TMI Blog2014 (12) TMI 857X X X X Extracts X X X X X X X X Extracts X X X X ..... court or Revenue stepping into the arm chair of the assessee and the SWC Group for splitting the amounts between capital gains and Section 28(ii)(a) – in 2012 (1) TMI 52 - SUPREME COURT OF INDIA [2012 (1) TMI 52 - SUPREME COURT OF INDIA] the position has been crystallized, when a majority shareholder transfers the said shareholding to another party - intrinsic to transaction of transfer of shares in a given case would include rights and entitlements which constitute and were themselves capital assets within the meaning of Section 2(14). The transaction was structured as a case of sale of shares and not an asset sale - Ownership of shares in such situations constitutes and partake character of a controlling interest - The controlling incident is an incident of controlling shares which flows out from the said holding - controlling interest, is not identifiable as a distinct asset independent of holding of shares - The control of the company resides in the voting power of the shareholders as the shares represent an interest of the shareholder and are made of various rights - Shares and the rights which emanate include the right of a shareholder in the character of controlling inte ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and in the circumstances of the case, the amount of ₹ 6.6 crores received by the assessee from SWC is on account of handing over management and control of CDBI* (which were earlier under the management and control of the assessee) to SWC as terminal benefit and is taxable u/s 28(ii) of the Income-tax Act or same is exempt as capital receipt being non competition fee by executing deed of covenant. (*correcting the typographical error, may be read as CDBL ) 2. The respondent-assessee, an individual, was the Chairman-cum-Managing Director of M/s Central Distillery and Breweries Ltd. (CDBL, for short), a public company listed on the Delhi Stock Exchange and the Bombay Stock Exchange. During the period relevant to the assessment year and earlier, CDBL was engaged in the business of manufacturing and sale of Indian Made Foreign Liquor (IMFL, for short) and beer. The respondent-assessee along with his family members, i.e. wife, son, daughter in law and two daughters held 1,86,019 shares, constituting 57.29% of the paid-up equity share capital of CDBL. 3. M/s Shaw Wallace Company Group (SWC Group, for short), a giant in liquor business in comparison to CDBL, offered and p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ise of a profession. In such cases, value of the benefit or perquisite, whether convertible into money or not, is chargeable to tax as income under the head of Profits and gains of business or profession . The present event would not be a case covered by clause (iv) to Section 28 of the Act as the provision does not apply when the payment is monetary. What is taxable under Section 28(iv) of the Act is the value of benefit or perquisite, whether convertible in money or not, and not the monetary amount itself, which has been received. It is highly debateable whether the assessed was carrying on a profession. 8. Section 28(ii) of the Act, however, requires interpretation and examination, and the same is accordingly reproduced below:- 28. The following income shall be chargeable to income-tax under the head Profits and gains of business or profession , xxx (ii) any compensation or other payment due to or received by (a) any person, by whatever name called, managing the whole or substantially the whole of the affairs of an Indian company, at or in connection with the termination of his management or the modification of the terms and conditions relating thereto; (b) ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ision under any other head would apply, would require adjudication. In the absence of any conflicting or contradictory provision, clauses (ii) to (vii) of Section 28 of the Act, shall be given full effect, regardless of the common or general perception that the said income falls under another head. This reasoning however, presupposes that the conditions and stipulations mentioned in clauses (ii) to (vii) are applicable and the income can be categorized and taxed under these clauses. We need not dilate on the said aspect in view of the authoritative pronouncement of the Supreme Court in Guffic Chem P. Ltd. versus Commissioner of Income Tax, Belgaum and Anr., [2011] 332 ITR 602. In the said case, the assessee had received consideration of ₹ 50 lacs as non-compete fee, under an agreement dated 31st March, 1997, i.e. assessment year 1997-98, consequent to transfer of a trademark. The seminal factual assertion that ₹ 50 lacs were received by the assessee towards non-compete fee was not disputed by the Assessing Officer. There was no lis on the nature and character of the consideration paid. The Supreme Court observed that there was a dichotomy between receipt of compensation ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hs from the decision of the third member, which read:- 15. ... The other plea of the learned D.R. was that amount in question was not for restrictive covenant as is alleged because business of CDBL was that of a company and it was not the business of the assessee. The execution of restrictive covenant was nothing but a colourable device adopted by the assessee in collusion with SWC group to avoid payment of due tax. The assessee executed two deeds on 13-4-1994 one for transfer of shares of assessee and his family members and other in respect of restrictive covenant. These two deeds, if read together, will go to show that amount in question was nothing but price paid by SWC group to assessee for handing over the management and control over CDBL that is why different clauses in the transfer deed of shares were mentioned by which the assessee and his family members agreed to hand over the management smoothly and to help in such smooth handing over. xxx 25. The assessee and his family members have shown in their returns of income for the year under consideration the amount of capital gain so earned on transfer of shares and AO has accepted the capital gain so shown by the a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to such cases alone. Sub-clause (a) to clause (ii) of the said Section is clear, plain and unambiguous. It will have to be given full effect to, and it would be incorrect to restrict the said clause only to termination of agency or modification of terms and conditions of agency which was being undertaken by the earlier. The word agency does not find mention in sub-clause (a) of clause (ii) to Section 28 of the Act. Sub-clause (c) of Clause (ii) to Section 28 of the Act relates to compensation or other payment received in connection with termination of agency or modification of the terms and conditions. Thus, sub-clause (a) of clause (ii) to Section 28 of the Act would be applicable if we hold that the payment of ₹ 6.60 crores was towards the termination of management or modification of terms and conditions relating thereto. 15. The reasoning given by the third member of the Tribunal records that it was an undisputed position that respondent assessee was the Chairman cum Managing Director of CDBL since 1960 and had 35 years of experience. In paragraph 23, the third member has recorded that the first MOU dated 13th April, 1994 states that the respondent assessee and his fa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... a on 31st of October, 1994. The third member of the Tribunal opined:- 27. The perusal of the above clause shall show that it is self imposed restriction on assessee and such deed in legal parlance is treated as restrictive covenant. There had been plethora of law on the point as to what will be the nature of such amount as to whether it will be capital receipt or will be revenue receipt. Ordinarily as laid down by Their Lordships of Privy Council in the case of Shah Wallace Co. (AIR 1932 P.C. 138) compensation for loss of office is to be recorded as a capital receipt. The legislation in its wisdom brought section 10(5A) w.e.f. 1-4-1955 wherein it was provided that payment received for termination of office would be the income from business and profession. It is undisputed fact that provision of Section 28(ii)(a) of the present Act are the same which were U/s 10(5A) of the Income-tax Act, 1922. 17. The aforesaid paragraph would indicate that this was not the real and quintessential controversy. Statements and wordings of the two MOUs were known but the central issue in controversy was whether description of ₹ 6.60 crores as non compete fee was binding and unalter ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t of ₹ 6.6 crores. To argue that this amount was quite big and not in consonance with the amount of salary and other remuneration being received by the assessee from CDBL and other concerns is no criteria to take it as exorbitant amount being paid as it is perception of SWC group. What-ever they thought fit they did and income-tax authorities have no business to challenge their perception unless they bring on record anything to show that SWC group and assessee were in collusion to defraud them. No such evidence or material came on record to show that there had been any collusion in between assessee and SWC group. All these facts completely go in favour of assessee and law also is towards the side of assessee. The above deal was completely a restrictive covenant executed by assessee for a consideration and that consideration is to be treated as capital receipt as laid down by Apex Court and other High Courts as well as by different benches of the tribunal. 35. It was also argued by the learned D.R. that there is no penalty clause in the alleged restrictive covenant as in case assessee indulges in the said business, .what was the remedy available to SWC, group and learned J. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ly recorded that non-compete fee payment was a sham and a fa ade to avoid payment of legitimate taxes. Thus, the Revenue had questioned and challenged reality of the taxable event as declared. Price per share quoted in the exchanges would not necessarily be the true price of a transaction for purchase of majority shares to acquire controlling interest in a company, which is your competitor. We have elaborated and tortuously commented on the said controversy later, but our comments at this place are necessary as question of deceit and subterfuge when answered with reference to the wordings of the documents would in many a case be a decrepit and tutored finding. It would be a credulous and simplistic determination. This question has been again dealt with and examined below, but first we deem it appropriate to notice and record the findings of the assessing officer who disbelieved the taxable event as declared, i.e. non compete fee, recording the following reasons:- (1) The respondent assessee in his letter dated 26th March, 1998, had stated that the SWC Group had gained substantial commercial advantage by sale of CDBL as their turnover increased from ₹ 9.7 crores in accoun ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... owing decisions:- a) Commissioner of Wealth Tax, Gujarat-II, Ahmedabad versus Arvind Narottam, [1988] 173 ITR 479 (SC), b) T.V. Sundaram Iyengar Sons (P.) Ltd. versus Commissioner of Wealth Tax, [1969] 72 ITR 607 (Mad.), c) Union of India Anr. versus Azadi Bachao Andolan Anr., [2003] 263 ITR 706 (SC), d) Banyan and Berry versus Commissioner of Income Tax, [1996] 222 ITR 831 (Guj.), e) Vodafone International Holdings B.V. versus Union of India, [2012] 341 ITR 1 (SC). 22. There is case law which holds that when the document is plain and clear, and when the legitimacy and genuineness of the document is not in question there is no scope to ignore the legal character of the transaction. The right of the assessed to choose a legitimate taxable event must be respected. However, in the present case, there are two MOUs which were executed on the same day and deception and maladroit trickery is alleged. The facts mandated a more comprehensive and thorough examination. The first MOU was for transfer of 57.29% of paid-up equity share capital in CDBL which was considerably large company having about 350 employees and manufacturing IMFL and beer. No doubt, market price of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... had observed:- Now, we shall proceed to examine the validity of those grounds that appealed to the learned judges. It is true that the apparent must be considered real until it is shown that there are reasons to believe that the apparent is not the real. In a case of the present kind a party who relies on a recital in a deed has to establish the truth of those recitals, otherwise it will be very easy to make self-serving statements in documents either executed or taken by a party and rely on those recitals. If all that an assessee who wants to evade tax is to have some recitals made in a document either executed by him or executed in his favour then the door will be left wide open to evade tax. A little probing was sufficient in the present case to show that the apparent was not the real. The taxing authorities were not required to put on blinkers while looking at the documents produced before them. They were entitled to look into the surrounding circumstances to find out the reality of the recitals made in those documents. 24. The reasoning given by the Tribunal lays emphasis that there were two separate MOUs and the respondents being two competing businessmen were entitle ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eously executed they have the same effect for all purposes such as are relevant to this case as if they were one deed. Each is executed on the faith of all the others being executed also and is intended to speak only as part of the one transaction, and if one is seeking to make equities apply to the parties they must be equities arising out of the transaction as a whole. It is not open to third parties to treat each one of them as a deed representing a separate and independent transaction for the purpose of claiming rights which would only accrue to them if the transaction represented by the selected deed was operative separately. In other words, the principles of equity deal with the substance of things, which in such a case is the whole transaction, and not with unrealities such as the hypothetical operation of one of the deeds by itself without the others. 25. On the question of interpretation of documents, the opinion of Lord Hoffmann in Investors Compensation Scheme Ltd. versus West Bromwich Building Society [1998] 1 All ER 98 (HL), records the following five principles as the guiding rules:- (1) Interpretation is the ascertainment of the meaning which the document wou ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Antaios Compania Naviera S.A. v. Salen Rederierna A. B. [1984] 3 All ER 229 at 235; [1985] 1 AC 191 (HL) at page 201. 26. Wigmore on Evidence, 1981, Vol-9, para 2461, agrees that there is a paradigm shift in the interpretation principles relating to documents and that there is a progress from stiff and superstitious formalism to flexible rationalism. Contractual interpretation must ascertain the intention of the parties. The courts must try to ascertain this and not arrive at a meaning of the contract which is at variance with their actual intention. When contrive and camouflage is adopted, the Courts must aim and strive to find out the true intention by looking at the genesis of the agreement, the context and the surrounding circumstances as a whole. Common sense cannot be given a go by. The meaning and intent of the transaction cannot be at variance with the actual intent. 27. In Sundram Finance Ltd. versus State of Kerala Anr., AIR 1966 SC 1178, it was held:- 24. The true effect of a transaction may be determined from the terms of the agreement considered in the light of the surrounding circumstances. In each case, the Court has, unless prohibited by statute, power t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nder which the lender is given the license to seize the goods. Thus, in Sundram Finance Ltd. (supra), a matter relating to sales tax, it was observed that true nature of the transaction or terms of the agreement may be determined from the surrounding circumstances and in each case, the court unless prohibited by the statute, has the power to go behind the document and determine the nature of the transaction whatever be the form of the document. The document must be looked at, as only a part of the evidence and the court should look at the other parts, i.e. surrounding circumstances to ascertain the actual truth. The reality must be ascertained to determine the nature of transaction. This would reveal the true nature and character. 28. In Lachminarain Madan Lal versus CIT, West Bengal (1972) 86 ITR 439 (SC), a matter relating to income tax, it was held that mere existence of an agreement between assessee and its agents and receipt of commission etc., would not bind the Assessing Officer to hold that the payment was exclusively and wholly for assessee s business for it is open to the Assessing Officer to consider relevant facts and determine whether the commission said to have ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . Before us, it was contended on behalf of the Revenue that Union of India v. Azadi Bachao Andolan [(2004) 10 SCC 1] needs to be overruled insofar as it departs from McDowell and Co. Ltd. v. CTO [(1985) 3 SCC 230] principle for the following: (i) Para 46 of McDowell judgment [(1985) 3 SCC 230] has been missed which reads as under: (SCC p. 255) 46. On this aspect Chinnappa Reddy, J., has proposed a separate opinion with which we agree. (i.e. Westminster [IRC v. Duke of Westminster, 1936 AC 1 (HL)] principle is dead). (ii) That, Azadi Bachao [(2004) 10 SCC 1] failed to read paras 41-46 of McDowell [(1985) 3 SCC 230] in entirety. If so read, the only conclusion one could draw is that the four learned Judges speaking through Misra, J. agreed with the observations of Chinnappa Reddy, J. as to how in certain circumstances tax avoidance should be brought within the tax net. (iii) That, subsequent to McDowell [(1985) 3 SCC 230], another matter came before the Constitution Bench of five Judges in Mathuram Agrawal v. State of M.P. [(1999) 8 SCC 667], in which Westminster [1935 All ER Rep 259 (HL)] principle was quoted which has not been noticed by Azadi Bachao [(2004) 10 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... (1981) 1 All ER 865 (HL)] lays down the principle of statutory interpretation rather than an over-arching anti-avoidance doctrine imposed upon tax laws. 66. Furniss v. Dawson [(1984) 1 All ER 530 (HL)] dealt with the case of interpositioning of a company to evade tax. On facts, it was held that the inserted step had no business purpose, except deferment of tax although it had a business effect. Dawson [(1984) 1 All ER 530 (HL)] went beyond Ramsay [(1981) 1 All ER 865 (HL)]. It reconstructed the transaction not on some fancied principle that anything done to defer the tax is to be ignored, but on the premise that the inserted transaction did not constitute disposal under the relevant Finance Act. Thus, Dawson [(1984) 1 All ER 530 (HL)] is an extension of Ramsay [(1981) 1 All ER 865 (HL)] principle. 67. After Dawson [(1984) 1 All ER 530 (HL)] , which empowered the Revenue to restructure the transaction in certain circumstances, the Revenue started rejecting every case of strategic investment/tax planning undertaken years before the event saying that the insertion of the entity was effected with the sole intention of tax avoidance. In Craven v. White (Stephen)[(1988) 3 All ER ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... it held that on facts the inserted step had no business purpose other than deferment of tax and Dawson reconstructed the transaction not on the dictum that anything done to defer tax should be ignored but on the premise that inserted transaction did not constitute disposal under the relevant Finance Act. Hon ble the Chief Justice thereafter had no hesitation in recording that the tax authorities in England started rejecting every case of strategic investment/tax planning on the pretext that it amounted to and was with the object of evading tax. Noticing this ill-disposed effect, in Craven (Inspector of Taxes) versus White (Stephen) [1988] 3 All ER 495, it was held that the Revenue cannot start with the question as to whether the transaction was tax deferment or saving device but can apply the look at test to ascertain its true nature. Genuine strategic planning is acceptable and not abandoned. Thus, the judgment elucidates and explains the English judgments and their ratio. The majority judgment in McDowell s case (supra) was referred to hold that tax planning may be legitimate, provided it is within the framework of law, but colourable devices cannot be a part of tax planning an ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nd examine the real nature of the transaction in view of the authoritative pronouncement of the Supreme Court in Vodafone s case (supra) approving the view taken Azadi Bachao Andolan (supra) is not apposite and congruous. 32. In his concurrent judgment, K.S. Radhakrishnan, J. has elaborately examined the Indian and English decisions on the question of tax avoidance and tax evasion. The following observations of Lord Tomlin in Westminster s case (supra) was quoted:- Every man is entitled if he can to order his affairs so as that the tax attaching under the appropriate Acts is less than it otherwise would be. If he succeeds in ordering them so as to secure this result, then, however unappreciative the Commissioners of Inland Revenue or his fellow taxpayers may be of his ingenuity, he cannot be compelled to pay an increased tax. This so-called doctrine of the substance seems to me to be nothing more than an attempt to make a man pay notwithstanding that he has so ordered his affairs that the amount of tax sought from him is not legally claimable. 33. Lord Atkin dissented stating that the substance of the transaction was that what was being paid was remuneration. Thereaf ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f complex artificial structures by which, as if by the wave of a magic wand, the taxpayer conjures out of thin air, a loss, or a gain, or expenditure, or whatever it may, which otherwise would never have existed. K.S. Radhakrishnan, J. observed that this led to a debate, what is acceptable and unacceptable tax avoidance. In the said judgment reference is then made to IRC versus McGuckian [1977] BTC 346, MacNiven (H.M. Inspector of Taxes) versus Westmoreland Investments Ltd. [2003] 1 AC 311, Mercantile Business Finance Ltd. versus Mawson (Inspector of Taxes) [2005] 1 AC 684 (HL) and IRC versus Scottish Provident Institution [2004] 1 WLR 3172 and finally observed:- Above discussion would indicate that a clear-cut distinction between tax avoidance and tax evasion is still to emerge in England and in the absence of any legislative guidelines, there is bound to be uncertainty, but to say that the principle of Duke of Westminster has been exorcised in England is too tall a statement and not seen accepted even in England. The House of Lords in McGuckian and MacNiven, it may be noted, has emphasised that the Ramsay approach is a principle of statutory interpretation rather than an over ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ge his affairs so that his taxes shall be as low as possible and that he is not bound to choose that pattern which will replenish the treasury. The Revenue's stand that the ratio laid down in McDowell is contrary to what has been laid down in Azadi Bachao Andolan, in our view, is unsustainable and, therefore, calls for no reconsideration by a larger Bench. 37. It is, therefore, clear from the aforesaid observations that there is a difference in approach and ratio as expounded by S.H. Kapadia, CJI, and the legal ratio elucidated in the judgment of K.S. Radhakrishnan, J. The said difference though slight but is perceptible. Noticeably, K.S. Radhakrishnan, J. has also referred to need for legislation after referring to general and specific anti-avoidance rules in Australia and their existence in South Africa, China, Japan etc. 38. Thus, in Vodafone s case (supra) earlier decisions in McDowell (supra) and Azadi Bachao Andolan (supra) stand explained and elucidated. Demanding and complicated question of tax avoidance and tax evasion, form over substance and what are the powers of the Revenue/income tax authorities stand explicated and unravelled. The issue is vexed but to our be ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... expressions involves an element of tax planning. It would be hard to conceive of a situation where the assessed does not indulge to some sort of tax planning, be it tax mitigation, acceptable tax avoidance, abusive tax avoidance or tax evasion. Tax planning , being common to all situations, cannot be the distinguishing feature, but nature and character of the planning and its nexus with the transaction is decisive. 43. Tax mitigation in simple words would refer to a taxpayer taking advantage or benefit of a beneficent provision under the tax code and complying with the requisites to his lower the tax liability. In the words of Lord Nolan in CIR versus Willoughby [1997] 4 All ER 65, it is:- The hallmark of tax mitigation, on the other hand, is that the taxpayer takes advantage of a fiscally attractive option afforded to him by the tax legislation and genuinely suffers the economic consequences that Parliament intended to be suffered by those taking advantage of the option The aforesaid quote uses the expression economic consequences that Parliament intended which as per some, causes confusion and is self contradictory. However, the said criticism overlooks that if the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... If the taxpayer cannot show that he had an honest belief that he was not liable to tax or liable to a lower tax, then prima facie such conduct would fall within the ambit/scope of tax evasion. 45. Tax avoidance by elimination would mean the residual and surplus, after we exclude cases of tax mitigation and tax evasion. Tax mitigation and tax evasion are two end points. It is easier and more beneficial to follow this discernment to define tax avoidance, for the confines and bounds of tax mitigation and tax evasion are easier to decipher and define legally and also identify with some exactness in practice. (Refer Tax Avoidance, Tax Evasion Tax Mitigation by Philip Baker.) 46. It is equally important to distinguish and differentiate acceptable tax avoidance and abusive tax avoidance. The Supreme Court in CIT versus Raman (A.) Co. [1968] 67 ITR 11, at p.17 had observed:- Avoidance of tax liability by so arranging commercial affairs that charge of tax is distributed is not prohibited. A taxpayer may resort to a device to divert the income before it accrues or arises to him. Effectiveness of the device depends not upon considerations of morality, but on the operation of th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y on the chosen tax event. The Act per se, unless a provision so stipulates, does not restrict or curtail the right of choice. Tax is determined and gets crystallized on the tax event adopted by the assessee. For example, in Vodafone s case (supra), the assessed had several options and therefore, right to choose a particular tax event. As long as the choice is within the framework of law, the Assessing Officer cannot disturb the tax effect or liability, which is the consequence of the event. The choice of the assessee is not abrogated or invalidated. For example, a company has several legal options, and therefore, right to choose how to dispose of a capital asset, as in Vodafone s case (supra). Similarly, an assessee can opt for and has multiple options for raising debt to finance business expansion plans. The assessed may have several legally permissible alternatives to effect and divide the assets on partition. Such examples are numerous. The choice might result in mitigation of tax liability, but the tax effect would not classify or help us differentiate between tax avoidance and abusive tax avoidance. Any attempt to minimize or eliminate tax liability would not make the choice ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tion 2(22)(e), i.e. the principle of deemed dividend, Section 94 relating to dividend stripping, clubbing of income of minors, are few such provisions where the legislature has enacted specific anti-tax avoidance rules. It is the obligation and duty of the court/tribunal to apply the said provisions in terms of the legislative mandate. When a specific anti-tax avoidance section/rule is invoked, the court and the tribunal must look at and interpret the relevant provision to decipher whether the chosen tax event falls within the said provision and accordingly the tax consequences will apply. 54. A caveat, the aforesaid discussion does not examine and elucidate scope and ambit of Section 271(1)(c) of the Act. Conclusion and final findings. 55. In the context of Vodafone s tests, we would paraphrase the words of Lord Nicholls in MacNiven (Inspector of Taxes) versus Wesmoreland Investments Ltd. (2002) 225 ITR 612; the decision in Ramsay s case (supra) had not enunciated a new legal principle but reiterated the courts duty to determine the legal nature of the transaction and then relate the finding to the fiscal legislation. Thus, when there is one or a series or combination of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , whether this transaction or transfer could be bifurcated into separate transactions for sale of shares, controlling interest or transfer of assets. It was observed that intrinsic to transaction of transfer of shares in a given case would include rights and entitlements which constitute and were themselves capital assets within the meaning of Section 2(14) of the Act. In the said case, as in the present one, the transaction was structured as a case of sale of shares and not an asset sale. Ownership of shares in such situations constitutes and partake character of a controlling interest. The said controlling incident is an incident of controlling shares which flows out from the said holding. Controlling interest, therefore, is not identifiable as a distinct asset independent of holding of shares. The control of the company resides in the voting power of the shareholders as the shares represent an interest of the shareholder and are made of various rights. Shares and the rights which emanate include the right of a shareholder in the character of controlling interest and cannot be dissected. Control and management is a facet of controlling shares [See IRC versus Crossman (1936) 1 All ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the above items. The essential character of the transaction as an alienation cannot be altered by the form of the consideration, the payment of the consideration in installments or on the basis that the payment is related to a contingency ('options', in this case), particularly when the transaction does not contemplate such a split up. Where the parties have agreed for a lump sum consideration without placing separate values for each of the above items which go to make up the entire investment in participation, merely because certain values are indicated in the correspondence with FIPB which had raised the query, would not mean that the parties had agreed for the price payable for each of the above items. The transaction remained a contract of outright sale of the entire investment for a lump sum consideration [see: Commentary on Model Tax Convention on Income and Capital dated January 28, 2003, as also the judgment of this Court in the case of CIT (Central), Calcutta v. Mugneeram Bangur and Company (Land Deptt.), (1965) 57 ITR 299 (SC)]. Thus, we need to look at the entire Ownership Structure set up by Hutchison as a single consolidated bargain and interpret the transac ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ly unless otherwise provided by the statute. Of course, the Indian company law does not explicitly throw light on whether control or controlling interest is a part of or inextricably linked with a share of a company or otherwise, so also the Income Tax Act. In the impugned judgment, the High Court has taken the stand that controlling interest and shares are distinct assets. Control, in our view, is an interest arising from holding a particular number of shares and the same cannot be separately acquired or transferred. Each share represents a vote in the management of the company and such a vote can be utilised to control the company. Controlling interest, therefore, is not an identifiable or distinct capital asset independent of holding of shares and the nature of the transaction has to be ascertained from the terms of the contract and the surrounding circumstances. Controlling interest is inherently contractual right and not property right and cannot be considered as transfer of property and hence a capital asset unless the statute stipulates otherwise. Acquisition of shares may carry the acquisition of controlling interest, which is purely a commercial concept; and tax is levi ..... X X X X Extracts X X X X X X X X Extracts X X X X
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