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Issues involved: Assessment under section 143(3) of the Income Tax Act, 1961 for the assessment year 2006-07 involving valuation of shares and treatment of non-compete fees as business income.
Valuation of Shares: The Assessing Officer challenged the CIT(A)'s order adopting earning capitalization method for valuation of shares instead of the method based on the Wealth Tax Act. The Tribunal referred to a previous case and held that the consideration attributable to non-compete obligations should be taxed as capital gains, not as business income. The Tribunal emphasized that the entire consideration for the sale of shares had already been included as capital gains, making the bifurcation academic and unnecessary. It was noted that the assessee was not actively engaged in the business, further supporting the decision to tax the consideration under the head of capital gains. Treatment of Non-Compete Fees: The Tribunal analyzed the Share Purchase Agreement and relevant legal provisions to determine the tax treatment of non-compete fees. It was observed that the consideration towards non-compete fees was not correctly assigned by the Assessing Officer, and the Tribunal held that such amounts should be taxed as capital gains, in line with established principles of valuation of shares. The Tribunal upheld the assessee's position of treating the entire consideration received on the sale of shares as taxable under the head of capital gains, rejecting the partial relief granted by the CIT(A) regarding the quantum of amount attributable to non-compete obligations. Conclusion: The Tribunal allowed the appeal of the assessee and dismissed the appeal of the revenue, following the decision in a similar case. The Tribunal upheld the action of the CIT(A) and declined to interfere, ultimately dismissing the appeal and confirming the tax treatment of the consideration related to shares and non-compete fees as capital gains.
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