2014 (12) TMI 678 - AT - Income Tax

Taxability of sale of shares and receipt of sum of ₹ 1.20 crores, after the death of her father - settlement of family dispute - nature of enhanced compensation, whether part of sale consideration of shares or otherwise - whether the amount of compensation of ₹ 1.20 crores is to be assessed under the head income from other sources or capital gain or partly as capital gain and or any other head of income - Shares were transferred in the year 2002 - family dispute was settled in the year 2004 - taxable in the AY 2003-04 or 2005-06 - Indo French DTAA - Held that - It has been specifically mentioned that out of sum of ₹ 1.20 crores, only sum of ₹ 33,38,135, pertains to settlement towards transaction of shares in respect of which Police complaint against Ms. Rashmi Agarwal, was filed by the assessee - The total sale consideration for sale of shares has been said to be for ₹ 93,70,135, out of which sum of ₹ 60,32,000, admittedly has been received by the assessee on 14th May 2002 i.e., in the A.Y. 2003 04 - no dispute other than the dispute relating to shares and land was involved - for the purpose of taxability/assessability of sum of ₹ 1.20 crores, the amount of ₹ 33,38,135, and ₹ 15 lakhs has to be segregated, because, the sum of ₹ 33,38,135, pertains to transaction of shares which is to be assessed and taxed under the head capital gains, which is not taxable by virtue of Article 14(6). The balance sum of ₹ 71,61,865, i.e. can neither be taxed as capital gain nor as income from other sources for the reason that the lump sum amount which has been agreed under the terms of settlement is basically a kind of compensation on account of personal damage done by Ms. Rashmi Agarwal, on the assessee for committing fraud, misappropriation of assets and breach of trust - it is not a case here, where the compensation has been paid on some kind of a breach of any agreement in the course of business or any transaction or any breach of contract between the two parties - Neither it is in the form of any interest on some principal amount, because nowhere it has been mentioned that M/s. Rashmi Agarwal, will pay any interest on the delayed payment of shares sold by her in the year 2002 - Thus, it cannot be taxed as income from other sources u/s 56 - Such a compensation is mainly towards damage for breach of trust or fraud which and has no co relation with any such business transactions and, therefore, the compensation amount received by the assessee cannot be taxed under any heads of income. All the receipts would not necessarily be income or deemed to be income for the purpose of income tax, because it will depend upon the nature of receipt and the true scope and effect of the relevant taxing provisions - the payment is towards compensation on account of personal injury caused by fraud and breach of personal trust - The amount has been paid to withdraw the criminal complaint and suit - The nature and character of such kind of receipt cannot be brought under charging section and hence cannot be taxed under any other provision - out of sum of ₹ 1.20 crores, sum of ₹ 33,38,135, is assessable under the head capital gain which cannot be taxed in case of the assessee due to benefit under Article 14(6) of Indo French DTAA, Secondly, sum of ₹ 15 lakhs towards sale of Alibaugh land has already been directed by the CIT(A) to be taxed as short term capital gain; and lastly, the sum of Rs ₹ 71,61,865, cannot be taxed under the charging provision of the Act, as the same is compensation in the form of capital receipt Decided against revenue. Liability to pay advance tax for deletion of interest charged u/s 234B Held that - Following the decsoin in DIRECTOR OF INCOME-TAX (INTERNATIONAL TAXATION) Versus NGC NETWORK ASIA LLC 2009 (1) TMI 174 - BOMBAY HIGH COURT - when a duty is cast on the payer to pay the tax at source, on failure, no interest can be imposed on the payee-assessee Decided against revenue.

Summary

Issues Involved:
1. Whether the amount of Rs. 1.20 crores received by the assessee was for the transfer of shares.
2. Determination of the actual date of sale of shares.
3. Whether the amount of Rs. 33.38 lacs mentioned in the 'Settlement' is out of the sale proceeds of the said shares.
4. Whether the sum of Rs. 1.20 crores received by the assessee should be assessed as 'Capital Gains'.
5. Whether the assessee is liable to pay advance tax and the interest charged under section 234B of the Act.

Detailed Analysis:

1. Whether the amount of Rs. 1.20 crores received by the assessee was for the transfer of shares:
The Revenue contended that the learned Commissioner (Appeals) erred in concluding that the consideration of Rs. 1.20 crores received by the assessee represents payments for the transfer of shares. The Revenue argued that there was no proof of such transfer and whether the amount received was share consideration. The assessee, a non-resident British citizen domiciled in France, claimed that the entire amount of monetary compensation of Rs. 1.20 crores was towards the dispute relating to shares, as the value of these shares was more than Rs. 1.62 crores at the time of settlement. The learned Commissioner (Appeals) concluded that the compensation received was closely linked with the main dispute of shares and partly of Alibaug land.

2. Determination of the actual date of sale of shares:
The Revenue argued that the shares were sold in 2002, and the learned Commissioner (Appeals) should have verified the actual date of sale. The assessee contended that the shares were sold without her consent and knowledge and that the transfer of shares can be said to have arisen in the assessment year 2005-06 because the settlement was reached on 31st May 2004. The learned Commissioner (Appeals) held that the shares were not transferred in the year 2002 but only when the matter was settled in May 2004, when the assessee relinquished her rights in those shares.

3. Whether the amount of Rs. 33.38 lacs mentioned in the 'Settlement' is out of the sale proceeds of the said shares:
The Revenue contended that there was no evidence to prove that the proceeds of Rs. 33.38 lacs were relatable to the sale of shares. The assessee argued that the amount of Rs. 33.38 lacs was part of the sale proceeds of Rs. 93.70 lacs, offered to her in the financial year 2004-05. The learned Commissioner (Appeals) noted that the amount of Rs. 33.38 lacs was indeed in lieu of shares and should be taxed under the head "capital gains."

4. Whether the sum of Rs. 1.20 crores received by the assessee should be assessed as 'Capital Gains':
The Revenue contended that the amount of Rs. 1.20 crores received by the assessee could not be treated as 'Capital Gains' as the shares were sold in 2002, and the compensation was received in 2004 to avoid legal disputes. The assessee argued that the compensation received was towards the dispute of shares, considering the market value of the shares in 2004. The learned Commissioner (Appeals) concluded that the major amount received from the out-of-court settlement pertained to the misappropriation of shares by fraud and unfair means and directed the Assessing Officer to treat the amount as long-term capital gains, which is exempt under Article 14(6) of the Indo-French DTAA.

5. Whether the assessee is liable to pay advance tax and the interest charged under section 234B of the Act:
The Revenue challenged the deletion of interest charged under section 234B of the Act amounting to Rs. 12,50,801/-. The learned Commissioner (Appeals) held that since the assessee is a non-resident and her income was subject to TDS, she is not liable to pay advance tax. This issue was covered by the decision of the Hon'ble Jurisdictional High Court in Director of Income Tax (International Taxation) v/s NGC Network Asia LLC, which was followed by the learned Commissioner (Appeals).

Conclusion:
The Tribunal upheld the findings of the learned Commissioner (Appeals) that the major amount received from the out-of-court settlement pertained to the misappropriation of shares and should be treated as long-term capital gains, which is exempt under Article 14(6) of the Indo-French DTAA. The Tribunal also affirmed the deletion of interest charged under section 234B of the Act, following the decision of the Hon'ble Jurisdictional High Court. Consequently, the Revenue's appeal was dismissed.