCHASE AGREEMENT NO CONSIDERATION WAS ASSIGN ED TOWARDS NON- COMPETITION FEE AND IT WAS ONLY A SHARE PURCHASE AG REEMENT. THE LD. AR SUBMITTED THAT PROVISIONS OF SECTION 28(VA) OF THE ACT WOULD BE APPLICABLE WHERE THE ASSESSEE WAS CARRYING ON BUSINESS AND NOT WHERE THE ASSESSEE ONLY HAD RIGHT TO CARRY ON THE BUSINESS IN THE FORM OF CAPITAL ASSET. LD. AR SUBMITTED THAT THE INCIDENTAL CLAUS E IN THE SHARE PURCHASE AGREEMENT ONLY PROHIBITS THE ASSESSEE FROM CARRYIN G ON COMPETING BUSINESS FOR 5 YEAR AND AS SUCH THE CONCLUSION DRAW N BY THE AO ON NON- ITA NO.5294/17 5 COMPETE CLAUSE IS TOTALLY WRONG AND MISCONCEIVED AS HE HAS NOT UNDERSTOOD THE FACT THAT THE NON-COMPETITION IS O NLY ANCILLARY IN THE SHARE PURCHASE AGREEMENT. LD. AR ALSO POINTED OUT THAT IN THE HEARING DATED 05.06.2018, THE BENCH HAS DIRECTED THE ASSESSEE TO FILE FULL DETAILS OF THE OTHER SHAREHOLDERS IN THE SAID COMPANY AND THE STA TUS OF THEIR ASSESSMENTS. LD. AR OF THE ASSESSEE SUBMITTED THAT THE SHAREHOLDERS WHO HAVE SOLD THEIR SHARES IN THE SAME SHARE PURCHA SE AGREEMENT , WERE ASSESSED TO TAX UNDER THE HEAD CAPITAL GAINS BY THE REVENUE AND IT IS ONLY IN THE CASE OF PRESENT ASSESSEE, THE REVENUE H AS ADOPTED DIFFERENT POSTURE AND TRIED TO ASSESS THE INCOME UNDER THE HE AD BUSINESS INCOME. 7. WE HAVE HEARD THE RIVAL SUBMISSIONS AND PERUSED THE MATERIAL ON RECORD INCLUDING IMPUGNED ORDER AND SHARE PURCHASE/ SALE AGREEMENT. THE UNDISPUTED FACTS ARE THAT THE ASSESSEE WAS ONE OF THE SHAREHOLDERS IN THE COMPANY M/S GARDEN NAMKEENS PVT. LTD AND WA S ALLOTTED 59000 SHARES AT RS.5,90,000/- ON 1.4.2006 AND AGAIN 103,0 00 SHARES AT RS.10,30,000/- ON 20.06.2006. LATER ON THE SAID COM PANY WAS TAKEN OVER BY M/S CAVINKARE PVT. LTD. VIDE SHARE PURCHASE AGRE EMENT DATED 20.08.2009 AND THE ASSESSEE HAS RECEIVED THE NET CO NSIDERATION AMOUNT OF RS.4,26,00,000/- FOR TRANSFERRING AND SELLING TH E SHARES HELD BY HER. IT IS PERTINENT TO NOTE THAT THE ASSESSEE HAS SHOWN LONG TERM CAPITAL GAINS OF RS.93,09,083/- AFTER CLAIMING THE EXEMPTION U/S.5 4F AND 54EC OF THE ACT TO THE TUNE OF RS.95,73,999/- U/S.54F AND RS.50,00, 000/- U/S.54EC. THE ASSESSEE ALSO CLAIMED THE SET OFF OF SHORT TERM CAP ITAL LOSS RS.1,61,76,670/- AGAINST THE SAID LONG TERM CAPITAL GAINS. THE AO BY ITA NO.5294/17 6 APPARENTLY REFERRING TO THE CLAUSE 8.1 TO 8.2 CAME TO THE CONCLUSION THAT THE ASSESSEE HAS COVENANTED NOT TO ENTER OR ENGAGE OR PARTICIPATE IN A COMPETITIVE BUSINESS/SOLICIT FOR A PERIOD OF 5 YEAR S FROM THE DATE OF AGREEMENT UNLESS THE PURCHASER EXPRESSLY CONSENTS T O THE SAME IN WRITING WITH RESPECT TO ANY OF THE SELLERS. THUS, T HE AO CAME TO THE CONCLUSION THAT THE SAID RECEIPT(CONSIDERATION) IS A BUSINESS RECEIPT AND NOT TOWARDS THE SALE OF SHARES AND FINALLY ADDED TH E SAME TO THE INCOME OF THE ASSESSEE. IN THE APPELLATE PROCEEDINGS, THE CIT(A) REVERSED THE ORDER OF AO BY OBSERVING THAT IT WAS CLEARLY CASE WHERE THE ASSESSEE HAS SOLD THE SHARES HELD BY HER AND THE CONSIDERATION R ECEIVED IS NOT TOWARDS A NON-COMPETE FEES AND THE CLAUSE IN THE AGREEMENT IS JUST EXPLANATORY AND SUPPORTIVE CLAUSE TO THE SALE OF SHARES WHICH I S A STANDARD CLAUSE. WE ALSO NOTE THAT IN THE PREVIOUS HEARING DATED THE BENCH HAS DIRECTED THE ASSESSEE TO JUST FIND OUT AND PLACE B EFORE THE BENCH THE MANNER IN WHICH THE REVENUE HAS ASSESSED THE OTHER SHAREHOLDERS WHO TRANSFERRED SHARES UNDER THE SAME AGREEMENT UNDER W HICH THE ASSESSEE SELLS HER SHARES. DURING THE HEARING WE FIND AFTER PERUSAL OF THE DOCUMENTS/ASSESSMENT ORDERS IN THE CASE OF SUCH OTH ER SHAREHOLDERS THAT THEY WERE ASSESSED TO TAX UNDER THE HEAD OF LONG TE RM CAPITAL GAIN QUA THE GAIN ON SHARES SOLD UNDER THAT CONSOLIDATED AGR EEMENT AND NOT AS BUSINESS RECEIPT IN THE CASE OF THE ASSESSEE. IN OU R OPINION, A DIFFERENTIAL TREATMENT CANNOT BE GIVEN TO THE VARIOUS PARTIES UN DER THE SAME AGREEMENT AND, THEREFORE, WE ARE NOT IN A POSITION TO AGREE WITH THE CONCLUSION DRAWN BY THE CIT(A) THAT THE CONSIDERATI ON IS RECEIVED TOWARDS ITA NO.5294/17 7 THE NON-COMPETE FEE AND NOT TOWARDS THE SALE OF SHA RES. THE FACTS IN THE CASE OF THE ASSESSEE IS DISTINGUISHABLE VIS A VIS T HE DECISION RELIED ON BY THE AO IN THE CASE OF RAMESH D. TAINWALA VS. ITO, I TA NO.3853/MUM/2010. THE FACTS ARE SQUARELY DISTINGUIS HABLE AS IN THE SAID CASE THE AGREEMENT FOR PURCHASE OF SHARES AND NON-C OMPETE AGREEMENT WERE SEPARATE AND THE ASSESSEE WAS PAID ACCORDINGLY . THEREFORE, THE SAID DECISION IS NOT APPLICABLE TO THE FACTS OF THE PRESENT CASE. THE CASE OF THE ASSESSEE IS SQUARELY COVERED BY THE DECISION REFERRED BY THE LD. AR DURING THE COURSE OF HEARING IN THE CASE OF HULAS R AHUL GUPTA VS. CIT, [2012] TAXMANN.COM 191 (DELHI), WHEREIN IT HAS BEEN HELD THAT WHERE THE AGREEMENT FOR THE SALE OF SHARES DID NOT STIPULATE TOWARDS NON-COMPETE FEE, THE REVENUE AUTHORITIES COULD NOT ASSESS THE P ART OF THE SALE CONSIDERATION AS NON-COMPETE FEE AND THE CONSIDERAT ION FOR NON-COMPETE FEE IS ASSESSABLE U/S.28(VA) OF THE ACT. IN THE PRE SENT CASE THE AGREEMENT FOR SALE/PURCHASE OF SHARES, THE CONSIDERATION IS F OR TOWARDS SALE OF SHARES AND NOT TOWARDS NON-COMPETE FEE, THEREFORE, IN VIEW OF THE RATIO LAID DOWN BY THE TRIBUNAL, WE UPHOLD THE FINDINGS O F THE CIT(A) AS THE CIT(A) HAS PASSED A REASONED AND SPEAKING ORDER AND WE DO NOT FIND ANY REASON TO DEVIATE FROM THE SAME. ACCORDINGLY, WE DI SMISS THE GROUNDS OF APPEAL OF THE REVENUE. ITA NO.5294/17 8 9. IN THE RESULT, APPEAL OF THE REVENUE IS DISMISSE D. ORDER PRONOUNCED IN THE OPEN COURT ON 15/01/2019. SD/- (RAM LAL NEGI) SD/- (RAJESH KUMAR) / JUDICIAL MEMBER / ACCOUNTANT MEMBER MUMBAI ; DATED 15/01/2019 . . /PRAKASH KUMAR MISHRA , SR.PS. / COPY OF THE ORDER FORWARDED TO : / BY ORDER, ( ASSISTANT REGISTRAR ) , / ITAT, MUMBAI 1. / THE APPELLANT- 2. / THE RESPONDENT- 3. ( ) / THE CIT(A), MUMBAI 4. / CIT 5. , , / DR, ITAT, MUMBAI 6. / GUARD FILE. //TRUE COPY//