Share sale consideration must be segregated between share transfer and negative covenants for proper taxation under section 28(va)

ITAT Pune held that sale consideration of Rs. 85.79 crore received by assessee on share transfer was not exclusively for shares but also included value for negative covenants, given assessee's indemnity liability up to Rs. 40 crore. The tribunal directed AO to segregate consideration between share transfer (taxable as capital gains) and negative covenants (taxable as business income under section 28(va)). Disallowance under section 14A was upheld as AO correctly applied rule 8D(2)(iii) considering only exempt income yielding securities. Addition of deemed rent on vacant property was deleted as property constituted stock-in-trade, not house property income.

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Issues Involved:

1. Taxability of sale consideration received on transfer of shares.
2. Disallowance under Section 14A of the Income-tax Act.
3. Deletion of addition towards deemed rent on vacant property.

Summary:

1. Taxability of Sale Consideration Received on Transfer of Shares:

The primary issue was whether the entire sale consideration of Rs. 85.79 crore received by the assessee for transferring shares should be treated as 'Business income' under Section 28 of the Income-tax Act or as 'Capital gains.' The Assessing Officer (AO) treated the entire consideration as business income under Section 28(va), citing the Share Sale and Purchase Agreement (SSPA) which included non-compete and other negative covenants. The Commissioner of Income-tax (Appeals) [CIT(A)] attributed 10% of the consideration to non-compete and management termination clauses, treating it as business income, and the remaining as capital gains.

The Tribunal examined the SSPA and concluded that the consideration was not solely for the transfer of shares but also included compensation for negative covenants such as non-compete and non-solicitation. The Tribunal held that the consideration should be bifurcated, with the part related to negative covenants taxed as business income under Section 28(va) and the part related to the transfer of shares taxed as capital gains. The case was remanded to the AO for fresh determination of the amounts attributable to each.

2. Disallowance under Section 14A of the Income-tax Act:

The assessee had claimed exempt income but did not make any disallowance under Section 14A. The AO made a disallowance of Rs. 16,86,377 under Rule 8D(2)(iii) at 0.5% of the average value of investments, which was upheld by the CIT(A). The Tribunal found no exception to the disallowance, noting that the AO considered only those securities which yielded exempt income and did not make any disallowance towards interest, given the assessee's own capital exceeded the investments. The Tribunal dismissed the assessee's appeal on this ground.

3. Deletion of Addition towards Deemed Rent on Vacant Property:

The AO had added Rs. 92,159 as deemed rent on a vacant property held as stock in trade by the assessee's proprietorship concern. The CIT(A) deleted this addition, relying on a Tribunal decision that no income from house property can result from unsold flats held as stock in trade. The Tribunal upheld this deletion, noting that the amendment to Section 23(5) requiring determination of annual letting value (ALV) for stock in trade was prospective and not applicable to the assessment year in question.

Conclusion:

The cross appeals were partly allowed for statistical purposes, and the Cross Objection was dismissed as infructuous. The Tribunal directed a fresh determination of the amounts attributable to the transfer of shares and negative covenants for appropriate tax treatment.

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