2025 (11) TMI 1066 - AT - Income Tax

Sale proceeds of inherited shares treated as long-term capital gains; s.28(va) inapplicable without separate non-compete consideration

ITAT MUMBAI - AT held the sale proceeds of inherited shares are chargeable as capital gains, not business income; s.28(va) does not apply where no ... Correct head of income - Consideration received in respect of sale of shares taxed as business income OR capital gain - denial of exemption under section 54F and 54EC and denial of short-term capital loss - HELD THAT:- One the promoter of HCL was sister of grandfather of assessee and on her death assessee as well as other family members received shares of HCL and in case of four of shroff family similar transaction was accepted as capital gain. Thus, in our considered view the assessee cannot be treated differently as has been held in series of decisions by Higher Courts. As per section 28(va) of Income Tax Act, any sum received or receivable in cash or kind under an agreement for not carrying business or profession is treated as profit or gain from business or profession, thereby taxable as business receipt. As noted earlier the assessee has received consideration only for transfer of shares held in HCL and no consideration was received toward non-compete clause in the share purchase agreement. Even, the share purchase agreement does not attribute any amount towards noncompete clause in the agreement. Assessee was never involved in the business affairs of HCL thus, for getting consideration for not to carry on any business activities will not arise to the assessee. Hence, the provisions of section 28(va) is not applicable on the transaction of shares by assessee, sale of shares is only gives rise to earning of capital gain and not of business receipt. As in Hami Aspi Balsaraw [2009 (5) TMI 920 - ITAT MUMBAI] also held that where a shareholder sells their shares and the share purchase agreement includes a non-compete clause, the entire consideration received should be treated as capital gains from the transfer of shares, provided that no specific amount was assigned towards the non-compete fee in the agreement. Consideration received by assessee on sale of shares of HCL is not business receipt and to be taxed as capital gain. AO worked out business income on sale of impugned shares at Rs. 19.08 Crore (12389 x 15401), however, final sold price of shares of HCL was agreed at Rs. 14,869/- per share. The assessee received total consideration of Rs. 18.42 Crore (12389 x 14869), details of which are available at page No. 119 & 120 of PB. Thus, the AO is directed to consider the sale consideration of shares at Rs. 18.42 Crore for the purpose of computing long term capital gain. Thus, various sub-grounds of ground No. 1 of the appeal is allowed. Deduction u/s 54F, 54EC and allowing set off of capital loss, which was not verified after treating the gain on sale of share of HCL as business receipt, therefor, we direct the jurisdictional AO to verify the facts and allow relief to the assessee in accordance with law. Appeal of the assessee is allowed. ISSUES PRESENTED AND CONSIDERED 1. Whether consideration received on sale of long-held equity shares, effected pursuant to a share purchase agreement transferring majority control, is taxable as 'Profits and gains of business or profession' (business income) under section 28(va) or as 'Capital gains' on transfer of a capital asset. 2. Whether the presence of non-compete/other restrictive covenants in the share purchase agreement attracts section 28(va) when no specific amount is allocated to such covenants in the agreement. 3. Whether, and to what extent, the assessee's individual factual position (minority shareholding, non-management status, long holding period, and receipt of shares by gift/bonus/will) affects characterization of the receipt as business income or capital gain. 4. Determination of the correct sale consideration to be adopted for computation of capital gains where agreement price was subject to post-closing adjustments and differing values were used by authorities. 5. Direction to the Assessing Officer on consequential reliefs (allowance of exemptions under sections 54F/54EC and set-off/carry-forward of capital losses) once the characterization and correct consideration are determined. ISSUE-WISE DETAILED ANALYSIS Issue 1 - Characterization of receipt: business income under section 28(va) v. capital gains Legal framework: Section 28(va) taxes sums received under agreements for not carrying on business or profession as business/profession income. Capital gains taxation applies to transfer of a capital asset (shares) unless an alternative head is attracted by express provision or substance of the transaction. Precedent treatment: The Tribunal noted reliance by Revenue on a High Court authority that treated a broadly similar transaction as business income where the vendor was a major shareholder/promoter and actively controlled/managed the company; Tribunal also noted a Tribunal judgment that treated consideration as capital gains where no allocation to non-compete was made and vendor was a passive shareholder. Interpretation and reasoning: The Tribunal examined facts: assessee held a minority stake (