Income Tax Appellate Tribunal - Kolkata
R.K.B.K. Fiscal Services Pvt. Ltd., ... vs Department Of Income Tax on 3 February, 2010
आयकर अपीलीय अधीकरण, Ûयायपीठ - "ए " कोलकाता
IN THE INCOME TAX APPELLATE TRIBUNAL "A" BENCH : KOLKATA
(सम¢)Before ौी डȣ. के. ×यागी, Ûयायीक सदःय, एवं/and
Shri D.K.Tyagi, Judicial Member.
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ौी बी.के.हालदार, लेखा सदःय,
Shri B.K.Haldar, Accountant
Member
आयकर अपील संÉया / I.T.A.No. 770/KOL/2010
िनधॉरण वषॅ/Assessment Year : 2006-07
Asstt. Commissioner of -वनाम- M/s. R.K.B.K Fiscal Services
Income-tax, Circle-7, Kolkata Ltd PAN: AABCR 5623E
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Versus-
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आयकर अपील संÉया / I.T.A.No. 771/KOL/2010
िनधॉरण वषॅ/Assessment Year : 2006-07
Asstt. Commissioner of -वनाम- Shri Suresh Kumar Neotia
Income-tax, Circle-7, PAN : ABSPN 0223B
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Kolkata
Versus-
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आयकर अपील संÉया / I.T.A.No. 772/KOL/2010
िनधॉरण वषॅ/Assessment Year : 2006-07
Asstt. Commissioner of -वनाम- M/s. Lakhami Commercial Co.
Income-tax, Circle-7, Kolkata Ltd
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PAN : AAACL 4341A
Versus-
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आयकर अपील संÉया / I.T.A.No. 773/KOL/2010
िनधॉरण वषॅ/Assessment Year : 2006-07
Asstt. Commissioner of -वनाम- M/s. Govind Commercial Co.
Income-tax, Circle-7, Kolkata Ltd. PAN: AABCG 1643D
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Versus-
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आयकर अपील संÉया / I.T.A.No. 774/KOL/2010
िनधॉरण वषॅ/Assessment Year : 2006-07
Asstt. Commissioner of -वनाम- Smt. Bimala Devi Poddar
Income-tax, Circle-7, Kolkata PAN: EYPP 3823Q
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ITA Nos.770-774/Kol/2010
2
Versus-
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(अपीलाथȸ/APPELLANT ) (ू×यथȸ/RESPONDENT)
अपीलाथȸ कȧ ओर से/ For the Appellant: ौी/Shri D.R.Sindhal, ld.DR
ू×यथȸ कȧ ओर से/For the Respondent: ौी/Shri D.S.Damle, ld.AR
आदे श/ORDER
ौी बी.के.हालदार, लेखा सदःय, Shri B.K.Haldar, Accountant Member.
These are five appeals filed by the revenue against the respective orders of the learned Commissioner of Income-tax (Appeals), VIII, Kolkata dated 03.02.2010, 01.02.2010, 02.02.2010, 01.02.2010 & 03.02.2010 for the assessment year 2006-07. As the issues involved are identical and both the parties have advanced common arguments before us for all the five cases, these are disposed of by this common order for the sake of convenience.
2. The ld.DR & Ld.AR for the assessee have argued the appeal in ITA No.771/Kol/2010. Therefore, this appeal being ITA No.771/Kol/2010 [by the revenue] is taken up first.
ITA No.771/Kol/2010 AY 2006-07 [by the revenue]3. Initially the revenue had taken following three ground of appeal:-
1. That the Ld. CIT(A) erred on facts and in law, that Controlling interest has a separate existence from the shares and is separately tradable.
2. That the 1.4. CIT(A) erred in holding that for the purposes of capital gains only the portion of Rs.74.20 should be considered as sale value and the balance was non taxable ignoring the judgment of Madras High Court in the case of Venkatesh Minor Vs CIT 243 ITR 367 where the facts were absolutely identical.
3. That the Ld. CIT(A) was not justified in upholding the contention of the assessee that consideration amounting to Rs.4,69,50,288/- was received for parting with Controlling interest and thus was not taxable.
4. However, subsequently vide AO's letter dated 24th May, 2010 following seven grounds have been taken by the revenue.
ITA Nos.770-774/Kol/2010 3
1. That the ld.CIT(A) erred on facts and in law, that Controlling interest has a separate existence from the shares and is separately tradable.
2. That the Ld. CIT(A) erred in holding that for the purposes of capital gains only the portion of Rs.74.20 should be considered as sale value and the balance was non taxable ignoring the judgment of Madras High Court in the case of Venkatesh Minor Vs CIT 243 ITR 367 where the facts were absolutely identical.
3. That the Ld. CIT(A) was not justified in upholding the contention of the assessee that consideration amounting to Rs.28,45,68,900/- was received for parting with Controlling interest and thus was not taxable.
4. That the Ld. CIT(A) erred in holding that the decision of the Bombay High Court in the case of M/s. Vodafone (2009) 311 ITR 46 supports the case of the present assessee, whereas in fact it is the other way round.
5. Without prejudice, the Ld. CIT(A) has further erred in holding that the basis of valuing the alleged non- controlling Equity Value at Rs.74.20 per share was logical, ignoring the fact that even the quoted value of the subject shares as on the date of transfer, was at a much higher amount.
6. That, without prejudice, the Ld. CIT(A) has patently erred in ignoring the provisions of Section 55(2)(a) whereby the "Cost of Acquisition" in relation to "A right to manufacture, produce or process, any article or thing, or right to carry on any business" is deemed to be taken as nil.
7. That the appellant begs the liberty to add, delete, alter, modify or take new grounds of appeal.
4.1 The modified grounds of appeal filed by the revenue vide AO's said letter dated 24th May, 2010 have been admitted by the bench and the same are disposed of by this order.
5. The assessee, in his return of income, disclosed short term capital gain of Rs.3,77,02,504/- and long term capital gain of Rs.7,27,34,858/- from off market transactions of sale of shares of M/s. Gujarat Ambuja Cements Ltd. to Holderind Investment Limited through their Authorized Representative, Mr. Paul Hungentobler (hereinafter referred to as Holcim Mauritius). Though pursuant to agreement with Holcim and the assessee [ assessee being one of the various parties, who entered into a joint agreement with Holcim ] the full value of consideration was Rs.105/- per share, it was contended by the assessee before the AO that the value of share was only Rs.74.20 per share and the balance of Rs.30.80 was paid for parting with the managerial control. In support of ITA Nos.770-774/Kol/2010 4 the above contention the valuation report prepared by Deloitte Haskins & Sells was also submitted. It was contended by the assessee that only Rs.74.20 could be taken as sale consideration received for transfer of shares and the balance amount of Rs.30.80 could not be taxed as the same was on account of transfer of capital asset which had no cost of acquisition. Reliance was placed on the following :-
CIT Vs. B.C Srinivas Shetty 128 ITR 294 (SC) 5.1 The AO held that managerial control is not a separately tradable entity. It forms an inalienable part of the whole share. Share and managerial control could not be traded separately. Reliance was placed by him on the following cases:-
a. Maharani Ushadevi Vs. CIT 131 ITR 445(MP) b. Venkatesh (Minor) Vs. CIT 243 ITR 367(Mad) c. C.R Rajendra Vs. CIT 125 Taxman 55 d. CIT Vs. Mahadeo Ram Kumar 166 ITR 477(Cal) 5.2 The AO in terms of section 48 of the Act took the full value of consideration for transfer of impugned shares at Rs.105/- per share and calculated the short term capital gain at Rs.5,33,52,600/- and long term capital gain at Rs.10,40,35,050/-.
6. Aggrieved the assessee filed appeal before the ld.CIT(A).
7. Before the ld.CIT(A) the submissions of the assessee were as under:-
"(1) The appellants are Individuals/Concerns of Neotias (hereinafter referred to as the Neotia Group). The Neotia Group together with Sri Narotam S Sekhsaria and his associate concerns (hereinafter referred to as Sekhsaria Group), in the years 1980-81 conceptualized, promoted and established M/s. Gujarat Ambuja Cement Ltd (hereinafter referred to as GACL) inter alia at Gujarat, an industrial undertaking to carry on business of manufacture and sale of Cement in India. The two groups taken together and separately referred to as Promoter Group. Since inception until the transactions involved herein both groups acted in concert in promoting, establishing, managing and controlling the affairs of GACL (hereinafter referred to as the said company). Both groups taken together all along since inception held nearly 24% of shares of the total paid-up capital of GACL distributed between different individuals, companies, HUFs and others of the two group. From the inception till the date in question herein there has been no significant change in the share holding of the said Promoter Group. Mr. Suresh Neotia was all along the Chairman, Mr. Narotam S ITA Nos.770-774/Kol/2010 5 Sekhsaria all along the Managing Director of GACL and other Representatives and Nominees of the two Groups were on the Board of Directors of GACL managing its affairs.
(2) Apart from the shares held by the promoters, nearly 52% shares of the said Company were held by Institutional Investors, such as mutual funds, banks, FIIs and other private investors held 23% shares in the company. It is to be noted that the promoters never owned or held or controlled individually or as a block more than the said 24% shares in the Equity Capital of the company and the institutional Investors although they held nearly 52% shares taken together never acted in concert and never controlled the said 52% of the shares as a block nor did they ever participate in or control the affairs of the said company. Therefore in addition to the shares held by the promoters as aforesaid the promoters were all along in control of the affairs and management of the company. The appellants herein are one of the concerns which all along belonged to the Promoter Group and held the shares and participated in the management of the said company as aforesaid by way of acting in concert with other members of the Promoter Group in relation to the Group shareholding as a whole and controlling the affairs of the said company. Hence controlling interest rights were always held, enjoyed and exercised by the promoter Group.
All the various holders of the 24% of the promoter's shares all along acted in concert.
(3) Immediately prior to 28 t h January 2006 and 30 t h January 2006 the dates involved in the issues involved herein negotiations took place between the Promoter Group namely, Neotias and Sekhsarias on the on hand and Holcim Group, a Swiss Group, on the other hand, for take- over of the Promoter Group share holding and acquisition of the control and affairs of the said company. This understanding was given formal shape and put down in writing and implemented by two different Agreements namely:
(i) Share Purchase Agreement dated 28th January 2006 between the Promoter Share Holders and Holcim Group for sale and transfer on the said date 14.8%of the shares of the company namely, 200000000 Equity Shares of the company by the promoters to Holcim Group at a price of Rs.105.00 per share.
(ii) Having regard to the statutory requirements under the share listing agreement of the 'company with the Stock ITA Nos.770-774/Kol/2010 6 Exchange and the SEBI Take Over Regulations, it was considered expedient and necessary that although the transaction between the Promoters and the Holcim Group related to the acquisition of the control over the company by Holcim as well apart from acquiring the shares held by the promoters in the said company a separate Agreement was necessary for the purposes to deal with the question of acquiring control. In the premises on 30th January 2006 another Agreement was entered into between Promoter Group and Holcim, the object whereof as stated therein was that Holcim was desirous to acquire control of the company. In accordance with the SEBI Substantial Acquisition of Shares Regulation 1997 as recorded in Clause 2.1 of the said 3O January 2006 Agreement, it was agreed that promptly on execution of the Agreement Holcim would announce to the public an offer to purchase the shares of the company @ Rs.90.00 per share. The said 30th January 2006 Agreement refers to and proceeds on the basis of the First Agreement dated 28th January 2006 and in addition to the recording of fact of having acquired the 14.8% of the shares of the Promoter group refers to further Agreement between the Promoters and the Acquirer, namely Holcim, that the promoters will further handover the balance 9% shares in the company to Holcim in terms as agreed in the said Agreement dated 30th January 2006. The Agreement dated 30th January '2006 in addition to and apart from referring to acquisition of shares recorded change in the Management of the company and resignation of some of the Directors of the Promoter Group as on 30th January 2006. It further refers to induction of Directors of the Holcim Group on completion of the open offer. As a result of the said Agreement relating to change in the management, Mr. Narotam S Sekhsaria resigned as Managing Director and some of the Directors of the Neotia Group also resigned. Mr. Pulkit Sekhsaria also resigned as Wholetime Director. (4) Information in relation to the said transaction under the Agreements dated 28th January 2006 and 30th January 2006 were soon after given to the Stock Exchanges where the shares of the Company were quoted and to SEBI and also to FIPB (Foreign Investment Promotion Board) of the Government of India as per law required.
(5) The Companies Act 1956 u/s 255 states 'that Directors are to be appointed by the Company in the General Meeting. It does not in any other manner deal with the question of control of a company by the share-holders.
ITA Nos.770-774/Kol/2010 7 (6) Therefore the Companies Act, itself has been deficient in relation to the matter of control of a Company. Control of a company therefore more or less had always been a question of the fact of control than de-jure control. In fact and in law it has not been the requirement in the matter of 'management and control of the affairs of a company, particularly a Public Limited Company, that the persons in control thereof must own or hold individually or as a block majority shares or more than 50% shares of the company. There has been as in the instant case and in various other cases of leading Public Companies that the persons in control of affairs of the company and/or promoters held less than 51% shares but have been in control or held the controlling interest and are enjoying controlling interest of the company. It is also a fact, which is easily demonstrated from public information, that in cases of most of the prominent public limited companies, persons or groups owning majority shares or substantial block of shares individually or as a block did not participate in and did not control and did not enjoy the controlling interest in the affairs of a company. A Chart of such holdings of Promoter Controllers and other share-holders is annexed in Paper Book II [Page -1] . In the past quarter century in India and little earlier in other countries' regulations have come into existence which by law require public limited listed companies to furnish information, to the Stock Exchange and to the Regulatory Authorities, relating to the -persons and/or groups in control of the affairs of the company and changes therein from time to time. Such regulations in India are (1) listing agreement with the stock exchange and (2) the SEBI Take Over Code 1997. In addition to the listing agreement and SEBI Take Over Code, since April 2004 in order to control the participation of foreigners in Indian Companies the Reserve Bank of India constituted Foreign Investment Promotion Board (FIBP) sanction whereof was required to be taken and information to which was required to be given in relation to acquisition of shares of a company by foreigners prior to such acquisition. We will deal in detail with such requirements later on.
(7) Having regard to the requirements of the Listing Agreement of the company with NSF, BSE and SEBI Take Over Code and FIPB information was furnished by the parties and Company to the Stock Exchanges, SEBI and FIPB in relation to the said Agreements dated 28th January 2006 and 30th January 2006 between Promoter ITA Nos.770-774/Kol/2010 8 group and Holcim Group and permission was sought for the change in the management and induction of the Directors of the Holcim Group and for sanction of the public offer for acquisition of the requisite shares so as to facilitate acquisition of the control of the affairs of the company by Holcim. The said information given in the applications are enumerated herein below and annexed in Paper Book I. Particulars Page No. of Paper Book 1
1. Copy of letter of Stock 95-96 Exchanges dated 27.09.2005 containing statement of shareholding or promoters pursuant to the requirements of the SEBI(Takeover Regulations) 1997
2. Copy of Form No.32 filed 97-100 with the Registrar of Companies on 31.01.2006 incorporating details of resignations of promoter Directors, Mr. Vinod Kumar Neotia, Mr. Pulkit Sejsharia and Mr.Harshvardhan Neotia
3. Copy of letter dated 101-102 30.01.2006 informing the Stock Exchanges about the purchase of shares from the promoters by Holderind Investment Ltd and also about the resignations of the promoter Directors
4. Copy of letter of offer issued 123-162 by Holderind Investments Ltd in connection with the proposal to acquire further 20% of the equity in the company as per SEBI (Takeover Regulations) 1997
5. Copy of first quarter interim 168-189 report for the year 2006 by Holeim Ltd informing in shareholders that they have ITA Nos.770-774/Kol/2010 9 management control of Gujarat Ambuja Cements Ltd.
(8) The public offer was duly made and completed where Holcim was able to acquire additional shares of the company in the open offer. Having regard to the aforesaid facts, the relevant Stock Exchanges SEBI and FIPB sanctioned the aforesaid transaction between the Promoter and Holcim and allowed Holcim to takeover the control and management of the company.
(9) The aforesaid facts are duly noted in Holcim's report for the 1 s t quarter of 2006 at PB-1(186) which reads as follows:-
"On January 27, 2006, Holcim acquired a 14.8 percent stake in Gujarat Ambuja Cements Ltd. from the founder families, which has been accounted for as an associated company since that date due to the significant influence in the entity. Under the Indian takeover code, Holcim was obliged to launch a mandatory public takeover offer for upto 20 percent of the shares of Gujarat Ambuja Cements Ltd., in which only a few shares were tendered. Subsequently, Gujarat Ambuja Cements Ltd. has joined the shareholders agreement, which is designed to transfer management control of Gujarat Ambuja Cements Ltd. to Holcim. Furthermore, three Holcim representatives have been elected to the Board of Gujarat Ambuja Cements Ltd. The total investment of Holcim in Gujarat Ambuja Cements Ltd. amounts to USD 477 million.
(10) The said negotiations between the Promoter and Holcim prior to the Agreement dated 28th Jan '06, and 30th Jan '06, the said Agreements and the open offer furnishing all information and applications and sanctions by and from Stock Exchange, SEBI and FIPB are not separate individual disintegrated events and disjointed facts but are a chain of events and there was a dovetailing about them which could not be ignored. The whole thing has to be looked and considered as one single complete event for the purpose of deciding the issues involved herein.
(11) The assessee/appellants herein all along held the shares of the company as aforesaid as its capital asset and the sale and transfer thereof by it along with other group members to Holcim was therefore offered for taxation under the head 'Capital Gain Tax'. in deciding the question of the said tax the assessees contend that having regard to the facts and circumstances of the case and ITA Nos.770-774/Kol/2010 10 holding of shares and controlling interest by the Group, in relation to the company, the transaction could not be looked and considered as sale of mere shares as such only but a transaction which involved in addition to and apart from the transfer of shares, the transfer of control and therefore the consideration received by the assessee under the transaction has to be apportioned between and as price of the share and as price of the control. It is the contention of the assessee that apportionment is legally permitted in case of composite price paid for two different elements comprised in one transaction. In support of such apportionment the assessee relied upon Valuation Report of M/s. Deloitte Haskins and Sells dated 28th July 2006 whereby the valuer determined the value of non controlling value of shares at Rs.74.20 per equity share only (Paper Book I -- Page 121). The value of controlling interest transferred therefore amounted to Rs.30.80 per share. The per share value is merely a method of calculation and is not a value of the share so far as the value of controlling interest is concerned. It is the contention of the assessee that the value of controlling interest namely Rs.30.80 per share is not taxable as it had and has no cost of acquisition and as per well settled principles of law under the Income Tax Act, 1961.
Issue:
The question for decision before the Hon'ble Commissioner of Income Tax (Appeals) therefore are:
(1) Whether the transaction in question involved in addition to and apart from the transfer of shares a transaction of transfer of controlling interest by the assessee namely the promoter group to Holcim and there was transfer of control of the company.
(2) If the answer to the first is in the affirmative, on the principles of apportionment what value out of the composite consideration received to be apportioned as value received for the transfer of controlling interest? (3) Whether the value of controlling interest is liable to capital gains tax.
Assessment Order In respect of the assessees involved herein the Assessing Officer by respective Assessment Orders for the A.Y. 2006- 07 disallowed the aforesaid contention and claim of the assessee for, inter-alia, the following reasons:
"However, managerial control is not a separately tradable entity, it forms an inalienable part of the whole share. Whatever control is exercised over the management is by ITA Nos.770-774/Kol/2010 11 way of control over the shares. The A/R was asked (f it was possible to transfer the shares but to retain the management control to which he replied that it was possible to rirjfer the management without transferring the shares but not possible the other way round. This implies that the two are intrinsically linked and any attempts to value them separately is only an artificial one, because the two are not separately tradable. In the case of Maharani Ushadevi Vs.CIT, as reported in 131 ITR 445 (MP) it was held that "controlling interest is an incidence arising from holding a particular number of shares in a company. It can not be separately acquired or transferred. It flows from the fact that a number of shares are held by a person."
In the case of Venkatesh (Minor) Vs CIT (2000) 243 ITR 367 (Mad) it was held that "controlling interest is incidence of share holding and has no independent existence. Therefore entire consideration was required to be considered for the purpose of Capital Gains in the hands of the assessee ". Same view was followed in the subsequent case of C.R. Rajendra Vs CIT (2002) 125 Taxman 55, whereby it was ruled that "gross sale proceeds with reference to sale of shares held by assessee in certain companies are to be taken into consideration for computing capital gains ". In a similar case of the jurisdictional High Court of Kolkata, as reported in 166 ITR 477 the Ld. Members of the bench have observed that "it appears to us that the controlling interest attached to the said block of shares can not be considered separately from the shares themselves. Each share represents a vote in the management of the company Controlling interest is therefore inextricably attached to the block of the shares and can not form a separate asset by itself"
Section 48 which prescribes the method of computing capital gains states that "the income chargeable under the head capital gains shall be computed by deducting from the full value of consideration received or accruing as a result of the transfer of the capital asset...:. ". There is only one material asset, and that is the shares of GA CL, this asset may contain within it many subsidiary rights, profits and privileges which would follow to the buyer as an inseparable content along with the transfer of the material asset. Whatever consideration is received or accrues, is by virtue of the transfer of shares and not by differentiated subsidiary rights which are neither fungible nor separately tradable.
ITA Nos.770-774/Kol/2010 12 Thus it is abundantly clear that the action of the assessee of artificially splitting the value of consideration received i not tenable or logical grounds and also in the light of the judgments quoted above, and the whole exercise has been undertaken with sheer motive to evade taxes on the ensuing capital gains. Hence the whole amount of consideration received is being considered for the purpose of Capital Gains.
The views of the Assessing Officer may be summarized as follows:
(1) Managerial control is not a separately tradable entity, it forms an in-alienable part of the whole shares. Whatever control is exercised over by way of control over the shares, it is not possible to transfer management without transferring the shares and therefore the two are intrinsically linked and any attempt to value them separately was artificial because the two are not separately tradable. The Assessing Officer relied on the observation of the Madhya Pradesh High Court in the case of Maharani Ushadevi (131 ITR 445) at Page-449 that controlling is an interest arising from holding of a particular number of shares in a company. It. cannot be separately acquired or transferred. It flows from fact that a number of shares are held by a person. The Assessing Officer further relies upon the decision of Madras High Court in the case of Venkatesh (Minor) Vs CIT(243 ITR
367) wherein at Page-370 the Court has followed the aforesaid observation of the Madhya Pradesh High Court in 131 ITR 445. The Assessing Officer also relies the decision of the Calcutta High Court in the case of Mahadeo Ram Kumar (166 ITR 477) wherein the Court observed at page 492 that "controlling interest attached to the block of shares cannot be considered separately from the shares themselves. Each share represents a vote in the management of the company and the shares put together formed a block and aggregated the votes. Votes arising, from majority block of shares would represent majority vote which could be utilized to control the company".
Submissions:
Question: Controlling interest is inextricably attached to shares and can not form a separate asset by itself. A Myth:-
It is respectfully submitted with due respect to the observations of the Hon'ble Courts in the aforesaid decisions in 131 ITR 445 , 243 1TR 367 and 166 ITR 477 ITA Nos.770-774/Kol/2010 13 that the aforesaid observations, factually and legally, have no basis whatsoever and it is a myth which can be easily exploded and has been exploded in various other judicial decisions in relation to facts of various companies.
(a) The Companies Act itself do not speak of the question of control of a company or controlling interest as a part of or inextricably linked with or an intrinsic quality of a share or otherwise. Sec. 255 of the Companies Act only says that the Directors are to be elected in the General Meeting. Control of any organization or a control of affairs of any organization is basically a defacto issue. It is not always and as an essential condition necessary and it is not a pre-condition that those who have control of affairs of an organization or the person having controlling interest or desire to acquire control must have a de-jure authority for the same. Over the history as shown in relation to the affairs of a company that persons have acquired first de-facto control and acquire de-jure either not at all or later. It is not to say and it is not being suggested that dejure control is not a fact but what is being emphasized is that shares based control isnot a condition precedent or an essential condition to acquire or retain control of an organization. A promoter of a company or a person or a group who establishes business organization or any other organizations may continue to be in control of the affairs of the company or organization without having majority or near majority holding in the share capital of the company, as normally has been the fact, as in the case of the instant company and various other companies as demonstrated by a list of shareholding pattern of companies in Paper Book 11. The list annexed and the facts of the company herein also demonstrates that persons other than promoter or controlling person in spite of having substantial block of shares do not have a share in participation or do not enjoy any control in the affairs of the organization. The requirement of the law such as the Listing Agreement, the SEBI Take Over Code, FIPB and Others clearly demonstrate that transfer of control of a Company is an issue separate and distinct from the question of transfer of shares.
(b) The three decisions relied on by the Assessing Officer as aforesaid do not deal with the facts and the law as have over years developed and the changing circumstances relating to companies and in company jurisprudence.
ITA Nos.770-774/Kol/2010 14
(c) Concept of Control :
Gower in his "The Principles of Modern Company Law" 3 Edition at page 197-198 states:-
"Control is a matter of degree, ranging from complete legal control for all purposes....... to defacto control .........normally exercisable by the existing management even though they may hold few or none of the shares. It may be difficult to detect.... but it is coming to be recognized as a separate item of Property, the value of which will depend upon the degree of its completeness.... But defacto control over the Board can exist without any legal power at all..... Thus legal control may be exercised through agreements divorced from shareholding"
It is now well recognized that there is a growing divorce between the ownership and control of a company. Control of a company is a matter which is being dealt with and discussed separately from the question of ownership of shares of a company. It is demonstrable that control of the affairs of a company is not dependent upon and/or is not a necessary concomitant of ownership of the shares of a company.
Gower in his aforesaid commentary further notes at page 615 -- "under an amalgamation merger or take over two (or more companies) are merged either de-jure by consolidation of their undertaking or defacto by acquisition of controlling interest in the share capital of one by the other or of the capital of both by a new company".
Gower, at page 540 notes four different methods by which a person wishing to obtain control of a company may go about it --
"Anyone wishing to obtain control of a company may go about it in one of four main ways: (i) he may buy the company's undertaking, (ii) he may make a general offer to the shareholders to purchase their shares or sufficient of them to give control, (iii) he may do a deal with the existing board whereby they sell their shares to him and resign their offices, filling the casual vacancies, thus created, by his nominees or (iv) he may seek to acquires, by purchase on the stock exchange or otherwise, sufficient shares to enable him to wage a successful battle of proxies with the existing management so that they are dismissed and replaced by his nominees. In all except the fourth case it will be necessary, or at least desirable, to have the concurrence of the existing directors. If they receive some ITA Nos.770-774/Kol/2010 15 special benefits in return for their support. will this be a secret pro fit for which they must account?"
From the aforesaid observations of Gower it is clear that in order to takeover control of a company acquisition of any requisite number of shares is not an essential condition. Control, necessarily do not follow acquisition of shares. A person may acquire control of a company even without acquiring any requisite number of shares therein. By mere acquisition of any particular number of shares a person does not necessarily or automatically, as a natural outcome of acquisition of shares, acquire control, as well of that company. Gower notes in Page No.543 - 544 "(iii) Deal with directors. As already emphasized more than once, de facto control of a company can be exercised, especially by the existing board, although they hold considerably less than 50 per cent of the voting capital. Hence a bidder may be able to acquire effective control by purchasing, say, 20 per cent, of the equity shares from the directors (and others f need be) and arranging with the directors to resign their offices and to fill the casual vacancies thus created by nominees of the bidder. Such a transaction would fall completely outside section 193 and 194 and hence, so far as those sections are concerned, the directors are entitled to demand whatever they can Let from the bidder.:
(d) Statutory requirements relating to control:
Under section 4 of the Companies Act, control of a company and holding of shares are two different independent criteria to determine the Holding or subsidiary nature of a company.
(A) SEBI Takeover Code deal with two different and distinct situations where it can apply
(i) Acquisition of 15% or more of shares or voting right of any company. This speaks only of acquisition of shares without speaking any thing about acquisition of control.
Therefore, the person acquiring more than 15% shares necessarily may not be acquiring control also. As a result of that 15% acquisition it is not necessary that the control will follow the shares.
ITA Nos.770-774/Kol/2010 16 Regulation 10: Substantial Acquisition of shares or voting rights in and acquisition of control over a listed company "Acquisition of (15%) or more of the shares or voting rights of any company -- No acquirer shall acquire shares or voting rights which (taken together with shares or voting rights, f any, held by him or by persons acting in concert with him), entitle such acquirer to exercise [fifteen] per cent or more of the voting rights in a company, unless such acquirer makes a public announcement to acquire shares of such company in accordance with the Regulations"
Regulation -- 11 requires a person acquiring more than 15% to less than 55% of shares or voting right to make public offer, it he intends to acquire such shares. The most significant part f the SEBI Regulation for our purpose is Regulation -12, which reads as follows:
Acquisition of control over a company "12. Irrespective of whether or not, there has been any acquisition of shares or voting right in a company, no acquirer shall acquire control over the target company unless such person makes a public announcement to acquire shares and acquire such shares in accordance with the Regulations."
Explanation to Regulation -12 states that for the purpose of this regulation, acquisition shall include direct or indirect acquisition of control of a target company by virtue of acquisition of companies whether listed or unlisted, whether in India or abroad.
"Control" is defined in Regulation 2(c) -- to include -- "control" shall include the right to appoint majority of the directors or to control the management or policy decisions exercisable by a person or persons acting individually or in concert, directly or indirectly, including by virtue of their shareholding or management rights or shareholders agreements or voting agreements or in any other manner, [Explanation -- (i) Where there are two or more persons in control over the target company, the cesser of any one of such persons from such control shall not be deemed to be a change in control of management nor shall any change in the nature and quantum of control amongst them constitute change in control of management; nor shall any changes in the nature and quantum of control amongst them constitutes change in control of management;
ITA Nos.770-774/Kol/2010 17 Provided that the transfer from joint control to sole control is effected in accordance with clause (e) of sub- regulation (1) of regulation 3,
(ii) If consequent upon change in control of the target company in accordance with regulation 3, the control acquired is equal to or less than the control exercised by person(s) prior to such acquisition of control, such control shall not be deemed to be a changes in control;] The said provisions of the SEBI Takeover Regulations clearly demonstrate that acquisition of shares and acquisition of control are two distinct and separate questions dealt with therein separately and both have different requirements to be fulfilled thereby. Regulation-
12 dealing with acquisition of control clearly states that acquisition of shares or voting right is wholly irrelevant for the purpose thereof. It says "irrespective of whether or not there has been any acquisition of shares or voting right in a company....... " This very clearly establishes that there is a dichotomy and divorce in law between shares/voting rights on one hand and control of the company on the other. The two do not necessarily go together. So far as acquisition of control is concerned the acquisition of shares is not a necessary concomitant or pre-condition thereof.
(B) Stock Exchange Listing Agreement Requirements "35. The company agrees to file the following details with the Exchange on a quarterly basis within 21 days from he end of each quarter, in the format specified as under:-
Statement Showing Shareholding Pattern Name of the Company Script Code Quarter Ended Category Category of Code shareholder (A) Shareholding of Promoter and Promoter Group
1. Indian
(a) Individuals/Hindu Undivided Family
(b) Central Government/State Governments ITA Nos.770-774/Kol/2010 18 ( c) Bodies Corporate
(d) Financial Institutions/Banks
(e) Any Others (Specify) Sub Total (A) (1)
2. Foreign a. Individuals (Non-
Residents individuals/Foreign Individuals b. Bodies Corporate c. Institutions d. Any Others (specify) Sub Total (A) (2) Total Shareholding of Promoter and Promoter Group (A)=(A)(1) +(A)(2) (B) Public shareholding
1. Institutions
(a) Mutual Funds/UTI
(b) Financial Institutions/Banks (c ) Central Government/ State Government(s)
(d) Venture Capital Funds
(e) Insurance Companies
(f) Foreign Institutional Investors
(g) Foreign Venture Capital Investors
(h) Any Other (specify) Sub-Total (B)(1) B-2 Non-Institutions
(a) Bodies Corporate
(b) Individuals I Individuals-
I.individual
shareholders holding
normal share capital
upto Rs.1 lakh
II II-individual
shareholders holding
ITA Nos.770-774/Kol/2010
19
nominal share
capital in excess of
Rs. 1 lakh
( C) Any Other (specify)
Sub-Total (B)(2)
(B) Total Public
Shareholding
(B)=(B)(1)+(B)(2)
TOTAL (A)+(B)
(C ) Shares held by
Custodians and
against which
Depository Receipts
have been issued
GRAND
TOTAL(A)+(B)+( C)
(I)(b) Statement showing Shareholding of person belonging to the category Promoter and Promoter Group Sr.No. Name of the Number Shares as a Shareholder of Shares percentage of total number of shares(i.e Grand Total (A)+(B)+(C) indicates in statement at para(1) Above 1 2 Total (I)(c) Statement showing Shareholding of person belonging to the category "Public" and Holding more than 1% of the total number of share Sr. Name of the Number Shares as a No. Shareholder of percentage of Shares total number of shares(i.e Grand Total (A)+(B)+(C) indicates in statement at ITA Nos.770-774/Kol/2010 20 para(1) Above 1 2 Total (I)(d) Statement showing details of locked in share Sr. Name of the Number of Locked in No. Shareholder Shares Shares as a percentage of total number of shares (i.e Grand Total (A)+(B)+(C) indicates in statement at para(1) Above 1 2 Total (II)(a) Statement showing details of Depository Receipt(DRs) Sr. Type of Numb Number of Shares No. outstanding er of share underlying DR(ADRs,G outsta underlying outstanding DRs nding outstanding DRs as a SDRs. Etc DRs DRs percentage of total number of shares (i.e Grand Total (A)+(B)+(C ) indicate in Statement at para(1)(a) Above 1 2 Total ITA Nos.770-774/Kol/2010 21 (II)(b) Statement showing details of Depository Receipt(DRs), where underlying shares are in excess of 1% of the total Sr. Name of Type of Number of Shares No. the DR outstanding share underlying Holder DR(ADRs, underlying outstanding GDRs,SDRs, outstanding DRs as a etc) DRs percentage of total number of shares (i.e Grand Total (A)+(B)+(C ) indicate in Statement at para(1)(a) Above 1 2 Total (C) Information to and permission of FIPB is also required in relation to acquisition of shares ( so far as in the case of a foreign acquirer ), under Regulation 1OB Notification No. FEMA-20/200-RB dated 03.05.2000.
The above development of law relating to companies is not only restricted to India but almost in all countries where similar company jurisprudence is existing. (D) The three decisions herein before mentioned relied by the Assessing Officer were rendered in circumstances when the aforesaid requirement of law relating to change in control of the affairs of the company was not there and they do not deal with or lay down any principle or the principle laid down therein is not concerned with a situation arising out of circumstances relating to acquisition of control of a company. The reliance on the said decisions therefore in the facts and circumstances of the instant case was therefore wholly irrelevant and inappropriate and the principle laid down therein can not be held to be the law as on the present day in the present ITA Nos.770-774/Kol/2010 22 day's circumstances, relevant to the case of the appellants herein.
In any event on the facts of those cases, as well, the said decisions are not applicable here:
(i) Maharani Ushadevi Vs CIT :131-ITR-445 (MP) -- Page 449 It was a question of determination of cost of acquisition of shares -- acquired at a price higher than the market price.
The ITO and the Tribunal held that the difference was payment for controlling interest.
This was not approved by the court. The court held that was a transaction of shares simplicitor. Hence the consideration was wholly for shares
(ii) Venkatesh (Minor) Vs CIT: 243-ITR-367, 370 (Mad) The facts are nearly the same as above. The court merely followed the above decision.
The principle laid down in the aforesaid decision are not based on any statutory provision or any earlier judicial authority.
(iii) CIT Vs Mahadeo Ramicumar: 166-ITR-477 (Cal) On facts the case is entirely different. The 66 sellers never had control of the Jessop company and did not transfer any controlling interest as pointed by the court at page 493. The court held at page 493 further that the Government purchased merely the block of shares
-- which although majority holding -- did not have control attached/implied in it.
(E) It is now necessary that we should open up our mind to the law and facts as relevant today. We should not allow our mind to be misguided/coloured by decisions in circumstances entirely different.
(F) In the past as well when managing agency system was prevalent, as a matter of fact and in law, ownership of the company, its shares and voting rights had been distinct and separate from the management and control of a company where managing agents were appointed and engaged. Therefore, even in the past, it is not correct to say that the control of affairs of a company was a necessary adjunct to ownership of the shares. it is further submitted that each single share of a company does not, as a matter of fact or in law, participate in or control in any manner the affairs of a company and has no controlling interest whatsoever. A block of shares as such or similar shareholders acting in concert controlling a block of shares, even less than major ITA Nos.770-774/Kol/2010 23 shareholders, may be in control of the affairs of a company and enjoy controlling interest. Those shareholders, who do not form part of the controlling group, do not in any manner whatsoever, either in fact or in law, have and enjoy any part of participation in the question of controlling interest. As has been demonstrated herein above, that in several well established public limited companies other group or persons holding substantial shares have no controlling interest whatsoever. Hence the theory or principle laid down in the aforesaid three decisions is not based either on facts and is not supported by law.
(G) Various judicial decisions point out to the facts that controlling interest value could be considered separately and distinctly.
The House of Lords in Gold Coast Selection Trust Ltd. Vs. Humphrey [17 ITR (Supl) page 19 at Page 26] observed "if the asset takes the form of fully paid shares, the valuation will take into account not only the terms of agreement but a number of other factors such as prospective yield, marketability, "there may also be an element of value in the fact that the holding of the shares gives control of the company". This decision of the House of Lords in Gold Coast Selection Trust Ltd., clearly demonstrates that control is a factor to be considered separately. The said factor does not relate to all shares of the company but is restricted to a part of block of shares only and where such block of shares give control question of valuation of control arises.
In Short Vs. Treasury Commissioners (1948) (2) All England Reports Page 509 = 1948 AC 534 question relating to separate value of controlling interest practically arose before the House of Lords. In March 1947 the Ministry of Air Production under the Defence Regulations appointed a Controller of the Undertaking of Short Brothers (R & B Ltd) and there after in March directed its shareholders to transfer all shares to the nominee appointed by the Controller. Under the Regulations a shareholder for the transfer of shares was required to be paid a price for the shares at the prevailing Stock Exchange price on the appointed date. In the background of the said facts the shareholder of Short Brothers contended that the Stock Exchange value was not appropriate. They suggested various different methods for the payment of value of shares acquired and claimed inter alia that the value to be paid and included ITA Nos.770-774/Kol/2010 24 the value of the complete control of the undertaking. The House of Lords negatived the said contention of the shareholders primarily on the ground that the regulations require the value to be paid for "any share" which referred to those embraced in an individual holding and not to the value of the shares as a whole. Lord Uthwatt at Page 512 recognized that the shares taken as a block were worth more than the Stock Exchange value. But under the regulation what was required was to fix a price that represented each and every share acquired. It was not concerned with the finding of price as respects all shares taken as a single block or as respect any share a price based on value of all the shares taken as a single block, at Page -512-5l3.His Lordship recognized at Page 513 as follows:
"I desire only to add that, if some one shareholder held a number of shares sufficient to carry control of the company, it might well be that the value proper to be attributed to his holding under the regulation was greater than the sum of values that would be attributed to the shares comprised in that holding if they were split between various persons. The reason is that he has something to sell -- control -- which the others considered separately have not"
His Lordship clearly recognized in fact and in law that one shareholder may sell the control which the other shares may not be able to do so. Therefore control is a quality or a commodity or an asset or a right which can be transacted separately from the shares. This is recognized by the aforesaid decision of the House of Lord. But on the facts of that case the said principle was not applicable. But the importance and relevance of the said principle in our case, is not by that reason, in any way diminished. The principle laid down therein by the House of Lord clearly demolishes the principle sought to be propounded by the Assessing Officer.
This has been recognized by the authorities on Company Law. Grower in his aforesaid commentary at page-346 refers to [Dean Vs. Prince (1953) Chancery 590] a decision of Justice Herman where the court recognized and held that the fair value of the block of shares conferring control must include something about the brake-up value of the asset in respect of those control. Therefore, control is a factor to be valued separately and is not a question of mere valuation of a share more particularly when the ITA Nos.770-774/Kol/2010 25 question of value of a block capable of giving controlling interest is involved.
Pennington in his Company Law -- 4th Edition -- recognizes at Page 830 as follows:
"Moreover, except' in a case where the transferee company and its subsidiaries held more than 10 per cent of the class of shares bid for before the offer was made, the transferee company may pay a higher price for shares held by a controlling shareholder or group of shareholders than it offers to the other shareholders; the difference in price does not indicate that the offer to the non-controlling shareholders is unfair, but merely reflects the additional value of control of the compairv enjoyed by the holders of the controlling block of shares ".
(H) In this connection it is very much relevant to refer to a recent dispute which has arisen between a foreign assessee and the Income Tax Department in India, i.e. in the case of Vodafone in relation to acquisition by Vodafone International Holding the shares of a foreign company outside India which through its holding company held shares in Hutchison Essar Ltd. (HEL) [an Indian company] . The Income Tax Department contended and issued notice to the Vodafone international to subject them to tax deduction requirement under Section 195 read with Section 9 of the income Tax Act in relation to its failure to deduct tax on consideration paid for acquisition of a capital asset in India, namely controlling interest in HEL. The case of the Department was and is that it was not a transaction o" mere acquisition of shares by a foreigner in a foreign company. It was in fact and in law and in reality a transfer for acquisition of controlling interest by the foreigner of an Indian Company. The controlling interest of the Indian Company was an asset situated in India. By the transaction in question the foreign company through the vehicle or mode of acquisition of shares of another foreign company, directly or indirectly and in reality acquired capital asset in India namely the controlling interest in the India Company, and therefore was liable to deduct tax thereon u/s 195 read with Sec. 9 of the Income Tax Act 1961.
This initiation of proceeding by the Department against Vodafone was disputed by the company as without jurisdiction before the Bombay High Court. The Bombay High Court decision is reported in 311 ITR 46 = 1975 Taxman 399. Vodafone International before the Court contended and relied on the principle laid down in the ITA Nos.770-774/Kol/2010 26 three decisions relied by the- Department in the instant case -- para 53-54. The Bombay High Court was not impressed by the aforesaid decision and the principle laid down therein. The Bombay High Court accepted on the other hand, the contention of the Income Tax department as noted in Para 92(f), 94 and 102 that shares in themselves may be an asset but in some case like the present one, shares may be merely a mode or vehicle to transfer some other assets. Mr. Parasaran for the Department pointed out that the very purpose of entering into agreement between the two foreigners was to acquire the controlling interest which one foreign company held in the Indian Company and therefore, the transfer was subject to Indian Income Tax Act. The Department relied upon the disclosure made and permission obtained in respect of the said transfer under the regulatory provisions of New York Stock Exchanges, SEBI Takeover Code, Listing Agreement of the Indian company and FIPB permission in relation thereto. Since it was a transfer relating to transfer of controlling interest such permission were required and disclosures were made. Therefore, controlling interest was and is an asset distinct and separate from the shares. The Department was not interested in initiating the proceeding had it been a transfer of mere sale of shares only. The Court in Para -161 accepted the contention of the Income Tax Department and held that "Shares in themselves may be an asset, but in some case like the present one, shares may be merely a mode or vehicle to transfer some other assets. In the instant case the subject mater of transfer as contracted between the parties are not actually the shares of Cayman island Company but the assets situated in India. The choice of the petitioner in selecting a particular mode of transfer of these rights enumerated above will not alter or determine the nature or the character of the asset". The Department's own contention before the Court in the Vodafone case (upheld by the Court) is a complete answer to the department stand in the instant case and completely supports the contention of the appellant herein. The said decision clearly establishes that shares and controlling interest are two separate and distinct transferable assets, which can be subjected to tax in India.
(I) Further case laws -
in the following cases the courts noted that control of a company can be separate and distinct from the shares:
(I) New Era Agencies Pvt. Ltd 68 ITR 585 (SC) ITA Nos.770-774/Kol/2010 27 Page 587 -- The court noted that in the year 1942 Mulraj Karsondas obtained control of Elphinstone Spinning and Weaving Mills. He also acquired managing agency of Elphinstone Mills. Subsequently the assessee company acquired and dealt with in the shares of Elphinstone mills treating them as business transaction. In 1953 Mulraj Karsondas offered to K. D. Jalan of Calcutta shares of Elphinstone Mills, resignation of directors of Elphinstone Mills, to get the nominees of K D Jalan appointed as directors, resignation of existing managing agent for a consideration of Rs.45 lacs which K. D. Jalan accepted.
Out of the said Rs.45 lacs assessee received nearly Rs.1O lacs in respect of shares held by it. The assessee company contended that the amount received should be apportioned between price of shares and as consideration for resignation of the directors etc. Page 591 -- The court noted that the conduct of the appellant assessee in disposing shares of Elphinstone Mills was not consistent with the story that the appellant was acquiring shares for supporting the managing agent.
Page 592 -- The court did not accept the contention that the price paid by Jalan over and above the market price of the shares was paid for controlling interest so far as the appellant assessee was concerned. What is significant for the present purpose here is that the Court recognizes that it may be that in the total disposal of that entire block of shares in favour of J D Jalan the later may acquired certain amount of controlling power apart from mere acquisition of shares. It was also conceivable that Mulraj Karsondas in going through the transaction that Mulkraj might give K D Jalan not only the shares but certain other advantages. But the question should be examined from the point of view of the appellant and what we have to see is what the appellant parted with and what the appellant got in return? It should be noticed that the appellant itself had no controlling interest in the Elphinstone Mills. Page 593 -- There is nothing on the record of the case to support the theory that the transaction with K D Jalan was not a transaction by Mulraj Karsondas himself but the transaction of the entire group. No controlling power was held by the appellant in Elphinstone Mills and it was not in a position to procure the resignation of directors or to bring about the appointment of person of their choice of K D Jalan as director nor was it in a position to call upon ITA Nos.770-774/Kol/2010 28 the managing agent to relinquish its office. All this was possible for Mulraj Karsondas.
.........................................
Therefore the court held that what was received by the assessee in that case was price of shares alone and court held that no part of the amount received by the appellant can be regarded as consideration for any other valuable rights.
The deficiency found by the Court in the above case is filled in the present case. Facts of the appellant in the present case are entirely different and completely support and lead to the conclusion that it was not a transaction for shares as such simplicitor but a compact transaction for shares and transfer of controlling interest. The appellants all along acted in concert as a group in relation to the transaction in question as well. Therefore the consideration received has to be apportioned as consideration for the valuable right of controlling interest transferred apart from the value of shares.
(ii) Mrs. A. Ghosh 139 1TR 119 (Calcutta) Page 126 -- Dr. and Mrs. Ghosh (assessee) were founders of the company therein. Dr. and Mrs. Ghosh had advanced in age and the company required huge funds due to advancement of technology which Ghosh were not able to arrange. Ghosh were in effective control of the affairs of the company i.e. the de facto control although the.y had a mInority interest. This fact noted on page 126 clearly establishes that control is not a necessary ingredient of and do not flow from shares. A person may be in control de facto.
(iii) National Finance Ltd 44 ITR 788 (SC) Page 798 -- 799 -- The question related to the Madhusudhan Mills shares which had been acquired at a higher price than the market price. The question was whether the assessee in acquiring those shares only acquired a stock in trade or also acquired a capital asset of an enduring nature?
Page 799 -- The facts found clearly showed that this was not a mere purchase of shares as shares; buying a big block at a higher price. The seller owned not only shares but the managing agency as well and it was clear that the seller would not sell the shares without charging for the managing agency. The price agreed was out of proportion with the market price which indicated that the acquisition was something more than mere shares.
ITA Nos.770-774/Kol/2010 29 Page 800 -- Controlling interest was acquired by the Bhalla Group for the benefit of the assessee and it was an acquisition of interest of an enduring nature. Therefore the transaction was of capital nature.
This decision clearly establishes that controlling interest is an acquirable interest of an enduring nature and cannot be looked as a mere appendix to acquisition of shares.
(iv) The aforesaid views further finds support from the decision of the Patna High Court in the case of Raghuvir Narayan Sing reported in 147 ITR 447. The court negatived the contention of the department that the entire consideration received was liable to be taxed as capital gain on account of shares and no part of it could be held as price for delegating the power of management of the company.
(J) As a matter of fact it can be pointed out that in the case of Maruti, the Government received from Suzuki a substantial consideration only for transfer of control of the company exclusively to Suzuki, irrespective of the fact that Government did not part with any of the shares held by it in Maruti. The amount received was a payment of premium for control of the management of the company and no part of it related to shares;
These facts clearly establish that in order to give control of a company to a person even shares are not required as a vehicle and control can be transferred without shares. One does not follow the other necessarily and therefore if a transaction involves transfer of both the shares and controlling interest it cannot be considered to be a transaction for one single asset namely shares only. Shares and controlling interest are two different distinct rights. Share is not a tangible asset. It is a chose-in-action. Shares are a bundle of rights. Similarly controlling interest is a distinct right which all shareholders do not have. The controlling interest right is enjoyed and exercised by an individual or a group of persons who may be in de facto control of the company or who may have as by way of support control over a block of shares. The block which may be a majority block or may not be a majority block. Any other person other than those who are having a controlling interest, even if he has substantial number of shares even as a block, he does not enjoy merely by holding of such stock, the benefit of the controlling interest rights. The aforesaid facts and legal position cannot be ignored. The Assessing Officer has acted unlawfully in brushing aside the aforesaid consideration in deciding the ITA Nos.770-774/Kol/2010 30 issue involved herein. The decision arrived at herein by the Assessing officer for the reasons aforesaid stated is wholly untenable and unlawful.
Apportionment of the consideration It is respectfully submitted that having regard to the aforesaid submissions it is well established that shares and controlling interest in the instant case were separate and distinct from each other and the transaction was not a transaction of transfer of shares only as such but it was a transaction of transfer both of shares and controlling interest in fact and in law. Therefore the consideration received, composite consideration, was for the transfer of two distinct interests and rights. In the premises it is respectfully submitted that having regard to the established principles of apportionment the consideration received should be apportioned between shares and controlling interest. The appellants before the Assessing Officer relied upon, on in this regard, the valuation where the controlling interests have been valued at Rs.30.80 per share and the share value has been estimated at Rs.74.20 per share. The Assessing Officer has not disputed the legality and validity of the said apportionment and valuation.
Established principles of apportionment:
The Supreme Court in CIT --Vs-. Best & Co. Pvt. Ltd, 60- ITR-1 1 at page 23 held "If the compensation paid was in respect of two distinct matters one taking the character of capital recezt and the other of a revenue receipt, we do not see any principle which prevents the apportionment of the income between the two matters. The difficulty in apportionment cannot be a ground for rejecting the claim either of the revenue or of the assessee. In the present case the apportionment has to be made on a reasonable basis......."
The Supreme Court again in CIT --Vs- Ahmedbhai Umarbhai & Co., 1 8-ITR-472 at pages 496 observed -
"In the case of a composites business, i.e., in the case of a person who is carrying on a number of businesses, it is always difficult to decide as to the place of accrual of profits and apportionment inter Se.... Profit or loss has to be apportioned between these business in a business like manner and according to well established principles of accountancy........."
Non-taxability of consideration for controlling interest It is well established in law for income Tax that a capital asset for which there is no cost of acquisition is not ITA Nos.770-774/Kol/2010 31 subjected to taxation uls.45 of the Act. This principle has been well established by the Supreme Court in the case of B, C, Srinivasa case [128- ITR-294] . Controlling interest in the instant case was not acquired at a cost. So far as the appellants are concerned, appellants were the promoters and persons who had established and managed and controlled the company although out since its inception; irrespective of and apart from their shareholding. Therefore controlling interest was a right which naturally inherred in the appellants all along. There was no cost of acquisition for the purposes of computation of capital gain of the controlling interest. In the premises the whole amount of Rs.30.80 apportionable to controlling interest is a pure capital receipt, which is not taxable. The aforesaid submissions are without prejudice to the rights and contentions made earlier before you and we reiterate the same herein.
We crave your leave to add, amend and supplement the aforesaid submissions, if so necessary, at the time of hearing."
8. The ld.CIT(A) forwarded the paper book submitted before him to the AO and sought for his comments on the same. The AO vide his letter dated 24-11-2009 observed as under:-
COMMENTS OF THE ASSESSING OFFICER "1. The first one is the share purchased agreement dated 28.01.2006 between the Promoters of Gujarat Ambuja Cements Limited and Holderind Investments Limited, Mauritius. This document had been shown during the assessment. However, under the Clause D on Page No.8 of the said agreement, it is mentioned that -
"Holcim Mauritius desired to purchase the Sale Shares from the Sellers, and the Sellers desire to sell and transfer the Sale Shares to Holcim Mauritius on the terms and subject to the conditions more specifically set forth in this Agreement."
The very wordings in fact clarify that the primary objective of the agreement is sale of shares only. The covenant 'subject to conditions', mentioned above is a general covenant and in no way impedes upon the obvious inference that the material transactions is the transactions of shares only.
2. Exhibit two is the share holders agreement dated 30.01.2006 between the promoters of Gujarat Ambuja ITA Nos.770-774/Kol/2010 32 Cements Limited and Holderind Investments Limited, Mauritius. Under Clause-D of the said agreement on Page No.45, it is mentioned that the 'Holcim Mauritius being desirous of acquiring control of GACL pursuant to this Agreement is making an open offer (the GACL Open Offer) under and in accordance with the Regulations 12 read with 10 of the Securities Exchange Board of India. It would not be out of place to deduce from the said words that the open offer is being made to acquire the control of the GACL. If, as the assessee has all along been contending, the controlling interest and share had the element of mutual severability, then there was no need for Holderind to make an open offer for purchase of shares. It could have merely bought the management control without buying the shares. The intention stated of Holcim is to "acquire control" of GACL and not "acquiring control and shares both", for the obvious reasons that management control would be an automatic fall out of sell of shares.
3.Third is the letter to Stock Exchange. I have no comments to make on this and in my opinion they have no bearing on the facts of the case.
4.Fourth is Copy of form 32 filed with RoC. I have no comments to make on this. Fifth is the copy of letter to the Stock Exchanges. I have no comments on the same.
5.Sixth is the valuation report by Deloitte Haskins & Sells. In my opinion this valuation does not have any consequence on the provisions of Income Tax.
7.No comments on document number 7
8.No comments on document number 8
9.No Comments. This is mere intimation to the exchange and perhaps does not advance the claim of assessee in any way regarding the positin of controlling interest being partible from shares.
10.No Comments.
11 .No Comments
13.Twelth is the report of the Disinvestment Ministry for the case of Maruti Udyog Ltd. Under par 5(11) on page number 193 it is mentioned that "In the earlier transaction with SUZUKI in 1982 and 1992, when SUZUKI's shareholding was allowed to be increased (Vis a Vis GOI), first from 26% to 40% and then from 40% to 50 %, no control premium had been paid by SUZUKI, though control had passed to them. "This also makes It clear that control is something which passes on automatically by way of increase in the shareholding and it does not have to separately traded or exchanged. On page number 192 of ITA Nos.770-774/Kol/2010 33 the said report the disinvestment has been proposed by a two stage process, the first being rights issue by MUL of Rs. 400 Crores with Government renouncing its rights share to Suzuki. Suzuki would gain majority control and pay Rs. 1000 crores to Government as control premium. This in itself shows that the gaining of majority control would be achieved by way of Government renouncing its Rights Shares to Suzuki. There was no other way for the Suzuki to gain control over MUL but by increasing the threshold of its share holding. The moot point is that no alienation of shares and the control inherent in them is plausible. The two have to be traded together.
13. Exhibit thirteen is the copy of Patna High Court's decision in the case of Raghubar Narayan Singh's case. However, the decision has not attained finality in light of the fact that an SLP against the said decision was admitted before the Supreme Court. The present status of the said SLP is not known to the undersigned. Whereas the decision of Jurisdictional High Court in the case of CIT Vs Mahadeo Ram Kumar, as reported in 166 ITR 477, the Ld. Members of the bench have observed that" it appears to us that the controlling interest attached to the said block of shares can not be considered separately from the shares themselves.
Each share represents a vote in the management of the company Controlling interest is therefore inextricably attached to the block of the shares and can not form a separate asset by itself."
This dictum, being of the jurisdictional High Court was binding on the assessee. Similar view has been expressed In the case of Maharani Ushadevi Vs. CIT, as reported in 131 ITR 445 (MP) wherein it was held that "controlling interest is an incidence arising from holding a particular number of shares in a accompany. It can not be separately acquired or transferred. It flows from the fact that a number of shares are held by a person." This interpretation was also echoed in the cases of Venkatesh (Minor) Vs CIT [2000] 243 ITR 367 (Mad) and C.R. Rajendra Vs CIT [2002] 125 Taxman 55.
14. Fourteenth is the copy of decision of Bombay High Court in the case of Vôdafone Ltd. On page no 227 there is a judgment of Supreme court in the case of CIT Vs Jeewanlal Ltd. AIR 1953 SC 473, wherein it has been noted that "When a shareholder holding the majority of shares authorizes an agent to vote for him in respect of shares so ITA Nos.770-774/Kol/2010 34 held by him, the agent acquires no interest, legal or beneficial,. in the shares. The title in the shares remain vested in the share holder. The share holder may revoke the authority of the agent at any time. Therefore the shares being always subject to his will and ordering, the controlling interest which the holder of the majority shares has, never passes to the agent". This judgment, along with others, once again fortifies the claim of the assessing officer that managerial control is not a separate entity capable of being traded.
Even otherwise, the comparison with the case of Vodafone is not proper for the reasons that there it was not the case of mere controlling interest, but also a bundle of other tangible and intangible rights.
15. No Comments."
9. The ld. CIT(A) sought counter comments of the assessee on the comments made by the AO and counter comments of the assessee were as under:-
COUNTER COMMENTS OF THE APPELLANT "With reference to the Remand report of the Assessing Officer dated 24.11.09 in the instant appeals, the Appellant beg to reiterate and rely upon the submissions already made before you and without prejudice to the same deal with the said Report as follows: Para 1 &2: The Assessing Officer seeks to emphasize that the deal was for shares only and control was incidental to acquisition of shares. Hence he takes the view that the open offer was also for shares so as to get control. The two are therefore not severable.
The AO has not understood both facts and the law properly. Holcim bought both control and shares from the Promoter Group. By this one can not jump to the conclusion that the two aye' not severable and control is a natural incident of shareholding and to get control buying shares is essential or the only recognized method, both in law and the commercial world.
He missed the fact that acquisition of 14% share of prompters could not have given control to Holcim from the promoters. Holcim had to negotiate for control also with the promoters.
Object and primary purpose of the transaction was to get control - shares - only worked as the facilitator or the ITA Nos.770-774/Kol/2010 35 catalytic agent. Control was with the promoters. Mere getting shares of promoters, by itself, could not have given control to Holcim.
Since Holcim got control open offer was required to be made, as per Regulation 12 of the SEB1 Takeover Code. He missed the fact that by getting 14% share Regulation 10 and 11 had not become applicable. It was a case of Regulation 12 of the SEBI Take Over Code.
The two agreements and all subsequent steps taken in consequence thereof are not disjointed facts but have to be read together. There is a dovetailing about them, which cannot be ignored.
However he now accepts the fact and the position that deal was both for share and control. So the price received has to be apportioned between the two. On the first Page of his Remand report AO observes --
"It would not be out of place to deduce from the said words that the open offer is being made to acquire the control of the GACL".
Para 3to 11: The statutory informations were filed as Holcim wanted and negotiated for Control. The Valuation Report is relevant in so far as to determine the value of control to be apportioned for the purposes of taxation. Para 12 The AO has not correctly appreciated the facts of Maruti case. Suzuki was a partner in control of Maruti. After May 2002 agreement exclusive (majority) control passed to Suzuki. The agreement recognizes that for earlier control and for passing the majority control a separate consideration, i.e. control premium was paid by Suzuki to GO! Premium was paid by Suzuki to GO! for the control of Maruti it got from GOl It had already got the share nd paid for the shares separately to GO!.
The facts of Maruti case establish that the two could be and are being dealt with and paid for separately. Para 13 On the correct legal principles various judicial decisions and authors on Company jurisprudence have been relied upon by the appellant. The cases relied upon by the AO are distinguishable on facts and could not be said to be legally sound and at least are notf applicable in view of the changed legal requirements, applicable and applied in the instant case. Hence the instant case could not be decided on the basis of principles in cases relied or by the AO. J Para -- 14 Reliance, by AO, upon Jeewanlal case in AIR 1953 SC 473, referred to in Vodafone case is wholly misplaced. Jeewanlal was a case of Principal and agent -
ITA Nos.770-774/Kol/2010 36 position of an agent who votes on behalf of his principal- shareholder.
The Bombay High court view in Vodafone case is ftlly supported by the Supreme Court decision in Technib case in 2005(5) SCC 465 - dealing with acquisition of control in a company. Vodafone also relied upon the cases and principles relied upon by AO, but that did not impress Bombay High Court in holding that it was not a transaction of transfers of shares not impress Bombay High Court in holding that it was not a transaction of transfers of shares only - object of the transaction was to get control for which the shares were only a medium a vehicle a vessel. Controlling interest was and is an asset a right situates in India and therefore the transaction was subjected to Indian Tax laws. That was and is the case of the Dept. in Vodafone case.
In the premises it is submitted that the report of AO is no answer to the appellants' submissions."
10. The ld.CIT(A), in the above circumstances, held that even though the promoters group of M/s.GACL held about 24% of share before transferring the impugned shares to Holicim, the group had management control over GACL. Thus, it was concluded by him that the assessee himself being a part of that group, which held controlling interest over GACL, when the shares were transferred not only the shares but the controlling interest was also transferred.
11. The ld.CIT(A) analyzing the judgment of Hon'ble Bombay High Court in the case of Vodaphone International Holding B.V Vs. U.O.I & Anr reported in 311 ITR 46 was of the opinion that Hon'ble Bombay High Court in the said judgment held that controlling interest was a separate asset, which was distinct from the shares. He drew further support from the judgment of the Hon'ble Patna High Court in the case of Raghuvir Singh reported in 147 ITR 447(Pat) and the press release issued by the Ministry of Disinvestment, Government of India dated 14.05.02.
12. The ld.CIT(A) further held that the total consideration of Rs.105/- per share was required to be apportioned towards price for selling the shares and the price for transferring the controlling interest in company, M/s.GACL. That apportionment is required to be done in the facts and ITA Nos.770-774/Kol/2010 37 circumstances existing in the present case, the ld.CIT(A) was of the view, was also supported by the following cases of the Hon'be Apex Court:-
a. Best & Co. Pvt. Ltd 60 ITR 11(SC)
b. Ahmed Bhai Ummer Bhai & Co. 18 ITR 472(SC)
13. The ld.CIT(A) held that the valuation of shares without controlling interest as done by Deloitte Haskins & Sells was required to be accepted. He, therefore, directed the AO to take the full value of consideration for transfer of impugned shares at Rs.74.2 per shares and work out the capital gains accordingly.
14. It was held by the ld.CIT(A) that the balance consideration was for transfer of controlling interest. As controlling interest does not have any cost of acquisition, no capital gain could be computed. Reliance was placed by him on the Hon'ble Apex Court's decision in the case of B.C. Srinivas Shetty (supra). It was held by him that the capital asset being 'controlling interest' is not covered by section 55(2)(a).
15. Aggrieved the revenue has filed appeal before the Tribunal.
16. Before us the ld.DR relied on three written submissions dated 18- 06-2010, 29-06-2010 and 15-09-2010. The main contentions of the ld.DR could be summarized as under:-
I. As per Article 2.1 of share purchase agreement dated 28- 01-06 shares alone were not sold, but the same was sold together with all rights and advantages. This would show that controlling interest which was inseparable part of shares were also transferred.
II. As per Article 2.2 of the said agreement the consideration for purchase of sale shares were Rs.105/- per sale share. This would show that shares were sold for Rs.105/- per share inclusive of controlling interest. There was no bifurcation of the amount towards shares sans controlling ITA Nos.770-774/Kol/2010 38 interest and controlling interest. It would, therefore, follow that shares were sold inclusive of inseparable controlling interest.
III. Shareholder's agreement dated 30-01-06 makes it abundantly clear that object of this agreement was to "Acquire Control of GACL". This would show that the purchase of the shares by Holicim was inclusive of Controlling interest, which are inseparable. IV. Shareholders' agreement dated 30-01-06, last page of which is available at page 94 of APB, is not signed by anybody. Thus, no notice of this agreement as an authentic document can be taken.
V. The AO has relied on following case laws for the proposition that controlling interest is inseparable part of each share:-
a. Maharani Ushadevi Vs. CIT 131 ITR 445(MP) b. Venkatesh (Minor) Vs. CIT 243 ITR 367(Mad) c. C.R Rajendra Vs. CIT 125 Taxman 55 d. CIT Vs. Mahadeo Ram Kumar 166 ITR 477(Cal) The ld. CIT(A) without distinguishing the above cases has relied on the decision of the Hon'ble Bombay High Court in the case of M/s. Vodaphone International Ltd. (supra) by observing as under:- "In any case, the judgment of Hon'ble Bombay High Court has been rendered later in time after considering the decisions in 131 ITR 445 & 243 ITR
367. This is, therefore, relied on."
The ld.CIT(A) was not justified in doing so. Specially in view of jurisdictional High Court's decision in CIT Vs. Mahadeo Ram Kumar (supra). As such the jurisdictional High Court in the said judgment observed as under:-
"It appears to us that the controlling interest attached to the said block of shares cannot be ITA Nos.770-774/Kol/2010 39 considered separately from the shares themselves.
Each share represents a vote in the management of the company. Controlling interest is, therefore inextricably attached to the block of the shares and cannot form a separate asset by itself."
VI. The case of Maruti Suzuki does not establish that shares and controlling interest are separable. The moment Suzuki became the larger shareholder, control passed to it automatically. This would show that controlling interest could not be traded separately. The judgment in the case of Vodpahone & Technip are not applicable in the present case.
VII. The judgment in the case of CIT Vs. Jeewanlal [24 ITR 475(SC)] also supports the proposition that shares and controlling interest are inseparable and inalienable. The principles of apportionment do not apply to the facts of the case of the assessee. Thus, the ld. CIT(A) has wrongly relied on the following case laws for the proposition that apportionment of consideration is required to be made between transfer of shares sans controlling interest and controlling interest:-
a. Best & Co. Pvt. Ltd 60 ITR 11
b. Ahmed Bhai Umar Bhai & Co.18ITR 472
VIII. The valuation report of M/s. Deolitte Haskins & Sells cannot be relied upon in the Income-tax proceedings as has been mentioned in the said valuation report. Without prejudice to the above what has been determined by valuer is the market price of shares sans controlling interest. For the purpose of computation of capital gain fair market value is not relevant. What is relevant is the full value of consideration. This view is supported by the following decisions:-
a. CIT Vs. Smt. Neelofr I Singh 309 ITR 233(Del) b. Dev Kumar Jain Vs. ITO & Ors. 309 ITR 240(Del) ITA Nos.770-774/Kol/2010 40 As the full value of consideration of the impugned shares was Rs.105/- per share, capital gain should be worked out with reference to the same. IX. Non compete fee of Rs.15 per share, which forms part of the full value of consideration of Rs.105/- per share as per said agreement dated 28-01-06, is also taxable as per provision of section 28(va) inserted by the Finance Act'02 w.ef 01-04-2003. X. Without prejudice to the above, if it is held that controlling interest is a separate and distinct capital asset capable of being transferred independent of the shares, sale of such capital asset would be taxable u/s.55(2)(a).
17. It was, therefore, contended that the order of the AO be upheld.
18. The ld .AR for the assessee, on the other hand, has supported the order of the ld. CIT(A). The submissions made before him were reiterated. The submissions of the ld. AR for the assessee are summarized hereunder:-
I. Neotia Group & Sekhsarias group were promoters of M/s. Gujrat Ambuja Cement Ltd (GACL) (hereinafter referred to as the Promoters Group). Promoters Group all along from the beginning were in control of it's management. The Chairman, the Managing Director and 3 Directors belonging to the Promoter Group were on the Board of Directors of the company. They were responsible for controlling the affairs as well as managing the business of M/s. GACL since inception and till the time of the impugned transaction, which took place in January 2006. Being part of the promoter group, the respondent assessees alongwith the Sekhsarias enjoyed the controlling rights relating to the management of the company.
II. As per share purchase agreement dated 28-01-06, 20 crore shares equal to 14.78% of the shares of M/s. GACL were transferred by promoters group in off market transaction at Rs.105/- per share. In the said agreement an implied understanding was there to ultimately confer on Holcim the control of the company by the ITA Nos.770-774/Kol/2010 41 promoters. This being so, as per SEBI (Substantial Acquisition of Shares & Takeovers) Regulations 1997, Regulation-12 came in force and the requirement of the Regulation was complied with by the purchaser by making requisite public offer at Rs.90.64 per share. However, by the said open offer Holcim was able to get only .3,66,481 shares thereby holding less than 15% share of GACL as the close of the open offer. If control of the company was not handed over to Holcim, there was no need to comply with Regulations-12 of SEBI (Substantial Acquisition of Shares & Takeovers) Regulations 1997. Even the shareholders' agreement dated 30-01-06 abundantly makes it clear that by agreement dated 28-01-06 controlling interest was transferred to Holcim III. The department has contended that the view expressed by the Hon'ble Jurisdictional High Court in the case of Mahadeo Ram Kumar (supra) and that of Maharani Usha Devi & Venkatesh (Minor) of Hon'ble Madras High Court are applicable in the facts of the case. SEBI Regulations 1997 has not changed the applicability of the above decisions in the present case. This view is not sustainable in law. Where specific provisions do not exist in the income-tax Act, in order to understand and interpret a transaction and legal rights flowing therefrom, it has to be interpreted and understood with reference to the other laws as applicable to the transaction. It has been so held by the Hon'ble Apex Court in the case of CIT Vs. Bhagyalakshmi & Co. [55 ITR 660, at page 664].
IV. Regulations 12 of SEBI (Substantial Acquisition of Shares & Takeovers) would show that even when majority of the shares in the target company is not held by the acquirer, the controlling interest could be transferred to the acquirer. As such this view is further supported by the Hon'ble Jurisdictional High Court 's decision in the case of Hindustan Motors [AIR 1976(Cal) 450 dated 27-3-1973. Thus, a defacto control without having de-jure control by acquiring ITA Nos.770-774/Kol/2010 42 more than 50% voting rights in the company can also be termed as controlling interest and the same is capable of being transferred. Principles of Modern Company Law (3rd Edition by LCB Gower also states that "..........de-facto control over the Board can exist without any legal power at all. Thus, it is well-known with a large and dispersed membership of a comparable small proportion of the total shares, if held in one hand, may enable actual control to be exercised.
V. The above view of the Hon'ble Calcutta High Court was not noted by the court in the subsequent decision in the case of Mahadeo Ram Kumar(supra). In the case of Mahadeo Ram Kumar (supra) the attention of the court was also drawn to the judgment of House of Lords in Short and another Vs. Treasury Commissioners (1948) (Appeal cases 534). However, the High Court did not distinguish the same and held that controlling interest attached to block of shares cannot be considered separately. Thus, above decision of the court cannot be used in all circumstances and in respect of al transactions to suggest that even one share which carries with it one vote, controlling interest is embedded in the share. The other decisions are also distinguishable.
VI. Taking note of Hindusthan Motors judgment of the Hon'ble Calcutta High Court, Gower's Commentary on Principles of Modern Company Laws, Hon'ble Apex Court's decision in the case Technip SA (2005)(S) SCC 465] and the press release dated 14-5-02 by the Ministry of Disinvestment, G.O.I in the case of Maruti Udyog Ltd, it has to be held that controlling interest could be a separate and distinct capital asset, which could be transferred along with shares, share being only a vehicle to transfer such capital asset. This view is also supported by Hon'ble Bombay High Court in the case of Vodaphone International (supra). It is contended that there is no ITA Nos.770-774/Kol/2010 43 dispute that as a matter of fact there was transfer of control by respondent assessee to Holicim along with the shares. VII. As it is contended that controlling interest and shares sans controlling interest are distinct and separate capital asset, the apportionment of composite consideration is required to be done between the above two capital assets. In such case apportionment is required to be done is supported by following case laws:-
a. CIT Vs. Best & Co. Pvt Ltd. 60 ITR 11(SC)
b. CIT Vs. Ahmed Bhai Ummar Bhai & Co.18 ITR 472(SC)
c. Tata Iron & Steel Co. Ltd Vs. State of Bihar 48 ITR 123(SC)
VIII. Even Hon'ble Bombay High Court's decision in the case of Voda Phone International (supra) supports such apportionment. IX. The valuer's report can be used for the purpose of determining tax liability under the Income-tax Act. It has considered all relevant factors and arrived at price of shares sans controlling interest at Rs.74.80 per share.
X. The revenue has contended that market price of shares on the date of agreement was Rs.90/- per share and therefore, the same should be accepted. However, considering the abnormal circumstances due to which the share price was influenced, the uninfluenced value of share price before the news of the takeover was reported by the newspaper, was about Rs.74/- per share. In view of the above, the value of shares sans controlling interest determined by the valuers should be accepted.
XI. Regarding the taxability of consideration received for transferring the capital asset .being controlling interest, it was submitted that controlling interest admittedly is a capital asset in the hands of the assessee. Such capital asset does not have any cost of acquisition. Thus, in view of Hon'ble Supreme Court's decision in the case of B.C.Srinivasa Shetty(supra), the same cannot be brought to tax as capital gain. Section 55(2)(a) mentions specified capital asset, which ITA Nos.770-774/Kol/2010 44 could be brought to tax under the head capital gains, even though the cost of acquisition of such capital asset is unascertainable Controlling interest is not enumerated in section 55(2)(a). Thus, there is no application of the above section in the facts of the present case. Therefore, the amount received for transfer of controlling interest cannot be brought to tax.
19. It was, therefore, contended that the appeal of the revenue be dismissed.
20. The bench required the respondent assessee to furnish the following documents:-
a. Evidence of Holicim complying with Regulations-7 of SEBI Regulations 1997.
b. Copy of D-mat a/c of the assessee portraying transfer of impugned shares. c. Copy of Exhibit-B of agreement dated 28-01-06 being power of attorney and Board's Resolutions d. Annual reports of the company ending in 2005 and 2006. e. Memorandum of Article of Association of M/s. GACL f. Composition of Board of Directors prior and subsequent to share sale agreement.
20.1 However, the assessee has shown his inability to furnish the following documents:-
a. Copy of D-Mat account
b. Power of Attorney & Board's Resolutions being Exhibit-B of agreement
dated 28-01-06.
It has also failed to furnish any evidence of Holicim complying with Regulations -7 of SEBI Regulations 1997.
21. We, therefore, proceed to decide the appeal on the basis of evidence available on record.
22. We have heard the parties and perused the record of the tribunal. We have also gone through the various submissions made and case laws relied upon by both the parties. 22.1 At the outset we would like to clarify that even though the revenue has taken various grounds of appeal, the subject matter of appeal before the tribunal is the transactions entered into by the parties as per share purchase agreement dated 28-01-06. It is very unusual that neither the AO nor the ld.CIT(A) has taken note of article 5 of the said agreement, where it has been clearly stated that Rs.15/- per share is being paid per sale share towards Non-
Compete Undertaking, which is included in the sale consideration payable to the sellers in terms of article 2.2 of the agreement. In such peculiar circumstances, we will give our factual findings on the issue of capital gains or any other income arising out of the transactions ITA Nos.770-774/Kol/2010 45 entered into by the concerned parties as per share purchase agreement dated 28-01-06. Thus, the contention of the assessee that there is no dispute that Controlling Interest was transferred together with shares is not accepted by us. We will give our findings on this basis..
22.2 It is to be noted that the assessee is not a signatory to the share purchase agreement dated 28-01-06. It has been claimed that Power of Attorney was being given by the assessee to Mr. Narattom S. Sekhsaria , who signed the said agreement on his behalf. However, even though copy of the power of attorney was required to be filed as per the bench's direction, the assessee has shown his inability to file the same. Thus, it is unclear as to what authority was parted by the assessee as per the said power of attorney. It is undisputed position in law that power of attorney holder can act on behalf of the person concerned, who gives such power to a person only to the extent enumerated in such power of attorney. It has not been shown by brining any evidence on record that Sh. Suresh Kumar Neotia, who was the chairman of M/s. GACL during the relevant period has given the authority to Mr. Sekhsaria to part with controlling interest over GACL, if any, held by him. In the above facts, we hold that Shri Sekhsaria could not have parted with controlling interest, if any held by the assessee in GACL. 22.3 We would like to state here that there is confusion on the issue as to what is meant by the term 'controlling interest'. The revenue understood the term to mean holding of more than 50% voting right in a company. The assessee, on the other hand, claims that same would mean actual control of the company held by an entity even though it held less than 50% of the voting right in a company. Such control could be partial and value of such controlling interest would vary depending on the completeness of such control. 22.4 Based on the above factual findings, we will proceed further. 22.5 It is a well settled principle of law that while analyzing a document what is expressly written therein and the surrounding circumstances are required to be taken into consideration. Nature and character of transactions entered into through such a document could not be determined by the label, which the parties may ascribe to the transaction. As such the Hon'ble Bombay High Court in their judgment in the case of Vodaphone International (supra) in para 140 have analyzed the above position of law.
ITA Nos.770-774/Kol/2010 46 22.6 Keeping the above position of law in view, we proceed to interpret the share purchase agreement dtd. 28-1-06. In preamble of the said agreement, it is mentioned as under:-
"D Holicim Mauritius desires to purchase the Sale Shares from the Sellers, and the Sellers desire to sell and transfer the Sale Shares to Holcim Mauritius on the terms and subject to the conditions more specifically set forth in this Agreement."
22.7 In definition and interpretation article 1.9 reads as under:
"Reference to agreements shall include a reference to the amendments thereto which have been executed in writing by the Parties thereto."
22.8 'Object of sale' and 'sale consideration' has been elaborated in articles 2.1 & 2.2 which are as under:-
" 2.1: Object of Sale Subject to the terms and conditions of this Agreement, the Sellers shall sell and transfer to Holcim Mauritius and Holcim Mauritius shall purchase the Sale Shares from the Sellers for the Sale Consideration, free from all Liens or other restrictions whatsoever and together with all rights and advantages now and hereafter attaching or accruing thereto at the Shares Sale Closing, so that Holcim Mauritius will upon transfer of the Sale Shares in its name receive full legal and beneficial ownership and all shareholder rights relating thereto."
" 2.2: Sale Consideration The consideration for the purchase of the Sale Shares shall be an amount of Rs.105/- (Rupees One Hundred and Five) per Sale Share aggregating to Rs.2100,00,00,000 (Rupees Two Thousand One Hundred Crores) (the Sale Consideration). Details of the manner in which the Sale Shares are held by, and the details of the Sale Consideration payable to each of RMIL and the Other Sellers are set out in Annex-2.2 hereto. The Sale Shares shall be sold and purchased for the Sale Consideration by way of a negotiated deal on a spot delivery basis in the manner set out in art.2.4 below."
22.9 'Completion' and 'closing' is enumerated in article 2.4 as under:
" 2.4.1:Date and Place The execution of this Agreement and the Closing of the sale and purchase of the Sale Shares (the Share Sale Closing) shall take place simultaneously on January 28,2005 (the Closing Date). The Share Sale Closing shall take place at the office of RMIL's solicitors in Mumbai, India or at such other place and time as may be earlier agreed in writing between the Parties. All transactions contemplated by this Agreement to be consummated at the Share Sale Closing are interrelated and are expressly to be so, and all transactions under taken by or pursuant to this Agreement ITA Nos.770-774/Kol/2010 47 shall be unwound. If not all such transactions are consummated in accordance with this Agreement."
"2.4.2: Closing Actions At the Closing Date, the following shall occur:
(a) the Parties shall exchange executed counterparts of this Agreement.
(b) RMIL shall provide to the Sellers DPs duly executed delivery transactions in the prescribed form for the transfer of the Sale Shares from the Seller DPs to the Holcim OP Account with HSBC Mumbai for the benefit of Holcim Mauritius and shall cause each of the Seller DPs (i) to duty acknowledge such instructions, and to deliver a copy of such acknowledgement to Holcim Mauritius, and (ii) credit the Sale Shares to the Holcim OP Account, and
(c) Holcim Mauritius shall cause HSBC Mumbai to release to RMIL, the banker's drafts representing the Sale Consideration payable to RMIL and the Other Sellers."
22.10 Article 5 relating to non-complete undertaking reads as under:
"5: Non-Compete Undertaking "In consideration of RMIL and each of the Other Sellers jointly and severally undertaking for a period of three years after the Closing Date, not to enter or engage directly or indirectly, into any business activity in India or from or out of India that is in the filed of manufacturing, marketing and trading of cementitious material, clinker, concrete, concrete products, aggregates, mortar and asphalt or related activities and services (each, a Rs. stricted Business) without the prior written consent of Holcim Mauritius acting reasonably, Holcim Mauritius shall pay to RMIL and the Other Sellers an amount of Rs.15/-(Rupees Fifteen) per Sale Share, aggregating to Rs.300,00,000(Rupees Three Hundred Crores) which amount constitutes part of the State Consideration payable to the sellers in terms of Article 2.2(the Non-Compete Component) For purposes this art.5, RMIL and/or the Other Sellers shall not be deemed to engage in the Restricted Business only by virtue of the fact that
(a) any of them invests, directly or indirectly, up to(but no more than)10% of its net worth in, or that RMIL and/or the Other Sellers collectively acquire, directly or indirectly, up to (but no more than) 10% or the shares of ownership interests in any company of entity or other business association engaged in whole or in part in a Restricted Business other than GACL.
(b) any of the Other Sellers (except for those Other Sellers who are currently serving or have in the past been serving on the GACL board of directors or executive management assume a position as non-executive director, consultant, or adviser of a Restricted ITA Nos.770-774/Kol/2010 48 Business. It is understood and agreed that (i) none of the Other Sellers shall assume any executive directorship or employment position. In a Restricted Business and (ii) in addition to the foregoing those Other Sellers who are currently serving or have in the past been serving on the GACL board of directors or executive management shall not assume a position as non executive director, consultant or adviser of a Restricted Business. It is understood and agreed that nothing in this Article 5 shall restrict any of the Sellers from assuming any directorship(executive otherwise) or employment position in, or entering into any consultancy or advisory management with Ambuja Cement India Limited. The Associated Cement Companies Limited. Ambuja Cement Limited or any other entity in India controlled by Holcim Mauritius or its Affiliates.
That Non Compete component shall be paid to the Sellers in the proportion set out in Annex 2.2 hereto, and shall be paid as set out in art .2.4.2 22.11 The name of the assessee figures at Sr. No.9 of Annexure-2.2 of the above agreement. The same is reproduced hereunder:-
"Sr.No. Name of the shareholder Nos. of GACL shares 9 Suresh Neotia 1,149,360 Details of d-mat account Name of Depository Share of sales consideration 10090033 UTI Bank Ltd (Rs.90/- per share) 103,442,400 Non-Compete Component Total Sale consideration (Rs.15/- per share) (Rs.105/- per share) 17,240,400 120,682,800"
22.12 From the recital in the said agreement, relevant portions of which have been reproduced by us hereinabove, it is crystal clear that the sale of share was completed on 28- 01-06. The object of sale was the share and full value of share sale consideration was Rs.90/- per share. Rs.15/- per share was paid by the purchaser on account of non-compete undertaking . Thus, total sale consideration of Rs.105/- per share consisted of above two items. It did not relate to transfer of any controlling interest as claimed by the assessee. As such what the assessee is claiming to be 'controlling interest' is nothing, but fulfillment of non-compete undertaking. We note that even when the ld.AR for the assessee was asked to address the bench on the issue of 'non compete undertaking' as enumerated in the said agreement dated 28-01-2006, the ld.AR for the assessee did not address the bench on the ITA Nos.770-774/Kol/2010 49 issue. We have also noted that the agreement dt. 28.01.2006 have not been amended in any way as stipulated in the said agreement. In the facts and circumstances of the case, we are of the considered opinion that the amount received by the assessee for the said non-compete undertaking is squarely covered by section 28(va) of the Act.. It has nothing to do with transfer of controlling interest. We, therefore, hold that in terms of said agreement Rs.15/- per share is assessable as income under the head 'business' as per provision of section 28(va) of the Act.
22.13 We have noted that copy of disclosure dated 25-05-06 issued to the Stock Exchange showing the movement of share holdings of the promoters post acquisition by Holderind Investment Ltd, which is available at page 167-168 of APB, shows that Holderind Investment Ltd is one of the party of so-called promoters group, holding 14.75% of the share of M/s.GACL as on 5-5-2006. This would show that Holderind Investment Ltd. was included in promoters' group. As per Articles of Association of M/s. GACL, copy of which has been furnished by the ld. AR for the assessee, Article 122 reads as under:-
"122 (a) So long as GIIC continue to hold more than 10% in the equity share capital of the Company, GIIC shall be entitled to nominate upto 2 Directors whether rotating or non- rotating (hereinafter referred to as "GIIC Directors"). Provided, however, that in the event of GIIC reducing its equity shareholding to 10% or below 10% of the paid up equity share capital of the Company, then in such an event GTIC shall be entitled to nominate only one Director on the Board of the Company. NSS shall be entitled to nominate at least 4 Directors on the Board of the Company, whether rotating or non-rotating (hereinafter referred to as 'NSS Directors").
(b) Deleted.
(c) GIIC's Directors shall always be appointed in consultation with Government of Gujarat.
(Approved at the 5th Annual General Meeting held on 30.10.87).".
22.14 The above would show that NSS [ Shri Narotam Satyanarayan Sekhsaria] is entitled to nominate at least 4 directors on the Board of Company. It has not been shown to us that the above articles of association has been modified in any way in view of share purchase agreement dated 28-01-06. The promoters' group excluding Holderind Investment Ltd, ITA Nos.770-774/Kol/2010 50 however, in compliance to article 5 of the said agreement has limited the total share holding in M/s. GACL below 10% of the total shares. 22.15 The above fact also supports our finding that total sale consideration of Rs.105/- per share does not include any consideration for transfer of so-called controlling interest as claimed by the assessee.
22.16 As regards the full value of consideration of transfer of shares of M/s.GACL as per agreement dated 28-01-06, the agreement itself states the same to be Rs.90/- per share. It has not been disputed by the ld. AR for the assessee that full value of sale consideration has no relationship with 'market value ' of the capital asset . Thus, there is no question of determination of market value of impugned capital asset being share. In this view of the matter, the valuer's report as submitted by the assessee has no relevance for adjudication of the issue at hand.
22.17 The ld.AR for the assessee has contended that the 'controlling interest' was not a part and parcel' of the shares sold through the agreement. It was contended that the promoters' group had controlling interest right from the inception of M/s.GACL and the capital asset being 'controlling interest' was a self-generated asset. According to him controlling interest did not arise on a/c of holding of shares and was, thus, an independent capital asset. This being the case of the assessee, controlling interest as understood by the assessee was not part of the capital asset being share. This would further fortify our finding of fact that full value of consideration for transfer of impugned share was Rs.90/- per share. 22.18 As we have given our finding of fact on the issues involved in the present case as enumerated hereinabove, we do not find it necessary to go into hypothetical legal issues and arguments raised by either of the parties. According to us they are not germane to the issues involved in the present case. We, therefore, hold that :-
a. The full value of consideration for transfer of impugned shares is Rs.90/- per share for the purpose of calculation of capital gains; b. Rs.15/- per share is to be assessed as income under the head' business' as per section 28(va)
23. In the result, the appeal [ITA No.771/Kol/2010 AY 2006-07] of the revenue is allowed.
ITA Nos.770,772,773 & 774/Kol/2010 AY 2006-07 [by the revenue]
24. ITA Nos.770,772 & 773/Kol/2010 relate to company assessee. However, these companies are also not signatories to share purchase agreement dated 28-01-06. These ITA Nos.770-774/Kol/2010 51 companies also have not furnished the copies of the power of attorney given to N.S.S [Shri Narotam Satyanarayan Sekhsaria].
24.1 ITA No.774/Kol/2010 relates to an individual. She is also not a signatory to share purchase agreement dated 28-01-06. In her case also the copy of power of attorney given to N.S.S has not been furnished.
24.2 Nos. of share held in case of ITA Nos. 770,772,773,774 & 775/Kol/2010 AY 2006-07
as under:- [Page Nos.28-29 of PB-1]
S.No. Name of No.of
the GACL % of D-mat a/c Sale Non-compete
Total
shareholders Share Equity /Name of Consideration
Component Sale consideration
D. (Rs.15/- per
Participant shar
1. RKBK 100,000 0.007 10068179 9,000,000 1,500,000 10,500,000
Fiscal Services UTI Bank
P.Ltd. Ltd.
2. Likhami 9204000 0.68 10079819 828360000 138060000 966420000
Commercial -do-
Co Ltd.
-Do- 1329000 0.10 10159101 119610000 19935000 139545000
-do-
3. Bimla D.Poddar 1516230 0.11 10103918 136460700 22743450 159204150
-do-
4. Govind 905250 0.07 10159097 81472500 13578750 95051250
Commercial Co. -do-
Ltd
-do- 8334000 0.62% 10079827 750060000 125010000 875070000
25. The facts and circumstances of these cases, other than no. of shares sold by each of them, are similar to that in the case of Sri Suresh Neotia [ITA No.771/Kol/2010]. For the reasons mentioned in ITA No.771/Kol/2010 we hold that :-
a. The full value of consideration for transfer of impugned share is Rs.90/- per share for the purpose of calculation of capital gains;
b. Rs.15/- per share is to be assessed as income under the head' business' as per section 28(va)
26. Thus, these appeals by the revenue being ITA Nos.770,772,773 & 774/Kol2010 for the AY 2006-07 are also allowed.
ITA Nos.770-774/Kol/2010 52
27. In the result, all the appeals being ITA Nos.770 to 774/Kol/2010 for the AY 2006-07 filed by the revenue are allowed.
यह आदे श खुले Ûयायालय मɅ सुनाया गया है This order is pronounced in the open court on 3-02-2011 Sd/- Sd/-
(डȣ. के. ×यागी ), Ûयायीक सदःय ( बी.के.हालदार ), लेखा सदःय, (D.K.Tyagi), Judicial Member.) (B.K.Haldar, Accountant Member) (तारȣख)Date :3-02-2011 *PP/Sr. Private Secretary :
आदे श कȧ ूितिलǒप अमेǒषतः-
Copy of the order forwarded to:
1. (अपीलाथȸ/APPELLANT ): Asstt. Commissioner of Income-tax, Circle-7, Kolkata
2. (ू×यथȸ/RESPONDENT) ::
• Mess. RKBK Fiscal Services P.Ltd./ • Shri Suresh Kumar Neotia/ • Mess. Likhami Commercial Co.Ltd / • Mess. Govind Commercial Co.Ltd • Smt. Bimala Devi Poddar
3. आयकर किमशनर (अपील)/The CIT(A)
4. आयकर किमशनर (अपील)/The CIT
5. वभािगय ूितनीधी / DR, Kolkata Bench
6. Guard File स×याǒपत ूित/True Copy, आदे शानुसार/ By order, पंजीकार/Asstt. Registrar ITA Nos.770-774/Kol/2010 53