TaxTMI 
TaxTMI 
2012 (10) TMI 743
X X X X Extracts X X X X
X X X X Extracts X X X X
.... salary income of Rs. 127,46,783, short term capital gain Rs. 24,527 and long term capital gain Rs. 85,07,43,805. The assessee was promoter shareholder in Phoenix Lamps Ltd. He along with other promoters/shareholders was holding 36.63% of the share holding of M/s. Phoenix Lamps Ltd. The break up of the shares held by the assessee along with his family members are as under: Sr. No. Name of Shareholders No. of shares % age 1. Bhushan Kumar Gupta 11,360 0.05% 2. Hulas Rahul Gupta 46,63,618 19.55% 3. Priya Desh Gupta 35,00,000 14.68% 4. Abha Gupta 5,60,749 2.35% 87,35,727 36.63% 3. On 3rd of July 2007, the assessee along with other promoters entered into a tripartite warrant subscription and share purchase agreement (hereinafter referred to as WSSPA) with M/s. Argon India Ltd. and M/s. Argon South Asia Ltd. ('Acquirers' in short ). As per this agreement, 87,35,727 shares held by the promoters were sought to be sold to the Acquirers/vendee at a price of Rs.152 per share. Over and above the sales consideration, the promoters were also to be paid a sum of Rs. 38 per share as non-compete consideration ....
X X X X Extracts X X X X
X X X X Extracts X X X X
..... The show-cause notice issued by the Learned Commissioner on 24.2.2010 under sec. 263 of the Income-tax Act, 1961 reads as under: "Shri Hulas Rahul Gupta C-12, Friend Colony, New Delhi. PAN. AAAPG4437F Assessment Year - 2007-08 On an examination of the records in your case for A.Y. 2007-08 it is observed that you had shown the long term capital gain of Rs. 85,07,43,805 from the sale of 46,63,618 shares @ Rs. 190 of Phonix Lamps Ltd. and these shares were purchased/acquired from 27.12.1992 to 13.3.2003 and the total cost price of the shares as shown by yourself is Rs. 3,50,44,015. During the course of assessment proceedings your AR had filed the copy of Escrow agreement dated 3.7.2007, it appeared that the acquirer and sellers have entered into a certain warrant subscription and share purchase agreement of even date for, inter alia, the sale by the sellers to acquirer of 8735727 equity shares of the company for a price of 152 per equity share (total of Rs. 1327,830,504) and Rs. 38 per equity share as non compete consideration (Rs. 33,19,57,626). Further, it appears from the assessment record you had shown the sale of Phonix Lamps Ltd shares for Rs. 88,6087,420 ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....of the assessee u/s. 28(va) of the Act. But the proviso appended to this clause suggests that if any sum received or receivable on account of transfer of right to carry on any business then the same would be chargeable under the head "capital gain". According to the assessee, the distinction between both the situations is that when an agreement to refrain from doing an activity in respect of any business then it is covered under business gain, but if an assessee refrain itself from doing any business i.e. the very apparatus of the business is sold then it would attract capital gain. According to the assessee, Article 13 of the WSSPA suggests that assessee has transferred the right to carry on the business only. He has not received anything for refraining himself from doing any one or more activity in the line of that business. In other words, the case of the assessee before the Learned Commissioner was that whole business as an earning apparatus stands transferred and not single activity or activities. The second fold of the submissions raised by the assessee has been taken note by the Learned CIT(Appeals) in summarized form on page 5 paragraph 2.3. It reads as under: "1. ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....earned CIT on an analysis of all these details recorded a finding that SEBI had not advised the acquirer to amend the negotiated prices. The SEBI has only advised to the acquirer to revise the offer price by including the payment of non-compete fees in the negotiated price, it was meant for the public. Learned CIT has not raised any dispute with regard to the proposition that in the amended WSSPA, the clauses representing non-compete consideration have been omitted. Learned CIT observed that in the commercial world, there is no free lunch. Each of the activities, parties to an agreement decide upon and charge a price. The pre-revised WSSPA provides non-compete consideration in the revised WSSPA, the assessee has omitted the expression "representing non-compete consideration". Learned Commissioner though agreed that it is not the case of any party that amendment to WSSPA was contrived. Few observations referred by us are worth to note from the order of the Learned Commissioner. They read as under: "4.2(c) What the amendment to WSSPA has done to the recitals of the earlier agreement is these. It has deleted the definition of "non-compete consideration" in clause 1.1. It has omitte....
X X X X Extracts X X X X
X X X X Extracts X X X X
....assessee. For the reasons given here in before and taking support of Jiyajee Reassessment order Cotton Mills v. CIT 34 ITR 888 (S.C), I hold that non-compete consideration at Rs. 38 per share is taxable as income from business u/s. 28(va) of the Act, and while both the WSSPA and its amendment are valid and legal, the interpretation on the taxability of non-compete consideration made out by the assessee in the context of both the documents is illogical and without basis". 7. The learned counsel for the assessee while impugning the order of the Learned Commissioner submitted that though assessment order is very brief, it nowhere discussed the taxability of long term capital gain on transfer of shares, but assessee has produced both the WSSPA before the Assessing Officer. His accounts are duly audited. All the relevant details for determination of true income was produced before the Assessing Officer. Learned Commissioner has not issued show-cause notice under sec. 263 on account of no inquiry or inadequate inquiry conducted by the Assessing Officer. His show-cause notice is based on the ground that Assessing Officer has applied incorrect provisions while determining the long term ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....to have charged a price for this refrainment. The learned counsel for the assessee submitted that Learned Commissioner has failed to appreciate that under the amended WSSPA, there was no separate consideration for non-compete fees. The source of powers for the revenue to tax non-compete consideration as a business income under sec. 28(va) of the Act is the WSSPA. They cannot assume certain clauses which have been obliterated by the assessee. Learned Commissioner further observed that open offer price to other shareholders cannot be a valid basis to say that assessee has sold the share @ Rs. 190 per share. The case of the assessee is governed by WSSPA and not open offer. The learned counsel for the assessee pointed out that the assessee is not disputing that his case is governed by WSSPA but Learned Commissioner is assuming existence of clauses which have been omitted by the assessee and the acquirer. He cannot brought the amount to tax on the basis of a contract which is no more in existence and not enforceable by the parties. 9. The learned counsel for the assessee in his next fold of submissions pointed out that there were four shareholders. Priya Das Gupta was holding 14.68% ....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... 436 (Delhi) 12. Learned DR on the other hand submitted that before Assessing Officer assessee has not filed complete documents. He demonstrated as to how the pages of pre-amended WSSPA were missing. He pointed out that assessee failed to submit 13 pages of WSSPA and these pages are 5, 8, 14, 16 and 17 etc. He demonstrated as to how these pages are not forming part of the WSSPA. Taking us through the paper book of the revenue, he pointed out that on the back side of page 4 of WSSPA, there is a page 6 and 5 is missing. Similar is the situation with regard to page 7 on its back is page 9 instead of page 8. This suggests the level of mind application at the end of the Assessing Officer while framing the assessment. No discussion is discernible in the assessment order. The crucial pages where the scope of non-compete agreement were mentioned are pages 17 & 13. These pages were missing. Thus, Assessing Officer has not applied his mind on this issue. Learned DR thereafter appraised us under which situation section 263 can be invoked. Learned DR has filed written submissions. They read as under: "4. In this factual background, one has to see whether CIT's action u/s 263 is in order ....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... Ltd, were acquiring 36.63% of the promoters quota from the appellant, who was the Managing Director of the company and his relatives, they were required to make a public offer under SEBI's Takeover Regulations, 1997. The said regulations provided that in case the acquirers were paying non-compete fee to the promoters at the rate of 25% or higher of the sale price, than the offer to public shareholders should be made at the rate inclusive of the "non-compete fee". (Please refer to Page 146 of Departmental Paper Book). Therefore, in the light of such provisions only, the SEBI advised the acquirers to increase the "offer price" from Rs.152 to Rs.190 per share to the public/ minority shareholders after including non-compete fee of Rs.38/- per share. But one should not lose sight of the fact that this revision of offer price from Rs.152/- to Rs.190/- was only meant for "public shareholders" other than the promoters. It was never meant to be applicable to the promoters, whose shares were being acquired under a separate contract /agreement known as WSSPA. This is unequivocally provided in Page 4 of the "Letter of Offer" (see page 7 of the Appellant's Paper Book), wherein it is mentioned ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....uirers as well as the appellant to be applicable only for "public shareholders" and not to the "promoter shareholders". The said Clause C reads as under: "By its letter dated 27 December, 2006 SEBI has provided its comments on the draft letter of offer filed by the Acquirer whereby SEBI has directed that thereafter price per share payable to the public shareholders of the Company be revised to include the non compete fee per share agreed to be paid to the sellers as part of the negotiated price in the Acquisition Agreement to the Sellers" (emphasis mine) When the parties to the agreement themselves are acknowledging the fact that SEBI's directions were only to revise the "offer price" for public shareholders , the simultaneous revision of price payable to the promoters at Rs.190/- per share from Rs.152/- per share, after including the non-compete fee earlier agreed to be paid, while at the same time retaining the non-compete clauses, was only a "tax avoidance device" adopted by the assessee and his family members. (vi) Clause 8 of the "Revised WSSPA" provides that only two lines are to be added to the Clause 13.1 of the Original WSSPA, which mentions various non-comp....
X X X X Extracts X X X X
X X X X Extracts X X X X
....le" of goodwill alongwith non-compete agreement, then the same will be lawful & void. But in the present case, there is no consideration attributable to goodwill & non-compete. Hence, the revised WSSPA is entirely superfluous, invalid in the eye of law & does not make any commercial sense. Hence, it should have been ignored by the A.O., while passing the assessment order. But he has failed to do so, thereby making his order "erroneous". Moreover, Section 25 of the Contract Act reads as under: "Section 25 - Agreement without consideration is void, unless it is in writing and registered, or is a promise to compensate for something done-An agreement made without consideration is void, unless- (1) It is expressed in writing and registered under the law for the time being in force for the registration of documents, and is made on account of natural love and affection between parties standing in a near relation to each other, or unless (2) It is a promise to compensate, wholly or in part, a person who has already voluntarily done something for the promisor, or something which the promisor was legally compellable to do, or unless (3) It is a promise, made ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....he I.T. Act, S.10, 25 & 27 of the Indian Contract Act, 1872 and failure to look at the tax-avoidance scheme sought to be achieved through a superfluous revised WSSPA, while passing the assessment order u/s 143(3) of the IT Act, the CIT has rightly invoked the powers available to him u/s 263 of the IT Act. 7. Delhi High Court in two earlier judgements reported in Gee Vee Enterprises v. Addl. CIT, (1975) 99 ITR 374 and Duggal and Co. v. CIT [1996] 220 ITR 456 (Del) have held that "The AO is not only an adjudicator but also an investigator. He cannot remain passive in the face of a return which is apparently in order but call for further enquiry. It is incumbent on A.O. to further investigate the facts stated in the return, what circumstances would make such an enquiry prudent. The word "erroneous" in S.263 includes the failure to make such enquiry." 8. The same view has now been reiterated by the Delhi High Court in a judgement rendered in the case of CIT v. DLF Power Ltd. [2012] 17 Taxmann.com 269 (Del). In that case, the appellant pleaded that the assessee had submitted all documents before the A.O. Therefore, the CIT's revision based on the same documents was argued to have ....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... has already held at Para 7 that w.e.f. 01-04-2003, "non-compete fee" has been made a revenue receipt under the head "business". Relevant portion of its order is reproduced hereunder: "One more aspect needs to be highlighted. Payment received as non-competition fee under a negative covenant was always treated as a capital receipt till the assessment year 2003-04. It is only vide the Finance Act, 2002 with effect from April 1, 2003 that the said capital receipt is now made taxable (See section 28(va)). The Finance Act, 2002 itself indicates that during the relevant assessment year compensation received by the assessee under non-competition agreement was a capital receipt, not taxable under the 1961 Act. It became tax-able only with effect from April 1, 2003. It is well settled that a liability can-not be created retrospectively. In the present case, compensation received under the non-competition agreement became taxable as a capital receipt and not as a revenue receipt by specific legislative mandate vide section 28(va) and that too with effect from April 1, 2003" 10. Now coming to the various other legal contentions raised by the Ld.AR, the same are dealt one by one hereunde....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... proceedings initiated in this case under section 271C read with section 274 of the Income-tax Act, 1961 are hereby dropped. According to the High Court, there was no basis indicated for dropping the proceedings. The Tribunal referred to certain aspects and held that the initiation of proceedings under section 263 of the Income-tax Act, 1961 (in short, "the I. T. Act") was impermissible when considered in the background of the materials purportedly placed by the assessee before the Assessing Officer. What the High Court has done is to require the Assessing Officer to pass a reasoned order. The High Court was of the view that the Tribunal could not have substituted its own reasonings which were required to be recorded by the Assessing Officer. According to the assessee, all relevant aspects were placed for consideration and if the officer did not record reasons, the assessee cannot be faulted. We do not think it necessary to interfere at this stage. It goes without saying that when the matter be taken up by the Assessing Officer on remand, it shall be his duty to take into account all the relevant aspects including the materials, if any, already placed by the assessee, and pass a....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... the case justifies including an order enhancing or modifying the assessment, or canceling the assessment or directing a fresh assessment. In the present case, Learned Commissioner on an analysis of the record found that the Assessing Officer has applied incorrect provisions of law while assessing income of the assessee, thus, his order is an erroneous order which caused prejudice to the revenue because the income has escaped taxes. After conducting the inquiry he did not remit the issue to the Assessing Officer for fresh investigation or fresh assessment rather he himself determined the income and directed the Assessing Officer to include such income in the total income of the assessee. In this way, Learned Commissioner has decided the issue on merit also. 14. Let us examine whether facts & circumstances are available on record to enable the Learned Commissioner to assume jurisdiction under sec. 263 of the Act. The learned representatives have referred a large number of decisions in their arguments. It is not necessary to recite and recapitulate all those decisions because the ITAT in the case of Mrs. Khatiza S. Oomerbhoy v. ITO [2006] 100 ITD 173 (Mum.) has analyzed in detail ....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... with the explanation of the assessee, the decision of the A.O cannot be held to be erroneous simply because in his order he does not make an elaborate discussion in that regard." 15. Before embarking upon an inquiry about the facts of the present case and how those facts have been considered by the learned revenue authorities below, we deem it appropriate to make a reference to the observations of the Hon'ble Delhi High Court in the case of Gee Vee Enterprises v. Addl. CIT [1975] 99 ITR 375 wherein Hon'ble High Court has expounded the approach of the Assessing Officer while passing assessment order. The observations of the Hon'ble High Court read as under:- "It is not necessary for the Commissioner to make further inquiries before canceling the assessment order of the Income-tax Officer. The Commissioner can regard the order as erroneous on the ground that in the circumstances of the case the Income-tax Officer should have made further inquiries before accepting the statements made by the assessee in his return. The reason is obvious. The position and function of the Income-tax Officer is very different from that of a civil court. The statement made in a pleading proved by t....
X X X X Extracts X X X X
X X X X Extracts X X X X
....has applied incorrect provisions of law while determining the taxable income of the assessee and, therefore, his order is an erroneous order which has caused prejudice to the revenue and the same enabled the Learned Commissioner to take cognizance under sec. 263 of the Act. In order to ascertain whether Assessing Officer has applied incorrect provisions of law or not. We are required to look into the clauses of WSSPA. The case of the revenue is that assessee has amended the WSSPA whereby the parties have agreed to delete the clauses representing the consideration required to be paid by the acquirer for non-compete clauses. Admittedly, the clause representing consideration in lieu of non-compete at the end of the promoter has been omitted from the amended WSSPA. Learned DR in his submissions has emphasized that SEBI has NOT directed the assessee or the acquirer to delete the clause representing consideration in lieu of non-compete. The SEBI has only appraised the parties to give an open offer of Rs. 190 per share to the public which includes sale price of the share as well as price representing for non-compete. The instructions of the SEBI are the guidelines for making an offer pric....
X X X X Extracts X X X X
X X X X Extracts X X X X
....e is that there exists a legally enforceable and final agreement between the parties which was executed and acted upon by the parties. The learned counsel for the assessee drew our attention towards section 62 of the Contract Act which contemplates if the parties to a contract agree to substitute a new contract for it, or to recite or alter it, the original contract need not be performed. 18. On an analysis of the different clauses of pre-amended as well as revised WSSPA, we are of the view that parties have agreed for sale of shares. They have fixed the sales consideration. In the original agreement, they have segregated the sales consideration and allocated it for different situations, however, they did not adhere to the conditions enumerated in the agreement and renegotiated the agreement itself. In the revised agreement, they have fixed the sales price for sale of shares and did not segregate for other issues. The revenue wants to challenge the very wisdom of the parties to enter into a contract for sale and purchase of the shares. Section 62 of the Contract Act provides that if the parties to a contract agree to substitute a new contract then they need not to enforce the or....