TMI Blog2005 (9) TMI 248X X X X Extracts X X X X X X X X Extracts X X X X ..... the sale price of the shares for purposes of capital gains tax ought to have been taken at Rs. 258.89 per share as purposes of capital gains tax ought to have been taken at Rs. 258.89 per share as against Rs. 400 adopted by the authorities below. Various observations made by the authorities below in their respective orders while deciding the above issues are either factually incorrect or are legally untenable. Facts and the circumstances of the case and the evidence as produced before the authorities below had either been ignored or had not been appreciated properly." 3. The facts and circumstances giving rise to the aforesaid grounds of appeal are as follows. The assessee is assessed in the status of an HUF. It derives income from house property and other sources. During the previous year the assessee had sold 3,929 Nos. equity shares owned by it in a company by name M/s Groz Beckert Saboo Ltd. (hereinafter referred to as 'GBS Ltd.') and the capital gain on such transfer was declared in the return of income. The computation of long-term gain on transfer of shares declared by the assessee was as follows: Computation of Capital Gain Rs. Sale proceeds received ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... p filed an appeal before the Hon'ble Delhi High Court and also obtained an order of stay of operation of the order passed by the Company Law Board. It was under these circumstances that the Saboo Group and the SB Group reached an out of Court settlement by which the shares held by the Saboo Group were purchased by the SB Group. 6. A copy of the agreement dt. 21st Jan., 1993 between the members of the Saboo Group and the GB Group, dt. 21st Jan., 1993 is placed at page Nos. 206-225 of the assessee's paper book. The main terms and conditions of the agreement are that: Saboo Group was to receive a consideration of Rs. 400 per share inclusive of the amount towards accepting negative covenants and conditions restricting the groups' earning capacity subject to the following conditions imposed on the Saboo Group: (1) Giving up its right to receive dividend for the year ended 31st March, 1992 and subsequent years. (2) Sale of entire 40 per cent equity ownership to enable GB Group to take complete control without hindrance of M/s Groz Beckert Saboo Ltd. (3) Undertaking not to engage in any business similar to or competing with GB Group. (4) Not to engage any of the employees of G ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... negative covenants under the agreement for sale of shares and that such capital receipts were not chargeable to tax. The first plea of the assessee was that there were various restrictive covenants under the share transfer agreement dt. 21st Jan., 1993. According to the assessee, out of the total sale value of Rs. 400 per share, Rs. 100 per share will have to be allocated as consideration received by the assessee towards accepting negative covenants under the agreement of transfer of shares. In this regard, the assessee had filed the report of a chartered accountant M/s Vaish Associates wherein they have valued the shares only at a sum of Rs. 93.12 as per the break-up value of shares as on 31st March, 1993. According to the assessee though in law he was entitled to claim the entire difference between the sale consideration and the break-up value as given by the valuation report of the chartered accountant towards compensation received for accepting various negative covenants mentioned in the share purchase agreement, yet it had apportioned only Rs. 100 as consideration received for accepting various negative covenants under the share transfer agreement. It was further submitted b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... device adopted by the assessee to hoodwink the Department by reducing the incidence of taxation. The AO made a reference to the decision of the Hon'ble Supreme Court in the case of McDowell Co. Ltd. vs. CTO (1985) 47 CTR (SC) 126 : (1985) 154 ITR 148 (SC) in this regard. 11. With regard to the expenses of Rs. 41.11 claimed by the assessee on account of the legal expenses connected with the transfer of shares, the AO held that there was no evidence to show that the expenses in question had infact been incurred. The AO also referred to the fact that the litigation related to a total of 4,40,000 shares held by the Saboo Group. According to the AO, if the plea of the assessee were to be accepted, then the legal expenses of litigation would come to Rs. 2,60,08,400. In the opinion of the AO such huge expenditure for an out of Court settlement was unbelievable. The assessee filed a copy of the savings bank account in which consideration on sale of shares was actually realized only at Rs. 358.89 per share. According to the AO production of the bank account was not enough evidence regarding the claim of legal expenses. The AO also concluded that in any event the expenses cannot be said ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... should be treated as capital receipt. The action of the AO on this point is, therefore, confirmed." 13. Aggrieved by the order of the CIT(A), the assessee is in appeal before us. In this appeal two issues arise for consideration. (i) Whether sum of Rs. 100 out of the sale consideration of Rs. 400 per share as mentioned in the share transfer agreement can be said to be consideration paid by the purchasers towards the obligation to adhere to the various negative covenants set out in the aforesaid share purchase agreement? The incidental question that will arise while deciding this question is as to whether in the absence of specific bifurcation in the agreement for transfer of shares whether the assessee can make such bifurcation? In other words, whether consideration mentioned in the share transfer agreement was a composite consideration for transfer of shares as well as for performance of the various negative covenants set out in the said agreement? (ii) Whether the legal expenses incurred in connection with the legal proceedings before the Company Law Board as well as the Hon'ble Delhi High Court can be said to be expenditure incurred in connection with the transfer of shar ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Ltd. The intellectual property rights relating to the confidential information relating to GBS Ltd. was also not to be infringed by the Saboo group. 16. In the light of the aforesaid restrictive covenants, it cannot be said that the consideration of Rs. 400 per share as fixed in the agreement is only towards the value of the shares. This fact is also further confirmed by the report of the valuers M/s Vaish Associates, chartered accountants according to whom the break-up value of one share of GBS Ltd. as on 31st March, 1993 was only Rs. 93.12. As per the audited financial accounts of GBS Ltd. as on 31st March, 1992, the value of one equity share as per r. 1D of the WT Rules was also at Rs. 60.24 only. From the aforesaid facts it is clear that the fair value of one share of GBS Ltd., as on date of transfer was much lower than the consideration of Rs. 400 per share. In fact the fair value of one share was not even Rs. 100 per share. In those circumstances we are of the view that the assessee has on a very conservative estimate apportioned 25 per cent of the value of shares towards consideration payable for the obligations to be performed by it in the form of negative covenants und ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e of capital receipt". In Best Co.(P) Ltd.'s case the Supreme Court has held that "the compensation agreed to be paid was not only in lieu of giving up the agency but also for the assessee accepting a restrictive covenant for a specified period. As far as the loss of agency was concerned, it was only a normal trading loss and the income received on that account was only a revenue receipt. But, with reference to the loss on account of the restrictive covenant, after referring to the decision in Gillanders Arbuthnot Co. Ltd.'s case, the Supreme Court reiterated that the restrictive covenant was an independent obligation undertaken by the assessee not to compute with the new agent in the same field and that part of the compensation attributable to the restrictive covenant was a capital receipt, not assessable to tax". In Saraswathi Publicities case the Madras High Court has held that "the amount of consideration referable to the restrictive covenant was a capital receipt not liable to income-tax". Similar views have been expressed in the various other decisions relied upon by the learned counsel for the assessee. The law on this aspect is fairly well settled and suffice it to say ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r s. 28(va) of the Act. 20.1 As far as the claim of the assessee that a sum of Rs. 41.11 was expenditure incurred in connection with transfer of the shares we firstly notice that the AO has observed that there is no evidence regarding actual incurring of these expenses. The CIT(A) however, has merely held that these expenses related to litigation before the Company Law Board and Delhi High Court which took place prior to the transfer of shares and therefore, they cannot be said to be expenditure wholly and exclusively incurred in connection with the transfer of the shares. We are of the view that the conclusions arrived at by the CIT(A) are just and proper and does not call for any interference. 21. The learned counsel for the assessee has placed reliance on the decision in the case of CIT vs. Bengal Assam Investors Ltd. (1969) 72 ITR 319 (Cal). In the said case the expenditure in question was incurred in connection with proceedings for obtaining restriction of voting rights of shares and suits for cancelling special resolution, etc. In the present case, there is no dispute with regard to the title of the shares held by the assessee. He also referred to two decisions, one of th ..... X X X X Extracts X X X X X X X X Extracts X X X X
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