TMI Blog2023 (11) TMI 334X X X X Extracts X X X X X X X X Extracts X X X X ..... for a sum up to Rs. 40.00 crore for violation of the negative covenants without receiving any consideration there against in the first instance. Had the consideration of Rs. 85.79 crore been exclusively towards sale of shares, there was no question of the assessee accepting the obligation of indemnifying the buyer up to a sum of Rs. 40.00 crore for the violation of the negative covenants. It is thus graphically glaring that even though there is no separate mention of the consideration for the negative covenants, but they, forming an essential and integral part of the SSPA, do carry value, which is embedded in total consideration. It is the substance rather than the form of the SSPA, which should be looked into. It is ergo held that the consideration of Rs. 85.79 crore was not only for transfer of shares but also for accepting the negative covenants. We, therefore, jettison the contention advanced on behalf of the assessee that the entire consideration was towards transfer of shares. How it is taxable? - We find that para 14.5 of the JVA deals with the situation in which a shareholder agrees to purchase the shares of the company from another shareholder. This para states that: ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e assessee. The Pune Bench of Tribunal in M/s Cosmopolis Construction [ 2018 (9) TMI 1621 - ITAT PUNE] has held that no income from house property can result in respect of unsold flats held by the builder as stock in trade at the year-end. Insertion of sub-clause (5) to section 23 by the Finance Act, 2017 w.e.f. 01.04.2018, requiring determination of the ALV in respect of building and land appurtenant thereto which is held as stock in trade, is prospective and cannot apply to the assessment year 2015-16 under consideration. We, therefore, uphold the impugned order on this score. - Shri R.S. Syal, Vice President And Shri S.S. Viswanethra Ravi, Judicial Member For the Assessee : Shri Mihir Naniwadekar For the Revenue : S/Shri Keyur Patel CIT-DR and Ramnath P Murkende ORDER PER R.S. SYAL, VP : These two cross appeals one by the assessee and the other by the Revenue along with one Cross-objection by the assessee emanate from the order dated 19.11.2018 passed by the ld. CIT(A) in relation to the A.Y. 2015-16. 2. The first issue raised in the cross appeals is against treating the extent of sale consideration received on transfer of shares as Business i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d to be attributed to termination of management and non compete obligations. In the absence of SSPA specifying any consideration for non compete and termination of bundle of management rights, he held that 10% of the sale consideration should be treated as consideration for these. That is how, he held that Rs. 8.57 crore was to be treated as Business income and balance consideration towards sale of shares for computing long term capital gain. Both the sides have come up in appeal before the Tribunal on their respective stands. 4. We have heard the rival submissions and perused the relevant material on record. There is no dispute on the fact that the assessee received total consideration of Rs. 85.79 crore. He claimed this sum as consideration for transfer of shares resulting into long term capital gain. On the other hand, the AO canvassed the view that the entire consideration was in the nature of Business income chargeable to tax u/s 28(va). However, the ld. CIT(A) attributed 10% of the consideration to non-compete clause and termination of the management. Now, the moot question is to find out if the assessee received Rs. 85.79 crore only towards transfer of shares liable t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Precisely, this is a business carried on by the Indian company, whose shares were transferred by the assessee to the foreign company. It is thus explicit that the assessee agreed not to compete with the business of the Indian company for a period of two years. Article 7.6 is a `Non solicitation clause, which provides that the assessee shall not solicit the existing employees or consultants of the Indian company for a defined period. Article 7.7 is a `Non interference clause, which prohibits the assessee from causing or inducing or encouraging any existing customer or existing qualified supplier of the Indian company. Article 7.8 is a `Non disparaging clause. 6. An overview of the above clauses of the SSPA clearly transpires that the assessee received a sum of Rs. 85.79 crore not only for the transfer of shares but also for agreeing to the negative covenants of non compete, non disclosure, non solicitation etc. for a definite period. It is further corroborated from Article 3 of the SSPA, which states that the Purchaser (the foreign company) shall, in accordance with the terms of this Agreement, pay to the Seller (the assessee), a purchase price of Rs. 801.027077 per Sale Sha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... at the liability of the assessee to indemnify the Purchaser for violation of the negative covenants contained in Article 7 of the SSPA can extend up to a maximum of Rs. 40.00 crore (Rs. 150 million + Rs. 150 million + Rs. 100 million). No person will undertake the liability to indemnify the foreign company for a sum up to Rs. 40.00 crore for violation of the negative covenants without receiving any consideration there against in the first instance. Had the consideration of Rs. 85.79 crore been exclusively towards sale of shares, there was no question of the assessee accepting the obligation of indemnifying the buyer up to a sum of Rs. 40.00 crore for the violation of the negative covenants. It is thus graphically glaring that even though there is no separate mention of the consideration for the negative covenants, but they, forming an essential and integral part of the SSPA, do carry value, which is embedded in total consideration. It is the substance rather than the form of the SSPA, which should be looked into. It is ergo held that the consideration of Rs. 85.79 crore was not only for transfer of shares but also for accepting the negative covenants. We, therefore, jettison the co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... elied on the judgment of Hon ble Bombay High Court in Premier Automobile Ltd. vs. ITO Anr. (2003) 264 ITR 193 (Bom) to contend that when the business is transferred, chargeability arises in terms of section 50B. It is no doubt true that both the Hon ble High Courts have held as has been argued. 11. The AO/ld. CIT(A) have fully/partly taken shelter of section 28(ii)(a)/(va) to canvass their respective points of view. It thus becomes essential to mull over the prescription of the relevant parts of the section, as under: - 28. The following income shall be chargeable to income-tax under the head `Profits and gains of business or profession - (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; .. (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 profession; or (b) not sharing any know-how, pate ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rmination of management rights. 14. Now we turn to section 28(va), which embodies two elements, viz., (a) not carrying out any activity in relation to any business or profession; and (b) not sharing any know-how, patent, copyright, trade-mark, licence, franchise or any other business or commercial right of similar nature or information or technique likely to assist in the manufacture or processing of goods or provision for services. The first thing which is accentuated from this provision is that it brings within the ambit of `Business income , any sum paid for `not doing the specified things. Unlike, the usual business income, which is earned on `doing something, say, sale of goods or rendering of services etc., this provision taxes as business income a consideration for `not doing the specified things. But for their inclusion in this provision, any sum received for such `not doings , being a capital receipt, was not chargeable to tax. 15. When we examine all the relevant clauses of Article 7 of the SSPA, they symbolize only `not doings , that is, negative covenants. Articles 7.2.and 7.3 contain Confidentiality clause (prohibiting the assessee from sharing the Technical I ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n should be attributed to section 28(va), in our considered opinion, again does not merit acceptance. We have noted above that the SSPA is a consolidated agreement not only for accepting the negative covenants but also for the transfer of shares. Actual transfer of shares by the assessee to the foreign company is not denied. When the consideration in the agreement is a consolidated figure, the part relatable to transfer of shares cannot be covered u/s 28(va) by treating it also towards negative covenants, when in fact the assessee did transfer his shares also. In that scenario, the part of consideration relatable to transfer of shares needs to be considered for taxation under the head `Capital gains . 18. The decision in Sumeet Taneja (supra), relied by the ld. DR, does not support his case. The assessee in that case was holding 100% shares of the business which were transferred along with agreeing to non-compete. Cent percent transfer of shares led to the transfer of business. It was in that backdrop of the facts that the Hon ble High Court held that the assessee transferred its business as a whole. Right now, we are concerned with the facts wherein the assessee had only 51% sh ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e Hon'ble Supreme Court reversed it by holding that it was case of purchase of shares of a Non-resident, namely, CGP Investments by a Non-resident, namely, Vodafone International, Netherlands from another Non-resident, namely, Hutchison International, Hong Kong under an agreement which was entered outside India and hence no capital gains chargeable to tax in India arose in the hands of Hutchison International, Hong Kong. To neutralize the ratio of the judgment of Hon'ble Supreme Court in Vodafone International, the legislature stepped in and carried out certain statutory amendments, including altering the definition of capital asset u/s 2(14), the definition of transfer u/s 2(47) and insertion of Explanations (4), (5), (6) and (7) to section 9(1)(i). When we examine the factual matrix under consideration in the hue of the judgment in Vodafone International, it becomes overt that the facts of both the cases are poles apart. In that case, the question was whether the shares of the foreign company, deriving value from assets situated in India, would constitute capital asset in India so as to magnetize the chargeability in the hands of the non-resident transferor? In othe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... -E. If along with transfer of some capital assets, not resulting in transfer of business as a whole, the assessee undertakes some negative covenants, then consideration for the transfer of shares should be considered for computation of capital gain and for the negative covenants as chargeable under section 28(va) of the Act. If however, the capital asset under transfer is any right to manufacture, produce or process any article or thing or right to carry on any business, income is computed under the head `Capital gains by taking cost of acquisition of such right to manufacture etc. or right to carry on business u/s 55(2)(a) at Nil, unless the assessee or the previous owner paid some purchase price for acquiring such rights. In case the assessee transfers such right to manufacture etc. and also simultaneously accepts the negative covenant of non-compete, total consideration received is considered for computing capital gain u/s 45 without taking any recourse to the provisions of section 28(va) of the Act. This position is enshrined as the proviso to section 28(va). If however, an assessee accepts the negative covenant of non-compete along with the transfer of any capital asset such ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e as per the SSPA was Rs. 801.027. While referring to the letter dated 29.01.2015 of the foreign company addressed to Citi Bank NA, the ld. AR submitted that the price per share as per valuation guidelines was determined at Rs. 774 per share. He argued that the differential amount of Rs. 2.79 crore at the rate of Rs. 26.027 per share [Rs.801.027 minus Rs. 774] may be attributed to the negative covenants chargeable to tax u/s 28(va), as against the ld. CIT(A) assigning the value of Rs. 8.57 crore. This was strongly countered by the ld. DR. Referring to the Joint venture agreement dated 16.12.1996, the ld. DR submitted that Para 14 deals with Restriction on transfer of shares . While referring to para 14.5, he submitted that the sale of shares was required to be made on the basis of the Net Asset Value method. Drawing our attention towards the Valuation report submitted on behalf of the assessee, the ld. DR showed that the Valuer did not compute value of shares under the Net Asset Value method as was agreed under the JV Agreement. We find that para 14.5 of the JVA deals with the situation in which a shareholder agrees to purchase the shares of the company from another shareholder. T ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tments. This disallowance was echoed in the first appeal. 28. Having heard the rival contentions and perused the material on record, it is seen that the AO made the disallowance only towards rule 8D(2)(iii), which is 0.5% of the average value of investments. It is further borne out from para 30 of the assessment order that the average value of investments was computed by the AO considering only those securities which yielded exempt income and not all the investments. Considering the fact that the assessee had own capital more than the amount invested in securities yielding exempt income, the AO did not make any disallowance towards interest. In our opinion, no exception can be taken to the disallowance made and sustained u/s 14A. We, therefore, dismiss this ground of appeal. 29. The ld. AR submitted that the other grounds taken up in the assessee s appeal are either general or consequential, not requiring any separate adjudication. 30. The only other ground which survives in the appeal of the Revenue is against the deletion of addition of Rs. 92,159/- made by the AO towards deemed rent on vacant property. The assessee was having a proprietorship concern by the name and sty ..... X X X X Extracts X X X X X X X X Extracts X X X X
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