Income Tax Appellate Tribunal - Chandigarh
Sh. Sumeet Taneja,, Chandigarh vs Assessee on 15 March, 2012
IN THE INCOME TAX APPELLATE TRIBUNAL
CHANDIGARH BENCHES 'B', CHANDIGARH
BEFORE Ms SUSHMA CHOWLA, JUDICIAL MEMBER AND
SHRI MEHAR SINGH, ACCOUNTANT MEMBER
ITA No.1101/Chd/2009
Assessment Year 2006-07
Sumeet Taneja V. Addl. C.I.T.
H No. 3203, Tax Range - IV
Defence Scientist (TBRL) Chandigarh
Societ y, Sector 51-D
Chandigarh
PAN: AACPT 8236 F
ITA No. 1102/Chd/2009
Assessment Year 2006-07
Harbir Singh Khurana V. Addl C.I.T.
H No. 108, Sector 36-A Tax Range - IV
Chandigarh Chandigarh
PAN:
(Appellant) (Respondent)
Appellant By : None (Written Submissions)
Respondent By: Smt. Jaishrre Sharma
Date of hearing: 15.3.2012
Date of pronouncement: 08.06.2012
ORDER
PER SUSHMA CHOWLA, JM
These two appeals by different assessees are against separate orders of CIT(A) dated 25.9.2009 and 14.10.2009 relating to Assessment Years 2006-07 against the order passed us/ 143(3) of the Act. In both the appeals, identical issue has been raised by the assessees and hence the same are being decided by this consolidated order for the sake of convenience.
2. Common effective ground of appeals has been raised in both the appeals by the different assessees which read as under:
2
"1 That the ld. CIT(A) has gravely erred in dismissing the appeal in confirming the addition of Rs. 44,18,000/- in ITA No. 1101/Chd/2009 and Rs. 44,65,000/- in ITA No. 1102/Chd/2009 amount received on account of sale of Equity shares as Business income u/s 28(v) of the IT Act, 1961."
3. The present appeal was adjourned from date to date and fixed for hearing on 6.2.2012 on which date the ld. counsel for the assessee was directed to file the paper book. The case was adjourned to 15.3.2012 at the request of the ld AR for the assessee. The assessee filed written submissions along with compilation of papers which are taken on record. None was present on behalf of the assessee except for the written submissions filed by the assessee. In the said written submissions, the learned A.R. for the assessee has also addressed the case laws cited by the learned D.R. for the Revenue on the last date of hearing. We proceed to dispose off the present appeal after hearing the ld. DR for the revenue and the written submissions filed by the assessee.
4. The issue raised in the present appeal is in relation to the computation of income on account of sale of equit y shares which was declared under the head "capital gain by the assessee" and was assessed as business income by the AO. The facts of both the parties are identical, however, reference is made in ITA No. 1101/Chd/2009 for adjudicating the issue.
5. Brief facts of the case are that during the year under consideration the assessee had declared income from short term and long term capital gains amounting to Rs. 38,88,426/- in addition to income from business and income from other sources. The assessee had declared long term capital gains on sale of non-listed securities i.e. Excel Callnet Pvt Ltd which as per the assessee were sold on 24.5.2005 for total consideration of 44,18,000/-. The cost of purchase was declared at Rs. 4,70,000/- and capital gain of Rs. 39,48,000/- was declared as income from long term capital gains. The AO during the course of assessment proceedings asked the assessee to furnish the details of transactions of securities of Excel Callnet Pvt Ltd. The assessee in reply furnished letter 3 from M/s Excel Callnet Pvt Ltd confirming the sale of securities of Sri Sumit Taneja i.e. the assessee before us in which it was stated that the assessee had sold shares and earned long term capital gains as per annexure I without paying STT on it. The contents of annexure I are reproduced by the AO at page 4 of the assessment order. The AO on perusal was of the view that the purchase of securities of Excel Callnet Pvt Ltd was not purchased as shares by an investor as the assessee was the original founder/promoter of the company and his share was in the nature of equit y holding of the company. The AO was thus of the view that the said share holding was not investment made by the investor of capital asset but was in the nature of business asset of the company. The AO made inquiries in respect of the nature of sale of share holding. Summons were issued u/s 131 of the IT Act to the Managing Director (M.D) of Pugmarks Interweb Pvt Ltd., who had purchased the assessee's share in the company. The statement of the said M.D. was recorded on 28.11.2008 and the copy of the same is annexed as Annexure (A) to assessment order. The AO at pages 8 and 9 of the assessment order has reproduced the relevant extract of the statement viz-a-viz the nature of sale. The said company had purchased out of total shares of 1,25,050 equit y shares of M/s Excel Callnet Pvt Ltd., 47000 shares from Sumit Taneja, the first assessee before us. The sale purchase agreement was filed by the said purchaser and is annexed as Annexure-B to the assessment order. The terms of agreement are reproduced by the AO at pages 11 to 13 of the paper book. The AO observed that on perusal of the said agreement, following aspects regarding nature of sale become patentl y evident.
"1) The transaction of shares is not limited to transfer of share of a company but would in effect mean transfer of management of the company to the purchaser with a rider of no interference by the sellers who were also Directors of the company.
2) This transaction of shares would also translate into renunciation of the management by the seller Directors in favor of purchaser. This is clear from Article 2.1 of the agreement. This is further strengthened by Article 5.1.1. of the Agreement which clearly enunciates that the 4 delivery of effective resignation in writing by the Directors (in this case Shri Sumit Taneja) as a part of the activities of completion.
3) The transaction would entail handing over responsibilities to the purchasers including employee and product data base, customers support contracts, verbal commitments as ell as new clients' proposals.
4) Article 8 - Non Compete covenants is extremely pertinent. Article 8.4 very clearly states that the transfer of shares would also entail renunciation of rights in not only the company M/s Excel Callnet Pvt Ltd but also a blanket ban on engaging in any call centre activity by the sellers within a radius of 100 Kms from Chandigarh of a period f 2 years. The extract is reproduced as under:
The seller agrees not to engaged in any call centre, business process outsourcing or IT enabled services business in the States of Chandigarh, Pujab, Haryana or Himachal Pradesh within a radius of 100 Kms from Chandigarh for a period of 2 years from the date of this agreement.
5) This agreement also imposes upon the sellers a restriction to:
directly or indirectly solicit a business that the company has done since its inception without prior written permission of the company.
6) The agreement also renounced brand equity of the company by the sellers in favour of the purchasers. Article -8.10 is relevant, the extract thereof is reproduced as under:
The sellers will not take advantage of the brand equity of the company by using any names, logos, trademarks, partnerships, affiliations, names etc. 8.11 The sellers cannot use domains that contain the word Excel and would not use or claim the domain name www.Excel.netcom.
7) The agreement also includes a clause under Article 9 called the Non-solicitation of employees covenant where by the seller will not directly or indirectly solicit, hire, employ, induce or attempt to induce any present or future employee of the company or the purchaser."
6. The AO was of the view that the transfer of the share was not the transfer of capital asset within the meaning of section 2(14) of the Act but was in fact a transfer/renunciation of control over the company Excel Callnet Pvt Ltd in favour of the purchaser Pugmarks Interweb Pvt Ltd. The AO further held that the case of the assessee also does not fall within the ambit of a 'slump sale' as defined in section 2(42C) of the Act. The purchaser had purchased 50% of the entire equit y of the company. Further liabilit y of the seller was not taken over by the purchaser. In view thereof the AO held that 5 the gain arising in the said transaction could not be taxed as capital u/s 45 or Section 50B of the Act. The transaction was held to be within the ambit of Section 28 (va) of the Act. The AO made reference to clause 16 of the non compete covenant detailed in Article 8 of the agreement and held that the assessee vide share purchase agreement dated 26.3.2005 (completed on 24.5.2005) had received consideration of Rs.48,18,000/- for not carrying out the activit y relating to the business of call centre founded and promoted by him in the year 2001. Accordingl y the said consideration of Rs.48,18,000/- was charged to tax as income from the profession and business.
7. The C IT(A) upheld the order of the AO observing that the assessee - as Director is carrying on the business activity of M/s Excel Callnet Pvt Ltd. He is a promoter of the company, has major share holding and is exercising control over the supervision and management of the company. That is why there is a clause of non-interference (Article -2) of the appellant in the day-to- day management of M/s Excel Callnet Pvt Ltd. The second plea of the assessee that the shares of the company were capital asset and not business asset was also rejected by the C IT(A) observing that - it was not a case of simple transfer of shares. Here the transfer of shares from the appellant to M/s Pugmarks Interweb Pvt Ltd is under an agreement with the stipulation that the assessee would not carry out any activity in relation to any business of call centre nor would he interference in any matter nor he would do similar business within 100 Kms from Chandigarh nor he would use the brand name of M/s Excel Callnet Pvt Ltd. The assessee is in appeal against the order of the CIT(A).
8. The ld AR for the assessee in the written submissions has pointed out that the assessee has purchased 47000 shares of Excel Callnet Pvt Ltd at Rs. 10/- each on 28.3.2002 and the said investment was reflected in his balance sheet from year to year. The said shares were sold in the month of May, 2005 6 vide share purchase agreement dated 26.3.2005. The plea of the ld AR for the assessee was that the provisions of section 28(va) were not applicable to the assessee as he was not doing any business and his income was onl y from salary and it was the company, Excel Callnet Pvt Ltd which was doing the business of Call Centre. The investment in the company was for earning income from dividend and not for trading in shares. The contention of the ld AR for the assessee was that the provisions of section 28(va) of the Act would be attracted where the assessee was carrying on the business and not where the assessee onl y had the right to carry on the business in the form of capital asset. The clauses in the share purchase agreement were claimed to be onl y incidental to the agreement and no consideration was claimed to be received for non compete agreement. The price settled between the parties were onl y the market price of the shares. The assessee placed reliance on the under mentioned decision:
(A) Mrs. Hami Aspi Balsara V. A.C.I.T. (2009) 30 DTR (Mum) (Trib) 576 (B) Govindbhai C Patel V. D.C.I.T. (2010) 1 ITR (Trib) 34 Ahm "B"
Bench The learned A.R. for the assessee further pointed out that the reliance by the ld DR for the Revenue on the last date of hearing on the judgment reported in 48 SOT 324 (Mum) was misplaced as the facts were totall y different from the present case.
9. The ld. DR for the revenue placed reliance on the findings of the CIT(A) in para 3 & 4 and thereafter in paras 8 to 12 and pointed out that the agreement between the parties was both for transfer of shares and for non-compete clauses. The ld. DR for the revenue pointed out that both the promoter and Director before us sold their share holdings, which in turn had been purchased by the M.D. of Pugmarks Interweb Pvt Ltd. Our attention was invited to Article 3.1 of agreement between the parties, copy of which is annexed to the 7 assessment order. The plea of the ld DR for the Revenue was that the said agreement was in the nature of income assessable u/s 28(va) of the Act. The ld. DR for the revenue placed reliance on Guffic Chem P. Ltd V. CIT/ CIT v. Mandalay Investment P. Ltd, [332 ITR 602 (SC)]. The ld. 'DR', for the revenue clarified that the said provision was applicable from Assessment Year 2003-04.
10. On the perusal of the record and after considering the written submissions filed by the learned A.R. for the assessee and the submissions made by the learned D.R. for the Revenue, we proceed to dispose off the present appeal. The onl y issue arising in the present appeal is in respect of the treatment of the amount received on sale of equit y shares of the private limited company held by the assessee, which were transferred during the year under consideration. The plea of the assessee in respect of the said transaction is that it is a mere sale and purchase of investment held by the assessee and consequentl y gain arising on the said transaction is to be assessed under the head income from capital gains. The authorities below, however have assessed the said gain as income from business and profession under section 28(va) of the Act. The assessee held 47000 equity shares of Rs.10/- each of M/s Excel Callnet Pvt. Ltd. which were purchased on 28.3.2002. The said shares were transferred @ Rs.94/- per share to M/s Pugmarks Interweb Pvt. Ltd. on 24.7.2005. The Managing Director /Director of M/s Excel Callnet Private Limited i.e. both the assessees before us had 50 % share holding in the said company and were the brain behind the business carried on by the said company. They entered into an agreement with M/s Pugmarks Interweb Pvt. Ltd. dated 26.3.2005 under which the shares held by the assessee before us were transferred on 24.7.2005. The shares held by the assessee were not listed and were allotted to the assessee as original promoters of the company. The assessee was the Managing Director of the said company 8 M/s Excel Callnet Private Limited, which carried on the business of running a call centre. The share purchase agreement dated 26.3.2005 is enclosed as Annexure-B to the assessment order. The perusal of the said share purchase agreement dated 26.3.2005 reflected the same to be amongst shareholders of M/s Excel Callnet Private Limited and Shri K.K.Suri the authorized representative of M/s Pugmarks Interweb Pvt. Ltd., S/Shri Sita Ram Jhawar and J.K.Singal. The subscribed and paid-up equit y capital of M/s Excel Callnet Private Limited was Rs.2,50,100/- of equit y shares of Rs.10/- each. The sellers of the shares which included both the assessees before us were beneficiary owner of 112550 shares i.e. 45% shareholding of the company. The assessee Shri Harbir Singh Khurana held 47500 shares and Shri Sumeet Taneja held 47000 shares. The balance shares were held by other persons as enlisted in the share agreement. As per Article-2 of the said agreement, the interim understanding between the parties was as under:
2.1 The Seller would refrain from day to day management from the date of this Agreement and would not exercise their powers as director of the Company.
2.2 The Sellers would cooperate in handing over the
responsibilities to the Company. The items involved in this
handover process include but not limited to Employee
Database, Products Database, Customer Support, New Client proposals in pipeline, Other prospects and customer's database, Payment Recovery and Customer. Management cases, Contract, Verbal Commitments, Banking Information, software/licenses and any other property that is acquired under the tenure of the Sellers working with the Company.
2.3 The handover process is expected to be completed within 30 days from the date of this Agreement. However, if any process requires signatures of the Sellers like banking, the same shall continue with mutual cooperation. For signing bank Cheques post the date of this Agreement, and until the new board is able to communicate new signatories to the bank, any cheque signed by the continuing 9 Directors shall be counter-signed by either of exiting Directors as an obligatory duty during this period.
11. As per Article-3 of the said agreement, consideration per share for sale of shares by the seller to the purchaser was fixed to Rs.94/- which included non-compete premium per equit y share of the company. As per clause 3.4 the purchaser i.e. M/s Pugmarks Interweb Pvt. Ltd. released token advance mone y of Rs.5 lacs and the additional Rs.8 lacs was to be paid by 18.4.2005. The balance would be paid within a period of eight weeks from the date of the Agreement. Under Article-4 the effective date would be from the date provided however the obligation of the parties was to complete the transaction of sale and purchase subject to and conditionall y upon the other part y fulfilling its obligation to proceed to completion.
12. Article-4.2 provides as under:
4.2 The Purchasers and Sellers shall expeditiously apply for and diligently pursue and use all reasonable endeavours to obtain any applicable consents, permission or approvals(together the "Approvals") as may be required for them to complete and perform their obligations as envisaged in this Agreement.
13. Under Article 4.3 in case of non-deposit of the balance money by the purchaser the token advance amount was to be forfeited.
14. Article-5 i.e. activities at completion enlisted the acts and deeds to be done by the sellers and the purchasers:
5.1.1 The Sellers shall do or cause to be done the following acts and deeds:
(a) deliver to the Purchaser effective resignation in writing( if not already tendered) of Mr Harbir Singh Khurana, Mr. Avtar Singh Khurana, Mr. Sumit Taneja and Mr. P.K Taneja as directors on the board of directors of the Company.10
(b) deliver to the Purchaser share transfer forms duly signed by or on behalf of the Seller as transferor;
(c) deliver to the Purchaser share certificates in original in respect to fall the Sale Shares;
5.1.2 The Purchasers shall do or cause to be done the following acts and deeds:
(a) Deliver to the Sellers , the Consideration for sale of Sale Shares, as provided in Article 3.2.
(b) Deliver a certificate relieving the Sellers from the Company's employment duties, obligations, commitments and liabilities with effect from the Completion date with the exception of the representation and warranties and other such clauses of the Memorandum & Articles of Association of the Company, which will be limited to actions or inactions till the Completion Date.
5.2 The Sellers and the Purchasers shall have convened a meeting of the Board of Directors of the Company to be held at Completion and to pass a resolution granting "in principle" approval for effecting the transfer of Sale Shares from the Sellers to the Purchasers, subject to the amendments to Articles of Association of the Company, subject to receipt of duly executed share transfer forms, original share certificates in relation to the Sale Shares.
15. Under Article-6 certain representations and warranties were agreed upon between the parties. Article-7 is in respect of indemnification of clauses of agreement. Under Article-8 the covenants of non-compete are enumerated under which the seller agreed not to engage in any call centre, B.P.O. and IT Enabled services business in State of Chandigarh, Punjab, Haryana or Himachal Pradesh within a radius of 100 km from Chandigarh for a period of two years from the date of agreement. The seller also agreed not to solicit business of the company done since its inception without prior written permission of M/s Pugmarks Interweb Pvt. Ltd. Various other non-covenant clauses were agreed between the parties as per Article 8.1 to 8.6 under which 11 the sellers were stopped from soliciting the business carried by them. Certain misc. business items were covered thereafter as part of the agreement i.e. for the handing and taking over of the business by the shareholders to M/s Pugmarks Interweb Pvt. Ltd. Further statement of Shri Kulwinder Singh Suri, Managing Director of M/s Pugmarks Interweb Pvt. Ltd. was recorded on 28.11.2008 in which he admitted that he had 45% shares in M/s Pugmarks Interweb Pvt. Ltd. In respect of the transaction with M/s Excel Callnet Private Limited the deponent stated that the transactions to buy shares in M/s Excel Callnet Private Limited was completed in May, 2005 and 47500 shares were purchased from Shri Harbir Singh for total consideration of Rs.44,65,000/- and 47000 shares from Shri Sumit Taneja for total consideration of Rs.44,18,000/-. Reference was made to the agreement between the parties in respect of the terms of purchase. The deponent further stated that the purchase value was agreed on mutuall y acceptable consideration of premium of Rs.84/- per share over face value of Rs.10/- per share and the Assessing Officer confronted the deponent with the Balance Sheet of M/s Excel Callnet Private Limited as on 31.3.2006 where the opening value per share was Rs.7.29 per share and the deponent was asked to give basis of premium paid on the face value of the share. The repl y of the deponent was that the same was based on mutuall y agreed and acceptable price consideration. Further he stated that he was Managing Director of M/s Excel Callnet Private Limited and enjoyed equall y management control as the other shareholders of the company M/s Excel Callnet Private Limited. The said statement was recorded by the Assessing Officer and the counsel of the assessee vide order-sheet entry dated 27.11.2008 was accorded an opportunit y to cross examine the Managing Director of M/s Pugmarks Interweb Pvt. Ltd. on the issues that arose during the course of statement. However, the counsel did not avail of the said opportunit y. The copy of the statement was handed over to him vide order-sheet entry dated 1.12.2008 against which the repl y of the assessee was filed on 17.12.2008 in 12 which he admitted that he alongwith other promoter of the company had established the first international call centre in Chandigarh. It is further submitted by him that the investment was made to earn income in the shape of dividend and not for the purposes of trading in shares.
16. Taking into consideration the entiret y of facts and circumstances of the case and agreement entered into between the parties as referred to by us in the paras hereinabove, it is apparent that the transaction in question was in the nature of purchase of business by the incoming company. The transaction entered into between the assessee before us as shareholder of M/s Excel Callnet Private Limited and the Managing Directors of M/s Pugmarks Interweb Pvt. Ltd. was not merel y for the transfer of shares of the company but was in fact transfer of management of the company to the purchaser with a rider of non-interference by the sellers who were the Directors of the company. Reference is made to the Article 2.1 of the agreement dated 26.3.2005 wherein the seller i.e. the assessee before us was refrained from day-today management of the business from the date of the agreement. In addition, the sellers i.e. the shareholders of the company were to hand over the E m p l o ye e D a t a b a s e , Products Database, Customer Support, New Client proposals in pipeline, Other prospects and customer's database, Payment Recovery and Customer. Management cases, Contract, Verbal Commitments, Banking Information, software/licenses and any other property that was a c q u i r e d u n d e r t h e t e n u r e o f t h e S e l l e r s w o r k i n g w i t h t h e C o m p a n y. Because of the complexity of the handing over operation by the sellers i.e. the shareholders of the company to the Managing Director of the new c o m p a n y, t h e p a r t i e s e n t e r e d i n t o a g r e e m e n t o n 2 6 . 3 . 2 0 0 5 a n d h a d completed the process on 24.7.2005. If it was a mere sale of the investment by way of shareholding by the assessee then the said exercise was not required. Even the sale consideration agreed upon between the 13 parties including the consideration on account of non-compete covenant was paid in installment over a period of time. Further the transfer of shares in effect translated into renunciation of management by the seller Directors in favour of the purchaser which is apparent from Article 5.1.1 of the agreement which enunciated the delivery of effective resignation in writing by the Directors as part of the activities of the completion. The next point under consideration is the non-compete covenants agreed upon between the parties as per Article 8, under which Article 8.4 c l e a r l y s t a t e d the seller agrees not to engaged in any call centre, business process outsourcing or IT enabled services business in the States of Chandigarh, Pujab, Haryana or Himachal Pradesh within a radius of 100 Kms from Chandigarh for a period of 2 years from the date of this agreement. Further non-compete covenants imposed a restriction upon the seller Directors to directly or indirectly solicit a business that the company has done since its inception without prior written permission of the company. Under Article 8.10 there was renunciation of brand equit y of the company by the sellers in favour of the purchaser as the parties agreed that the sellers will not take advantage of the brand equity of the company by using any names, logos, trademarks, partnerships, affiliations, names etc. As per para 8.11 the sellers cannot use domains that contain the word Excel and would not use or claim the domain name www.Excel.netcom. Article 9 of the agreement further refer to non- solicitation of employees covenant where by the seller will not directly or indirectly solicit, hire, employ, induce or attempt to induce any present or future employee of the company or the purchaser."
17. In view thereof we are in agreement with the orders of the authorities below that the transaction in question was not mere transfer of capital asset within the meaning of section 2(14) of the Act but was in fact transfer of business as it was the assessee who was prevented from doing business. 14 Further it was the assessee who had given up his rights to do business and i.e. how he received the consideration by way of price of shares fixed at Rs.94/- as against face value of Rs.10/- per share. The profits arising in the said transaction by way of transfer of share is assessable in the hands of the assessee as profits under section 28(va) of the Act. We find no merit in the plea of the assessee that the said shares were held onl y for the purposes of investment. The said shares were held by the assessee because of his association with M/s Excel Callnet Private Limited and were the mode of holding in the said company by the assessee, of which he was the Managing Director and was also engaged in carrying on the business on day-to-day basis. Such investment was in the business being carried on by the assessee and in view of the terms of the agreement agreed upon between the parties i.e. non- payment of upfront share price of the shares sold by the assessee and the fixation of the agreed sale price of the shares which was not in consensus with the market price tabulated from the results shown by the assessee and also non- compete covenants agreed upon by the assessee and other shareholders for carrying on the business of BPO in the specified area of Chandigarth, full y support the view taken by the authorities below. In the entiret y of the facts and circumstances, we are in agreement with the orders of the authorities below that the gain arising from the transfer of share is to be assessed as income from business. The provisions of section 28(va) of the Act are squarel y applicable to the present facts of the case. Consequentl y, the ground of appeal raised by the assessee is dismissed.
18. The facts and the issues arising in ITA No.1102 /Chd/2009 are similar to the facts and issues in ITA No.1101/Chd/2009 and our decision in ITA 15 No.1101/Chd/2009 shall appl y mutatis mutandis to ITA No.1102/Chd/2009. The ground of appeal raised by the assessee is dismissed.
19. I n t h e r e s u l t , b o t h t h e a p p e a l s r e l a t i n g t o a s s e s s m e n t ye a r 2 0 0 6 - 0 7 filed by the different assessees are dismissed.
Order pronounced in the open court on this 8th day of June, 2012.
Sd/- Sd/- (MEHAR SINGH) (SUSHMA CHOWLA) ACCOUNTANT MEMBER JUDICIAL MEMBER Dated 8 t h June, 2012 SURESH/Rati
Copy to: The Appellant/The Respondent/The CIT/The CIT(A)/The DR Assistant Registrar, ITAT, Chandigarh