2014 (12) TMI 857 - HC - Income Tax

Nature of payment of ₹ 6.60 crores Business income or consideration paid for transfer of shares - Whether the payment of ₹ 6.60 crores, ostensibly stated to be non-compete fee under the MOU dated 13th April, 1994, can be treated and regarded as payment covered under sub-clause (a) to clause (ii) of Section 28 of the Act, or consideration paid for transfer of shares Held that - Assessee had indulged in abusive tax avoidance - The real and true nature of the transaction or event was the sale of shares and transfer of control and management of CDBL in favour of the SWC Group - The consideration of ₹ 6.60 crores was not a fee paid towards non-compete - It would not be exempt - transfer of majority shares holding would include consideration receivable towards the controlling interest - The price paid by the SWC Group and received by the respondent-assessee was for purchase of shares, including the controlling interest - The price paid would include the right to control and manage CBDL - Any division or bifurcation would result in the court or Revenue stepping into the arm chair of the assessee and the SWC Group for splitting the amounts between capital gains and Section 28(ii)(a) in 2012 (1) TMI 52 - SUPREME COURT OF INDIA 2012 (1) TMI 52 - SUPREME COURT OF INDIA the position has been crystallized, when a majority shareholder transfers the said shareholding to another party - intrinsic to transaction of transfer of shares in a given case would include rights and entitlements which constitute and were themselves capital assets within the meaning of Section 2(14). The transaction was structured as a case of sale of shares and not an asset sale - Ownership of shares in such situations constitutes and partake character of a controlling interest - The controlling incident is an incident of controlling shares which flows out from the said holding - controlling interest, is not identifiable as a distinct asset independent of holding of shares - The control of the company resides in the voting power of the shareholders as the shares represent an interest of the shareholder and are made of various rights - Shares and the rights which emanate include the right of a shareholder in the character of controlling interest and cannot be dissected - Control and management is a facet of controlling shares - Thus, the SWC Group had acquired by entering into an agreement for purchase of shares, also the controlling interest - It would, therefore, include the price paid for the same - More importantly, it also included the price paid for acquiring control of a competitor, who henceforth would not be a competitor but a part of the SWC Group - the capital gains tax on sale of shares where controlling interest has resulted in transfer of control of management would form part of the consideration received. It should not be segregated or bifurcated - ₹ 6.60 crores to be treated as consideration paid for sale of shares, rather than a payment under Section 28(ii) of the Act - the sale consideration for transfer of shares was artificially and deceitfully bifurcated under a sham agreement/ documentation, which was unreal and not a true record of the intention. Whether ₹ 6.60 crores should be taxed in the hands of the assessee as an individual or should be bifurcated as per the shareholding between the assessee and his family members, i.e. wife, son, daughter-in-law and two daughters Held that - The assessee, having chosen the taxable event, i.e. to receive the entire sale consideration in his name, must therefore bear and face the tax consequence - Thus, the entire amount would be taxed in the hands of the assessee, and would be treated as part of the sale consideration received on transfer of the shares in CDBL, held by him - ₹ 6.60 crores was taxable as capital gains in the hands of the assessee being a part of the full value sale consideration paid for transfer of shares Decided in favour of revenue.

Issues Involved:
1. Taxability of the non-compete fee under Section 28(ii) of the Income Tax Act, 1961.
2. Applicability of Section 28(iv) of the Income Tax Act, 1961.
3. Nature of the payment received by the respondent-assessee.
4. Interpretation of the transaction and the surrounding circumstances.
5. Determination of the true nature of the transaction.
6. Whether the payment should be treated as part of the sale consideration or as a non-compete fee.
7. Taxability of the amount in the hands of the respondent-assessee or his family members.

Detailed Analysis:

1. Taxability of the Non-Compete Fee under Section 28(ii):
The core issue was whether the payment of Rs. 6.60 crores, ostensibly stated to be a non-compete fee, could be treated as a payment covered under sub-clause (a) to clause (ii) of Section 28 of the Income Tax Act, 1961, or if it was part of the consideration for transfer of shares. The court noted that the phrase "in connection with" in Section 28(ii) gives it a broad meaning, but the payment must be for termination of management or modification of terms and conditions of management. The court concluded that if the payment was on account of non-compete fee, it would not be covered under sub-clause (a) to clause (ii).

2. Applicability of Section 28(iv):
The court noted that Section 28(iv) of the Act was not applicable in this case as it pertains to benefits or perquisites arising from business or profession, which are not monetary. Since the payment in question was monetary, Section 28(iv) was not applicable.

3. Nature of the Payment Received by the Respondent-Assessee:
The court examined whether the payment of Rs. 6.60 crores was genuinely a non-compete fee or a part of the consideration for the transfer of shares and management control. The court observed that the payment was made under a separate Memorandum of Understanding (MOU) and was described as a non-compete fee. However, the court also noted that the payment of Rs. 6.60 crores was significantly higher than the consideration received for the shares, raising questions about the true nature of the payment.

4. Interpretation of the Transaction and the Surrounding Circumstances:
The court emphasized the importance of looking at the entire transaction and the surrounding circumstances to determine the true nature of the payment. The court referred to various legal principles and precedents, including the need to look at the documents and the context to which they properly belong, and to ascertain the real nature of the transaction.

5. Determination of the True Nature of the Transaction:
The court found that the payment of Rs. 6.60 crores was not genuinely a non-compete fee but was part of the consideration for the transfer of shares and management control of CDBL. The court noted that the payment was made in connection with the termination of management and transfer of control, and thus, it should be treated as part of the sale consideration.

6. Whether the Payment Should be Treated as Part of the Sale Consideration or as a Non-Compete Fee:
The court concluded that the payment of Rs. 6.60 crores should be treated as part of the sale consideration for the transfer of shares, rather than as a non-compete fee. The court reasoned that the sale of shares included the transfer of controlling interest and management rights, and any division or bifurcation of the payment would be artificial and not reflective of the true nature of the transaction.

7. Taxability of the Amount in the Hands of the Respondent-Assessee or His Family Members:
The court held that the entire amount of Rs. 6.60 crores should be taxed in the hands of the respondent-assessee, as he had received the entire payment. The court noted that the respondent-assessee had chosen the taxable event and must bear the tax consequences. The payment was treated as part of the sale consideration received on the transfer of shares in CDBL.

Conclusion:
The court answered the substantial question of law in favor of the appellant-Revenue, holding that the amount of Rs. 6.60 crores was taxable as capital gains in the hands of the respondent-assessee, being part of the full value sale consideration paid for the transfer of shares. The appeal was disposed of with costs awarded to the appellant-Revenue.

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