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2015 (5) TMI 690 - HC - Income TaxCapital receipt not chargeable to tax - bifurcation of income - Whether ITAT is justified in law in treating a sum of ₹ 100/- per share as capital receipt not chargeable to tax because as per provisions of Section 48, the entire receipts on sale of shares are chargeable to tax? - Whether there being no bifurcation in the agreement as regards the value of the share and the value of the negative covenants, the respondent/assessee was not entitled to apportionment thereof for the purposes of assessment under the Income Tax Act? - Held that - Ms. Dhugga s, absolute proposition that the assessee is not entitled to seek bifurcation of the consideration stipulated in the Share Purchase Agreement merely because the agreement does not provide for the same is not well founded. In our view, an assessee is entitled to seek bifurcation of the consideration mentioned in the agreement. We see no reason in principle to prevent the assessee from doing so. The value to be ascribed to each transaction must obviously depend upon the evidence and the facts in each case. The tax of whatever nature, must be levied on the basis of the true value of the asset of the transaction and not merely on the basis of the value ascribed to it by the assessee. Indeed, the view to the contrary could cause severe prejudice to the revenue itself. To accept the contention would enable assessees to ascribe artificial values to assets enabling them to avoid tax.The first contention therefore stands rejected. The Tribunal was right in coming to the conclusion that the consideration ought to be bifurcated and a part thereof apportioned towards the restrictive covenants. - Decided in favour of the respondents/assessees Whether there was infact no consideration payable in respect of the negative covenants? - Held that - According to the Groz Beckert group, the application for registration of that trade mark was made without prior consultation and it objected to the registration thereof. Groz Beckert Saboo Ltd. ultimately withdrew its application on the condition that Groz Beckert group would register its trademark in its own name and Groz Beckert Saboo Ltd. would be permitted to continue to use the trade mark in India. Accordingly, lawyers of Groz Beckert Saboo Ltd. withdrew the application for registration and the said R.K.Saboo confirmed the same.There were prolonged negotiations in this regard. There is nothing to indicate that there was no such dispute. Infact, there obviously were several disputes. This is clear from the fact that the dispute is reflected in the petition filed before the Company Law Board whereas the Share Purchase Agreement was entered into much later namely after the appeal under Section 10-F before the Delhi High Court. It is obviously in view of these various disputes that various clauses were introduced by the parties in the Share Purchase Agreement. Anyone familiar with such matter would know that the agreement is consistent with an exercise for the resolution of such disputes in corporate matters. The negative covenants therein are not at all unusual in such cases. There is nothing to indicate that they were introduced to avoid tax.The submission that there was no consideration for the negative covenants is therefore rejected. - Decided in favour of the respondents/assessees Whether Tribunal order is perverse - whether tribunal failed to take into consideration that even assuming that a sum of ₹ 100/- could be considered to be the consideration for the negative covenants contained in the Share Purchase Agreement, there was no further bifurcation and apportionment of the consideration towards each of the covenants/negative covenants contained in the various clauses of the Share Purchase Agreement? - Held that - There is no justification for allowing the appellant to raise this point for the first time in the appeal before us. Had the contention been raised before the C.I.T. (A) or before the Tribunal, the respondent could conceivably have had several answers to it. If we allow the appellant to raise this contention before us we would be depriving the respondents the opportunity of adducing evidence to deal with the same. - Decided in favour of the respondents/assessees The Tribunal accepted the value of the shares at ₹ 60.24 per share. The Tribunal, therefore, rightly held that the value of ₹ 100/- apportioned towards the negative covenants was not such as to warrant interference. We agree. The Chartered Accountant valued the shares in three different ways. The valuation at ₹ 106.90 per share was arrived at on the basis of Rule 14 of Schedule-III of the Wealth Tax Act, 1957; of the business as a whole, at ₹ 118.90 per share on the yield basis and at ₹ 93.12 on the basis of Rule 11 of Schedule III of the Wealth Tax Act i.e. breakup value. There is nothing to indicate that the valuation report was dishonest or malafide for any reason. Nor is there anything to indicate that it is unsustainable for any reason. It is important to note that there is no ground of appeal before us against the Tribunal s acceptance of the valuation report. The appellants themselves have not valued the shares. In that event even assuming that some valuation is to be attributed to the covenants/negative covenants contained in the Share Purchase Agreement other than Clause 5.5, it would make no difference. The apportionment of sum of ₹ 100/- out of ₹ 400/- towards clause 5.5 would in any event be reasonable. We agree with the findings of the Tribunal that in view of the above facts the apportionment of 25% of the value of shares towards the negative covenants was on conservative basis. -Decided in favour of the respondents/assesses Whether consideration for the negative covenants under Clause 5.5 is assessable to tax under section 28 of the Act? - Held that - Section 28 (ii) (a) & (b) are inapplicable to the facts of this case. The members of the Saboo group held only 40% of the equity shares in Groz Beckert Saboo Ltd. Their share holding even together did not give them the right to manage the whole or substantially the whole of the affairs of Groz Beckert Saboo Ltd. The terms of the collaboration agreement are important. Under the collaboration agreement, the general administration and management of Groz Beckert Saboo Ltd. was to be in the hands of the two Managing/Executive Directors with equal powers, one to be nominated by the Groz Beckert group and the other to be appointed by the Saboo group. Both the groups were entitled to nominate three Directors each. It is important to note that the Chairman of the Board of Directors was always to be one out of the three nominees of the Groz Beckert group and the Chairman was to have a casting vote. Further in respect of ten specified matters, no decision could be taken by the Board of Directors or by the company except by the unanimous consent of all the Directors. It cannot be said, therefore, that the Saboo group managed the whole of the affairs of Groz Beckert Saboo Ltd. Thus it is not necessary to consider whether section 28(ii)(a)(b) of the Act applies in view of other certain aspects raised by Ms. Suri. - Decided in favour of the respondents/assessees
Issues Involved:
1. Bifurcation and apportionment of consideration for the sale of shares and negative covenants. 2. Whether there was any consideration payable for the negative covenants. 3. Whether the Tribunal's order is perverse. 4. Taxability of consideration for negative covenants under Section 28 of the Income Tax Act. Issue-wise Detailed Analysis: 1. Bifurcation and Apportionment of Consideration: The court addressed whether the assessee could bifurcate the consideration stipulated in the Share Purchase Agreement for the sale of shares and negative covenants. The court held that an assessee is entitled to seek bifurcation of the consideration mentioned in the agreement. The judgment of the Bombay High Court in Baijnath Charurbhuj and another v. Commissioner of Income Tax, Bombay City-II was cited, which supported the principle that the full value of shares must be the true value, not an artificial value assigned by the parties. The court emphasized that the negative covenants and shares are independent and distinct assets, and the consideration must be apportioned towards each if it is possible to ascertain their value. 2. Consideration Payable for Negative Covenants: The court rejected the contention that there was no consideration payable for the negative covenants. It was argued that the members of the Saboo group did not possess the technical expertise to run a similar business. However, the court held that the term "engage" is of wide import, and the members of the Saboo group could engage in similar business merely as investors or through joint ventures. The clause 5.5 of the agreement prevented the Saboo group from engaging in any business similar to or in competition with Groz Beckert Saboo Ltd., directly or indirectly. The court noted that the absence of a penalty for breach of clause 5.5 did not render it meaningless or without value, as the Groz Beckert group could enforce the negative covenants through legal action. 3. Perverse Order of the Tribunal: The court addressed the contention that the Tribunal's order was perverse because it failed to apportion the consideration towards each of the covenants/negative covenants. The court rejected this submission, noting that the contention was not raised before the Assessing Officer, the CIT(A), or the Tribunal. Additionally, the court held that even if some value should be attributed to other covenants, the apportionment of Rs. 100 out of Rs. 400 towards the negative covenants was reasonable. The Tribunal accepted the valuation of the shares at Rs. 60.24 per share, and the apportionment of 25% of the value of shares towards the negative covenants was on a conservative basis. 4. Taxability under Section 28 of the Income Tax Act: The court examined whether the consideration for the negative covenants under Clause 5.5 was assessable to tax under Section 28(ii)(a) & (b) of the Income Tax Act. The court held that these sections were inapplicable as the members of the Saboo group held only 40% of the equity shares and did not manage the whole or substantially the whole of the affairs of Groz Beckert Saboo Ltd. The court noted that the general administration and management were in the hands of two Managing/Executive Directors, one nominated by each group, with the Chairman having a casting vote. Therefore, the Saboo group did not manage the whole of the affairs of the company. Additionally, Section 28(va) did not apply as it came into force with effect from 01.04.2003, and the case pertained to the assessment year 1994-95. Conclusion: The court concluded that the consideration must be bifurcated and apportioned between the sale of shares and the negative covenants. The contention that there was no consideration for the negative covenants was rejected. The Tribunal's order was not perverse, and the apportionment of Rs. 100 towards the negative covenants was reasonable. The consideration for the negative covenants was not assessable to tax under Section 28 of the Income Tax Act. The appeals were dismissed with no order as to costs.
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