TaxTMI 
TaxTMI 
2009 (5) TMI 920
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.... that the additions upheld, be deleted. 2. The learned CIT(A) has erred in upholding that the sale of the equity shares took place on 27th January, 2005, the date on which the Share Purchase Agreement was signed and not in April 2005, when the actual share transfer took place. You Appellants submit the finding is erroneous, contrary to facts and the records and ought to be set aside. -Without prejudice to the above ground, the learned CIT(A) has erred in not considering the cost of acquisition of shares and allowing benefit of indexation of cost of shares whilst calculating the capital gains. -Without prejudice to the above ground, the learned CIT(A) has erred in not correctly considering the dates of deposit in Section 54EC Bonds and thereby denying benefit of exemption from tax of capital gains. 3. The findings of the learned CIT(A), viz. that: a) The entire sale consideration of Rs. 10,65,06,753/- has been received by the Appellant and; b) The terms of Article 5 of the Share Purchase Agreement categorically stated the extinguishment of rights of the promoters and shares holders, is erroneous, contrary to the record and ought ....
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....res be taken as 1.4.2005 in case of Balsara Home Products Ltd., and 15.4.2005 in case of Balsara Hygiene Products Ltd., and Vesta Cosmetics Ltd. The assessee relied on the decision of the Hon'ble Supreme Court in the case of Allapati Venkatramaiah v. CIT 57 ITR 185 (SC), wherein, it was held that 'entries in the books of account are not relevant for determining date of transaction'. The AO referred to the submission of the assessee that transfer of movable property is complete and effective when the movable property is delivered pursuant to contract of sale and pointed out that as per Sub-section (47) to Section 2 ,the same does not speak of physical transfer. He further pointed out that as per Section 2(47) relinquishment of assets or extinguishment of rights is sufficient for transfer. In the backdrop of this definition of transfer, he examined various covenants of share purchase agreement and came to the conclusion that there was a substantial extinguishment of rights of the assessee related to her rights in the target company i.e. Balsara Home Products, Balsara Hygiene products and Besta Cosmetics Ltd. He pointed out that as per agreement dated 27.1.2005 the assesse....
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.... of the buyer was to occur once the shares were dematerialize. iv) In case of Balsara Home Products Ltd., the share transfer form clearly recorded the date of transfer as 1.4.2005. In case of Vesta Cosmetic Ltd. and Balasara Hygiene Products Ltd., the shares were dematerialized on 14.4.2005. Thus, upto these dates, the assessee was owner of the shares. v) The shares being movable property were covered by the sales of Goods Act and, therefore, the transfer of shares could occur only after 1.4.2005 because as per the terms of Sales of Goods Act, the agreement to sale did not amount to sale of goods. vi) As per the Companies Act, the transfer could not be completed till the document was registered. There could not be any question of extinguishment of rights till the transfer was completed. vii) The sale of equity shares did not take place on 27.1.2005 because there were certain prerequisites like directors resignation, directors and share holders' approval, repayment of fixed deposit, release of personal guarantees, obtaining consents from banks, dematerialization of shares, etc, which occured between 27.1.2005 and April, 2005. viii)....
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....ansaction with any related parties; causing any liquidation or winding up of the target companies; issuing of any shares of securities of the target companies; causing any amendment to the Articles of Association and Memorandum; entering into or varying terms of any material contracts; recruitment of new employees; varying the terms of employment of any existing employee; preparing any business plan or financial or sales projection etc. Any conduct of business was to be with the prior written approval of the buyer or its nominees. These restrictions show that the promoters and management of the target companies were prevented from carrying out any business activity in the targeted companies. ii) The restrictions arose because of the agreement to sell shares by the shareholders of the target companies. iii) The shareholders had forgone their rights to dividend and receipt of any further shares by way of rights/bonus etc. From, the above, he concluded that the shareholders had substantially extinguished their rights in the Target Companies and the assessee being a party to the sale agreement dt. 27.1.2005, its rights as a shareholder stood extinguished from 27.1.....
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....nder: The Buyer confirms that by the completion date and in any event as soon as practicable, it shall obtain the approval of its shareholders as required under Section 372-A of the Companies Act to implement the transactions contemplated by this Agreement ("Completion condition"). The Buyer hereby confirms that it has taken all necessary steps including (a) obtaining the required board approval and (b) calling for an extra ordinary general meeting (c) the shareholders of the Buyer for approving the transactions contemplated hereby. c) "Purchase Price" means the aggregate purchase price for the shares which is Rs. 142,77,75,147.00 (Rupees one hundred and forty two crores seventy seven lakhs seventy five thousand one hundred and forty seven only) payable by the Buyer in favour of the Sellers by delivery thereof to the Attorney and apportioned in the manner set out in Schedule 4. d) "Replacement guarantee" means the guarantee to be issued by the Buyer to replace the guarantees. e) "Retention Amount" means an amount of Rs. 5,00,00,000 (Rupees five crores) consisting a part of the purchase price payable to Taronish Enterprises on Completion Date. ....
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....t fulfilled on 27th January, 2005 but on 7th March, 2005 when in terms of Article 2.1, approval of shareholders as required under Section 372A of the Companies Act was obtained. Ld. Counsel further referred to pages 201 to 210 of PB to demonstrate that on 1st April, 2005, Dabur India Limited returned the original guarantees duly cancelled by Citibank to Mr. Sujjain Talwar, Partner Economic Laws Practice. Ld. Counsel further referred to the definition clause contained at page 96 and pointed out that the signatories meant the date on which the agreement was signed which was 27.1.2005 but the completion date was the date when necessary resolutions Under Section 372A(1) of the Companies Act was passed. Thereafter, Ld. Counsel referred to pages 98 to 103,109,117,133 and 181 to demonstrate various conditions to be complied with before sale could finally took place. He submitted that on 27.1.2005, several obligations were to be fulfilled by the sellers and buyer and, therefore, it could not be said that transfer took place on the said date. Ld. Counsel further referred to Article 5 contained at page 100 of PB and pointed out that the said Article dealt with interim conduct of business whi....
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....row agreement dated 1.4.2005 contained at pages 148 onwards which had been entered into between Dabur India Ltd. and HSBC for dematerialization of shares. Ld. counsel submitted that Escrow agent held property to be handed over to person actually entitled the property. Thus, prior to 1.4.2005, it could not be said that the shares were transferred to Dabur India Limited. Ld. Counsel further referred to pages 226 to 227 to demonstrate that in the Annual Report for 2005-06, Dabur India Limited stated about the acquisition of Balsara business. He also referred to page 229 of PB wherein, the balance sheet of Dabur India Ltd. is contained to demonstrate that shares of Balsara Hygiene Products Ltd., & Balsara Home Products and Besta Cosmetic Ltd. appeared in the balance sheet of Dabur India Limited as at 31.3.2006 and not on 31.3.2005. Ld. Counsel further referred to page 231 of PB wherein, Corporate Announcements on Dabur India- BSE Announcement, is contained and pointed out that intimation was sent to BSE and NSE on 31.5.2005, in which, it was mentioned as under: Source BSE -Dabur India Ltd. has informed BSE that pursuant to approval of the shareholders by way of postal ballot a....
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....e Calcutta High Court in the case of CIT v. Arun Dua 186 ITR 494 (Cal), wherein, it was, inter alia, held that if the company and the employee had understood the agreement in a certain way, and had acted upon that agreement, it was not open to the ITO to give another interpretation and tax the assessee on a hypothetical amount. Ld. Counsel further referred to the decision of the Hon'ble Supreme Court in Allapati Venkatramaiah, 57 ITRR 185 (SC). In this case, the Court was concerned with the date of transfer in respect of immovable property for which, an agreement was entered into on 17.3.1948. The possession of property was handed over to the transferee and entries for transfer were also passed by both the parties in the books of account on 20.3.1948. The conveyance was, however, executed on 22.11.1948. The date of transfer was relevant in that case because if it was on the date of agreement i.e. on 17.3.1948, then, it would have been to subject to capital gains, but, if it was after 31.3.1948 (22.11.1948), there was no charging provision to charge capital gains to tax. The Court held that delivery of possession of immovable property cannot by itself be treated as equivalent to....
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....regard, ld. counsel referred on the decision of the Hon'ble Supreme Court in the case of ACIT, Gujarat v. Surat Art Silk Manufacturers Association 121 ITR 1 (Guj) (page 17) wherein, inter alia, it was observed that it is true that the consequences of a suggested construction cannot alter the meaning of a statutory provision where such meaning is plain and unambiguous, but they can certainly help to fix its meaning in case of doubt or ambiguity. He, therefore, submitted that in order to find out true intention of legislature, the differentiation drawn by legislature between movable assets and immovable assets cannot be lost sight of. Ld. Counsel submitted that if revenue's view is to be accepted then, as per AO himself since there was substantial extinguishment of rights, control and management on 27.1.2005, therefore, implies that some rights were extinguished in April 2005. Admittedly, assessee never contemplated any consideration vis-a-vis extinguishment of particular rights but the consideration contemplated was for entire sale. He submitted that that if AO's view is to be accepted, then, full value of consideration will have to be divided between various rights in r....
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.... the transferee, the transaction is complete when the share certificates are handed over. The mere fact that the company has not registered the transfers in its books would not justify the claim that the transfer took place only later. 7. Ld. D.R. submitted that the date of allotment cannot be taken as assessee's date of investment as per Section 54EC. He submitted that Section 2(47) is an inclusive definition and pointed out that extinguishment of any right would attract the provisions of Section 2(47) and it is not necessary that all rights should have extinguished. He submitted that as per share purchase agreement substantial rights extinguished on 27.1.2005 and, therefore, this date was rightly taken as date of transfer by the AO. He further submitted that Section 2(47) does not speak of physical transfer and includes all kinds of conceivable transfers. Ld. D.R. referred to Article 5 of share purchase agreement and submitted that the same takes away effective control of shares from sellers. He referred to assessment order and pointed out that AO clearly demonstrated with reference to various covenants of the agreement contained in Article 5 as noted in para 5.2 (ii) that....
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....missions and perused the record of the case. The facts as noted earlier in detail in the arguments of Ld. Counsel for the assessee are not disputed. Admittedly, it is a case of sale of shares. In this regard, share purchase agreement was entered into on 27.1.2005 and final delivery of shares took place on 1/15.4.2005. In the share purchase agreement, detailed provisions were made restricting the vendors from exercising various rights in relation to shares. Revenues' main contention is that on account of substantial extinguishment of rights in pursuance to share purchase agreement, the transfer took place on 27.1.2005. Per contra, the assessee's claim is that when the delivery of shares was over and all the convents contemplated in the share purchase agreement became irrevocable on 1.4.2005 then only transfer was complete and, accordingly, the investment made by the assessee in the specified securities within six months reckoned from 1.4.2005 entitled the assessee for exemption under Section 54EC. In the first place, we are in agreement with the contention of ld. Counsel for the assessee that sale as contemplated Under Section 2(47)(i) and extinguishment rights as contemplat....
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.... It was only on execution of second amendment to share amendment to share purchase agreement on 1.4.2005 that the Escrow agreement and the power of attorney became incapable of being revoked,, modified or altered unilaterally by the sellers . Therefore, prior to this date, the sellers had the right to revoke the share purchase agreement. Further Section 372A Clause (c) of the Companies Act mandates that a company cannot acquire by way of subscription, purchase or otherwise the securities of any other body corporate unless previously authorized by the special resolution passed in a general meeting. Admittedly, this special resolution was passed by the Dabur India Ltd. on 28.3.2005. Therefore, in any case, prior to this date, it cannot be said that shares of assessee were acquired by Dabur India Limited. The share is a movable property and is governed by sale of Goods Act. Section 4 of the Sales of Goods Act reads as under: Sale and agreement to sell. 1. A contract of sale of goods is a contract whereby the seller transfers or agrees to transfer the property in goods to the buyer for a price. There may be a contract of sale between one pat-owner and another. ....
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.... handing over of the shares by the transferors to the transferee, the shares should be taken to have been transferred to the transferee, though until the transfer of share is registered in accordance with the Companies Law, the transfer could not enable the transferee to exercise rights of the shareholder vis-a-vis the company. Thus, in sum and substance, the transfer of share is complete when the share certificate alongwith duly executed transfer deed is handed over to the transferee. Therefore, we, respectfully, do not agree with the proposition laid down in the said decision. 13. Now coming to the Circular No. 704 dt. 28.4.1995 . This circular deals with two situations. Firstly, shares listed on stock exchange and transfer taking place through brokers. Secondly, transactions taking place directly between the parties and not through stock exchange. We are concerned with the second situation. In this regard, it is mentioned in the circular as under: In case the transactions take place directly between the parties and not through stock exchanges the date of contract of sale as declared by the parties shall be treated as the date of transfer provided it is followed up by....
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....India Ltd. Vide letter dt.19.12.2007 intimated that the price was arrived at between the buyer and the seller, which was paid. The AO observed that the purchase price provided by Dabur India Ltd., for the Target Companies was as under: Balsara Home Products Rs. 27.66 per share Balsara Hygiene Product Rs. 300.06 per share Besta Cosmetics Ltd. Rs. 412.34 per share He observed that the book value of shares of these three companies on the basis of balance as at 31.3.2005 was as under: Balsara Home Products Rs. 29.38 per share Balsara Hygiene Product Rs. 40.83 per share Besta Cosmetics Ltd. Rs. 13.62 per share The AO required the assessee to explain as to why the difference between the book value and purchase price be not considered as non compete fees received from M/s. Dabur India Limited as per Article 11.1 of share purchase agreement. The assessee explained that no element of non-compete fee was there as transferor was not having any technical knowledge about manufacturing activities. AO, after considering the Schedule II, observed that assessee was purchasing equity shares of Jesie House Hold Care Products Pvt. Ltd., and immovable assets of....
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....nt of HSBC is contained to demonstrate that assessee had invested Rs. 50000000 in rural electrification bonds. 16. The ld. D.R. relied on the orders of the lower revenue authorities. 17. We have considered the rival submissions and have perused the record of the case . The A.O has determined the book value of shares and has treated the difference between the sale price of shares and its book value as consideration towards non-compete fees. Admittedly, in the share purchase agreement no consideration was assigned towards non-compete fees and the parties had entered into the share purchase agreement after mutually settling the price of shares. The A.O. has primarily relied on Article 11.1 of the share purchase agreement to infer that assessee had paid amount towards non-compete fees. Article 11.1 reads as under: In consideration of the Purchase price received by the Sellers under this Agreement, the sufficiency of which is hereby acknowledged, the Sellers agree that for a period of 5 years from Completion, the Sellers shall not be engaged in any of the Restricted Business in India. This clause clearly shows that in the purchase price of shares, consideration towards....
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....ed that Sub-clause (a) shall not apply to: (i) Any sum, whether received or receivable, in cash or kind, on account of transfer of the right to manufacture, produce or process any article or thing or right to carry on any business, which is chargeable under the head "Capital gains, Thus, Section 28(va) would be attracted where the assessee was carrying on business and not where assessee only had right to carry on business in the form of capital asset. Further as per Circular No. 763 dated 18/2/1998 by Finance Act, 1997 the amendments were made in Section 55(2)(a) of the Act to bring extinguishment of right to manufacture, produce or process any article or thing or right to carry on any business within the ambit of capital gain tax. Similarly Circular No. 8 of 2002 dated 27/8/2002 explaining the provisions of Finance Act, 2002 by which Clause (va) was inserted in Section 28 of the Act, clarifies that receipts for transfer of rights to manufacture, produce or process any article or thing or right to carry on any business, which are chargeable to tax under the head capital gain would not be taxable as profits and gains of business. Thus, the difference between the sale con....