2005 (9) TMI 248 - AT - Income Tax

Summary

Issues Involved:
1. Adoption of gross sale price of shares for capital gains calculation.
2. Treatment of sale price including negative covenants as capital receipt.
3. Deductibility of legal expenses related to the transfer of shares.

Issue-Wise Detailed Analysis:

1. Adoption of Gross Sale Price of Shares for Capital Gains Calculation:
The assessee argued that the gross sale price of the shares of Groz Beckert Saboo Ltd. should be adopted at Rs. 358.89 per share instead of Rs. 400 per share. The assessee claimed that Rs. 41.11 per share was incurred towards legal expenses for conducting proceedings before the Company Law Board (CLB) and the Delhi High Court, which should be deducted from the sale consideration. The Assessing Officer (AO) and the Commissioner of Income Tax (Appeals) [CIT(A)] disagreed, stating that the full value of the consideration accrued was Rs. 400 per share as per the share purchase agreement. The Tribunal upheld the CIT(A)'s view, stating that the legal expenses related to litigation prior to the transfer of shares and were not incurred wholly and exclusively in connection with the transfer of shares.

2. Treatment of Sale Price Including Negative Covenants as Capital Receipt:
The assessee contended that the sale price of the shares included Rs. 100 per share for accepting various negative covenants under the agreement of sale of shares, which should be treated as a capital receipt not liable to capital gains tax. The Tribunal examined the share purchase agreement and concluded that the consideration of Rs. 400 per share was not solely towards the value of the shares but also included compensation for the restrictive covenants. The Tribunal referred to various judicial precedents, including the Supreme Court's decision in Gillanders Arbuthnot & Co. Ltd. vs. CIT, which held that compensation for agreeing to refrain from carrying on competitive business is of the nature of a capital receipt. The Tribunal accepted the assessee's claim that Rs. 100 per share should be considered as a capital receipt not chargeable to tax.

3. Deductibility of Legal Expenses Related to the Transfer of Shares:
The assessee claimed that legal expenses of Rs. 41.11 per share incurred in connection with the legal proceedings before the CLB and the Delhi High Court should be deductible as expenditure incurred in connection with the transfer of shares or as the cost of improvement of the asset. The AO and CIT(A) rejected this claim, stating that there was no evidence of actual incurring of these expenses and that the expenses related to litigation prior to the transfer of shares. The Tribunal upheld the CIT(A)'s view, concluding that the legal expenses were not incurred wholly and exclusively in connection with the transfer of shares and could not be considered as the cost of improvement of the capital asset.

Conclusion:
The Tribunal partly allowed the appeal by the assessee, accepting the claim that Rs. 100 per share should be treated as a capital receipt not liable to capital gains tax, while rejecting the claims related to the adoption of gross sale price and deductibility of legal expenses.