2011 (2) TMI 1436 - AT - Income Tax

Summary

Issues Involved:
1. Whether controlling interest has a separate existence from the shares and is separately tradable.
2. The correct sale value for the purposes of capital gains.
3. Taxability of consideration received for parting with controlling interest.
4. Applicability of Section 55(2)(a) regarding the cost of acquisition of controlling interest.
5. Whether non-compete fees are taxable under Section 28(va).

Detailed Analysis:

1. Whether controlling interest has a separate existence from the shares and is separately tradable:
The assessee argued that the controlling interest is separate from the shares and should be valued independently. The Assessing Officer (AO) disagreed, stating that managerial control is an inalienable part of the shares and cannot be traded separately. The AO relied on several case laws including Maharani Ushadevi vs. CIT, Venkatesh (Minor) vs. CIT, and CIT vs. Mahadeo Ram Kumar, which held that controlling interest is an incidence arising from holding a particular number of shares and cannot be separately acquired or transferred.

2. The correct sale value for the purposes of capital gains:
The assessee disclosed a short-term capital gain of Rs. 3,77,02,504 and a long-term capital gain of Rs. 7,27,34,858 from the sale of shares at Rs. 105 per share. The assessee contended that only Rs. 74.20 per share should be considered for capital gains, with the balance being non-taxable as it was for parting with managerial control. The AO, however, took the full value of consideration for transfer of shares at Rs. 105 per share, calculating higher capital gains.

3. Taxability of consideration received for parting with controlling interest:
The CIT(A) held that the transaction involved the transfer of controlling interest and that the value of controlling interest should be apportioned from the total consideration. The CIT(A) accepted the valuation report by Deloitte Haskins and Sells, which valued the shares without controlling interest at Rs. 74.20 per share. The balance was considered as the value for controlling interest, which was held to be non-taxable as per the Supreme Court's decision in B.C. Srinivasa Shetty.

4. Applicability of Section 55(2)(a) regarding the cost of acquisition of controlling interest:
The AO argued that as per Section 55(2)(a), the cost of acquisition in relation to "a right to manufacture, produce, or process any article or thing, or right to carry on any business" is deemed to be taken as nil. The CIT(A), however, held that controlling interest is not covered by Section 55(2)(a) and thus, the consideration received for it is not taxable.

5. Whether non-compete fees are taxable under Section 28(va):
The agreement dated 28-01-06 included a non-compete undertaking, for which Rs. 15 per share was paid. The tribunal held that this amount is squarely covered by Section 28(va) of the Act and is assessable as income under the head 'business'.

Conclusion:
The tribunal decided that the full value of consideration for the transfer of shares is Rs. 90 per share for the purpose of calculating capital gains, and Rs. 15 per share is to be assessed as business income under Section 28(va). The appeals by the revenue were allowed, overturning the CIT(A)'s decision to apportion the consideration between shares and controlling interest.