TaxTMI 
TaxTMI 
TaxTMI 
2012 (10) TMI 743
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....m 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 (clause 3.5 and 13.2 of WSSPA). The promoters were selling more than 20% of the shares held b....
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....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 @ Rs. 152 + 38) per shares. This is not allowable because the non compete consideration on 46,63,618 @ Rs.38 shares....
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.... 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. There exists a legally enforceable and final agreement between the parties which was executed and acted upon by the parties, which had not been denied by either party, and which was considered by....
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....ncluding 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 omitted 'non-compete consideration' in each of the clauses in 4.2, 4.3 and 9.1. In clause 3.1 of the agreement whereas, it was earlier provided that the sale price would be Rs.152 per share and that the sellers are en....
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.... 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 capital gain assessable in the hands of the assessee. The learned counsel for the assessee took us through the show-cause notice available on pages 219 to 220 of the paper book (extracted supra). The show-cause notice suggests that t....
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.... 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% of the shares. This person sold 35,000 shares and no non-compete fees was presumed in her case. Similar is the situation with regard to other two promoters. The revenue ought to have adopted a uniform policy. For the principle of consist....
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....f 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 or not. There is no dispute with the proposition espoused by the Ld. AR that an order passed by the Assessing Officer can be revised u/s 263 if the following conditions are satisfied:- (a) there is wrong assumption of facts; (b) there ....
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.... 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 as under: Offer Offer to acquire upto 56,03,860 fully paid up Equity Shares of the face value of Rs.10/- each representing 20.00% of the voting paid up equity share capital (assuming conversion of 41,70,000 Warrants issued to the Acquirers into 41,70,000 Equity Shares ....
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....ereafter 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-compete clauses binding upon the promoters including the appellant. That goes to show that all the "non-compete clauses" are retained in the revised/ amended WSSPA, but strangely, no "consideration" remains payable for it since the only purpose of the whole revised WSSPA was to avoid/ evade higher tax payable on the s....
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....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 in writing and signed by the person to be charged therewith, or by his agent generally or specially authorized in that behalf, to pay wholly or in part a debt of which the creditor might have enforced payment but for the law for the limitation of suits. In any of these cases, such an agreement is a contract." This revised agreement is void t....
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....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 been done on a mere change of opinion. Negating such claim, the Delhi High Court relied on its earlier judgements in Gee Vee Enterprises case and Duggal & Co's case (cited supra) and held that "The mere submission of a letter to the Assessing Officer giving bifurcation does not necessarily mean that proper verification and investigation was done and accepted. Averm....
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.... 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 hereunder: (a) The first objection raised was that the assessee cannot be faulted if the assessment order is a cryptic one and the issue had been decided without discussing it in detail. The assessee does not have control over the way an order is drafted by the AO. In this connection, he relied on one Allahabad High Court decision and also the decision of Delhi High Court in the ....
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....hen 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 reasoned order.(Paras 4 & 5)" In the light of the above decisions, the cryptic order passed by the A.O. without due application of mind has been rightly revised u/s 263 of the Act, since all the ingredients of S.263 have been duly satisfied. (b) The second objection raised by the appellant that all relevant documents had been duly called for by the A.O. The scrutiny proceedings con....
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....come 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 various authoritative pronouncements including the decision of Hon'ble Supreme Court in the case of Malabar Industrial Ltd. (supra) as well as Hon'ble Bombay High Court rendered in the case of CIT v. Gabriel India Ltd. [1993] 203 ITR 108/71 Taxman 585 and has propounded the following broader principle to judge the action of CIT taken under section 263:- "The fundamental principle which emerge from the above cas....
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....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 the minimum amount of evidence may be adopted by a civil court in the absence of any rebuttal. The civil court is neutral. It simply gives decision on the basis of the pleading and evidence which comes before it. The Income-tax Officer is not only an adjudicator but also an investigator. He cannot remain passive in the face of the return which is apparently in order but calls for further inquiry. It is his duty to ascertain the truth of....
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....ue 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 price to the public. On due consideration of this contention, we are of the opinion that it is not of much relevance, because according to section 2(h) of the Indian Contract Act, 1872, an agreement enforceable by law is a contract. The parties entering into an agreement for sale and purchase of share may not require instructions from the SEBI but they were required to take the permission of SEBI while fixing the offer price of share for the p....
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....-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 original one. In other words, the original contract would lapse. The arguments raised by the Learned DR on the strength of section 10, 25 and 27 of the Indian Contract Act are concerned, none of the conditions provided in these sections are attracted in the present case. The parties are competent to enter into a contract. The contract was for sale of shares. They have fixed the sales price and paid the consideration. How it can be said that co....