TaxTMI 
TaxTMI 
2005 (9) TMI 248
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....d as capital receipt not liable to capital gains tax. In other words, the sale price of the shares for purposes of capital gains tax ought to have been taken at Rs. 258.89 per share as purposes of capital gains tax ought to have been taken at Rs. 258.89 per share as against Rs. 400 adopted by the authorities below. Various observations made by the authorities below in their respective orders while deciding the above issues are either factually incorrect or are legally untenable. Facts and the circumstances of the case and the evidence as produced before the authorities below had either been ignored or had not been appreciated properly." 3. The facts and circumstances giving rise to the aforesaid grounds of appeal are as follows. The assessee is assessed in the status of an HUF. It derives income from house property and other sources. During the previous year the assessee had sold 3,929 Nos. equity shares owned by it in a company by name M/s Groz Beckert Saboo Ltd. (hereinafter referred to as 'GBS Ltd.') and the capital gain on such transfer was declared in the return of income. The computation of long-term gain on transfer of shares declared by the assessee was as follows: &n....
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....959. Shri R.K. Saboo and Groz Beckert Group entered into an agreement to form and promote in India a private limited company. That is how Groz Beckert Saboo Ltd. was incorporated which later on became a deemed public limited company under s. 43A of the Companies Act, 1956. Groz Beckert Group held 60 per cent shares and Saboo Group held 40 per cent shares. The assessee was one of the members of the Saboo Group who acquired shares in M/s GBS Ltd. The relationship between the Saboo Group and GB Group were very cordial and friendly for more than 25 years. M/s Saboo Group was managing the affairs of the company for long time. Disputes and differences arose between the GB group and Saboo Group. The Saboo Group were, therefore forced to file petition under ss. 397 and 398 of the Companies Act before the Company Law Board against GB group for mismanagement and oppression of minority shareholders. The Company Law Board, however, rejected the petition filed by the Saboo Group and directed that the Saboo Group will sell 40 per cent of its holding in M/s GBS Ltd. to the GB Group at a value to be determined by M/s S.B. Billimoria and Company, chartered accountants. The order of the Company Law ....
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.... The aforesaid understanding was embodied in the Share Purchase Agreement, dt. 21st Jan., 1993. The restrictions placed on the Saboo Group under the Share Purchase Agreement are contained in cls. 1.8, 5.5, 5.6, 5.6(a)(b)(c), 5.3 and 5.9 and 6.4 thereof. 7. Under the provisions of s. 48 of the Act the computation of capital gain has to be made as follows: "48. Mode of computation-The income chargeable under the head "capital gains" shall be computed, by deducting from the full value of the consideration received or accruing as a result of the transfer of the capital asset the following amounts, namely: (i) expenditure incurred wholly and exclusively in connection with such transfer; (ii) the cost of acquisition of the asset and the cost of any improvement thereto:" 8. In the present appeal the dispute is with regard to the computation of the consideration received on sale of shares. As can be seen from the computation of capital gains given in para 3 of this order, the assessee had declared only Rs. 358.89 as sale consideration received on transfer of shares as against Rs. 400 per share as mentioned in the share transfer agreement. Secondly, the assessee sought to ded....
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....m the sale consideration received on transfer of shares to arrive at the capital gain chargeable to tax. 10. The AO, however, did not agree with the contentions as were put forth by the assessee. With regard to the plea of the assessee that a sum of Rs. 100 has to be excluded from the sale consideration received on transfer of shares towards obligations of the assessee to adhere to the negative covenants in the share transfer agreement, he held that the sum of Rs. 400 was shown as sale consideration for each share inclusive of all dividend rights and that no split-up value has been given in the agreement. According to the AO the non-competition clause-in the agreement restricting the Saboo Group not to engage in any other business competing with that of the M/s GBS Ltd. was merely a precaution taken by the purchaser. In any event, since the Saboo Group was not engaged in a competing business, the same will not have any effect. The AO also held that with the transfer of shares the right to dividend as well as voting rights ceased to exist and, therefore, the assessee cannot be said to have lost anything by transfer of shares. The AO also held that the plea of bifurcation by exclu....
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....d obtained a stay against order of the Company Law Board. In the meantime, an out of Court settlement was reached under which the Saboo group agreed to sell its shares to GB group @ Rs. 400 per share. Now as per the share purchase agreement, dt. 21st Sept., 1993, the shares were sold @ Rs. 400 per share, the assessee was not justified in showing sale consideration at Rs. 358.89 per share. As per s. 48(1)(a), the assessee has to show full value of consideration received or accrued as a result of the transfer of the capital asset. In the instant case full value of the consideration accrued was Rs. 400 per share and not Rs. 358.89 per share. So far as claim of legal expenses of Rs. 41.11 per share is concerned, to my mind, it relates to litigation before the Company Law Board and the Delhi High Court which is prior to transfer of shares. Thus, these expenses have not been incurred wholly and exclusively in connection with the transfer of these shares and are, therefore, not allowable as per provision of s. 48(1) of the IT Act. The action of the AO on this point is confirmed. Besides, the sale consideration is inclusive of all dividend rights and does not talk of any other conditions. ....
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....rchased or acquired from sellers and pay therefore at the closing, 440,000 (four hundred forty thousand) fully paid equity shares of Groz Beckert Saboo Ltd., (the "company") having a nominal value of Rs. 10 per share (individually a "share" and collectively "shares") at the price of Rs. 400.00 (rupees four hundred) per share aggregating to Rs. 176 million. The shares constitute 40 per cent of the total issued and outstanding equity shares of the company. The sale price of the shares is inclusive of all dividend rights." 15. As can be seen from the preamble to the aforesaid agreement it makes a reference to the various representations, warranties and covenants. One of the covenants mentioned in the agreement is the one mentioned in cls. 5.5, 5.6, 5.7 and 5.8. Under cl. 5.5 for a period of 5 years none of the persons of the Saboo Group or any firms or companies or other entities owned or controlled by any of them will directly or indirectly engage in India in any business similar to or competing with the business of the company as now conducted. Similarly, the Saboo Group was also prohibited from hiring any employees of the GBS Ltd. They were also under an obligation not to do bus....
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.... by the other High Courts in the decision relied upon by the learned counsel for the assessee. We, therefore, hold that the apportionment of consideration mentioned in the share transfer agreement has to be made and a sum of Rs. 100 has to be apportioned towards the consideration paid by the transferee to the assessee for observance of the various negative covenants mentioned in the share transfer agreement. 19. As far as the taxability of sum received by the assessee as non-compete fee is concerned, in the following decisions such question had been considered: (i) CIT vs. Best & Co. (P) Ltd. (1966) 60 ITR 11 (SC) (ii) CIT vs. Automobile Products of India Ltd. (1982) 26 CTR (Bom) 116 : (1983) 140 ITR 159 (Bom) (iii) CIT vs. Saraswathi Publicities (1981) 132 ITR 207 (Mad) (iv) Oberoi Hotel (P) Ltd. vs. CIT (1999) 152 CTR (SC) 474 (v) Addl. CIT vs. Dr. K.P. Karanth (1983) 139 ITR 479 (AP) (vi) Chelpark Co. Ltd. vs. CIT (1991) 94 CTR (Mad) 71 : (1991) 191 ITR 249 (Mad). The Supreme Court in Gillanders Arbuthnot & Co. Ltd. vs. CIT (1964) 53 ITR 283 (SC) held that: "Compensation paid for agreeing to refrain from carrying on competitive business in the commodities....
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....ubstances that Deplete the Ozone layer under the United Nations Environment Programme, in accordance with the terms of agreement entered into with the Government of India. Explanation: For the purpose of this clause- (1) 'agreement' includes any arrangement or understanding or action in concert, (A) whether or not such arrangement, understanding or action is formal or in writing; or (B) Whether or not such arrangement, understanding or action is intended to be enforceable by legal proceedings; (ii) 'service' means service of any description which is made available to potential users and includes the provision of services in connection with business of any industrial or commercial nature such as accounting, banking, communication, conveying of news or information, advertising, entertainment, amusement, education, financing, insurance, chit funds, real estate, construction, transport, storage, processing, supply of electrical or other energy, boarding and lodging." The above sub-section along with the proviso and Explanation comes into effect from 1st April, 2003. In other words this sub-section was introduced only prospectively and not retrospectively. Hence, upto ....