2015 (7) TMI 1021 - AT - Income Tax

Tax Tribunal: Lack of Evidence for Share Sale Value, Non-Compete Fee Likely

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

Smt. A Rajya Lakshmi, Visakhapatnam and others Versus ITO, Ward-3 (2), Visakhapatnam and others - TMI Issues Involved:1. Whether the CIT(A) was justified in confirming the order passed by the Assessing Officer that both assessees received consideration of Rs. 2,00,00,000 towards the sale of shares.2. Whether the amount of Rs. 2,00,00,000 represented the sale consideration for transfer of shares or was it a commitment for a future event (daughter's marriage).3. Whether the Assessing Officer correctly assessed the capital gain on accrual basis.Issue-wise Detailed Analysis:1. Justification of CIT(A) in Confirming Assessing Officer's Order:The primary issue in the appeals was whether the CIT(A) was justified in confirming the Assessing Officer's order that both assessees received Rs. 2,00,00,000 towards the sale of shares. The CIT(A) confirmed that the assessees received Rs. 2,00,00,000 on transfer of shares but disagreed with the allocation of the entire amount to Shri A. Janakiram. Instead, the CIT(A) allocated the amount proportionally between Shri A. Janakiram and Smt. A. Rajyalakshmi based on the number of shares transferred.2. Nature of Rs. 2,00,00,000 - Sale Consideration or Future Commitment:The crux of the dispute revolved around a letter found during a search operation, which mentioned a commitment to pay Rs. 2,00,00,000 towards the value of 7.5% shareholding in M/s. Varun Motors Pvt Ltd. The assessees argued that this amount was a commitment for future payment at the time of their daughter's marriage and not the sale consideration for the shares. The Assessing Officer, however, treated the amount as the sale consideration and assessed the capital gains accordingly. The assessees contended that the letter was not acted upon and that the amount was not related to the sale of shares.3. Assessment of Capital Gain on Accrual Basis:The Assessing Officer assessed the capital gain on the basis that the Rs. 2,00,00,000 represented the sale consideration for the shares, even though the payment was to be made in the future. The CIT(A) upheld this view but redistributed the amount between the two assessees based on their respective shareholdings.Tribunal's Observations and Conclusions:The Tribunal noted that the valuation of shares is typically done scientifically, considering factors like book value, past performance, and future earning potential. The tax authorities did not provide any material to corroborate the Rs. 2,00,00,000 as the value of 7.5% shareholding. The Tribunal also observed that the Memorandum of Understanding (MOU) between the parties, which was not examined by the tax authorities, indicated that the Rs. 2,00,00,000 could be a non-compete fee rather than a sale consideration.The Tribunal found that the tax authorities did not bring any material on record to support the inference that the Rs. 2,00,00,000 represented the sale consideration of the shares. The Tribunal also noted that the MOU and the letter might pertain to a common agreement, and the amount could represent a consolidated sum for the value of shares and non-compete rights.Final Decision:The Tribunal concluded that the inference drawn by the tax authorities lacked credence and that the amount of Rs. 2,00,00,000 did not solely represent the sale value of the shares. The Tribunal set aside the orders of the CIT(A) and directed the Assessing Officer to delete the impugned addition in the hands of both assessees. The appeals filed by both assessees were allowed.