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Smt. A Rajya Lakshmi, Visakhapatnam and others Versus ITO, Ward-3 (2) , Visakhapatnam and others

2015 (7) TMI 1021 - ITAT VISAKHAPATNAM

Consideration towards sale of shares received - Addition to income - Held that:- The inference drawn by the tax authorities that the letter was acted upon by the parties and the amount of ₹ 2.00 crores represented the value of 7.5% of the share holding is not supported by any material. On the contrary, a combined reading of MOU and the letter written by Shri V. Prabu Kishore would show that there is a possibility to infer that the amount of ₹ 2.00 crores was a consolidated amount agr .....

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Learned CIT(A) was not justified in treating the amount of ₹ 2.00 crores as the sale consideration towards the shares transferred by the assessees. Since we have held that the surrounding circumstances show that the MOU / letter was not given effect to and the amount of ₹ 2.00 crores does not represent the sale value of shares alone, we do not find it necessary to deal with the question of actual receipt/payment or accrual.

We are unable to agree with the conclusions reac .....

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have filed separate appeals against a common order dated 30.12.2011 passed by the ld CIT(A), Visakhapatnam and they relate to assessment year 2007- 08. 2. Since the issues contested in these appeals are identical in nature and also arise out of common set of facts, both the appeals were heard together and are being disposed of by this common order, for the sake of convenience. 3. The solitary issue involved in these appeals is whether the ld CIT(A) was justified in confirming the order passed b .....

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m sold 40000 shares for a consideration of ₹ 10,00,000/- and Smt. A Rajyalakshmi sold 31000 shares, out of 35000 shares held by her, for a consideration of ₹ 7,75,000/-. Both the assessees sold the shares to a person named Shri V Prabhu Kishore, who is the Managing Director of VMPL. It is also pertinent to note that Shri A. Janakiram was also one of the directors of M/s VMPL. Both the parties declared long term capital gain arising from the sale of the shares in the returns filed by .....

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onsolidated sum of ₹ 2 corres (Rupees two crores only) towards the value of your 7.5% share holding in M/s. Varun Motors Pvt Ltd. The above said ₹ 2 crores shall be paid by me to you at the time of your daughter Ms Divya s wedding, as and when the wedding takes place. Further, I have agreed to pay you and your wife Mrs Laxmi a sum of ₹ 50,000/- (Rupees fifty thousand only) each every month for your family comfort level with effect from 1.5.2006 until I pay your daughter as said .....

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regarding share transfer. Please explain. Ans. I have sold my shares to Mr V. Prabhu Kishore, MD M/s. Varun Motors Pvt Ltd., for ₹ 10 lakhs received by Cheque No.103893 dated 9.6.2006 of M/s. Varun Motors Pvt Ltd., towards sale consideration of my 40000 shares which is deposited again in M/s. Varun Motors Pvt Ltd., on 9.6.2006 as a loan. Q. 21- What is the reference of two crores mentioned by Mr V Prabhu Kishore in letter dated 17.4.2008. Ans:- It is a commitment given by Mr V. Prabhu Kis .....

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/- as consideration against this transfer of 7.5% share holding which was again given back by us to M/s. Varun Motors Pvt Ltd., as loan. Q.7- Why did you take a letter from Mr V. Prabhu Kishore regarding the transfer of 7.5% shares and why did Mr V. Prabhu Kishore mention that ₹ 2 crores is the consideration to be paid against his transfer of 7.5% shareholding. Ans: Generally, Mr V. Prabhu Kishore is very cautious and systematic. This ₹ 2 crores is a gift to be received and has no re .....

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8377; 10,00,000/- received by Shri Janakiram) is assessable as capital gain on accrual basis, even though, the sale consideration was not paid on that date. Accordingly, he assessed the amount of ₹ 1.90 crores in the hands of Shri A. Janakiram. 9. In the hands of Smt. A Rajyalakshmi, the Assessing Officer assessed a sum of ₹ 1 crore as long term capital gain, which was calculated at 50% of the amount of ₹ 2 crores referred to in the letter found during the course of search. 10. .....

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ocated between Sri A Janakiram and Smt. A Rajyalakshmi in proportion to number of shares transferred by them i.e. in the ratio of 40,000 : 31,000. Aggrieved by the order passed by the ld CIT(A), both the assessees have filed appeals before us. 11. The Learned A.R submitted that the dispute has arisen on the basis of the letter written by Shri V. Prabhu Kishore, the Managing director of M/s Varun Motors (P) Ltd to Shri Janakiram. He submitted that the letter was given in connection with an agreem .....

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proceeding and also during the course of statement taken from him subsequently within a period of less than a month. The assessee Shri Janakiram had clearly stated in his statements that the impugned amount of ₹ 2.00 crores was not related to the value of shares and it was agreed to be given by Shri V. Prabhu Kishore to meet the marriage expenses of his daughter. He has further stated that he has received a sum of ₹ 10.00 lakhs only on transfer of 40,000 shares. 12. The Ld A.R submi .....

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videnced by the answer given by him to Q. No.24 and 25. In reply to those questions, he has admitted about the existence of unaccounted income and agreed to offer the same. The said admission of unaccounted income and the reply of the assessee with regard to the amount of ₹ 2.00 crores, according to Learned A.R, show the bona fides of the assessee, i.e., according to Learned A.R, Shri Janakiram would have admitted undisclosed income, if any, arising on transfer of shares. Since the assesse .....

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t have any connection with the sale of shares. The Learned A.R submitted that the said clarification can be considered as retraction of the earlier statement, in which case, the revenue should not place reliance on the earlier statement. In this regard, the Ld A.R placed reliance on the decision rendered by the Hon ble Supreme Court in the case of Vinod Solanki Vs. Union of India & Anr (Civil appeal No.7407 of 2008 dated 18-12-2008) and submitted that the revenue cannot place reliance on the .....

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shares, but Shri V. Prabhu Kishore has written letter only to Shri Janakiram, meaning thereby there was no agreement between the three parties involved in the transaction. He further submitted that the revenue did not examine Shri V. Prabhu Kishore, though he also filed a letter before the Assessing Officer, wherein he has clearly stated that the amount of ₹ 2.00 crores was intended to be given to meet the expenses of marriage of daughter of Shri Janakiram. He has further clarified that t .....

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he letter were not acted upon. The Learned A.R further submitted that there is no evidence to show that the assessees were given the amount of ₹ 2.00 crores as stated in the letter. Accordingly he submitted that the absence of any other credible material clearly show that the contents of the letter should not be relied upon for making assessment. In this connection, the Ld A.R placed reliance on the decision rendered by the co-ordinate bench in the case of Grandhi Narendra Vs. ACIT (2010)( .....

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P High Court rendered in the case of CIT Vs. Naresh Kumar Agarwal (369 ITR 0171) to submit that the addition cannot be made on the basis of mere confessional statement. 15. The Learned A.R further submitted that Shri Janakiram and Shri Prabu Kishore had entered into a Memorandum of Understanding (MOU), as per which the assessees herein was barred from doing identical business. The AO has referred to the MOU in the assessment order. The impugned letter was written at that relevant point of time. .....

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o Shri Janakiram has been inferred by the tax authorities to be the gratuitous payment stated in the letter, which is totally incorrect. Accordingly he submitted that the above said facts also prove that the parties herein as well as Shri Prabhu Kishore did not act upon the letter cited above. 16. He further submitted that the conducting of marriage of daughter is an obligation of the parents. He submitted that the letter has stated that the impugned amount of ₹ 2.00 crores was to be paid .....

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sments in the hands of both the assessees on the basis of a letter, which was not acted upon by the parties. 18. On the contrary, the Ld D.R submitted that the letter written by Shri V. Prabu Kishore clearly states that the amount of ₹ 2.00 crores is committed towards the value of 7.5% share holding held by the assessees in VMPL. He submitted that the surrounding circumstances would show that the said letter was actually acted upon by the assessees and Shri V. Prabu Kishore. He submitted t .....

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nt of payment of sale consideration to a future date would not invalidate the sale transaction. In this connection, the Ld D.R invited our attention to section 5 of the Sale of Goods Act, 1930, which reads as under:- 5. Contract of sale how made:- (1) A contract of sale is made by an offer to buy or sell goods for a price and the acceptance of such offer. The contract may provide for the immediate delivery of the goods or immediate payment of the price or both, or for the delivery or payment by .....

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rdingly the Learned D.R submitted that the tax authorities are justified in assessing the capital gain on accrual basis. 19. The Ld D.R further submitted that assessees as well as Shri V. Prabu Kishore has not disowned the letter. Though the assessees have transferred 71,000 shares out of 75,000 shares, the Learned CIT(A) has observed that the balance quantity of 4000 shares have been retained only to ensure the receipt of ₹ 2.00 crores stated in the letter. Hence the contents of the lette .....

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d in the subsequent statement, he has changed his version and stated that the same represented gift agreed to be given by Shri V. Prabu Kishore. The Learned D.R the second statement was mere an afterthought. He submitted that there was no necessity to state about the gift in the letter written for a business transaction. He further submitted that there was no necessity to write a separate letter to Smt. A Rajyalakshmi, since she was the spouse of Shri Janakiram and hence his decision should be a .....

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akiram is a Director of M/s. Varun Motors Pvt Ltd., and he, along with his wife, held 75000 shares of M/s. Varun Motors Pvt Ltd., which appears to be 7.5% of the total shareholding of the company. In the above said letter, Sri V Prabhu Kishore has promised to pay a consolidated sum of ₹ 2 crores towards value of 7.5% shareholding in M/s. Varun Motors Pvt Ltd. The said promise has been interpreted by the revenue authorities to mean that the value of 7.5% of shareholding is equivalent to  .....

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ncern Varun Motors, dealing in Bajaj Auto Ltd belonging to Sri V Prabhu Kishore will continue to be exclusive and any future business opening provided by Bajaj Auto Limited will be dealt exclusively by proprietory concern M/s. Varun Motors Only. Since, Sri V Prabhu Kishore is the key person for joint business venture of Mr Janaki Ram and Sri V Prabhu Kishore, in the event of any difference of opinion or dispute, Mr Prabhu Kishore s word shall be the final word i.e. Sri V Prabhu Kishore will have .....

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he Assessing Officer himself accepts that the amount of ₹ 2.00 crores was promised to be given for surrendering his interests as well as for not starting his own business, i.e., as non - compete fee. 23. The MOU referred to in the assessment order and the letter written by Shri Prabu Kishore appear to be related to a common agreement reached between the parties and the observation made by the Assessing Officer also vindicates the said view. The main contention of the assessee is that the t .....

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owever, as contended by the assessee, the tax authorities have not brought any material on record to corroborate the amount of ₹ 2.00 crores as representing the value of 7.5% of the share holding. In this regard, it is pertinent to note that the valuation of shares is normally done in a scientific manner considering various factors like the book value of shares, past financial performance, future earning potentials etc. In the case of listed companies, the market value of shares could be e .....

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shown by the tax authorities that such an exercise was carried out by the assessees/ Prabhu Kishore. Even in the search operations also, no material relating to valuation of shares was seized. Further the tax authorities have not brought any material on record to show that the value of 7.5% of share holdings in M/s. Varun Motors Pvt Ltd. could be ₹ 2.00 crores. We notice that the Learned CIT(A) has observed that the market price of shares of Pvt Ltd Company would be much more than the book .....

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g found in a piece of paper, if not accepted by the assessee, should be corroborated with other materials. In the instant case the tax authorities have not brought any material on record to ascertain intrinsic value of shares of M/s. Varun Motors Pvt Ltd., in order to corroborate the amount of ₹ 2 crores, which was claimed to be the sale consideration of 75000 shares and hence, we are of the view that the inference drawn by the tax authorities that the amount of ₹ 2 crores actually r .....

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n for a share value unless it is combined with some other rights of intangible nature. We have also noticed that the MOU cited above, in fact, creates a non-compete right in favour of Sri V Prabhu Kishore. In the letter written by Shri Prabu Kishore, he has used the expression consolidated sum and the word consolidate usually means to unite into one or to merge . Accordingly, it is possible to infer that the amount of ₹ 2.00 crores represented a consolidated amount towards the value of sha .....

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that the MOU was given effect to by the parties thereto. According to the MOU, Shri A. Janakiram shall not start independent business and he can do the business jointly with Prabu Kishore. According to the ld A.R., Sri A. Janakiram continues to offer his services to M/s. Varun Motors Pvt Ltd as done earlier to the MOU and accordingly it was submitted that the letter was not given effect to. This fact, in our view, supports the case of the assessee that the MOU / letter was not given effect to. .....

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e gratuitous payment mentioned in the letter does not appear to be correct. The observations of the Learned CIT(A) that the assessee Shri Janakiram has preserved the letter with the intention to enforce the same is also an inference drawn by him, when both Janakiram and Shri Prabu Kishore has offered explanations about the letter. Further, it was seen that the assessees have not transferred the entire 75,000 shares (i.e., 7.5% of the share holding) as stated in the letter, but only 71,000 shares .....

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