2009 (5) TMI 920 - AT - Income Tax

Assessee's Appeals Allowed: Deductible Expenses, Incorrect Value Attribution, Importance of Natural Justice

MRS. HAMI ASPI BALSARA Versus ASSISTANT COMMISSIONER OF INCOME-TAX, CIRCLE 12 (3), MUMBAI.

The Tribunal allowed the appeals filed by the assessee, concluding that the sale of shares took place in April 2005, the expenses incurred in connection ... Computation of capital gains - Transfer of shares - Extinguishment of rights - Share Purchase Agreement - Principle of Interpretation - Whether Share is a Immovable or movable Assests? - Revenue's contention is that on account of substantial extinguishment of rights in pursuance to share purchase agreement, the transfer took place on 27-1-2005 - assessee's claim is that when the delivery of shares was over and all the covenants contemplated in the share purchase agreement became irrevocable on 1-4-2005 then only transfer was complete and, accordingly, the investment made by the assessee in the specified securities within six months reckoned from 1-4-2005 entitled the assessee for exemption u/s 54EC. HELD THAT:- It is well settled Principle of interpretation that no word in an statute is superfluous and each word has to be assigned specific meaning in the context in which it is used. We further find lot of substance in the argument of ld. Counsel in this regard with reference to inclusion of Clause (v) in the definition of transfer u/s 2(47) only with reference to immovable property and not with reference to movable property. In the present case when final delivery of shares took place on 1/15-4-2005 and, therefore, in view of the decision in the case of M. Ramaswamy [1983 (7) TMI 15 - MADRAS HIGH COURT] and Rajgiri Rubber and Produce Co.[1993 (2) TMI 67 - KERALA HIGH COURT]), in our opinion, transfer of shares took place on 1/15.4.2005. This view is fully supported by the decision of the Hon'ble Supreme Court in the case of Shellate VR v. P.J Thakkar [1974 (7) TMI 78 - SUPREME COURT] wherein, it was held that procedure required by law was to be complied with and, accordingly, delivery of share certificate along with transfer deed had to be handed over to purchaser in order to complete the transfer. Regarding extinguishment of rights - We have already held that a case of sale and that of extinguishment of right are mutually exclusive. However, in any view of the matter, we are of the opinion that it could not be said that there was extinguishment of rights on 27-1-2005 because extinguishment of rights implies that the right cannot be revived. However, till the time the right is revocable, it could not be said that there was extinguishment or rights. At best it can be said to be a case of suspension of rights till all the requirements for completing the sale were over. It was only on execution of second amendment to share amendment to share purchase agreement on 1.4.2005 that the Escrow agreement and the power of attorney became incapable of being revoked,, modified or altered unilaterally by the sellers .Therefore, prior to this date, the sellers had the right to revoke the share purchase agreement. Further Section 372A Clause (c) of the Companies Act mandates that a company cannot acquire by way of subscription, purchase or otherwise the securities of any other body corporate unless previously authorized by the special resolution passed in a general meeting. Admittedly, this special resolution was passed by the Dabur India Ltd. on 28.3.2005. Therefore, in any case, prior to this date, it cannot be said that shares of assessee were acquired by Dabur India Limited. The share is a movable property and is governed by sale of Goods Act. Now coming to the Circular No. 704. This circular deals with two situations. Firstly, shares listed on stock exchange and transfer taking place through brokers. Secondly, transactions taking place directly between the parties and not through stock exchange. We are concerned with the second situation. This clearly shows that the date of contract of sale will be the date which the parties have agreed to. No other date can substitute the date as declared by the parties. In the present case, the date of contract of sale as understood by the parties is 1.4.2005 and the same cannot be substituted by the date of share purchase agreement because completion date was specified in Article 6 of the Share purchase agreement, which was not later than 4.4.2005 or such other later date that was mutually agreed in writing. As per Article 6, on the completion date the attorney was to receive letters of discharge from the lenders recording the unconditional and irrevocable discharge of the guarantees and the cancelled the original guarantees. This occurred on 1.4.2005. Therefore, the date of contract of sale as declared by the parties in the share purchase agreement was 1.4.2005. The directors resigned on the date as per the said Article. Therefore, the contract was completed on fulfillment of conditions contemplated in Article 6 which took place on 1.4.2005. Thus, from the very beginning, the parties had declared the date of contract of sale subject to fulfillment of conditions and, therefore, on the date of fulfillment of above conditions, the date of contract of sale crystallized. We are, therefore, of the opinion that this circular in no way prejudice the assessee's claim. It is pertinent to note that Dabur India Limited, the purchaser has also recognized the purchase of shares in F.Y. 2005-06 and not F.Y. 2004-05. The CIT(A) has observed that the entire sale consideration but the fact is that it was not the entire sale consideration as the assessee had received on completion of sale. In view of the above discussion, we are of the opinion that as the transfer of shares of target companies was completed on 1/15-04-05, the capital gains were to be taxed in AY 2006-07 and there is no merit in including the income from capital gain on sale of shares of target companies in the A.Y 2005-06. Ground Nos. 1, 2& 3 stand allowed. Long term capital gains - Difference between the sale price of shares and its book value as consideration towards non-compete fees - AO, restricted the long term capital gains to the book value of the share and treated the balance amount towards non-compete fees u/s 28(va) - CIT(A) confirmed the AO's action. HELD THAT:- We are of the opinion that the basis adopted for assigning consideration towards non-compete fees was not correct. Admittedly, assessee on her own was not carrying on business and it was the company in which she was share holder was carrying on the business. Thus, it is evident that where capital asset is in the nature of right to carry on business, then the same will come within the ambit of capital gain tax. Thus, Section 28(va) would be attracted where the assessee was carrying on business and not where assessee only had right to carry on business in the form of capital asset. Further as per Circular No. 763 the amendments were made in Section 55(2)(a) to bring extinguishment of right to manufacture, produce or process any article or thing or right to carry on any business within the ambit of capital gain tax. Similarly Circular No. 8 of 2002 explaining the provisions of Finance Act, 2002 by which Clause (va) was inserted in Section 28, clarifies that receipts for transfer of rights to manufacture, produce or process any article or thing or right to carry on any business, which are chargeable to tax under the head 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. We have already held that the date of transfer of shares was 1/15-4-2005 and the investment in the specified securities had, accordingly, been made within the specified period. Therefore, in any view of the matter, no tax was payable This ground is accordingly allowed. Expenditure towards transfer of shares of the targeted companies - CIT(A) confirmed the A.O's action inter-alia observing that the assessee had failed to submit as to how its share of expenses on account of Ambit was arrived, when other sellers were also involved. As regards payment to Economic Law Practice also CIT(A) observed that charges related to joint purpose of drafting , negotiating etc - HELD THAT:- The ld. Counsel the paper book wherein the copy of bills of Ambit Corporate finance and Economic Law Practice were enclosed. The bills are in the name of assessee, therefore, the deduction had rightly been claimed by the assessee. This ground is accordingly allowed. In the result, the assessee's appeal is allowed. Issues Involved:1. Opportunity of being heard and principles of natural justice.2. Date of sale of equity shares.3. Extinguishment of rights under the Share Purchase Agreement.4. Attribution of value to negative covenant under Section 28(va) of the Income-tax Act.5. Disallowance of expenses incurred in connection with the transfer of shares.Issue-wise Detailed Analysis:1. Opportunity of Being Heard and Principles of Natural Justice:The assessee argued that the CIT(A) disposed of the appeal without granting a proper opportunity to be heard and without considering the detailed factual and case-law paper books submitted, which was contrary to the principles of natural justice. The Tribunal found merit in the assessee's contention and allowed the appeal on this ground.2. Date of Sale of Equity Shares:The primary contention was whether the sale of equity shares took place on 27th January 2005, the date of the Share Purchase Agreement, or in April 2005, when the actual share transfer took place. The Tribunal examined the detailed submissions and covenants of the Share Purchase Agreement. The Tribunal concluded that the transfer of shares took place on 1/15 April 2005, as the completion obligations and the actual delivery of shares occurred on these dates. The Tribunal relied on various judicial precedents and the specific terms of the agreement, which indicated that the sale was not complete until the conditions were fulfilled and the shares were delivered.3. Extinguishment of Rights Under the Share Purchase Agreement:The Tribunal held that the concept of extinguishment of rights under Section 2(47) of the Income-tax Act is not interchangeable with the concept of sale. The Tribunal emphasized that the sale of shares is complete only when the delivery of shares and transfer deeds are handed over to the transferee. The Tribunal rejected the revenue's contention that substantial extinguishment of rights on 27th January 2005 amounted to a transfer. The Tribunal noted that the rights could still be revoked until the completion date, thus, there was no extinguishment of rights on 27th January 2005.4. Attribution of Value to Negative Covenant Under Section 28(va) of the Income-tax Act:The AO attributed a value to the negative covenant in the Share Purchase Agreement and assessed it under Section 28(va) of the Income-tax Act. The Tribunal found that the share purchase agreement did not specifically mention any consideration towards non-compete fees. The Tribunal noted that non-compete fees could be relevant primarily for the manufacturing company and not for companies holding Intellectual Property Rights (IPR). The Tribunal concluded that the difference between the sale price and the book value of shares should not be attributed to non-compete fees and should be taxed under capital gains as per Section 55(2)(a).5. Disallowance of Expenses Incurred in Connection with the Transfer of Shares:The assessee claimed expenses incurred for professional services in connection with the transfer of shares. The AO disallowed these expenses, and the CIT(A) confirmed the disallowance. The Tribunal examined the evidence, including bills from Ambit Corporate Finance and Economic Law Practice, and found that the expenses were legitimate and directly related to the transfer of shares. The Tribunal allowed the deduction of these expenses under Section 48(i) of the Income-tax Act.Conclusion:The Tribunal allowed the appeals filed by the assessee, concluding that the sale of shares took place in April 2005, the expenses incurred in connection with the transfer were deductible, and the attribution of value to the negative covenant under Section 28(va) was incorrect. The Tribunal emphasized the importance of adhering to the principles of natural justice and proper interpretation of legal provisions.