Sh. Sumeet Taneja and Ms. Supneet Kaur Khurana V. Commissioner of Income Tax, Chandigarh

ITA/293/2012

AI Insights

The case involves two Income Tax Appeals (No. 293 and 294 of 2012) filed by Sh. Sumeet Taneja and Ms. Supneet Kaur Khurana against the Commissioner of Income Tax, Chandigarh. The appeals were related to the same transaction involving the sale of shares of M/s Excel Callnet Private Ltd. by Harbir Singh Khurana (deceased) and others to M/s Pugmarks Interweb Private Ltd. The primary legal issue was whether the income derived from the sale of these shares should be classified under capital gains or business income. The Assessing Officer, CIT (Appeals), and ITAT all concluded that the transaction was a transfer of business, not just shares, and thus the income should be treated as business income under Section 28(va) of the Income Tax Act, 1961. The appellants challenged this interpretation, arguing that the transaction was merely a sale of shares, supported by the retrospective amendment to Section 2(14) of the Act. However, the court found that the agreement and the surrounding circumstances indicated a transfer of business control and assets, not just shareholding.

• Counselvise Citation: [2013] 140 COUNSELVISE.COM (IT) 814333 (HC-CHANDIGARH)
• Appeal Type: Others
• Pronouncement Date: 22-08-2013
• Assessment Year: misc
• Laws Referred To: Income Tax Act, 1961
• Result in Favour of: Revenue
• Court: HIGH COURT
• Department Lawyers: URVASHI DHUGGA
• Assessee Lawyers: ALOK MITTAL
• Keywords: Business income; Capital Gain; Income Tax; Non-compete clause; Share Transfer
• Section: 143(2); 2(14); 28(va)

Judgement Text

" Income Tax Appeal No.293 of 2012(O&M) -1- IN THE HIGH COURT OF PUNJAB AND HARYANA AT CHANDIGARH (1) Income Tax Appeal No.293 of 2012(O&M) Date of Order:22nd August, 2013 Sh. Sumeet Taneja ...Appellant Versus Commissioner of Income Tax, Chandigarh and another. ..Respondents (2) Income Tax Appeal No.294 of 2012(O&M) Ms. Supneet Kaur Khurana and others ...Appellants Versus Commissioner of Income Tax, Chandigarh and another. ..Respondents CORAM: HON'BLE MR. JUSTICE RAJIVE BHALLA HON'BLE MR. JUSTICE DR. BHARAT BHUSHAN PARSOON Present: Mr. Alok Mittal, Advocate for the appellant(s). Ms. Urvashi Dhugga, Advocate, for the respondents. RAJIVE BHALLA, J. C.M.No.31322-CII of 2012 Prayer in this application is to implead the legal representatives of Harbir Singh Khurana, who is stated to have passed away on 01.07.2011. In view of averments in the application and the arguments addressed by counsel for the appellants, the application is allowed, and legal representatives mentioned in paragraph 2 of the application are impleaded as appellants in place of Harbir Singh Khurana, deceased. The amended memorandum of parties is taken on record. Income Tax Appeal No.293 of 2012 By way of this order, we shall decide Income Tax Appeal Nos.293 and 294 o f 2012, as they relate to the same transaction Kumar Naresh N 2013.08.31 14:41 I attest to the accuracy and integrity of this document High Court Chandigarh Income Tax Appeal No.293 of 2012(O&M) -2- and involve adjudication of the same questions. Facts are being taken from Income Tax Appeal No.294 of 2012. The appellants, challenge orders dated 26.12.2008 (Annexure A-1), 14.10.2009 (Annexure A-2) and 08.06.2012 (Annexure A-3), passed by the Assessing Officer, Commissioner of Income Tax (Appeals) and the Income Tax Appellate Tribunal, Chandigarh Bench-'B', Chandigarh, respectively, for the assessment year 2006-2007. The appellant-Harbir Singh Khurana (since deceased), admittedly purchased 47500 equity shares of M/s Excel Callnet Private Ltd., at the rate of Rs.10/- each on 28.03.2002, i.e., for Rs.4,75,000/-. The aforesaid shares were sold in May, 2005 to M/s Pugmarks Interweb Private Ltd. by way of a share-purchase agreement, dated 26.05.2005. The appellant, filed his return of income for the assessment year 2006-07 disclosing an income from Short Term Capital Gain of Rs.2,10,900/- and income from Long Term Capital Gain of Rs.38,40,000/-, besides income from other sources. The case was selected for scrutiny and notice was issued under Section 143(2) of the Income Tax Act, 1961 (hereinafter referred to as 'the Act'). The Assessing Officer, after considering the entire matter including replies filed and documents placed on record, by the appellant, held that income from Long Term Capital Gain shall be treated as business income of the assessee under Kumar Naresh N 2013.08.31 14:41 I attest to the accuracy and integrity of this document High Court Chandigarh Income Tax Appeal No.293 of 2012(O&M) -3- Section 28(va) of the Act. The Assessing Officer, in essence, negatived the appellant's plea that the sale of shares, was a mere transfer of share holdings and not a transfer or purchase of business activities of the assessee. The appellant filed an appeal, which was dismissed by the Commissioner of Income Tax (Appeals) (hereinafter referred to as the 'CIT(Appeals), on 14.10.2009. The appellant, thereafter, filed an appeal before the Income Tax Appellate Tribunal (hereinafter referred to as 'the ITAT'), which was also dismissed. Counsel for the appellant submits that the impugned orders are illegal, and void as Income Tax authorities have ignored the explanation added to Section 2(14) of the Act, introduced with retrospective effect to clarify that “property” includes any rights in or relation to an Indian Company” including right of management or control or any other rights whatsoever. The explanation clearly places the disputed transaction, within Section 2(14) and, therefore, cannot be treated as a business transaction or income from business, so as to place it within Section 28(va) of the Act. The findings recorded by authorities, to the contrary, are based upon a misreading of the sale-purchase agreement and primary reliance upon the non-compete clause to hold that the sale- purchase agreement is a transfer of business and not a mere sale of equity shares. It is argued that the approach of the Kumar Naresh N 2013.08.31 14:41 I attest to the accuracy and integrity of this document High Court Chandigarh Income Tax Appeal No.293 of 2012(O&M) -4- respondents is clearly illegal and void and gives rise to the following substantial questions of law:- “(i) Whether in facts and circumstances of the case, the action of the ld. Authorities below have erred in holding that the sale of the equity shares as stock in trade does not fall within the ambit of Section 2(14) of the Income Tax Act despite the express “explanation” added by the legislature in the said section vide the Finance Act 2012 with retrospective effect? (ii) Whether in facts and circumstances of the case, the ld. Authorities below have erred in holding that amount received for sale of shares is on account of Non-Compete Covenants contained in Article 8 of the Sale Purchase Agreement by ignoring the fact that the same has been received on account of transfer of shares and no consideration whatsoever has been paid towards the said Non-compete Covenant and the price settled between the parties was only the marked price of the shares? (iii) Whether in fact and circumstances of the Kumar Naresh N 2013.08.31 14:41 I attest to the accuracy and integrity of this document High Court Chandigarh Income Tax Appeal No.293 of 2012(O&M) -5- case, the authorities below erred in ignoring the fact that the assessee was not doing any business in the company, he was merely drawing a salary and it was the company, Excel Callnet Pvt. Ltd which was doing the business of call centers, hence the sale of shares could not fall within the ambit of section 28(va)? (iv) Whether in fact and circumstances of the case, the action of the authorities below, the impugned orders Annexures A-1 to A-3 are legally sustainable in the eyes of law?” Counsel for the revenue submits that findings of fact recorded by the Assessing Officer, affirmed by the CIT(Appeals) and the ITAT, do not give rise to any substantial question of law much less the questions of law framed by the appellant. A perusal of the agreement leaves no manner of doubt that the transaction involves sale of the entire business as is not a simple transfer of shares. The Assessing Officer, the CIT (Appeals) as well as the ITAT have examined each and every clause of the agreement and have only, thereafter, recorded findings of fact that amount received by the appellant would be included in his business income. As regards the explanation of Section 2(14) of the Kumar Naresh N 2013.08.31 14:41 I attest to the accuracy and integrity of this document High Court Chandigarh Income Tax Appeal No.293 of 2012(O&M) -6- Act, it is argued that the said explanation does not apply to the appellant as the matter in dispute pertains to the assessment year 2006-07. We have heard counsel for the parties, perused the impugned orders as well as the substantial questions of law. The Assessing Officer, after perusal of the agreement recorded a finding of fact that the agreement, though, classified as an agreement for purchase of shares envisages purchase of business or rather purchase of business assets. The Assessing Officer has referred to various clauses of the agreement, that transfer all pervasive control of business from the assessee to the purchaser, to the complete and absolute exclusion of the assessee. The Assessing Officer has also referred to a non- compete clause in the agreement while holding against the assessee. The findings so recorded, have been affirmed by the CIT (Appeals) as well as by the ITA T. It would, therefore, be necessary to reproduce a relevant extract from the order passed by the ITAT, but before doing so, it would be appropriate to point out that the essential dispute in the present case is whether transfer of shares by the assessee is transfer of a capital asset within the meaning of Section 2(14) of the Act or a transfer of business that falls within the ambit of Section 28(va) of the Act. A relevant extract from the order passed by the Tribunal reads as follows:- Kumar Naresh N 2013.08.31 14:41 I attest to the accuracy and integrity of this document High Court Chandigarh Income Tax Appeal No.293 of 2012(O&M) -7- “10. The only issue arising in the present appeal is in respect of the treatment of the amount received on sale of equity shares of the private limited company held by the assessee, which were transferred during the year under consideration. The plea of the assessee in respect of the said transaction is that it is a mere sale and purchase of investment held by the assessee and consequently gain arising on the said transaction is to be assessed under the head income from capital gains. After recording as above, the ITA T proceeded to narrate the facts, which we need not to reproduce, referred to Articles 2, 3, 4.2, 4.3, 5 and 6 of the agreement, which relate to transfer of shares, a non compete clause that restrains the assessee from day to day management of the company, a clause requiring the assessee to hand over responsibilities to the purchaser including employee data base, customer support etc., and other relevant factors held that the agreement has all the attributes of a transfer of business. A relevant extract reads as follows:- “16. Taking into consideration the entirety of facts and circumstances of the case and agreement entered into between the parties as referred to Kumar Naresh N 2013.08.31 14:41 I attest to the accuracy and integrity of this document High Court Chandigarh Income Tax Appeal No.293 of 2012(O&M) -8- by us in the paras hereinabove, it is apparent that the transaction in question was in the nature of purchase of business by the incoming company. The transaction entered into between the assessee before us as shareholder of M/s Excel Callnet Private Limited and the Mnaging Director of M/s Pugmarks Interweb Pvt. Ltd. was not merely for the transfer of shares of the company but was in fact transfer of management of the company to the purchaser with aq rider of non interference by the sellers who were the Directors of the company. Reference is made to the Article 2.1 of the agreement dated 26.3.2005 wherein the seller i.e. the assessee before us was refrained from day to day management of the business from the date of the agreement. In addition, the seller i.e. The shareholders of the company were to hand over the Employee Database, Products Database,m customer support, New Clienmt proposals in pipeline. Other prospects and customer's database. Payment Recovery and Customer. Management case, contract, verbal commitments, Banking information, Kumar Naresh N 2013.08.31 14:41 I attest to the accuracy and integrity of this document High Court Chandigarh Income Tax Appeal No.293 of 2012(O&M) -9- software/licences and any other property that was acquired under the tenure of the Sellers working with the Company. Because of the complexity of the handing over operation by the seller i.e. the shareholders of the company to the Managing Director of the new company. The parties entered into agreement on 26.3.2005 and had completed the process on 24.7.2005. If it was mere sale of the investment by way of shareholding by the assessee then the said exercise was not required. Even the sale consideration agreed upon between the parties including the consideration on account of non-compete convenant was paid in installment over a period of time. Further the transfer of shares in effect translated into renunciation of management by the seller Directors in favour of the purchaser which is apparent from Article 5.1.1. of the agreement which enunciated the delivery of effective resignation in writing by the Directors as part of the activities of the completion. The next point under consideration is the non compete covenants agreed upon between the parties as per Article 8. Under Kumar Naresh N 2013.08.31 14:41 I attest to the accuracy and integrity of this document High Court Chandigarh Income Tax Appeal No.293 of 2012(O&M) -10- which article 8.4 clearly stated the seller agree not to engaged in asny call centre, business process outsourcing or IT enabled services business in the States of Chandigarh, Punjab, Haryana or Himachal Pradesh within a radius of 100 K.ms from Chandigarh for a period of 2 years from the date of this agreement. Further non compete covenants imposed as restriction upon the seller Directors to directly or indirectly solicit a business that the company has done since its inception without prior written permission of the company. Under Article 8.10 there was renunciation of brand equity of the company by the seller will not take advantage of the brand equity of the company by using any names, logos, trademarks partnerships, affiliations, names etc. As per para 8.11 the sellers cannot use domains that contain the word Excel and would not use or claim the domain name www.Excel.netom . Article 9 of the agreement further refer to non solicitation of employees covenant whereby the seller will not directly or indirectly solicit, hire employee, induce or attempt to induce any present or Kumar Naresh N 2013.08.31 14:41 I attest to the accuracy and integrity of this document High Court Chandigarh Income Tax Appeal No.293 of 2012(O&M) -11- future employee of the company or the purchaser. 17. In view thereof we are in agreement with the orders of the authorities below that the transaction in question was not mere transfer of capital asset within the meaning of section 2(14) of the Act but was in fact transfer of business as it was the assessee who was prevented from doing business.” A perusal of Sections 2(14) and 28(va) of the Act including the explanation to Section 2(14) relied by the appellant does not enable us to record an opinion contrary to the opinion recorded by the Assessing Officer, affirmed by the CIT (Appeals) and the ITAT. The mere fact that the agreement contains a non- compete clause, payment in respect whereof may not be chargeable to tax in accordance with the aforesaid provisions, does not enable us to hold that the agreement between the assessee and the purchaser is anything other than a transfer of the business of the assessee. A cursory perusal of the agreement between the assessee and the purchaser leads to a singular conclusion that the agreement is not an innocent transfer of share holdings that would place it within section 2(14) of the Act read with the explanation but a transfer of the business with all pervasive control being entrusted to the Kumar Naresh N 2013.08.31 14:41 I attest to the accuracy and integrity of this document High Court Chandigarh Income Tax Appeal No.293 of 2012(O&M) -12- purchaser to the complete and absolute exclusion of the seller whether as a share holder or for its management and control. The findings recorded by authorities under the Act that transfer of shares, evidences, a transfer of business, in our considered opinion are based upon a correct factual interpretation or the clauses of the agreement. The impugned orders do not suffer from any error of law or give rise to any substantial question of law as would require interference. As a consequence, the appeal is dismissed with no order as to costs. (RAJIVE BHALLA) JUDGE 22nd August, 2013 (DR. BHARAT BHUSHAN PARSOON) nt JUDGE Kumar Naresh N 2013.08.31 14:41 I attest to the accuracy and integrity of this document High Court Chandigarh "