CHAMPION HIGHLAND STUD FRAMS P.LTD, MUMBAI v. ACIT 2(1), MUMBAI

ITA 2390/MUM/2010 | 2006-2007
Pronouncement Date: 09-03-2011 | Result: Dismissed

Appeal Details

RSA Number 239019914 RSA 2010
Bench Mumbai
Appeal Number ITA 2390/MUM/2010
Duration Of Justice 11 month(s) 13 day(s)
Appellant CHAMPION HIGHLAND STUD FRAMS P.LTD, MUMBAI
Respondent ACIT 2(1), MUMBAI
Appeal Type Income Tax Appeal
Pronouncement Date 09-03-2011
Appeal Filed By Assessee
Order Result Dismissed
Bench Allotted C
Tribunal Order Date 09-03-2011
Assessment Year 2006-2007
Appeal Filed On 26-03-2010
Judgment Text
IN THE INCOME TAX APPELLATE TRIBUNAL MUMBAI BENCH C MUMBAI BEFORE SHRI N.V.VASUDEVAN(J.M) & SHRI RAJENDRA SIN GH (A.M) ITA NO.2390/MUM/2010(A.Y.2006-07) CHAMPION HIGHLAND AND STUD FARMS PVT. LTD. STATE BANK BUILDING ANNEXE BANK STREET FORT MUMBAI 23. PAN:AABCC 3369A (APPELLANT) VS. THE ACIT 2(1) AAYKAR BHAVAN MK ROAD MUMBAI. (RESPONDENT) ITA NO.2474/MUM/2010(A.Y. 2006-07) THE ACIT 2(1) AAYKAR BHAVAN MK ROAD MUMBAI. (APPELLANT) VS. CHAMPION HIGHLAND AND STUD FARMS PVT. LTD. STATE BANK BUILDING ANNEXE BANK STREET FORT MUMBAI 23. PAN:AABCC 3369A (RESPONDENT) ASSESSEE BY : SHRI ARVIND DALAL REVENUE BY : SHRI P.N.DEVADASAN ORDER PER N.V.VASUDEVAN J.M ITA NO.2390/M/2010 IS AN APPEAL BY THE ASSESSEE WH ILE ITA NO.2474/M/2010 IS AN APPEAL BY THE REVENUE. BOTH T HESE APPEALS ARE DIRECTED AGAINST THE ORDER DATED 19/1/2010 OF CIT(A ) IV MUMBAI RELATING TO ASSESSMENT YEAR 2006-07. ITA NO.2390&2474/MUM/2010(A.Y.2006-07) 2 2. THESE CROSS APPEALS ARISE FOR CONSIDERATION UNDE R THE FOLLOWING FACTS AND CIRCUMSTANCES. THE ASSESSEE IS A PRIVATE LIMIT ED COMPANY ENGAGED IN THE BUSINESS OF INVESTMENTS. THE ASSESSEE COMPANY SOLD 4000 SHARES OF THE DAWN MILLS CO. LTD. UNDER AN AGREEMENT DATED 24/11/ 2005. THE CONSIDERATION PAYABLE IN RESPECT OF THE TRANSFER OF THE SHARES WAS RS. 4642 PER SHARE TOWARDS COST OF THE SHARES AND RS. 1161/- PER SHARE TOWARDS NON- COMPETE FEE. THE ASSESSEE CLUBBED THE TOTAL VALUE RECEIVED ON SALE OF SHARES NAMELY RS.2 08 50 043/- AND REDUCED FROM THE SAID CONSIDERATION THE COST OF PURCHASE OF SHARES NAMELY RS.23 61 957/- AND ARR IVED AT THE LONG TERM CAPITAL GAIN. THE ASSESSEE OFFERED TO TAX THE LONG TERM CAPITAL GAIN WITHOUT CLAIMING BENEFIT OF INDEXATION AT 10%. UNDER THE P ROVISIONS OF SECTION 112 OF THE INCOME TAX ACT 1961(THE ACT) THE TAX PAYABLE O F LONG TERM CAPITAL GAIN IS AT 20%. IF THE ASSESSEE DOES NOT OPT FOR THE BENEF IT OF INDEXATION UNDER THE SECOND PROVISO TO SECTION 48 OF THE ACT THEN THE R ATE OF TAX OF LONG TERM CAPITAL GAIN IS ONLY 10%. THE COST OF ACQUISITION OF THE CAPITAL ASSET HAS TO BE DEDUCTED FROM THE FULL VALUE OF CONSIDERATION RE CEIVED TO DETERMINE THE CAPITAL GAIN. THE BENEFIT OF INCREASING THE COST O F ACQUISITION BY INDEXATION CONSISTENT WITH THE INFLATION IS GIVEN UNDER SECOND PROVISO TO SEC.48 OF THE ACT. THE BENEFIT OF INDEXATION CAN HOWEVER BE AVAI LED ONLY IF THE CAPITAL ASSET IN QUESTION HAS A COST. 3. CLAUSE 12 OF THE AGREEMENT DATED 24/11/05 BY WH ICH THE SHARES WERE SOLD BY THE ASSESSEE IT HAS BEEN PROVIDED THAT TH E NON-COMPETE CONSIDERATION IS RECEIVED TOWARDS NOT TO COMMENCE O R CARRY ON THEIR DIRECTLY OR INDIRECTLY ANY BUSINESS OR ACT AS CONSULTANT TO ANY ENTITY OR PERSON CARRYING ON ANY BUSINESS WHICH IS IN DIRECT COMPETI TION OF THE COMPANY (I.E. TEXTILE BUSINESS) AT ANY TIME FOR A PERIOD OF 5 YE ARS. ACCORDING TO THE AO THE SUM OF RS.46 44 000/-(RS.1 161 PER SHARES BEING EVEN FOR NON-COMPETE X 4000 SHARES) WAS CHARGEABLE TO TAX UNDER SECTION 28 (VA) OF THE ACT. THE SAID PROVISION READS AS FOLLOWS: ITA NO.2390&2474/MUM/2010(A.Y.2006-07) 3 28( VA ) ANY SUM WHETHER RECEIVED OR RECEIVABLE IN CASH OR KIND UNDER AN AGREEMENT FOR ( A ) NOT CARRYING OUT ANY ACTIVITY IN RELATION TO ANY BUSINESS; OR ( B ) NOT SHARING ANY KNOW-HOW PATENT COPYRIGHT TRA DE-MARK LICENCE FRANCHISE OR ANY OTHER BUSINESS OR COMMERCIAL RIGHT OF SIMILAR N ATURE OR INFORMATION OR TECHNIQUE LIKELY TO ASSIST IN THE MANUFACTURE OR PR OCESSING OF GOODS OR PROVISION FOR SERVICES: PROVIDED THAT SUB-CLAUSE ( A ) SHALL NOT APPLY TO ( I ) ANY SUM WHETHER RECEIVED OR RECEIVABLE IN CASH OR KIND ON ACCOUNT OF TRANSFER OF THE RIGHT TO MANUFACTURE PRODUCE OR PROCESS ANY ARTICLE OR THING OR RIGHT TO CARRY ON ANY BUSINESS WHICH IS CHARGEABLE UNDER TH E HEAD CAPITAL GAINS; ( II ) ANY SUM RECEIVED AS COMPENSATION FROM THE MULTIL ATERAL FUND OF THE MONTREAL PROTOCOL ON SUBSTANCES THAT DEPLETE THE OZONE LAYER UNDER THE UNITED NATIONS ENVIRONMENT PROGRAMME IN ACCORDANCE WITH THE TERMS OF AGREEMENT ENTERED INTO WITH THE GOVERNMENT OF INDIA. EXPLANATION. FOR THE PURPOSES OF THIS CLAUSE ( I ) AGREEMENT INCLUDES ANY ARRANGEMENT OR UNDERSTA NDING OR ACTION IN CONCERT ( A ) WHETHER OR NOT SUCH ARRANGEMENT UNDERSTANDING O R ACTION IS FORMAL OR IN WRITING; OR ( B ) WHETHER OR NOT SUCH ARRANGEMENT UNDERSTANDING OR ACTION IS INTENDED TO BE ENFORCEABLE BY LEGAL PROCEEDINGS; ( II ) SERVICE MEANS SERVICE OF ANY DESCRIPTION WHICH IS MADE AVAILABLE TO POTENTIAL USERS AND INCLUDES THE PROVISION OF SERVICES IN CON NECTION WITH BUSINESS OF ANY INDUSTRIAL OR COMMERCIAL NATURE SUCH AS ACCOUNTING BANKING COMMUNICATION CONVEYING OF NEWS OR INFORMATION ADVERTISING ENTE RTAINMENT AMUSEMENT EDUCATION FINANCING INSURANCE CHIT FUNDS REAL E STATE CONSTRUCTION TRANSPORT STORAGE PROCESSING SUPPLY OF ELECTRICAL OR OTHER ENERGY BOARDING AND LODGING;] 4. THE ASSESSEE SUBMITTED BEFORE THE AO THAT IT WA S ONLY A SHAREHOLDER HOLDING SHARES IN THE DAWN MILL CO. LTD. AND WAS N OT CARRYING ON ANY BUSINESS IN THE AREA OF TEXTILES OR OTHER ACTIVITY CARRIED ON BY THE SAID DAWN MILL CO. LTD. THE ASSESSEE SUBMITTED THAT THE PROV ISIONS OF SECTION 28(VA) IS APPLICABLE ONLY IN CASES WHEN A PERSON IN THE COURS E OF HIS BUSINESS RECEIVES ANY CONSIDERATION TOWARDS NOT INDULGING IN ANY COMP ETITIVE BUSINESS. THE ASSESSEE POINTED OUT THAT IT WAS NOT CARRYING OUT A NY BUSINESS AND THEREFORE PROVISIONS OF SECTION 28(VA) IS NOT APPL ICABLE. THE ASSESSEE ALSO SUBMITTED THAT RS.1161/- PER SHARE WAS NOTHING BUT AN ADDITIONAL CONSIDERATION RECEIVED FOR TRANSFER OF SHARES AND T HE SAME IS CHARGEABLE TO TAX UNDER SECTION 45 OF THE ACT. IN THIS REGARD TH E ASSESSEE POINTED OUT THE ITA NO.2390&2474/MUM/2010(A.Y.2006-07) 4 FINANCE ACT 2002 W.E.F. 1/4/2003 AMENDED CLAUSE(A) TO SUB-SECTION (2) OF SECTION 55 OF THE ACT WHEREBY RIGHT TO CARRY ON AN Y BUSINESS WHICH IS A CAPITAL ASSET AND WHEN THE SAME IS TRANSFERRED OR R ELINQUISHED THE COST OF ACQUISITION OF THE SAID CAPITAL ASSET WOULD BE NIL. THE AO HOWEVER REJECTED THE CONTENTION ON BEHALF OF THE ASSESSEE. HE HELD THAT THE CONSIDERATION RECEIVED IN RESPECT OF NON-COMPETE CLAUSE OF THE AG REEMENT FOR SALE OF SHARES WAS LIABLE TO BE TREATED AS BUSINESS INCOME UNDER S ECTION 28(VA) OF THE ACT. 5. ON APPEAL BY THE ASSESSEE THE CIT(A) HELD THAT T HE ASSESSEE RELINQUISHED ITS RIGHTS TO CARRY ON BUSINESS FOR 5 YEARS AND RECEIVED NON- COMPETE FEE. BY DOING SO THE ASSESSEE RELINQUISHED ITS RIGHTS TO CARRY ON BUSINESS AND NOT ANY ACTIVITY IN RELATION TO ANY BU SINESS. THE CIT(A) HELD THAT UNDER PROVISO (A) TO SEC.28(VA) OF THE ACT A NY SUM RECEIVED ON ACCOUNT OF TRANSFER OF RIGHT TO CARRY ON ANY BUSINESS IF I T IS CHARGEABLE UNDER THE HEAD CAPITAL GAINS ONLY THEN THE PROVISIONS OF SEC TION 28(VA) WERE APPLICABLE. THE CIT(A) THEREFORE HELD THAT ONLY THE PROVISION S OF SECTION 45 R.W.S. 55(2)(A) WILL APPLY TO THE CASE OF THE ASSESSEE AS HE HAD ONLY RELINQUISHED HIS RIGHT TO CARRY ON BUSINESS. THE RECEIPT OF NON-C OMPETE FEE WAS DIRECTED TO BE TAXED AS CAPITAL GAIN. THE ASSESSEE HAD PRAYED BEFORE CIT(A) THAT IN RESPECT OF THE RECEIPT REPRESENTING NON-COMPETE FEE NAMELY RS.46 44 000/- THE ASSESSEE SHOULD BE ALLOWED TAX RATE AT 10% BECA USE IT DID NOT OPT FOR BENEFIT OF INDEXATION UNDER SECOND PROVISO TO SEC.4 8 OF THE ACT AND BECAUSE THE RECEIPT OF NON-COMPETE FEE IS ALSO PART OF SALE CONSIDERATION FOR TRANSFER OF SHARES. WE MAY MENTION HERE THAT IF THE NON-COM PETE FEE IS TREATED AS NOT FORMING PART OF THE CONSIDERATION FOR SALE OF S HARES THEN THE CONSEQUENCE WILL BE THAT THE CAPITAL GAIN ON TRANSFER OF RIGHT TO CARRY ON BUSINESS(NON- COMPETE FEE) WILL COMPUTED BY ATTRIBUTING NIL COST AS COST OF ACQUISITION. WHEN THE COST OF ACQUISITION IS NIL THE QUESTION OF THE ASSESSEE AVAILING THE BENEFIT OF INDEXATION WOULD NOT ARISE. CONSEQUENTL Y THE RECEIPTS ON ACCOUNT OF NON-COMPETE FEE WILL BE CHARGED TO TAX AT 20%. IT IS BECAUSE OF THIS REASON ITA NO.2390&2474/MUM/2010(A.Y.2006-07) 5 THAT THE ASSESSEE PUT FORTH THE PLEA THAT THE RECEI PT ON ACCOUNT OF NON- COMPETE FEE SHOULD BE TREATED AS PART OF THE SALE C ONSIDERATION OF THE SHARES. THE CIT(A) DID NOT ACCEPT THIS PLEA OF THE ASSESSEE . 6. AGGRIEVED BY THE ORDER OF THE CIT(A) HOLDING THA T PROVISIONS OF SECTION 28(VA) WERE NOT APPLICABLE THE REVENUE HAS PREFERRE D THE PRESENT APPEAL BEFORE THE TRIBUNAL. 7. AGGRIEVED BY THE ORDER OF THE CIT(A) HOLDING THA T THE NON-COMPETE FEE IS NOT PART OF THE SALE CONSIDERATION FOR SALE OF SHARES THE ASSESSEE HAS PREFERRED THE PRESENT APPEAL BEFORE THE TRIBUNAL. 8. AT THE TIME OF HEARING OF THIS APPEAL IT WAS AGR EED BY THE PARTIES THAT IDENTICAL ISSUE HAD COME UP FOR CONSIDERATION BEFOR E THE TRIBUNAL IN THE CASE OF ACIT VS. ANR INVESTMENTS LTD. IN ITA NO.6230/M/0 9 AND ANR INVESTMENTS LTD. VS. ACIT IN ITA NO.6400/M/09 FOR A .Y 2006-07. IN THE ABOVE CASE WHICH RELATED TO ANOTHER SHAREHOLDER WHO SOLD SHARES OF M/S. DAWN MILL CO. LTD. UNDER AN IDENTICALLY WORDED SHAR E PURCHASE AGREEMENT CAME UP FOR CONSIDERATION BEFORE THE TRIBUNAL AND T HE TRIBUNAL HELD AS FOLLOWS: 9. THE FIRST ISSUE THAT WE SHOULD CONSIDER IS WHE THER THIS NON- COMPLETE CONSIDERATION WOULD FALL U/S. 28(VA). THE UNDISPUTED FACTS ARE THAT THE ASSESSEE IS AN INVESTMENT COMPANY. IT IS NOT IN THE BUSINESS OF MILLS. THUS THEORETICALLY THE ASSESSE E HAD ONLY A RIGHT TO CARRY ON THE SAME BUSINESS AS WHICH WAS BEING DONE BY M/S. DAWN MILL CO. LTD. THIS RIGHT IS GIVEN UP BY THE ASSES SEE BY AGREEING NOT TO UNDERTAKE OR COMMENCE OR CARRY ON EITHER DIRECTLY OR INDIRECTLY ANY BUSINESS OR ACT AS A CONSULTANT OR ADVISOR TO ANY E NTITY OR PERSON CARRYING ON ANY BUSINESS WHICH IS IN DIRECT COMPETI TION WITH THE BUSINESS OF THE COMPANY FOR A PERIOD OF FIVE YEARS. ON THESE FACTS WE FIND THAT THE ISSUE IS CLEARLY COVERED BY THE DECIS ION OF THE MUMBAI H-BENCH OF THE TRIBUNAL IN THE CASE OF MRS. HASPI A SPI BALSARA(SUPRA) WHEREIN IT IS HELD AS FOLLOWS: ADMITTEDLY THE ASSESSEE ON HER OWN WAS NOT CARRYIN G ON BUSINESS AND IT WAS THE COMPANY IN WHICH SHW WAS A ITA NO.2390&2474/MUM/2010(A.Y.2006-07) 6 SHAREHOLDER WHICH WAS CARRYING ON THE BUSINESS. TH US IT WAS EVIDENT THAT WHERE CAPITAL ASSET WAS IN THE NATURE OF RIGHT TO CARRY ON BUSINESS THEN THE SAME WOULD COME WITHIN THE AMBIT OF CAPITAL GAIN TAX. SECTION 28(VA) WOULD BE ATTRA CTED WHERE THE ASSESSEE WAS CARRYING ON BUSINESS AND NOT WHERE THE ASSESSEE ONLY HAD RIGHT TO CARRY ON BUSINESS IN THE FORM OF CAPITAL ASSET. FURTHER AS PER CIRCULAR NO.763 DATED 18/2/1998 BY THE FINANCE ACT 1997 THE CHARGEABLE TO TAX UNDER THE H EAD CAPITAL GAIN WOULD NOT BE TAXABLE AS PROFITS AND GAINS OF BUSINESS. THUS THE DIFFERENCE BETWEEN THE SALE CONSIDERATION AND TRUE VALUE OF SHARES WAS CHARGEABLE AS CAPITAL GAINS. 10. NO CONTRARY DECISION HAS BEEN BROUGHT TO OUR NO TICE BY THE LEARNED D.R. THUS RESPECTFULLY FOLLOWING THE SAME WE UPH OLD THE ORDER OF THE CIT(A) ON THE ISSUE WHERE THE NON-COMPETE FEE IN QU ESTION CAN BE BROUGHT TO TAX U/S. 28(VA) OR NOT. THE FIRST APPEL LATE AUTHORITY HAS RIGHTLY HELD THAT THE PROVISO TO SECTION 28(VA) WOU LD BE APPLICABLE. 11. IN THE RESULT THE REVENUES APPEAL IS DISMISS ED. 12. WE NOW COME TO THE ASSESSEES APPEAL. IN THE CASE OF TUCEMSEH INDIA PVT. LTD. THE DELHI SPECIAL BENCH OF THE TRIB UNAL WAS CONSIDERING THE CASE WHERE IN THE TERMS OF THE MOU AND AGREEMEN T IT WAS CLEAR THAT THE PARTIES HAD AGREED ON A TOTAL CONSIDERATIO N OF RS.52.5 CRORES AND IT WAS ALLOCATED BETWEEN THE ASSETS AND THE NON -COMPETE COVENANT. IT WAS A CASE WHERE WHIRLPOOL INDIA AGRE ED TO SELL ITS COMPRESSOR BUSINESS TO THE ASSESSEE WHICH IS A WHO LLY OWNED SUBSIDIARY OF TUCEMSEH USA. THE CONSIDERATION WAS SPLIT. AN AMOUNT OF RS.49.85 CRORES WAS PAID FOR LAND BUILDI NG INVENTORIES ETC. A SEPARATE NON-COMPLETE AGREEMENT WAS ENTERED INTO A CONSIDERATION OF RS.2.65 CRORES. THE ISSUE BEFORE THE SPECIAL BE NCH WAS WHETHER THE SAID PAYMENT FOR THE NON-COMPETE WAS CAPITAL OR REV ENUE EXPENDITURE. THE HONBLE SPECIAL BENCH HELD THAT AS THE NON- COM PETE AGREEMENT AS PART AND PARCEL OF THE ENTIRE TRANSACTION OF ACQ UISITION OF BUSINESS IT IS CAPITAL EXPENDITURE. IT HELD THAT THE INCURR ING OF THE EXPENDITURE BROUGHT AN ENDURING BENEFIT FOR THE ASSESSEE. THE LD. COUNSEL RELIES ON THIS DECISION FOR THE PROPOSITION THAT THE NON- COMPETE FEE RECEIVED IS A CAPITAL RECEIPT AND THAT IT IS A PART AND PAR CEL OF THE TRANSFER PRICE OF THE SHARES. 13. ON A CAREFUL CONSIDERATION OF THIS DECISION W E ARE OF THE HUMBLE OPINION THAT THE FACTS ARE DIFFERENT FROM THE PRESE NT CASE. THE SPECIAL BENCH WAS CONSIDERING A CASE OF TRANSFER OF ALL THE SSETS OF A CONCERN AS A GOING CONCERN. IN THE CASE ON HAND WHAT IS T RANSFERRED IS ONLY SHARES. THE CONSIDERATION FOR TRANSFER OF SHARES I S MENTIONED VERY CLEARLY IN CLAUSE D(A). CERTAIN ADDITIONAL CONSIDE RATION HAS BEEN PAID ITA NO.2390&2474/MUM/2010(A.Y.2006-07) 7 IN CLAUSE 12 AS NON-COMPETE FEE. A PLAIN READING OF CLAUSE D(A) CLAUSE 2 AND CLAUSE 12 DOES NOT SUGGEST THAT THE AM OUNT PAID AS NON- COMPETE FEE IS TOWARDS COST OF SHARE. THUS WE UPH OLD THE ORDER OF THE FIRST APPELLATE AUTHORITY THAT THE CONSIDERATION RE CEIVED AS NON- COMPETE FEE IS FOR TRANSFER OF RIGHT TO COMPETE WHI CH IS A SEPARATE CAPITAL RECEIPT. 9. IN VIEW OF THE ABOVE WE DO NOT FIND MERITS IN TH E APPEAL BY THE REVENUE AS WELL AS THE ASSESSEE. RESPECTFULLY FOLLOWING TH E DECISION OF THE TRIBUNAL REFERRED ABOVE BOTH THESE APPEALS ARE DISMISSED. 10. IN THE RESULT BOTH THE APPEALS ARE DISMISSED. ORDER PRONOUNCED IN THE OPEN COURT ON THE 9 TH DAY OF MARCH 2011. SD/- SD/- (RAJENDRA SINGH) (N.V.VASUDEVAN) ACCOUNTANT MEMBER JUDICIAL MEMBER MUMBAI DATED. 9 TH MARCH.2011 COPY TO: 1. THE APPELLANT 2. THE RESPONDENT 3 . THE CIT CITY CONCERNED 4. THE CIT(A)- CONCERNED 5. THE D.RC BENCH. (TRUE COPY) BY ORDER ASST. REGISTRAR I TAT MUMBAI BENCHES MUMBAI. VM. ITA NO.2390&2474/MUM/2010(A.Y.2006-07) 8 DETAILS DATE INITIALS DESIGNATION 1 DRAFT DICTATED ON 2/3/2011 SR.PS/PS 2 DRAFT PLACED BEFORE AUTHOR 3/3/2011 SR.PS/PS 3 DRAFT PROPOSED & PLACED BEFORE THE SECOND MEMBER JM/AM 4 DRAFT DISCUSSED/APPROVED BY SECOND MEMBER JM/AM 5. APPROVED DRAFT COMES TO THE SR.PS/PS SR.PS/PS 6. KEPT FOR PRONOUNCEMENT ON SR.PS/PS 7. FILE SENT TO THE BENCH CLERK SR.PS/PS 8 DATE ON WHICH THE FILE GOES TO THE HEAD CLERK 9 DATE OF DISPATCH OF ORDER