2020 (7) TMI 439 - HC - Income Tax

Sale of equity shares through Share Purchase Agreement having non-compete clause - allowable business income u/s 28(va) - Tribunal held that amount given for take over of business including Non-Compete covenant contained in the Sale Purchase Agreement was only share purchase agreement and not business take over, where the valuation is pursuant to Regulations 3 1 and 4 of the Securities and Exchange Board of India Substantial Acquisition of Shares and Take overs Regulations 2011, which deal with valuation of shares resulting in transfer of business? - HELD THAT - As decided by ITAT Market rate in the Stock Exchange on the date of sale was ₹ 71/- per share and therefore, the excess price of ₹ 10/- per share received by the respondent/assessee was treated as non-compete fee by the AO and the Agreement also stipulates that no non-compete fee would be paid by the purchaser and on account of the fact that the assessee selling a large amount of 2,82,50,291 equity shares to M/s.Tube Investments of India to get control over the company and that apart, same amount has been paid to third party general public also. As brought to the knowledge of this Court by the learned counsel for the respondent/assessee that the rate of ₹ 81/- per share was offered to all shareholders vide Regulations 3 1 and 4 of the Securities and Exchange Board of India Substantial Acquisition of Shares and Take overs Regulations, 2011. CIT Appeals as well as ITAT, ''D'' Bench, Chennai, had exhaustively dealt with those issues and arrived at a categorical finding deciding those issues/questions in favour of the respondent/assessee. No substantial questions of law

Summary

Issues involved:
1. Interpretation of Section 28[va] of Income Tax Act regarding non-compete clause in Share Purchase Agreement.
2. Determination of whether the amount for business takeover including non-compete covenant is to be treated as business income.
3. Evaluation of the treatment of amount received by the Public and the Managing Director.

Analysis:

Issue 1: Interpretation of Section 28[va] of Income Tax Act
The appellant challenged the Tribunal's decision regarding the sale of equity shares through a Share Purchase Agreement with a non-compete clause. The Tribunal held that such sale did not fall under Section 28[va] of the Income Tax Act, despite the legislative explanation added in 2012. The appellant argued that the Tribunal's interpretation was incorrect based on the legislative amendment.

Issue 2: Treatment of amount for business takeover
The Tribunal also had to determine whether the amount given for the takeover of a business, including a non-compete covenant, should be considered as part of a share purchase agreement or a business takeover. The valuation of shares under SEBI regulations was cited, questioning the characterization of the transaction and its tax treatment.

Issue 3: Treatment of amount received by Public and Managing Director
Another aspect was the treatment of the amount received by the Public and the Managing Director. The Tribunal was asked to decide whether both parties should be equally treated, considering the Managing Director's role in controlling the business and the retention of shares for future business contingencies.

The Commissioner of Income Tax [Appeals] had previously ruled in favor of the respondent/assessee, treating the income from the sale of shares as capital gains rather than business income. This decision was based on the nature of the shares sold as investments and the acceptance of a specific amount as capital gains. The Tribunal also noted that the price paid to the public shareholders could not be considered as having a non-compete fee embedded in it.

In conclusion, both the Commissioner of Income Tax [Appeals] and the Income Tax Appellate Tribunal had thoroughly examined and resolved the issues raised in favor of the respondent/assessee. As a result, the Tax Case Appeal was dismissed, with no substantial questions of law remaining for consideration.