2012 (10) TMI 743 - AT - Income Tax

Long term capital gain - sale of shares non-compete consideration over and above sale consideration - business income or capital gain - grievance of the assessee is that Learned Commissioner has erred in taking cognizance under sec. 263 of the Act and thereby modifying the order of Assessing Officer, directing him to treat a sum as a business income under section 28(va) of the Act - Held that - Contract was for sale of shares - They have fixed the sales price and paid the consideration - Department had not said that shares were sold at a lower price then the one available in the open market. The shares were sold at the price for which acquirer had acquired the shares of more than 20% from the public in an open offer - According to the assessee, he has sold the shares for which he has offered capital gain to tax - assessee has sold only 19.55% share of the total holding. Priya Das Gupta has sold 14.68% share and in her case department has accepted the capital gain by adopting the price at Rs.190 per share. There is no allocation towards alleged non-compete - Assessing Officer has taken one of the possible views. He has not applied any incorrect provisions of law and, therefore, the amount of Rs.1 7,72,17,484 cannot be treated as business income under sec. 28(va) of the Income-tax Act, 1961 as received for non-compete fees - Assessing Officer has rightly treated it as a part of long term capital gain - appeal of the assessee is allowed

Issues Involved:
1. Jurisdiction of the Commissioner under Section 263 of the Income-tax Act, 1961.
2. Classification of income: Whether the amount of Rs. 17,72,17,484 should be treated as business income under Section 28(va) or as long-term capital gain.
3. Validity and enforceability of the revised WSSPA under the Indian Contract Act, 1872.
4. Consistency in tax treatment among different shareholders.
5. Adequacy of inquiry conducted by the Assessing Officer.

Detailed Analysis:

1. Jurisdiction of the Commissioner under Section 263 of the Income-tax Act, 1961:
The Commissioner exercised jurisdiction under Section 263, considering the assessment order erroneous and prejudicial to the interest of the revenue. The Commissioner believed the Assessing Officer applied incorrect provisions of law, leading to the misclassification of income. The Tribunal noted that the Commissioner did not issue the show-cause notice under Section 263 on the grounds of inadequate inquiry but on the application of incorrect provisions. The Tribunal emphasized that the Commissioner can only act within the scope of the show-cause notice and cannot improve the case during the appeal.

2. Classification of Income:
The core issue was whether the amount of Rs. 17,72,17,484 should be classified as business income under Section 28(va) or as long-term capital gain. The assessee argued that the revised WSSPA included the non-compete consideration in the sale price of shares, thus treating the entire amount as capital gain. The Commissioner contended that the non-compete consideration should be treated as business income. The Tribunal concluded that the revised WSSPA, which omitted the non-compete consideration clause, was a valid and enforceable contract. The Tribunal held that the Assessing Officer correctly treated the amount as part of the long-term capital gain.

3. Validity and Enforceability of the Revised WSSPA:
The Commissioner argued that the revised WSSPA, which excluded the non-compete consideration, was void under Sections 10, 25, and 27 of the Indian Contract Act, 1872. The Tribunal, however, found that the revised WSSPA was a legally enforceable contract under Section 62 of the Indian Contract Act, which allows parties to substitute a new contract. The Tribunal emphasized that the contract had lawful consideration and was not void.

4. Consistency in Tax Treatment:
The Tribunal noted that other shareholders, including Priya Das Gupta, who sold shares at the same price, were not subjected to additional tax on non-compete consideration. The Tribunal emphasized the principle of consistency, citing the Supreme Court's judgment in Radhasoami Satsang v. CIT, and concluded that the assessee should not be treated differently.

5. Adequacy of Inquiry Conducted by the Assessing Officer:
The Tribunal observed that the Commissioner did not base the Section 263 notice on inadequate inquiry. The Tribunal highlighted that the Assessing Officer had accepted the assessee's computation of capital gain after examining the revised WSSPA. The Tribunal found no evidence that the Assessing Officer failed to conduct a proper inquiry.

Conclusion:
The Tribunal allowed the assessee's appeal, holding that the revised WSSPA was a valid contract, and the amount of Rs. 17,72,17,484 was rightly treated as part of the long-term capital gain. The Tribunal concluded that the Assessing Officer had taken a permissible view, and the Commissioner had no grounds to invoke Section 263.

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