2019 (10) TMI 833 - AT - Income Tax

Taxation of succession fee - value of any benefit or perquisite in the hands of Directors - AR argued that success fee was deducted at source from the funds of the shareholders, hence, no benefit whatsoever received by the share holders and no need to tax the same u/s 2(24)(iv) - HELD THAT - there was no legal liability of shareholders to make the payment. The AO did not furnish any material to show that the assessee had engaged the Barclays and the company made the payment on behalf of the assessee to derive the benefit directly or indirectly. Directors or shareholders are permitted to appoint their own consultant who will not have any say in the success fee. In view of this clause also, the contention of AO that the success fee was the obligation of the assessee is incorrect. As mentioned in the share purchase agreement (SPA), cost of transfer of shares should be borne by the assessee. Accordingly, the expenses in relation to the negotiation, finalization and execution of SPA have to be borne by the shareholders including the assessee. The success fee was for engaging the services of Barclays as per EL dated 05.07.2013 and the share purchase agreement was entered on 04.11.2013, much ahead of SPA, hence, the success fee cannot be treated as the expenditure incurred in connection with the SPA. - it cannot be held that the assessee got any benefit from the success fee paid by the TMPPL as observed by the CIT(A). Accordingly, we uphold the order of the Ld.CIT(A) and dismiss the revenue s ground on this issue. Success fee is to be paid only on the completion of the transaction - The AO rejected the contention of the assessee stating that the obligation of the assessee arose on the date of agreement dated 05/07/2013 when the assessee was a director of the company and holding substantial stake in the company, hence rejected the argument of the assessee. As per the discussion made in the preceding paragraphs we have held that the there was no benefit derived by the assessee and once it is held that the assessee did not derive any benefit the issue becomes infructuous. However, it is also a fact that the assessee ceased to be director /shareholder by the time the invoice was raised and the payment was made. The new directors taken the decision to make the payment. Hence it is incorrect to apply the provisions of section 2(24) (iv) in the case of the assessee. Payment of success fee is the obligation of the company since the agreement was entered into by the assessee company and the Barclays, hence we hold that no personal benefit derived by the assessee and we do not find any reason to interfere with the order of the Ld.CIT(A) and the same is upheld.

Summary

Issues Involved:
1. Taxability of success fee paid by M/s TMPPL to M/s Barclays Bank PLC.
2. Applicability of Section 2(24)(iv) of the Income Tax Act to the assessee.
3. Determination of whether the success fee constitutes a personal benefit to the assessee.
4. Treatment of the success fee in computing capital gains.

Issue-wise Detailed Analysis:

1. Taxability of Success Fee Paid by M/s TMPPL to M/s Barclays Bank PLC:
The assessee, along with other shareholders, sold shares in M/s Tirumala Milk Products Pvt. Ltd. (M/s TMPPL) to M/s BSA International. M/s TMPPL paid a success fee of ?28.81 crores to M/s Barclays Bank PLC for evaluating the value of its shares and assisting in identifying a potential buyer. The Assessing Officer (AO) objected to this payment, asserting that it should be the shareholders' obligation. The AO noted that M/s TMPPL did not claim this amount as an expenditure in its financials but showed it as paid from taxed profits. The AO issued a show-cause notice to the assessee, proposing to treat the proportionate amount as income under Section 2(24)(iv) of the Income Tax Act.

2. Applicability of Section 2(24)(iv) of the Income Tax Act to the Assessee:
The AO contended that the assessee, being a major shareholder and promoter-director, derived a benefit from the success fee paid by M/s TMPPL and thus, it should be taxed under Section 2(24)(iv). The AO argued that the benefit of the transaction was derived by the individual shareholders, including the assessee, and not the company. The assessee countered that he was not a director at the time of the invoice being raised or the payment being made, and hence, Section 2(24)(iv) should not apply.

3. Determination of Whether the Success Fee Constitutes a Personal Benefit to the Assessee:
The Commissioner of Income Tax (Appeals) [CIT(A)] observed that the Engagement Letter (EL) between M/s TMPPL and M/s Barclays was for providing financial advice related to a possible transaction, not exclusively for the transfer of shares. The CIT(A) held that the success fee paid by M/s TMPPL was not a benefit to the assessee, as the payment was made after the assessee ceased to be a director or shareholder. The CIT(A) concluded that the AO's finding was incorrect and allowed the assessee's appeal.

4. Treatment of the Success Fee in Computing Capital Gains:
The CIT(A) also noted that the success fee was recovered from the net consideration paid to the shareholders, indicating that the shareholders did not derive any personal benefit. The Tribunal upheld the CIT(A)'s decision, agreeing that the success fee was an obligation of M/s TMPPL and not the assessee. The Tribunal dismissed the revenue's appeal, confirming that no benefit was derived by the assessee from the success fee paid by M/s TMPPL.

Conclusion:
The Tribunal concluded that the success fee paid by M/s TMPPL to M/s Barclays Bank PLC did not constitute a personal benefit to the assessee and hence, could not be taxed under Section 2(24)(iv) of the Income Tax Act. The appeals filed by the revenue were dismissed, and the order of the CIT(A) was upheld.