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2023 (11) TMI 334 - AT - Income TaxCharacterization of receipts - treating the extent of sale consideration received on transfer of shares as Business income chargeable u/s 28 - terms and conditions of Share Sale and Purchase Agreement (SSPA) between the assessee and the foreign company - As per AO receipt for handing over the management and control of the Indian company and hence charged to tax as Business income as against capital gains shown - agreement talks of some specified negative covenants - Is entire consideration only for transfer of shares? - HELD THAT - Liability of the assessee to indemnify the Purchaser for violation of the negative covenants contained in Article 7 of the SSPA can extend up to a maximum of Rs. 40.00 crore (Rs. 150 million Rs. 150 million Rs. 100 million). No person will undertake the liability to indemnify the foreign company for a sum up to Rs. 40.00 crore for violation of the negative covenants without receiving any consideration there against in the first instance. Had the consideration of Rs. 85.79 crore been exclusively towards sale of shares, there was no question of the assessee accepting the obligation of indemnifying the buyer up to a sum of Rs. 40.00 crore for the violation of the negative covenants. It is thus graphically glaring that even though there is no separate mention of the consideration for the negative covenants, but they, forming an essential and integral part of the SSPA, do carry value, which is embedded in total consideration. It is the substance rather than the form of the SSPA, which should be looked into. It is ergo held that the consideration of Rs. 85.79 crore was not only for transfer of shares but also for accepting the negative covenants. We, therefore, jettison the contention advanced on behalf of the assessee that the entire consideration was towards transfer of shares. How it is taxable? - We find that para 14.5 of the JVA deals with the situation in which a shareholder agrees to purchase the shares of the company from another shareholder. This para states that In the event the Shareholders agree to purchase the shares but do not agree to the price at which the same are offered for sale, then the sale shall take place at the net sale value of the shares to be determined by'. Obviously, this para is referring to the situation of transfer of shares between the shareholders post the JV agreement, as is instantly prevailing. The Valuer did not value the shares under the Net asset value method, leave aside the determination of the value under this method. AO treated full sale consideration of Rs. 85.79 crore as attributable to the transfer of business, leaving no scope for finding out separate consideration towards the transfer of shares for the computation of capital gains. CIT(A) also did not go deep into the part of the consideration relatable to transfer of shares. He simply applied the magic wand and held that 10% of the consideration was towards non-compete and termination of role of the assessee in management. No reason or rationale has been given for the ad hoc figure of 10%. Under these circumstances, we are satisfied that the exercise of attributing sale consideration to the shares and the negative covenants is required to be done afresh by the AO. We order accordingly and direct him to segregate the consideration relatable to sale of shares and then accordingly compute the capital gains on transfer of such shares; and the remaining amount towards negative covenants should be taxed as business income u/s 28(va). Disallowance u/s 14A - HELD THAT - As seen that the AO made the disallowance only towards rule 8D(2)(iii), which is 0.5% of the average value of investments. It is further borne out from para 30 of the assessment order that the average value of investments was computed by the AO considering only those securities which yielded exempt income and not all the investments. Considering the fact that the assessee had own capital more than the amount invested in securities yielding exempt income, the AO did not make any disallowance towards interest. In our opinion, no exception can be taken to the disallowance made and sustained u/s 14A. We, therefore, dismiss this ground of appeal. Addition towards deemed rent on vacant property - HELD THAT - It is found as an admitted position that the vacant property, in respect of which deemed rent was calculated by the AO, was stock in trade of the assessee. The Pune Bench of Tribunal in M/s Cosmopolis Construction 2018 (9) TMI 1621 - ITAT PUNE has held that no income from house property can result in respect of unsold flats held by the builder as stock in trade at the year-end. Insertion of sub-clause (5) to section 23 by the Finance Act, 2017 w.e.f. 01.04.2018, requiring determination of the ALV in respect of building and land appurtenant thereto which is held as stock in trade, is prospective and cannot apply to the assessment year 2015-16 under consideration. We, therefore, uphold the impugned order on this score.
Issues Involved:
1. Taxability of sale consideration received on transfer of shares. 2. Disallowance under Section 14A of the Income-tax Act. 3. Deletion of addition towards deemed rent on vacant property. Summary: 1. Taxability of Sale Consideration Received on Transfer of Shares: The primary issue was whether the entire sale consideration of Rs. 85.79 crore received by the assessee for transferring shares should be treated as 'Business income' under Section 28 of the Income-tax Act or as 'Capital gains.' The Assessing Officer (AO) treated the entire consideration as business income under Section 28(va), citing the Share Sale and Purchase Agreement (SSPA) which included non-compete and other negative covenants. The Commissioner of Income-tax (Appeals) [CIT(A)] attributed 10% of the consideration to non-compete and management termination clauses, treating it as business income, and the remaining as capital gains. The Tribunal examined the SSPA and concluded that the consideration was not solely for the transfer of shares but also included compensation for negative covenants such as non-compete and non-solicitation. The Tribunal held that the consideration should be bifurcated, with the part related to negative covenants taxed as business income under Section 28(va) and the part related to the transfer of shares taxed as capital gains. The case was remanded to the AO for fresh determination of the amounts attributable to each. 2. Disallowance under Section 14A of the Income-tax Act: The assessee had claimed exempt income but did not make any disallowance under Section 14A. The AO made a disallowance of Rs. 16,86,377 under Rule 8D(2)(iii) at 0.5% of the average value of investments, which was upheld by the CIT(A). The Tribunal found no exception to the disallowance, noting that the AO considered only those securities which yielded exempt income and did not make any disallowance towards interest, given the assessee's own capital exceeded the investments. The Tribunal dismissed the assessee's appeal on this ground. 3. Deletion of Addition towards Deemed Rent on Vacant Property: The AO had added Rs. 92,159 as deemed rent on a vacant property held as stock in trade by the assessee's proprietorship concern. The CIT(A) deleted this addition, relying on a Tribunal decision that no income from house property can result from unsold flats held as stock in trade. The Tribunal upheld this deletion, noting that the amendment to Section 23(5) requiring determination of annual letting value (ALV) for stock in trade was prospective and not applicable to the assessment year in question. Conclusion: The cross appeals were partly allowed for statistical purposes, and the Cross Objection was dismissed as infructuous. The Tribunal directed a fresh determination of the amounts attributable to the transfer of shares and negative covenants for appropriate tax treatment.
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