2020 (7) TMI 439 - HC - Income Tax

Tax Appeal Dismissed: Shares' Sale Income as Capital Gains

The Tax Case Appeal was dismissed as both the Commissioner of Income Tax [Appeals] and the Income Tax Appellate Tribunal ruled in favor of the ... Characterisation of receipts as capital gains versus business income - treatment of non-compete fee embedded in share sale - application of Section 28(va) of Income Tax Act, 1961 to share sale with non-compete covenant - share purchase under SEBI (Substantial Acquisition of Shares and Takeovers) Regulations - valuation implications - identical consideration to promoters and public shareholders and its bearing on inference of non-competeCharacterisation of receipts as capital gains versus business income - application of Section 28(va) of Income Tax Act, 1961 to share sale with non-compete covenant - Sale proceeds received on transfer of equity shares held as investment were to be treated as capital gains and not as business income under the facts of the case. - HELD THAT: - The Assessing Officer treated part of the sale consideration as business income under the provision relied upon by the Revenue. The Commissioner of Income Tax (Appeals) accepted the factual position that the assessee had sold shares held as investments since the company's inception and noted that the Assessing Officer himself treated a portion as capital gains. The CIT(A) further relied on the clarificatory Circular of the Central Board of Direct Taxes dated 29.02.2016 to support the conclusion that the amount received on sale of the shares of 2,82,50,291 held as investments should be taxed as capital gains rather than business income. The High Court concurred with the concurrent findings of the CIT(A) and the Tribunal, holding that there was no error in treating the receipt as capital gains in the circumstances presented. [Paras 8, 9, 10]The receipt on sale of the shares held as investment is capital gains and not business income.Treatment of non-compete fee embedded in share sale - identical consideration to promoters and public shareholders and its bearing on inference of non-compete - share purchase under SEBI (Substantial Acquisition of Shares and Takeovers) Regulations - valuation implications - Amount paid per share under the share purchase agreement did not, on the facts, indicate a separate non-compete fee embedded in the consideration and the transaction was to be treated as a share sale and not a business takeover. - HELD THAT: - The Assessing Officer characterised the excess over market price as a non-compete fee. The CIT(A) and the Tribunal examined the agreement and the surrounding facts, including that the same price was offered and paid to promoter and public shareholders and that the rate was offered pursuant to SEBI (SAST) Regulations' valuation framework. The Tribunal observed that the agreement stipulated no separate non-compete payment by the purchaser and that identical consideration having been paid to public shareholders precluded treating the excess as a promoter-specific non-compete fee. The High Court found that the CIT(A) and ITAT had exhaustively dealt with the point and upheld their negative answer to Revenue's contention. [Paras 8, 9, 10]No non-compete fee was to be treated as embedded in the share sale; the transaction was a share purchase under the SEBI-related valuation process, not a business takeover attracting separate non-compete treatment.Identical consideration to promoters and public shareholders and its bearing on inference of non-compete - treatment of consideration received by different classes of shareholders - The equal consideration paid to both the promoter (managing director) and public shareholders precluded treating the amount received by the promoter as reflecting a distinct relinquishment of control or a separate non-compete fee. - HELD THAT: - Revenue argued that the managing director, controlling the business, should be treated differently since he gave up business continuity and part of his share was retained for contingencies. The CIT(A) and the Tribunal recorded that the same rate was offered to all shareholders and that public shareholders received identical consideration; therefore, the payment to public shareholders could not be characterised as lacking any non-compete element while the payment to the promoter carried such an element. The High Court accepted the concurrent findings that identical consideration to all shareholders negated the Revenue's inference of a promoter-specific non-compete component. [Paras 8, 9, 10]Payment of identical consideration to promoter and public shareholders prevents treating the promoter's receipt as a distinct non-compete fee or as business income.Final Conclusion: The concurrent findings of the Commissioner of Income Tax (Appeals) and the Income Tax Appellate Tribunal that the amounts received on sale of shares held as investments for Assessment Year 2013-14 are capital gains (and that no separate non-compete fee or business takeover treatment was justified) are upheld; the Tax Case Appeal is dismissed. Issues involved:1. Interpretation of Section 28[va] of Income Tax Act regarding non-compete clause in Share Purchase Agreement.2. Determination of whether the amount for business takeover including non-compete covenant is to be treated as business income.3. Evaluation of the treatment of amount received by the Public and the Managing Director.Analysis:Issue 1: Interpretation of Section 28[va] of Income Tax ActThe appellant challenged the Tribunal's decision regarding the sale of equity shares through a Share Purchase Agreement with a non-compete clause. The Tribunal held that such sale did not fall under Section 28[va] of the Income Tax Act, despite the legislative explanation added in 2012. The appellant argued that the Tribunal's interpretation was incorrect based on the legislative amendment.Issue 2: Treatment of amount for business takeoverThe Tribunal also had to determine whether the amount given for the takeover of a business, including a non-compete covenant, should be considered as part of a share purchase agreement or a business takeover. The valuation of shares under SEBI regulations was cited, questioning the characterization of the transaction and its tax treatment.Issue 3: Treatment of amount received by Public and Managing DirectorAnother aspect was the treatment of the amount received by the Public and the Managing Director. The Tribunal was asked to decide whether both parties should be equally treated, considering the Managing Director's role in controlling the business and the retention of shares for future business contingencies.The Commissioner of Income Tax [Appeals] had previously ruled in favor of the respondent/assessee, treating the income from the sale of shares as capital gains rather than business income. This decision was based on the nature of the shares sold as investments and the acceptance of a specific amount as capital gains. The Tribunal also noted that the price paid to the public shareholders could not be considered as having a non-compete fee embedded in it.In conclusion, both the Commissioner of Income Tax [Appeals] and the Income Tax Appellate Tribunal had thoroughly examined and resolved the issues raised in favor of the respondent/assessee. As a result, the Tax Case Appeal was dismissed, with no substantial questions of law remaining for consideration.