IN CASE OF ARMS LENGTH TRANSACTIONS -COMMERCIAL EXPEDIENCY AND DECISION OF BUSINESSMAN / ASSESSEE WILL PREVAIL- REVENUE HAS NO BUSINESS TO SECOND GUESS

[DEV KUMAR KOTHARI]

Scope of this article in about DECISION, T & C settled by assesse /businessman which are at arm’s length will prevail and tax authorities have no business to substitute their guess.

Judgments referred for study:

2020 (7) TMI 544 - SUPREME COURT  SHIV RAJ GUPTA VERSUS  COMMISSIONER OF INCOME-TAX, DELHI-IV

2014 (12) TMI 857 - DELHI HIGH COURT THE COMMISSIONER OF INCOME TAX, DELHI –IV VERSUS SHIV RAJ GUPTA

Sale of shares by assesse was accounted for and declared for consideration accruing on transfer of shares at ₹ 56 lacs. This was at rates at which other shareholders, who are members of same family and group  had also sold same shares in process of transferring controlling stake in a company.

 In case of assesse, further sum was received as payment for agreeing to abstain from competition in similar business , popularly referred as non-compete convent for  non-compete fees amounting to ₹ 6.60 crores. The AO considered the same as consideration accruing on transfer of said shares and considered terms and conditions for non-compete as colourable device. He applied ruling in case of McDowell’s case and viewed  that the non-compete fees was taken to reduce the consideration for sale of shares to avoid the tax.

The court held that a catena of judgments has held that commercial expediency has to be adjudged from the point of view of the assesse and that the Income Tax Department cannot enter into the aspects  of reasonableness of amounts paid by the assesse. (per author - in this case amount received by assesse for not competing)

The reasons given by the learned Assessing Officer and the minority judgment of the Appellate Tribunal are all reasons which transgress the lines drawn by the judgments cited, which state that the revenue has no business to second guess commercial or business expediency of what parties at arms-length decide for each other.

Judgment in case of  GUFFIC CHEM (P) LTD. & MANDALAY INVESTMENT P. LTD VERSUS COMMISSIONER OF INCOME-TAX [2011 (3) TMI 6 - SUPREME COURT]   is applicable to hold that  the nature of receipt for non-compete is    capital receipt.

Amendment to specifically tax such receipts under the non-competition agreement is with effect from 1-4-2003 and is not applicable in case of assesse for relevant previous year.

Conclusion:

The said amendment to section 28  is not retrospective.

In case of transactions which are at arm’s length are to be taken as per T & C settled between parties and revenue has no business to impose their discretion or put adverse comments on discretion or decision of the assesse.