TaxTMI 
TaxTMI 
2009 (5) TMI 920
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....ed 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 to be set aside. 4. The learned CIT(A) has erred in confirming the order of the Assessing Offi....
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.... 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 assessee alongwith other sellers, were made to sign the deed of adherence, approved the transfer of shares and made to execute....
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....corded 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) The sale of shares as per the provisions of Section 2(47)(i) and the capital gains arising thereon occurred only on the transfer of shares and not on the extinguishment of rights....
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.... 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 27.1.2005. As regards assessee's submissions with reference to Articles 6 & 8of the agreement dt. 27.1.2005, Ld. CIT (A) observed that they were in the nature of completion obligation of the sellers, mode of payments, procedure for resignation of nomine....
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....eby 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. Ld Counsel further referred to Article 3.1.1 to 3.1.13 dealing with sellers' specific undertaking, which read as under: 3.1.1. have caused, at their own cost (including cost of stamp duty and, or any direct or indirect tax, cost, as mutually agreed between the Buyer and the Sellers), the transfer of identified assets lis....
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....k 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 which is a normal term in a particular agreement to sale because buyer had to protect themselves on account of time lag between two events. But that does not mean that rights extinguishment. Ld. Counsel further pointed out that the Directors resigned on 1.4.2005. As regards the delivery of shares, Ld. Counsel further submitted that no delivery was give....
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....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 and subsequent decision of the Board of Directors of the Company in its meeting held on March 28, 2005, the acquisition process of Balsara Hygiene Products Ltd. and Besta Cosmetics Ltd. have been completed on April 16, 2006. Henceforth these two companies have become subsidiary of the company with effect from April 16,2005. Source NSE - Dabur India Ltd. h....
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....TRR 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 the conveyance of the said property even though it gave complete dominion to the transferee and sale must be effective on conveyance of the capital asset to the transferee. Ld. Counsel submitted that applying this principle in the present case, as per Section 108of the Companies Act, and as per Article 53 of the Articles of Association of the Target Companies, the instrument of transfer was to be executed by both the transferors and t....
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.... 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 respect of a capital asset and only that part of the consideration could be brought to tax which related to the rights which had been the subject matter of alleged extinguishment. Similarly, one will have to ascertain the cost of acquisition of the rights which had been allegedly extinguished. Since, cost of acquisition is of the capital asset being shares, and not of any rights, the computation provisions will become un-workable and, the....
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....ishment 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 there was substantial extinguishment of rights of the assessee related to rights in the Target Companies. Ld. D.R. submitted that share purchase agreement partakes the character of brokers note and, therefore, in view of Circular No. 704 contained at page 19 of PB, the date of share purchase agreement is to be treated as the date of transfer. Ld. D.R. referred to the decision of the ITAT Amritsar Bench in the case of Maxtelcon Ventures Ltd., v.....
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....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 contemplated Under Section 2(47)(ii) are not mutually inter changeable. If a particular transaction is the transaction of sale then unless the sale is complete, no transfer can be said to have taken place because, as rightly pointed out by ld. Counsel for the assessee, there will always be extinguishment of rights in case of sale and if a single right out of the entire bundle of property in capital asset is extinguished, then, the transfer would be taken as c....
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.... 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. 2. A contract of sale may be absolute or conditional. 3. Where under a contract of sale the property in the goods is transferred from the seller to the buyer, the contract is called a sale, but where the transfer of the property in the goods is to take place at a future time or subject to some condition thereafter to be fulfilled, the contract is called an agreement to sell. 4. An agreement to sell becomes a sale when the time elapses or the conditions are fulfilled....
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.... 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 the actual delivery of shares and the transfer deeds. This clearly shows that the date of contract of sale will be the date which the parties have agreed to. No other date can substitute the date as declared by the parties. In the present case, the date of contract of sale as understood by the parties is 1.4.2005 and the same cannot be substituted by the date of share purchase agreement because completion date was specified in Article 6 of the Share purchase agreement, which was not later than 4.4.2005 or s....
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....s. 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 the Target companies at book value. He, therefore, restricted the long term capital gains to the book value of the share and treated the balance amount towards non-compete fees. He, accordingly, taxed Rs. 8,55,33,802/- Under Section 28(va). Ld. CIT(A) confirmed the AO's action. 15. Ld. Counsel for the assessee submitted that Balasara Home Products was a manufacturing company and the Balsara Hygiene Products and Besta Cosmetics were companies having Intellectual Property Rights(IPR). He pointed out that competition can only be in manuf....
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.... 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 Restraint Clause was embedded. But the same was not specifically mentioned in the Share Purchase Agreement. As rightly pointed by the ld. Counsel for the assessee, non-compete fees could be payable primarily with respect to manufacturing company viz. Balasara Home Products. As regards other two IPR companies viz. Balasara Hygiene Products and Besta Cosmetics, since value of IPR was not reflected in the balance sheet, which constituted major part of the share price, the same had to be determined before arriving at the true book value of share of these two....
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....ht 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 consideration and true value of shares was chargeable as capital gains. We have already held that the date of transfer of shares was 1/15-4-2005 and the investment in the specified securities had, accordingly, been made within the specified period . Therefore, in any view of the matter, no tax was payable This ground is accordingly allowed. 18. The third issue raised vide ground No. 5 is relating to expenses claimed in respect of transfer of shares. 19. Brief facts apropos this issue are that the assessee had claimed an expenditure of Rs. 35,02,000/- towards transfer of shares of the targeted companies. This sum comp....