By C. N. Vaze, Shailesh Kamdar, Jagdish T. Punjabi, Bhadresh Doshi, Bhadresh Doshi
Chartered Accountants
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Section 28(va), section 55(2)(a) — Consideration received by a shareholder of a company, for transfer of shares of the company, under a share transfer agreement which includes non-compete covenant and the assessee is not actively engaged in business, is chargeable to tax as capital gains.
Facts:
The assessee along with other shareholders of Mandhana Boremann Industries Pvt. Ltd., who were all family members of the assessee, transferred their shares to Paxar BV, a Dutch Company. The shares were acquired by Paxar BV for a consideration of Rs.570 per shares which worked out to Rs.45.60 crore for the shares held by Mandhana family. All the shareholders in Mandhana family entered into an agreement with Paxar BV for the purpose of this transfer of shares, and one of the clauses in the agreement also provided that the transferor shall not carry on, or be interested in, any business which competes with the business of Mandhana Boremann. The AO held that a part of the sale consideration of Rs.570 is attributable to the non-compete covenant and is liable to be taxed in the hands of the assessee u/s.28(va). The AO computed the value of shares, by break-up method, at Rs.365. Accordingly, the balance amount of Rs.205 per share was treated as towards non-compete fee and brought to tax u/s.28(va) in the hands of the assessee.
Aggrieved, the assessee preferred an appeal to the CIT(A) who upheld the action of the AO in principle, but held that only Rs.41 per share can be attributed to non-compete fees. He also held that the decision of a Co-ordinate Bench in the case of Homi Aspi Balsara v. ACIT, (2009 TIOL 789 ITAT-Mum.) does not help the assessee as there is specific mention of non-compete obligations in the share sale agreement, and therefore, part of the sale consideration of shares is attributable to the non-compete obligations.
Aggrieved, the assessee preferred an appeal to the Tribunal and contended that no part of consideration can be attributed to non-compete fees.
Held:
The Tribunal noted that the even in the case of Homi Aspi Balsara there was a specific non-compete obligation and yet the Co-ordinate Bench had taken a view that no part of sale consideration of shares could be attributed to be taxed in the hands of the assessee as business income u/s.28(va).
Following the ratio of the decision of the Mumbai Tribunal in Homi Balsara the amounts held to be attributable to non-compete obligations are taxable as capital gains and not as business income. To this extent it reversed the order of the CIT(A). It observed that since the entire consideration was already offered for taxation as capital gains, the bifurcation between consideration attributable to sale of shares and for non-compete obligations is rendered academic and infructuous. It also noted that since it was uncontroverted position that the assessee was not actively engaged in the business it was not necessary to examine the matter any further. The Tribunal upheld the stand of the assessee in treating the entire consideration received on sale of shares as taxable under the head ‘capital gains’.
