By C. N. Vaze
Shailesh Kamdar
Jagdish T. Punjabi
Chartered Accountants
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46 2009-TIOL- 789-ITAT- MUM
Mrs. Hami Aspi Balsara vs ACIT
ITA No. 6402/Mum/2008
Assessment Year: 2005-06.
Date of Order: 22.5.2009
I S. 2(47), 54EC- Transfer of
shares is completed only on final delivery of shares and upon all covenants of
the share purchase agreement becoming finally irrevocable and not on the date of
execution of the share purchase agreement.
II Ss. 28(va), 55(2)(a)- Section
28(va) would be attracted where the assessee was carrying on business and not
where the assessee only had right to carry on business in the form of capital
asset— Where capital asset is in the nature of right to carry on business, then
the consideration for non-compete will come within the ambit of capital gains
tax.
Fact I:
The assessee, on 27.1.2005, entered into an agreement for the
sale of shares held by the assessee and other persons in three companies viz.
Balsara Home Products Ltd., Balsara Hygiene Products Ltd. and Besta Cosmetics
Ltd. (i.e. target companies) to Dabur India Ltd. (the buyer). A sum of Rs
10,65,06,753 was received by the assessee on 28.1.2005. As per the terms of the
share purchase agreement, the transfer of shares was effective from 1.4.2005.
The assessee regarded 1.4.2005 to be the date of transfer, and investments
qualifying for exemption u/s 54EC were made within a period of six months from
1.4.2005.
The Assessing Officer (AO) held that since various covenants
in the share purchase agreement resulted in substantial extinguishment of the
rights of the assessee in the target company, and also since the sale
consideration was not refundable to the assessee, the transfer of shares had
taken place on 27.1.2005, it being the date of the share purchase agreement. He
taxed capital gains in the assessment year 2005-06. He also held that the
investment had not been made within six months from the date of transfer and,
therefore, denied exemption u/s 54EC.
Aggrieved, the assessee preferred an appeal to CIT(A) who
confirmed the action of the AO.
Aggrieved, the assessee preferred an appeal to the Tribunal.
Fact II:
The sale consideration for shares of companies having
Intellectual Property Rights, was in excess of the book value of the shares.
Since the share purchase agreement had a non-compete covenant and no specific
consideration was assigned to it, the AO considered the difference between the
sale consideration for the transfer of shares and the book value of the shares —
which was approximately 80% of the sale consideration — to be the consideration
for non-compete, and charged it to tax u/s 28(va).
The CIT(A) confirmed the action of the AO.
Aggrieved, the assessee preferred an appeal to the Tribunal.
Held I:
(i) `Sale’, as contemplated u/s 2(47)(i), and
extinguishment of rights, as contemplated u/s 2(47)(ii), are not mutually
interchangeable. If a particular transaction is a transaction of sale, then,
unless the sale is complete, no transfer can be said to have taken place;
because there will always be extinguishment of rights in the case of a sale —
and if a single right out of the entire bundle of the property in a capital
asset is extinguished, then, the transfer would be complete. This will lead to
an absurd situation.
(ii) A case of sale and that of extinguishment of rights
are mutually exclusive. It could not be said that there was extinguishment of
rights on 27.1.2005 because extinguishment of rights implies that the right
cannot be revived. However, till the time the right is revocable, it could not
be said that there was extinguishment of rights. At best it can be said to be
a case of suspension of rights till all the requirements for completing the
sale were over. It was only on execution of the second amendment to the 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.
(iii) Clause (c) of Section 372A of the Companies Act, 1956
mandates that a company cannot acquire by way of subscription, purchase or
otherwise the securities of any other corporate body, unless previously
authorized by a special resolution passed in a general meeting. This special
resolution was passed by Dabur India Ltd. on 28.3.2005. Therefore, in any
case, prior to this date, it cannot be said that the shares of the assessee
were acquired by Dabur India Ltd.
(iv) The definition of the term `sale’ as per the Sale of
Goods Act assumes importance since this term is not defined in the Income-tax
Act. On a reading of S. 4 of the Sale of Goods Act, it becomes evident that an
agreement to sell becomes complete when the conditions contemplated in the
agreement are fulfilled.
(v) S. 65 of the Indian Contract and Specific Relief Act
makes it very clear that if, for any reason, the terms of a contract cannot be
fulfilled, then the assessee is bound to restore the benefits she had
received, including the consideration to the purchaser.
(vi) The decision of the Amritsar Bench of ITAT, in the
case of Maxtelcon Ventures Ltd. (301 ITR (AT) 90), was rendered with reference
to K N Narayanan (145 ITR 373)(Ker) without considering the subsequent
decision of the same High Court in the case of 203 ITR 663.
