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TMI Blog2019 (10) TMI 116X X X X Extracts X X X X X X X X Extracts X X X X ..... f ₹ 1.75 crore cannot be related to the three, rights referred to in the Addendum dated 20.08.2007. Second argument of the assessee that management right is a capital asset within the meaning of sec. 2(14) by virtue of retrospective amendment made by Finance Act, 2012 and so provisions relating to computation of capital gain will apply and not those relating to business income - It is true that under the scheme of taxation of capital gain, it is not the entire sale consideration of an asset which is chargeable to tax but it is the profit or gain arising on transfer thereof which is taxable. This observation is subject to the specific provisions of law which prescribe that in case of some category of capital assets, cost of acquisition is considered to be nil and, in those cases, full consideration accruing on transfer will become taxable. In the instant case, it is the stand of assessee that cost of acquisition of management right is indeterminate, no capital gain can be worked out and so the provisions are not workable. We observe that this plea was taken by the assessee before the AO himself, as is evident from para 4 of the assessment order and it has remained ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... appeal, reads as under: 1. Whether in law and on facts and circumstances of the case, the CIT (A) has erred in appreciating full facts and circumstances of the case and legal position, which were brought out by the A.O. during the course of assessment proceedings? 2. Whether in law and on facts and circumstances of the case, the ' CIT (A) has erred in admitting the documents as additional evidence in contravention of condition laid down in Rule 46A? 3. Whether in law and on facts and circumstances of the case, the CIT (A) erred in holding that the appellant did not have the right to manage the whole or substantially the whole of the affairs of the company? 4. Whether in law and on facts and circumstances of the case, the CIT (A) has erred in appreciating the fact that the amount of ₹ 1,75,00,000/- claimed to have been received by the assessee as professional goodwill is, in fact, compensation received by the assessee within the meaning of the provisions of sec. 28 (ii)( a ) of the IT. Act, 1961 and thereby erred in deleting the addition of ₹ 1,75,00,000/-? 5. Whether in law and on ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nt portion of Addendum dated 20.08.2007, for the shareholders agreement dated 6th April, 2007, and observed that as per the confirmation letter dated 15.11.2011, of M/s. Quality Care India Ltd, the amount was stated to be paid towards goodwill for agreeing to the additional rights incidental to the acquisition of shares. However, in the Addendum dated 20.08.2007, there is no mention of goodwill instead the amount has been referred to as additional amount . He further observed that since the Addendum dated 20.08.2007, is the basis of the confirmation letter dated 15.11.2011, the confirmation issued by the company is factually incorrect and the same cannot be relied upon to accept assessee's version of having received professional goodwill, The AO, therefore, observed that the amount of ₹ 1,75,00,000/- was received by the assessee on account of relinquishment of his rights in the management of M/s Ramkrishna Care in favour of M/s CARE and not on account of relinquishment of any right relating to professional expertise or acumen as surgeon. The AO concluded that the amount was received as compensation by the assessee in lieu of surrendering his rights relating to management ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he Board shall comprise of a minimum of 7 (seven) directors and a maximum of 12 (twelve) directors. 7.2.2 CARE shall have a right to recommend for appointment 4 (four) Directors and the Promoter Group shall have a right to recommend or appointment 3 (three) Director, on the Board of the Company. If the Board decides to increase the number of Directors, CARE and Promoter Group shall be entitled to appoint an equal number of Directors. It is clarified that CARE shall at all times have the right to nominate one director more than the Promoter Group and in compliance with the terms of this Agreement. 8. From the perusal of Clause 7.2, I find that even the Promoter Group, much less the appellant alone, did not have (he right to appoint majority of the directors in the Board, hence, I am convinced that the appellant did not have the right to manage the whole or substantially the whole of the affairs of the company at the time when the addendum was agreed upon. Furthermore, from the perusal of Shareholders Agreement, it is amply clear that the management of the company was vested with various Committees and not with the appellant alone. Therefore, the s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... emed to have always included disposing of or parting with an asset or any interest therein, notwithstanding that such transfer of rights has been characterized as being effected or dependent upon or flowing from the transfer of a share or shares of a company registered or incorporated outside India. 11. I am of the considered opinion that the Finance Act, 2012 has widened the scope of the term property to include even any right in or in relation to management or control. In the instant case, the appellant has received payment for agreeing to transfer the following additional rights: * To appoint majority of Directors on the Board of Ramkrishna CARE. * To share equally super majority rights with CARE; and * To appoint key managerial personnel by CARE. 12. I am of the considered opinion that Quality Care India Limited, vide clause 7.2 of the Shareholders Agreement dated 6th April, 2007, was already vested with the right to appoint the majority of the directors. Hence, it can be safely deduced that the consideration was received by the appellant mainly on account of transfer of right; ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ithout any cost. Regulation 14 makes it clear that FSI of receiving plot shall be allowed to be excluded in the prescribed manner. Such right was made available automatically without paying anything either to BMC or to the Government. (Para 9) The right construct the additional storeys on account of increase in FSI by virtue of regn. No. 14 was a capital asset held by the assessee. Therefore, assignment of such right in favour of the developers amounted to transfer of capital asset. The contention of the counsel for the assessee that there cannot be any transfer without having TDR is without force since right to construct additional floors and TDR are different and distinct rights which can be transferred for a consideration- CIT v. B.C. Srinivasa Setty [1981] 128 ITR 294 (SC) and CIT v. Tata Services Ltd.(1979) 13 CTR (Bom) 227: (1980) 122 ITR 594 (Bom) relied on. (Para 10) Right to construct the additional floors under the DCR, 1991 was acquired without incurring any cost and therefore, assessee was not chargeable to tax in respect of such receipts. The perusal of s. 55(2)(a) reveals that cost of acquisition ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lied to the present case. If the asset has inherent quality of being available on expenditure of money and the assessee, has acquired it without cost, then cost of acquisition shall be taken at nil. In the present case, the assessee society acquired the right to construct the additional floors by virtue of DCR, 1991, which could not be available to assessee on expenditure of money. Prior to DCR, 1991, no society had any right to construct the additional floors. So, it was not a tradable commodity. Suddenly, by virtue of DCR, 1991, the right was conferred by the Government on the assessee. Such right exclusively belonged to the building owned by the society. It could not be transferred to any other building. Similarly, similar right belonging to other societies could not be purchased by assessee for the purpose of constructing additional floors in its own building. Therefore, such right had no inherent quality of being available on expenditure of money and therefore, cost of such asset could not be envisaged. The right acquired by the assessee did not fall within the ambit of s.45 itself. The amended provisions are also not applicable since such right is not covered by any of the as ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ome chargeable under the head Interest on securities , Income from house property , Profits and gains of business or profession , or Income from other sources , and the expression improvement shall be construed accordingly. (2) For the purposes of sections 48 and 49, cost of acquisition , - (a) in relation to a capital asset, being goodwill of a business or a trademark or brand name associated with a business or a right to manufacture, produce or process any article or thing, or right to carry on any business tenancy rights, stage carriage permits or loom hours, (i) in the case of acquisition of such asset by the assessee by purchase from a previous owner, means the amount of the purchase price; and (ii) in any other case not being a case falling under sub-clauses (i) to (iv) of sub-section (I) of section 49, shall be taken to be nil; (aa) In a case where, by virtue of holding a capital asset, being a share or any other _ security, within the meaning of clause (h) of section 2 of the Securities Contracts (Regulation) Act, 1956 (42 of 1956) (hereafter in this clause referred to as the financi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the 1st day of April, 1981, means the cost of acquisition of the asset to the assessee or the fair market value of the asset as on the 1st day of April, 1981, at the option of the assessee; (ii) where the capital asset became the property of the assessee by any of the modes specified in sub-section (1) of section 49, and the capital asset became the property of the previous owner before the 1st day of April, 1981. means' the cost of the capital asset to the previous owner or the fair market value of the asset cm the 1st day of April, 1981, at the option of the assessee; (iii) where the capital asset became the property of the assessee on the distribution of the capital assets of a company on its liquidation and the assessee has been assessed to income-tax under (he head Capital gains in respect of that asset under section 46, means the fair market value of the asset on the date of distribution; (iv ) **** (v) where the capital asset, being a share or a stock of a company, became the property of the assessee on- (a) the consolidation and division of all or any of the share capital of the comp ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s.45. A partner depending on the terms of agreement, may or may contribute capital. There is nothing in the partnership Act that contribution of capital will be commensurate to the share which a partner acquires. A partner can contribute more capital but May have smaller share and vice versa. So, coniribution of capital cannot be regarded to be the cost of acquisition of such right,- CIT v. B.C. Srinivasa Setty [1981] 128 ITR 294 (SC) applied. (Para 1) (ii) The right to receive share is not, therefore, an asset within the meaning of s.45 of the Act and, therefore, on transfer of such right no capital gain can arise and as such cannot be brought to tax. (Para 1) 18. Looking to the facts and circumstances of the case as also decisions cited above, the addition made by the A.O holding the sums received as chargeable to tax u/s 28 cannot be sustained as the machinery provisions do not appear to be workable in the instant case. Hence, the addition made by the A.O is deleted. 5. At the time of hearing, the ld. DR while placing heavy reliance on the findings in the assessment order, argued that ld. CIT (A) erred in deleting the addition ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ntended that even if such other shareholdings are not considered, still the assessee was possessing substantial management right of the company; that since the amount of ₹ 1.75 crore was received only and only for relinquishing the three management rights, which vested in the assessee by virtue of his shareholding, and thus, the amount is clearly falling within the ambit of sec. 28(ii)(a). Concluding her arguments, she submitted that the ld. CIT(A) erred in granting relief to the assessee and therefore requested that the order of the AO maybe restored. 6. Per contra, ld. AR for the assessee defended the impugned order, and argued that ld. CIT(A) vyas perfectly justified in deleting the addition. He canvassed mainly two arguments, first, the assessee did not manage the whole or substantially the whole of the affairs of the company, which is the requirement for invoking sec. 28(ii)(a) and second, management right is a capital asset within the meaning of Explanation to sec. 2(14) inserted by Finance Act, 2012 w.r.e.f. 01.04.1962 and since the cost of acquisition of management right is not ascertainable, capital gain is not workable and hence charging provision ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed. He argued that there are different committees like remuneration committee, CAPEX committee, purchase committee, HR committee, professional induction committee etc. He further argued that in all these committees, although the assessee appeared as a member, there were other members/doctors also who were at least two in number and therefore, it is difficult to perceive that assessee had any substantial say in the decision-making process of these committees. He submitted that whole/substantial management was done by the Board and the other directors/key personnel and in fact, the AO misinterpreted the right of the assessee. He argued that at the time of execution of Addendum dated 20.08.2007, the three rights referred to therein were not with the assessee which is established by various clauses of shareholders agreement dated 06.04.2007, and therefore, the amount of ₹ 1.75 crore which accrued to the assessee by virtue of Addendum, cannot be related to any such managerial rights. He argued that the compensation to the assessee became due on the execution of Addendum i.e. on 20.08.2007 and on such date, 50% of shares were with CARE group and the assessee had just 11% of shares ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rused the material on record and considered the cases cited before us. We have also gone through the contents of documents in question i.e. the shareholders agreement dated 06.04.2007, the Addendum dated 20.08.2007 and the confirmatory letter dated 15.11.2011, The dispute before us is, whether the amount of ₹ 1.75 crore received by the assessee in terms of Addendum dated 20.08.2007 is chargeable to tax and if so, under which head of income. It is the case of AO that the impugned amount is covered by provisions of sec. 28(ii)(a) while the case of assessee is that since he was not managing the whole or substantially the whole of the affairs of the company, provisions of sec. 28(ii)(a) are not applicable. The assessee has taken one more argument to the effect that managerial right is a capital asset by virtue of retrospective amendment made in sec. 2(14) by Finance Act, 2012 and therefore, even if the taxability of the impugned amount is to be considered, it is under the head of capital gain and therefore, provisions relating to computation of capital gain will apply. 7.1 To examine the claim of Revenue, we have gone through the provisions of sec. 28(ii)(a) wh ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Hyderabad, it is difficult to perceive as to how the other party i.e. promoter group could be said to be managing the whole or substantially the whole of the affairs of the company. There is yet another point, the right to appoint less than 50% of the directors vested with promoter group . Ld. AR of the assessee has taken us through page number 35 of the shareholders agreement dated 06.04.2007 which contains a list of the persons comprising of promoter group . A perusal of this list shows that it comprises of as many as 24 persons/entities. It is all these persons who collectively had the right to appoint less than 50% of directors. Admittedly, the assessee's name and the name of his family members and maybe of some of the entities controlled by him is appearing in the list, nevertheless the list contains names of many other persons/entities who seemingly do not appear to be family members of the assessee and the Revenue has not brought any material on record to show that all the 24 persons/entities were related to assessee or controlled by him. Although the ld. DR argued that the assessee has major control over some of the companies/entities named in the list. However, thi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cannot be related to the three, rights referred to in the Addendum dated 20.08.2007. 7.2 Adverting to the second argument of the assessee that management right is a capital asset within the meaning of sec. 2(14) by virtue of retrospective amendment made by Finance Act, 2012 and so provisions relating to computation of capital gain will apply and not those relating to business income, the Explanation inserted in sec. 2(14) by Finance Act, 2012, is reproduced below: - For the removal of doubts, it is hereby clarified that property includes and shall be deemed to have always included any rights in or in relation to an Indian company, including rights of management or control or any other rights whatsoever. 7.3 Management right has thus now been included in the definition of property and therefore is a capital asset u/s 2(14). This being so, taxability of any amount received against relinquishment of management right has to be tested on the touchstone of provisions relating to computation of capital gain. Ld. AR of the assessee argued before us. that since management right is a capital asset, provisions relating to capital ga ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rther held that when there is a case to which the computation provisions cannot apply at all, it is evident that such a case was not intended to fall within the charging section. Hon'ble Supreme court further observed that what is contemplated is an asset in the acquisition of which it is possible to envisage a cost. None of the provisions pertaining to the head capital gain suggests that they include an asset in the acquisition of which no cost at all can be conceived. In such a case, when the asset is sold and the consideration is brought to tax, what is charged is the capital value of the asset and not any profit or gain. In the case of Maheshwar Prakash-2 Co-operative Housing Society Ltd. v. ITO [2009] 118 ITD 223 (Mum.), the question relating to taxability of amount received against the right to construct additional floors came up. It was held by Mumbai Bench of Tribunal that cost of acquisition of right to make additional construction being nil de hors and independent of sec. 55(2), computational provisions failed and the capital receipt could not be brought to tax under sec. 45. There is yet another dimension, as rightly pointed out by the ld. AR of the assessee. In th ..... X X X X Extracts X X X X X X X X Extracts X X X X
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