2020 (5) TMI 464 - AT - Income Tax

Reopening of assessment u/s 147 - reason to believe - LTCG - non-compete fee which is a capital receipt and is exempt from tax - recomputation of Long Term Capital Gains arising or accruing as a result of sale of shares in so far as the exclusion of the garnishee payment from the cost of acquisition/cost of improvement/expenses incurred in relation to transfer - HELD THAT - Revenue has rightly invoked provisions of Section 147 and we uphold reopening of the concluded assessment within four years from the end of the assessment as was made by Revenue in the instant case and more-so even scrutiny assessment was not framed by Revenue initially u/s 143(3) of the 1961 Act and return was merely processed u/s 143(1) - we reject the contentions of the assessee and uphold the reopening of the concluded assessment by Revenue u/s 147 - While upholding reopening of the concluded assessment u/s 147 in the instant case, we note that there was tangible material before the AO to reopen the concluded assessment as the assessee is claiming huge exemption of income by making incomplete, untrue and wrong claim before the AO and scrutiny assessment having not been made earlier by Revenue by invoking provisions of Section 143(3) read with Section 143(2) while originally processing return of income, and reopening of the concluded assessment u/s 147 is sought to be done within four years from the end of assessment, the Revenue is within its right to reopen the concluded assessment u/s 147 . Ratio of decision in the case of Rajesh Jhaveri Stock Brokers Private Limited 2007 (5) TMI 197 - SUPREME COURT shall be clearly applicable as processing of return of income u/s 143(1) cannot be equated to scrutiny assessment u/s 143(3) read with Section 143(2) of the 1961 Act. As laid down by Hon ble Supreme Court in the case of P.V.S. Beedies 1997 (10) TMI 5 - SUPREME COURT that reopening of concluded assessment u/s 147 can be made by AO based on factual errors pointed out by audit team of department. In the instant case, we hold that the Revenue was within its right to reopen the concluded assessment u/s 147 and we uphold the reopening of the concluded assessment by Revenue in the instant case. Long Term Capital Gains - Shares were held by Minor sons of the assessee - The minor sons of the assessee were neither Director of Aditya Leather Exports Private Limited nor guarantors for the said loan granted by Indian Bank to Aditya Leather Exports Private Limited - assessee being natural guardian of minor son has no right to use sale proceeds belonging to minor sons to discharge Indian Bank Loan without permission of the Court and then turn back and say that the said amount paid to Indian bank is to be allowed deduction on the ground of diversion of overriding tittle, which will lead to traversity of justice and illegality. Assessee has not come to Court with clean hand and we cannot be party to such illegal and perverse act of the assessee. We hold that the said amount of ₹ 4.25 crores was paid by assessee out of non compete fee received by assessee and further it is mere application of income and there is no diversion by overriding title as the shares were never part of the charge in favour of Indian Bank. The said amount of ₹ 4.25 crores was paid by assessee to Indian Bank to settle defaulted loan obligation of Aditya Leather Exports Private Limited. Further, the assessee has entered into simultaneous agreement for sale of shares as well for non compete fee and Indian Bank was also in a position to exercise restraint over non compete fee which belonged to assessee and even Indian Bank could not have exercised any extended lien over shareholding of minor sons in Kris Srikanth Sports Entertainment Private Limited without permission of Court keeping in view laws prevailing in India relevant to minor and guardianship. No such permission was ever taken from Courts by Indian Bank or by assessee under the laws applicable to minor and guardianship and hence extended lien if at all it is available was over non compete fee which in any case is held to be an exempt income. Assessee will not get any deduction from taxable income of amount paid to Indian Bank to discharge liability of Aditya Leather Exports Private Limited of the misconceived cannot be part of scheme of illegitimate tax evasion undertaken by assessee. Further, we also hold that payments made to Indian Bank by assessee to the tune of ₹ 4.25 crores was merely an application of income. Reference is drawn to decision of Perfect Thread Mills Limited v. DCIT 2019 (10) TMI 1198 - ITAT MUMBAI . We order accordingly. a) We uphold reopening of concluded assessment by AO invoking provisions of Section 147 of the 1961 Act. b) We hold that sale consideration of ₹ 7.50 crores was duly received for sale of shares of Kris Srikanth Sports Entertainment Private Limited which is to be brought to tax under provisions of 1961 Act including Section 60-64 of the 1961 Act. c) We hold that non compete fee of ₹ 7.50 crores was exempt from tax being capital receipt. d) We hold that payment of ₹ 4.25 crores was made by assessee to Indian Bank to settle loan availed by Aditya Leather Exports Private Limited which was in default, out of non compete fee earned by assessee which we have already held to be exempt from tax and now it is academic whether there was any diversion of income by overriding title or not. In any case for completeness, we hold that the assessee was not entitled for deduction by way of diversion by overriding title as there was no charge held by Indian Bank and there was merely a compromise entered into by assessee with Indian Bank voluntarily to pay defaulted loans availed by said Aditya Leather Exports Private Limited . Thus, the payment to Indian Bank was merely an application of income and that too of an exempt income. e) The question of taxability of ₹ 3 crores which was not received by assessee is again an academic question as we have already held that this non receipt of ₹ 3 crores was on account of non compete fee which is held to be exempt income.

Summary

Issues Involved:
1. Legality of reopening the concluded assessment under Section 147 of the Income Tax Act, 1961.
2. Taxability of non-compete fees received by the assessee.
3. Deduction of payment made to Indian Bank under the claim of diversion by overriding title.
4. Taxability of the amount not received by the assessee from the total consideration.

Detailed Analysis:

1. Legality of Reopening the Concluded Assessment:
The assessee filed the original return of income on 28.03.2002, which was processed under Section 143(1) of the Income Tax Act, 1961. The Revenue reopened the assessment under Section 147 within four years from the end of the assessment year, issuing a notice under Section 148 on 30.03.2006. The assessee challenged the reopening, arguing that there was no fresh tangible material available to justify the reopening. The Tribunal held that the reopening was valid as the return was not originally scrutinized under Section 143(3), and the Revenue had tangible material indicating that the income had escaped assessment. The Tribunal relied on the Supreme Court's decision in Rajesh Jhaveri Stock Brokers Private Limited, which allows reopening of assessments processed under Section 143(1) if there are reasons to believe that income has escaped assessment.

2. Taxability of Non-Compete Fees:
The assessee received ?7.5 crores as non-compete fees for agreeing not to compete with the company Kris Srikanth Sports Entertainment Private Limited for six years. The Tribunal held that the non-compete fees were not taxable for the assessment year 2001-02, as the amendment to Section 28 (inserting clause (va)) by the Finance Act, 2002, which made non-compete fees taxable, was applicable from 01.04.2003. The Tribunal relied on the Supreme Court's decision in Guffic Chem Private Limited, which held that non-compete fees received before the amendment were capital receipts and not taxable.

3. Deduction of Payment to Indian Bank:
The assessee claimed a deduction of ?4.25 crores paid to Indian Bank under the claim of diversion by overriding title. The Tribunal rejected this claim, holding that the payment was an application of income and not a diversion by overriding title. The shares of Kris Srikanth Sports Entertainment Private Limited were not subject to any charge by Indian Bank, and the payment was made under a compromise agreement to settle a loan availed by Aditya Leather Exports Private Limited, where the assessee was a director and guarantor. The Tribunal held that the payment was not incurred wholly and exclusively in connection with the transfer of shares and thus could not be deducted under Section 48(1).

4. Taxability of Amount Not Received:
The assessee claimed that ?3 crores out of the total consideration of ?15 crores was not received and should not be taxed. The Tribunal held that the entire sale consideration of ?7.5 crores for the shares was received and should be taxed. The Tribunal rejected the claim that the non-receipt of ?3 crores should be attributed to the sale of shares, as the shares were fully transferred, and the consideration was agreed upon. The Tribunal also noted that the assessee did not take any legal action to recover the unpaid amount, indicating that the entire sale consideration was effectively received.

Conclusion:
The Tribunal upheld the reopening of the assessment under Section 147, held that the non-compete fees were not taxable for the assessment year 2001-02, rejected the deduction of ?4.25 crores paid to Indian Bank, and held that the entire sale consideration of ?7.5 crores for the shares was taxable. The appeals were partly allowed.