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TMI Blog2012 (10) TMI 743X X X X Extracts X X X X X X X X Extracts X X X X ..... - Assessing Officer has taken one of the possible views. He has not applied any incorrect provisions of law and, therefore, the amount of Rs.1 7,72,17,484 cannot be treated as business income under sec. 28(va) of the Income-tax Act, 1961 as received for non-compete fees - Assessing Officer has rightly treated it as a part of long term capital gain - appeal of the assessee is allowed - I T Appeal No. 1577 (Delhi.) of 2010 - - - Dated:- 23-3-2012 - G.D. Agarwal, Rajpal Yadav, JJ. Salil Agarwal, R.P. Mall and G. Jain for the Appellant. D.N. Kar for the Respondent. ORDER Rajpal Yadav, Judicial Member The assessee is in appeal before us against the order of Learned Commissioner dated 15.03.2010 passed for assessment year 2007-08 under section 263 of the Income-tax Act, 1961. The grievance of the assessee is that Learned Commissioner has erred in taking cognizance under sec. 263 of the Act and thereby modifying the order of Assessing Officer, directing him to treat a sum of Rs. 17,72,17,484 as a business income under section 28(va) of the Act. He further directed that this amount should be reduced from the figure of long term capital gain offered and assessed t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... meaning thereby, according to the assessee, shares were sold @ Rs.190 per share. The assessee has computed the capital gain on sale of shares @ 190. Learned A.O. has accepted this computation of the assessee. He has not mentioned anything about this in the assessment order. His assessment order though passed under sec. 143(3) but running into 6-7 lines only. It reads as under: "Assessment Order Return of income filed on 31.10.2007 declaring income of Rs. 905966319. The case was selected for scrutiny. Notice u/s. 143(2) of the Income-tax Act, 1961 was issued on 18.09.2008 and duly served upon the assessee. In response to the statutory notices, Sh. Virender Kumar, CA, AR attended office from time to time and produced necessary details/documents which have been placed on record. After discussion returned income of the assessee is accepted. Assessed at Rs.905966319. Issue necessary forms". 4. Learned Commissioner on an analysis of the record formed an opinion that Assessing Officer has applied incorrect provisions of law whereby the payment received @ Rs.38 per share in lieu of non-compete clause has been accepted in the computation of long term capital gain. This amount oug ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... -compete consideration received on 46,63,618 shares @ 38/- per shares = Rs.17,72,17,484/- Tax on 17,72,17,484 @ 30% = 12,05,17,874 Total Tax (LTGG + Tax on business income) = 12,05,17,874 Resulting of above, tax is under charged to the tune of Rs.3,54,43,494/- excluding surcharge and education tax (Rs.12,05,17,874/- (-) Tax paid by the assessee on long term capital gains is 8,50,74,380/-) From the above, it is clear that the order dated 5.11.2009 passed u/s. 143(3) of the Act for A.Y. 2007-08 without due application of correct provisions of the Law, is erroneous in so far as it is prejudicial to the interest of the revenue. Accordingly, you are given an opportunity to represent your case in person and or through on authorized representative as provided u/s. 263 of the Income-tax Act, 1961. Your case is fixed for hearing on 3.3.2010 at 11.30 AM in my room No.412, 4th Floor, Mayur Bhawan, Connaught Place, New Delhi. Sd/- (J.B. MOHAPATRA) Commissioner of Income-tax, Delhi-XVI, New Delhi. " 5. In response to the notice, assessee raised mainly two fold submissions. It was contended that the plain reading of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is also supported by the market at which the Acquirers had been able to procure as much as 20% of the Companies share holding from general public through open offer. 4. The regulator itself has directed the price to be Rs. 190 per share and if the same price is adopted by the parties for taxation purposes, there shall not be any doubt about the bona fide of the assessee. 5. It can be clearly inferred that pricing at Rs. 152 per share was non-compliance of the Take Over Code and hence, non-workable as per agreement itself. Thus, the first agreement voids itself to the extent of non-compliance and their remains no sanctity of the sale price of Rs. 152. Only the price of Rs. 190 per share is contractual price available. 6. The amendment in WSSPA signify the acceptance of the parties, even if with reluctance, but the transaction that had been entered and executed between agreeing parties has to be seen as it is and no interference is called for. It may also be mentioned that the assessee was a shareholder of the company and was paid price for transfer of its shares at par with the public and accordingly treated sale consideration towards sale of shares of a listed compan ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... has a price. The pre-revised WSSPA in accordance with the SEBI Take Over Code laid down 25% of the share price as non-compete consideration. SEBI has not disputed either the right of the sellers of their share of non-compete consideration nor the quantum payable to them. By subsuming the non-compete consideration in the sale consideration and simultaneously retaining the clauses of the non-compete consideration in the revised WSSPA, it cannot be said that Rs.38 per share did not represent non-compete consideration as sellers' right and the acquirer's liability as per clause 13.1 of the pre-amended and post amended WSSPA" ** ** ** "4.2( i ) In CIT as B.M. Kharwar 72 ITR 603, S C held that while the taxing authorities are entitled to determine the true legal relation resulting from a transaction to unravel the device adopted by a party, the legal effect of a transaction. If one goes by the ratio of law in the case decided upon ( supra ), it is not any body's case that the amendment to WSSPA was contrived. Moreover, amendment to WSSPA was on various other matters, not forming any part of the issue on hand. The crux is whether by omitting the def ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the Learned Commissioner. The revenue cannot go beyond the scope of show-cause notice issued under sec. 263 and the discussion made in the impugned order. By such type of letter, Learned Commissioner cannot improve the case of the revenue before the ITAT. The learned counsel for the assessee while taking us through the order of the Learned Commissioner pointed out that the first reason assigned by the Learned Commissioner for exercising powers under sec. 263 is on the ground that Assessing Officer has applied wrong provisions of law, Learned Commissioner has observed that SEBI has not advised the acquirer to assess the negotiated price but it has only rendered advise to the acquirer to revise the offer price. Learned counsel for the assessee submitted that Learned Commissioner has ignored the amended WSSPA which was executed after the advise of the SEBI and once a fresh WSSPA had been entered by the parties whereby sale consideration was stated at Rs. 190 per share, there is no justification to segregate the price and conclude that consideration for share was 152 rupees per share and towards non-compete clause it is Rs. 38 per share. According to the learned counsel for the assesse ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... es to a contract agree to substitute a new contract for it, or to rescind or alter it, the original contract needs not be performed. 11. The learned counsel for the assessee further appraised us the scope of and ambit of section 263 in which situation, this section can be invoked. He emphasized that where two view are possible and the Assessing Officer has taken a view with which the Learned Commissioner does not agree, the said order cannot be treated as erroneous as well as prejudicial to the interest of the revenue unless the view taken by the Assessing Officer is unsustainable in law. For buttressing his contentions, he relied upon the judgment of the Hon'ble Supreme Court in the cases of Malabar Industrial Co. Ltd. v. CIT [2000] 243 ITR 83/109 Taxman 66 and CIT v. Max India Ltd. [2007] 295 ITR 282/[2008] 166 Taxman 188. He also referred following decisions: ( i ) CIT v. Design Automation Engineers (Bombay) (P.) Ltd. [2010] 323 ITR 632/[2009] 177 Taxman 9 (Bom.) ( ii ) CIT v. Mepco Industries Ltd. [2007] 294 ITR 121/163 Taxman 648 (Mad.) ( iii ) CIT v. Munjal Castings [2008] 303 ITR 23/168 Taxman 241 (Punj. Har.) ( iv ) Grasim Industries ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o, he would have found that many crucial pages in the said agreement were missing and that the appellant had received a sum of Rs.33,19,57,626/- as "non-compete consideration". ( ii ) He also did not take into consideration the newly inserted section 28(va) (introduced w.e.f. 01-04-2003) which provided that any sum received in the nature of "non-compete consideration" under an agreement is liable to be taxed as "business" income at the higher rate of 30% as against 10% under the head "capital gains". ( iii ) He also did not take into consideration the true import of other documents submitted by the appellant before him during the course of assessment proceedings. For example, he did not realize that SEBI's letter dated 27-12-2006 (pages 61 to 64 of the appellant's Paper Book) was meant only for the small and marginal shareholders whose interest was supposed to be protected under SEBI (Substantial Acquisition of Shares Takeovers) Regulations, 1997 (pages 121 to 146 of the Departmental Paper Book). According to the SEBI's Takeover Regulations, 1997, whenever any acquirer acquires more than 15% in any company either through market transactions or off-market deals from promoter ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ( iv ) Similarly, as mentioned earlier, the SEBI's order did not direct the acquirer to make any changes to the payments made to the promoters. SEBI's order does not question the entitlement of the promoters to non-compete fee. SEBI's order does not say that the non-compete fee is not payable to promoters. SEBI's order only directs the company to amend the payments to be made to non-promoters in the "open offer". There is no comparison between the payment of Rs.190/- to the promoter and Rs.190/- to the non-promoters, since they are not comparables. Payment to a non-promoter shareholder is by way of SEBI's order. Payment to the promoters is by way of WSSPA and both original and revised WSSPA retained "non-compete clauses". While the original WSSPA provided for 'non compete consideration", the revised one did not provide for any consideration only to escape taxation of that amount as "business income". Non promoters are not saddled with non-compete clauses. Promoters on the other hand are to abide by the non-compete clauses in the original and revised WSSPA. Only when they abide by the revised WSSPA and also abide by the non-compete clauses therein that they are entitled to payment o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... any law in force in India and not hereby expressly repealed, by which any contract is required to be made in writing or in the presence of witnesses, or any law relating to the registration of documents." A plain reading of the above section would show that in addition to free consent, competency to contract, lawful object, etc., "lawful consideration" is one of the pre-requisite for a valid contract. Only the original WSSPA had such lawful consideration for non-compete portion of the agreement. But the revised WSSPA did not provide for any such consideration attributable to non-compete provisions. Further, Section 27 of the Indian Contract Act, 1872 reads as under: "Section 27 - Agreement in restraint of trade void--Every agreement by which anyone is restrained from exercising a lawful profession, trade or business of any kind, is to that extent void. Exception 1-Saving of agreement not to carry on business of which goodwill is sold-One who sells the goodwill of a business may agree with the buyer to refrain from carrying on a similar business, within specified local limits, so long as the buyer, or any person deriving title to the goodwill from him, carries on a like bus ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cial substance, except to be used as a "subterfuge" to pay tax at a lower rate, the court/ tribunal must ignore it. Reliance is placed on the following case laws for this proposition: ( i ) Mcdowell Co. v. CTO [1985] 154 ITR 148 (SC) "Colourable devices cannot be part of tax planning and it is wrong to encourage or entertain the belief that it is honourable to avoid the payment of tax by resorting to dubious methods. It is the obligation of every citizen to pay taxes honestly without resorting to subterfuges". ( ii ) Twinstar Holdings Ltd v. Anand Kedia , DCIT [2003] 260 ITR 61 (Bom.) "Even if the transaction is genuine, it could be ignored, if the object is tax avoidance, and the method adopted is a colourable device." ( iii ) S. Krishnaswamy v. CIT [2003] 261 ITR 263 (Mad) "The facts show that the assessee took a series of steps all of which were preconceived with the sole objective of evading liability for capital gains tax and for no other purpose. While the assessee no doubt had the freedom of managing the affairs in a manner which would minimize their liability for tax, that does not obligate the revenue from examining the true character of tran ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 2011 date of decision 20-01-2012, the revision of assessment order by CIT has been upheld, where the A.O. failed to conduct necessary enquiries. The relevant portion of the unreported decision of the High Court's order is reproduced hereunder: (Extract from the case of CIT v. Harish J . Punjabi ITA No.749/2011 date of decision 20-01-2012) "10. In the present case, therefore, there was failure on the part of the Assessing Officer to conduct necessary and required enquiries. The finding of the Commissioner is clear and lucid. Failure to conduct the said enquiries, makes the assessment order erroneous and prejudicial to the interest of the Revenue. The Commissioner rightly exercised his revisionary power under Section 263 of the Act. The required conditions for exercise of the said power are satisfied. We may also note that the Commissioner in his notice under Section 263 had referred to six issues but had ultimately exercised power under Section 263 in respect of only one issue, i.e., commission of Rs.3.33 crores. 11. In view of the aforesaid findings, the question of law is answered in negative, in favour of the Revenue and against the respondent assessee. Accordingly, th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sessee by a cryptic noting that "after considering the assessee's reply, the penalty proceedings are dropped". The CIT revised that order of the A.O., holding the same to be erroneous and prejudicial in the interest of revenue. Although Tribunal decided the matter in favour of the assessee, the Ld. Delhi High Court reversed the decision of the Tribunal holding as under: "That it was necessary for the parties to know the reasons that had weighed with the adjudicating authority in coming to a conclusion. The order passed by the Assessing Officer should be a self-contained order giving the relevant facts and reasons for coming to the conclusion based on those facts and law. The order passed by the Assessing Officer was cryptic and could not be sustained. The Tribunal could not substitute its own reasoning to justify the order passed by the Assessing Officer when the Assessing Officer himself did not give any reason in the order passed by him. The matter was remanded to the file of the Assessing Officer to decide the issue afresh in terms of the order passed by the Commissioner under section 263 of the Act. (page 10-12)" When the matter was challenged before Supreme Court, the Hon' ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed the A.O. to re-examine the matter. This argument is without any merit since the CIT has decided the whole issue. He has not remanded the matter back to the A.O. for fresh adjudication. Even otherwise, the plain language of S.263 allows enhancement, annulment, setting aside for fresh assessment. ( d ) The Ld. A.R. has relied on "principle of consistency" to, say that since in other promoters cases, action u/s 263 has not been taken, no action should be taken in this case. In this connection, time is still available for taking action u/s 147/148 in the case of other promoters. Hence, "principle of consistency" will not apply in the instant case. Sd/- (D.N. Kar) Commissioner of Income Tax (DR),C- Bench, ITAT, N. Delhi." 13. We have duly considered the rival contentions and gone through the record carefully. Section 263 of the Income-tax Act, 1961, contemplates that Learned Commissioner may call for and examine the record of any proceedings under this Act. On examination of record, if he considers that any order passed therein by the Assessing Officer is erroneous in so far as it is prejudicial to the interest of the revenue, meaning thereby, that on such examination, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... equirement of order being erroneous. ( iv ) If the order is passed without application of mind, such order will fall under the category of erroneous order. ( v ) Every loss of revenue cannot be treated as prejudicial to the interests of the Revenue and if the A.O has adopted one of the courses permissible under law or where two views are possible and the A.O has taken one view with which the CIT does not agree, it cannot be treated as an erroneous order, unless the view taken by the A.O is unsustainable under law. ( vi ) If while making the assessment, the A.O examines the accounts, makes enquiries, applies his mind to the facts and circumstances of the case and determine the income, the CIT, while exercising his power under s. 263 is not permitted to substitute his estimate of income in place of the income estimated by the A.O. ( vii ) The A.O exercises quasi-judicial power vested in his and if he exercises such power in accordance with law and arrives at a conclusion, such conclusion cannot be termed to be erroneous simply because the CIT does not feel satisfied with the conclusion. ( viii ) The CIT, before exercising his jurisdiction under s. 263 must have materia ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... erein are assumed to be correct." 16. In the light of the above propositions, let us examine the facts of the present case. The first area of dispute between the parties before us is whether impugned assessment order was passed after conducting proper inquiry and order of the Learned Commissioner is sustainable on the ground that no proper inquiry was conducted by the Assessing Officer. The learned counsel for the assessee at the time of hearing took us through the show-cause notice and pointed out that in the show-cause notice , Learned Commissioner nowhere expressed his desire that he is taking action under sec. 263 for want of proper inquiry at the end of the Assessing Officer. On the other hand, Learned DR on the basis of the material sought to argue that complete copy of WSSPA was not submitted before the Assessing Officer and, therefore, he has not conducted a proper inquiry. In our opinion, the department cannot improve its case in an appeal of the assessee. The respondent can only support the order of the Learned Commissioner on the basis of the discussion available therein as well as the reasons shown in the show-cause notice. We have already extracted the show-cause n ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the free consent of the parties, competent to contract, for a lawful consideration and with a lawful object and are not hereby expressly declared to be void. According to the Learned DR, for any contract, there are three essential conditions, namely, the parties to contract should be competent for contracting, there should be free consent of the parties, there should be a lawful consideration and it should be for performance of a lawful object. According to the Learned DR, the moment assessee omitted clause representing non-compete consideration, this contract becomes a void contract. It was also contended that sec. 25 of the Contract Act also provides that if an agreement is entered into without consideration then such an agreement would be a void agreement. On the strength of section 27, it was contended by the Learned DR that if an agreement is entered into by the parties by which a restrain is being put upon a party from exercising lawful profession, trade or business of any kind then that contract would be a void contract to that extent. Learned DR pointed out that if all these clauses are looked into together then it will contemplate that if a negative covenant is imposed fo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n rescinded and it cannot assume existence of such clauses. It is also to be seen why Rs.38, why not Rs.50, Rs. 60 or even Rs.100. The rights of the parties are to be determined on the basis of the agreement and the agreement does not stipulate consideration towards non-compete or for any other issue. According to the assessee, he has sold the shares for which he has offered capital gain to tax. Learned DR at the time of hearing pointed out that if an agreement has been entered into by the parties in order to evade tax or to pay taxes at lower rate then the ITAT must ignore it. In our opinion, there is no material with the revenue to say that it is a colourable device. The parties have agreed for the conditions which are in accordance with law. It is for sale of shares. We have already observed that why allocation of Rs. 38 towards non-compete, it can be any amount if from the agreement it is ascertainable that parties have paid some amount towards non-compete . The rights of the parties are to be inferred from the clauses of the agreement and not by presuming existence of clauses in the agreement itself. We have duly considered all the case laws referred by the Learned DR in his w ..... X X X X Extracts X X X X X X X X Extracts X X X X
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