Ita/557/2006 Of Commr. Of Income Tax-I, Chd v. Usha Saboo

IN THE HIGH COURT OF PUNJAB & HARYANA AT CHANDIGARH. Date of Decision: 15th May, 2015 1.ITA No. 557 of 2006 CORAM:HON’B LE MR. JUSTICE S.J.VAZIFDAR, ACTING CHIEF JUSTICE|HON’BLE MR. JUSTICE G.S.SANDHAWALTA, JUDGE. Present :Ms. Urvashi Dhugga, Advocate, for the appellant. Ms. Radhika Suri, Senior Advocate with — Ms. Rinku Dahiya, Advocate, for the assessee. FR oR S.J.VAZIFDAR, ACTING CHIEF JUSTICE These appeals are against the order of the Income Tax AppellateTribunal allowing the respondent’s appeals against the order of theCommissioner of Income Tax (Appeals) 1n proceedings arising out of anassessment order passed under section 143(3) of the Income Tax Act, 1961 inrespect of the assessment year 1994-95. 2 |The main questions of law are the same in all the appeals. Thequestions of fact arise on account of the same transaction. The relevant factsare almost identical and are 1n any event interconnected. We, therefore, disposeof these appeals by this common order and judgment. We will for convenience,however, refer to the facts in ITA No. 557 of 2006. 3The case in a nut-shell is this. The respondents in the aboveappeals are members of the Saboo group. Groz Beckert Saboo Ltd. was a joint:venture between the respondents and M/s Theodor Groz & Sohne & ErnstBeckert Nadelfabrik Commandit Gesellschaft, a partnership firm in Germany(Groz Beckert group). The Saboo group and Groz Beckert group held 40% and60% shares of the equity capital of Groz Beckert Saboo Ltd. respectively.Disputes arose between two groups leading to the Saboo group filing a petitionfor oppression and mismanagement under sections 397 and 398 of theCompanies Act, 1956. The petition was dismissed. The Saboo group filed anappeal under section 1OF of the Companies Act, 1956 before Delhi High Court.The matter was ultimately settled in terms of a Share Purchase Agreementdated 21.01.1993.|400/- was stated to be the consideration for the sale of all|RAVINDER SHARMA2015.05.15 17:55I attest to the accuracy andauthenticity of this document the shares held by the Saboo group to the Groz Beckert group. The agreementalso contained restrictive/negative covenants given by the Saboo group. Therespondents contended that they were entitled to apportion a sum of100/- outof400/- as consideration for the negative covenants. This claim was rejectedby the Assessing Officer and the C.I.T. (A) but was allowed by the order of theTribunal impugned in this appeal. © 4We have held that although the agreement did not bifurcate theconsideration towards the various covenants 1n the agreement, the assessee was.entitled to bifurcate the same and apportion a part thereof towards the negativecovenants. The matter in our view is covered in the respondents’ favour by thejudgment of the Supreme Court. This 1s also the view taken by several otherHigh Courts. On facts we have held that the amount of100/- out of |400/- apportioned towards the negative/restrictive covenants was infact onthe conservative side. In arriving at these conclusions we have also dealt withcertain other issues. 5.The respondent filed a return of income of|5,55,280/-. TheAssessing Officer assessed the respondent’s income at41 ,22,020/-. Therespondent challenged the order before the Commissioner of Income Tax(Appeals) on various grounds including those that are the subject matter of thepresent appeal. The C.I.T. (A) dismissed the appeal. The Tribunal allowed therespondent’s appeal against this order. | 6.)law:- The appeal was admitted on the following substantial question of “Whether on the facts and circumstances of the case, the|Hon’ble ITAT is justified in law in treating a sum of|Rs.100/- per share as capital receipt not chargeable to tax| because as per provisions of Section 48, the entire receipts|on sale of shares are chargeable to tax’?” 5.The respondent filed a return of income of|5,55,280/-. TheAssessing Officer assessed the respondent’s income at41 ,22,020/-. Therespondent challenged the order before the Commissioner of Income Tax(Appeals) on various grounds including those that are the subject matter of thepresent appeal. The C.I.T. (A) dismissed the appeal. The Tribunal allowed therespondent’s appeal against this order. | 6.)law:- The appeal was admitted on the following substantial question of “Whether on the facts and circumstances of the case, the|Hon’ble ITAT is justified in law in treating a sum of|Rs.100/- per share as capital receipt not chargeable to tax| because as per provisions of Section 48, the entire receipts|on sale of shares are chargeable to tax’?” JIn 1959, one R.K.Saboo had obtained from the Government ofIndia an industrial licence for the manufacture of hosiery needles. A financialand collaboration agreement was entered into between R.K.Saboo and M/sTheodor Groz & Sohne & Ernst Beckert Nadelfabrik Commandit Gesellschaft,a partnership firm in Germany. Bya letter dated 21.11.1959, the Governmentof India approved the collaboration agreement. The said R.K.Saboo and theGroz Beckert group entered into an agreement to form and promote a privatecompany limited, by shares in India. Accordingly, on 15.10.1960, GrozBeckert Saboo Ltd. was incorporated which later became a deemed publiclimited company under section 43-A of the Companies Act, 1956. The GrozBeckert group held 60% shares and the said Saboo group 1.e. the respondents.held 40% shares of the equity capital. — 8.|In or about the year 1988 disputes and differences arose betweenthe Groz Beckert group and the Saboo group. On 22.01.1992, the Saboo group.filed a petition under sections 397 and 398 of the Companies Act, 1956 againstthe Groz Beckert group for mismanagement and oppression of minority share-holders before the Company Law Board at New Delhi. The Company LawBoard by an order dated 22.10.1992 rejected the petition and directed theSaboo group to sell its 40% shares in Groz Beckert Saboo Ltd. to the GrozBeckert group at a value to be determined by M/s S.B.Bilimoria & Company,Chartered Accountants. The Saboo group filed an appeal under section 1O(F) of theCompanies Act, 1956 before Delhi High Court in which an interim order Q_The members of the Saboo group and the Groz Beckert groupsettled the matter in terms of a Share Purchase Agreement dated 21.01.1993.The Groz Beckert group is referred to therein as the ‘purchaser’ and themembers of the Saboo group are referred to therein as the ‘sellers’. Each of themembers of Saboo group agreed to sell, transfer, assign and deliver to thepurchaser 1.e. the Groz Beckert group their shares having a nominal value of | 10/- per share at the price of400/- per share aggregating to17.60 crores.|The sale price of the shares was inclusive of all dividend rights. Clause 1.6 of the agreement provided that it was a fundamentalcondition and essence of the contract that the sale would be of the entire440,000/- equity shares owned by the Saboo group. The relevant provisions ofthe Share Purchase Agreement are as under:- xXxXxXxX “Tn considerationoT thepremises|andrespectiverepresentations,warranties,covenants,agreementsandindemnities herein contained, the parties hereto agree asfollows:- xXxXxX xX 5 5)Non;Competition:For a period of five years after theClosing date, neither sellers nor any firms, companies or otherentities owned or controlled by the Sellers will directly orindirectly engage anywhere in India in any business similar toor in competition with the business of the Company as nowconducted, or have any interest, directly or indirectly, in anysuch business. 5 6)Employees:For a period of five years after the closingdate, neither Sellers nor any of its affiliates or subsidiaries will:a) hire any employee of the company or induce or attempt to induce any employee of the company toleave its employ, or in any way interfere with the| xXxXxX xX 5 5)Non;Competition:For a period of five years after theClosing date, neither sellers nor any firms, companies or otherentities owned or controlled by the Sellers will directly orindirectly engage anywhere in India in any business similar toor in competition with the business of the Company as nowconducted, or have any interest, directly or indirectly, in anysuch business. 5 6)Employees:For a period of five years after the closingdate, neither Sellers nor any of its affiliates or subsidiaries will:a) hire any employee of the company or induce or attempt to induce any employee of the company toleave its employ, or in any way interfere with the| ITA No. 557 of 2006 : 6 : relationship between Company and any of itsemployees.employees. b)|induce or attempt to induce any supplier, licensee,distributor, customer, or other business relation ofthe company to cease doing business with it or inany way interfere with the relationship between|any customer or business relation and theCOMpahly, OLdistributor, customer, or other business relation ofthe company to cease doing business with it or inany way interfere with the relationship between|any customer or business relation and theCOMpahly, OL C)|do any other act detrimental to the company or itsaffiliates or the business of any of them.affiliates or the business of any of them. 5.7|For a period of five years after the closing date, neither|the purchaser nor any of its affiliates or subsidiaries will:a) hire any employee of the sellers or of any firms,companies or entities owned or controlled by thesellers or attempt to induce any employee to leavehis employ, or in any way interfere with the|relationship with such employees.the purchaser nor any of its affiliates or subsidiaries will:a) hire any employee of the sellers or of any firms,companies or entities owned or controlled by thesellers or attempt to induce any employee to leavehis employ, or in any way interfere with the|relationship with such employees. b)|induce or attempt to induce any supplier, licensee,distributor, customer, or other business relation ofthe Sellers or any firm, companies or any entities|owned or controlled by the sellers to cease doingbusiness with it or in any way interfere with the|relationship with them; ordistributor, customer, or other business relation ofthe Sellers or any firm, companies or any entities|owned or controlled by the sellers to cease doingbusiness with it or in any way interfere with the|relationship with them; or C)|do any other act detrimental to the Sellers or anyfirms or Companies or entities owned and_controlled by the Sellers, its affiliates or the|business of any of them.firms or Companies or entities owned and_controlled by the Sellers, its affiliates or the|business of any of them. 5 8)Intellectual Property Rights:From an after the closing,sellers will not use or disclose to any third party anyconfidential information relating to the company or itsbusiness (including customer lists). Sellers shall not useand shall do nothing to challenge or otherwise impair thetrade name, logos and trade marks and other intellectualproperty of the Company or the Purchaser.”sellers will not use or disclose to any third party anyconfidential information relating to the company or itsbusiness (including customer lists). Sellers shall not useand shall do nothing to challenge or otherwise impair thetrade name, logos and trade marks and other intellectualproperty of the Company or the Purchaser.” XXXXXXXXXXXXXXXX6.4This agreement will be filed by the parties in the appeal|pending in the High Court of Delhi at New Delhi being|Appeal No. 23 of 1992 with a request to the Hon’ble High|Court to take the same on record and to adjourn the|XXXXXXXX6.4This agreement will be filed by the parties in the appeal|pending in the High Court of Delhi at New Delhi being|Appeal No. 23 of 1992 with a request to the Hon’ble High|Court to take the same on record and to adjourn the| XXXXXXXXXXXXXXXX6.4This agreement will be filed by the parties in the appeal|pending in the High Court of Delhi at New Delhi being|Appeal No. 23 of 1992 with a request to the Hon’ble High|Court to take the same on record and to adjourn the|XXXXXXXX6.4This agreement will be filed by the parties in the appeal|pending in the High Court of Delhi at New Delhi being|Appeal No. 23 of 1992 with a request to the Hon’ble High|Court to take the same on record and to adjourn the| appeal to a date after 31 August, 1993, on which date.the appeal shall be withdrawn and disposed of upon.fulfillment of the terms of this agreement and the Escrow|Agreement.” 10.The respondents contended that out of the sum of400/- per)share, a sum of100/- ought to be apportioned as consideration on account ofthe negative covenants stipulated in the Share Purchase Agreement. Theycontended that the said sum of100/- per share would be on account of capitalreceipts for agreeing to the negative covenants under the Share PurchaseAgreement and the same being capital in nature was not chargeable to tax. To.justify the basis and the quantum of this claim for apportionment, therespondent filed a valuation report of the Chartered Accountants M/s Vaish &Associates which valued the shares at.93.12 as per break-up value as on)31.03.1993.| 11.The appellants accordingly claimed deduction of100/- out ofthe total sum of400/- per share. The Assessing Officer, however, disallowedthe same. He held that the respondent/assessee was not entitled to split-up thevalue of the shares as stipulated in the Share Purchase Agreement. TheAssessing Officer held that there was no split-up of the price ofAQQO/- 1n theShare Purchase Agreement and that there was no documentary proof that100/- out of |400/- per share was towards the negative covenants. The Assessing Officer noted the judgments of the Supreme Courtand the Madras High Court and observed that in those cases the sale ofbusiness and transfer of management or termination of agency andcompensation for its transfer and refraining from competition was treated as.capital receipt. Curiously, however, he held that the special provisions of the therefore, refused to follow the judgments. We will deal with section 28(11) ofthe Act later.. Referring to the above provision of the Share PurchaseAgreement, he held that the Groz Beckert group after paying400/- per sharewould have been foolish not to take the assurances contained in the aboveprovisions. It was contended even before us that these provisions were insistedupon by the Groz Beckert group only out of abundant caution. The AssessingOfficer also held on facts that the bifurcation on account of the negativecovenants had not been established. This contention was reiterated before usand we will also deal with the same later. He further held that the price of | 400/- was the sale price of each share and that the negative covenants merelyfollowed upon the Groz Beckert group taking over the management. Heobserved that 1f there were to be apportionment of the sale consideration, theDirectors who relinquished office would get a higher amount than the othermembers of the Saboo group. It was contended before us that infact there was.no apportionment. | 12.The C.1.T. (A) held that the respondent in ITA No. 557 of 2006was neither a Director nor an employee of the company; that she was not atechnical expert; that the sale of the shares could not have an element ofmanagerial control. It was held that as the respondent was not a Director or anemployee of the company, she could not have any element of managerialcontrol and that she did not have any expertise to run a venture similar to theone run by the purchaser of the shares 1.e. Groz Beckert group. He furtherconcluded that the restrictive covenant was not applicable to the respondent inITA No. 557 of 2006. It was, therefore, held that the entire amount of|400/-per share was received against the sale of the share and the Assessing Officer 12.The C.1.T. (A) held that the respondent in ITA No. 557 of 2006was neither a Director nor an employee of the company; that she was not atechnical expert; that the sale of the shares could not have an element ofmanagerial control. It was held that as the respondent was not a Director or anemployee of the company, she could not have any element of managerialcontrol and that she did not have any expertise to run a venture similar to theone run by the purchaser of the shares 1.e. Groz Beckert group. He furtherconcluded that the restrictive covenant was not applicable to the respondent inITA No. 557 of 2006. It was, therefore, held that the entire amount of|400/-per share was received against the sale of the share and the Assessing Officer ITA No. 557 of 2006 : 9 : had rightly treated the entire amount as a part of the capital receipt liable for capital gains. — 13.It is not necessary at this stage to refer to the order of the Tribunal which we have upheld. We will refer to the same later. © 14.Ms. Dhugga, learned counsel appearing on behalf of the appellant submitted as follows:- I)There being no bifurcation in the agreement between the value ofthe share and the value of the negative covenants, therespondent/assessee was not entitled to apportionment thereof forthe share and the value of the negative covenants, therespondent/assessee was not entitled to apportionment thereof for the purposes of assessment under the Income Tax Act. IT)There was infact no consideration payable in respect of thenegative covenants.negative covenants. III)|The order 1s perverse. IV)In any event, the consideration for the negative covenants under Clause 5.515 assessable to tax under section 28 of the Act. | Res[: There being no bifurcation in the agreement as regards thevalue of the share and the value of the negative covenants, therespondent/assessee was not entitled to apportionment thereoffor thepurposes ofassessment under the Income Tax Act. 145.Ms. Dhugga’s, absolute proposition that the assessee is notentitled to seek bifurcation of the consideration stipulated in the SharePurchase Agreement merely because the agreement does not provide for thesame is not well founded. In our view, an assessee 1s entitled to seekbifurcation of the consideration mentioned in the agreement. Whether a part ofthe consideration was paid in respect of a particular promise or not 1s aquestion of fact which must necessarily depend on the facts of each case. | 16.Ms. Suri’s reliance upon the judgment of a Division Bench of theBombay High Court inBaijnath Charurbhuj and another v. Commissioner ofIncome Tax, Bombay City-II, 1957 Income Tax Reports (Bombay) 643.1S well]founded. In that case, theManaging Agency of Gujarat Cotton Mills Ltd. was|held by the firm of Shantilal Bhagwandas & Co. and by an agreement dated18[th]January, 1938 the said firm assigned the managing agency and 4,736Shares of the company to Sheth Peeramal Chaturbhuj for7,51,000/-. By anagreement dated 07.09.1946, Peeramal Girdharlal & Co. agreed to relinquishtheir managing agency rights and to get M/s Chaturam & Sons appointed theManaging Agents and to sell 65,012 shares of the company at the price of 65/-per share. The assessee was a partner in Peeramal Girdharlal & Co. andthe Taxing Department sought to assess him to tax in respect of capital gainsfor the assessment year 1948-49 contending that the sale price of each shareshould be taken at.65/- 1.e. the price mentioned in the agreement. Theassessee contended that the market price of the shares on the date of theagreement was46/- per share and it is that price which ought to be taken intoconsideration for determining the capital gain. The Tribunal accepted thedepartment’s contention which led to the reference before the Division Bench. |Chief Justice Chagla speaking for the Court held:-. 65/-per share. The assessee was a partner in Peeramal Girdharlal & Co. andthe Taxing Department sought to assess him to tax in respect of capital gainsfor the assessment year 1948-49 contending that the sale price of each shareshould be taken at.65/- 1.e. the price mentioned in the agreement. Theassessee contended that the market price of the shares on the date of theagreement was46/- per share and it is that price which ought to be taken intoconsideration for determining the capital gain. The Tribunal accepted thedepartment’s contention which led to the reference before the Division Bench. |Chief Justice Chagla speaking for the Court held:-. GNow, the Tribunal has found as a fact, andthere can be no dispute about it, that the main object or|rather the only object of the agreement of the /7thseptember, 1946, was to get the purchasers of these|shares appointed the managing agents of the company.|The Tribunal also points out in its order that this was not|an ordinary agreement of purchase and sale of shares ofthe company entered into in the ordinary course of|business, and the only reason why it has rejected the.assessee's contention was that the parties did not| ITA No. 557 of 2006 : 11 : apportion the price of Rs. 65 to the shares and to the.managing agency. Under section 12B(2) for the purpose ofcomputing capital gain the full value of the consideration|for which the sale, exchange or transfer of the capital|asset is made has to be taken into account, and the shortquestion that we have to consider is : What is the fullvalue of the shares which were sold by the assessee and|in respect of which he made a capital gain? It is|erroneous to suggest that the full value is necessarily the|value which the parties place upon a capital asset. The|full value must be the true value, not any artificial value,which parties for any purpose may assign to a particular|capital asset. Here we have evidence that these shares|were marketable and they had a market price which was|Rs. 46 per share. The agreement also makes it clear that|it was a composite agreement by which not merely the|shares were being sold but the shares and the managing|agency rights. Therefore, the consideration paid by the|purchasers, viz., Rs. 609 per share, was not theconsideration paid for the shares alone but it was a|consideration that was paid for the shares and also for.the relinquishment of the managing agency by the.vendors. It is therefore not possible to accept the|contention that the full value of shares within the!meaning of section 12B(2) of the Act was Rs. 69 per.share. The full value was the market value of Rs. 46 per|share and an additional amount was paid by the.purchasers because they obtained not only the shares.but also the important right to manage the Gujarat Mills.Co. Ltd.It is difficult to understand how the mere factthat the parties have not apportioned the considerationbetween the two assets which were being dealt with by|this agreement can make any difference to the rights ofthe parties.The position might have been different if the|market value of the shares could not be ascertained. Thenit might be said that it is difficult to put a proper value|upon the shares and to put a proper value for the|consideration of the assignment or relinquishment of the|managing agency. But when the market value is availableand when it is known for what price these shares could| ITA No. 557 of 2006 : 12 : be purchased or sold, there is no difficulty whatsoever in the apportionment. ITA No. 557 of 2006 : 12 : be purchased or sold, there is no difficulty whatsoever in the apportionment. Mr. Joshis contention is that the capital assetwhich was being sold and in respect of which capital gain|was made was not merely the shares but also the|managing agency agreement, and therefore if Rs. 65 were|obtained by the purchasers they obtained it in respect of|the capital asset and the whole of the capital gain must|be brought to tax. Now, it is not the case of the Taxing|Department and it has never been their case that the|capital asset in respect of which capital gain was made by|the assessee and which is sought to be taxed was the|shares and the managing agency. The whole of the|reference is based upon the fact that the only capital|asset we are concerned with is the shares and not the|managing agency. Therefore, we must separate the|managing agency from the shares in considering what is the value to be put upon the shares. Let us test the|attitude taken up by the Department from this point of|view. Assuming that the parties had put Rs. 5 or Rs. 10|as the value of the shares and they had valued the|managing agency for the balance of the consideration,|would the Department have accepted the artificial value|put by the parties upon the shares if that value was far)below the market value? The position is the same here.|The parties have put upon the shares a value which is|much higher than the market value. Admittedly, it is an.artificial value and it is artificial because the value put|upon the shares is not the value of the shares alone but itis the composite consideration paid by the purchasers for,obtaining the shares and also acquiring the managing|agency. Under the circumstances, in our opinion, for the|purposes of section 12B(2) the sale price of the shares.should be taken at Rs. 46 per share and not Rs. 69 per'share.”(emphasis supplied). We are in respectful agreement with the judgment. In particularwe agree that the parties not having apportioned the consideration between two. or more assets can make no difference to the right of the assessee to seek anapportionment of the consideration in respect of each of them. | 17.We See no reason in principle to prevent the assessee from doingso. The value to be ascribed to each transaction must obviously depend uponthe evidence and the facts in each case. The tax of whatever nature, must belevied on the basis of the true value of the asset of the transaction and notmerely on the basis of the value ascribed to it by the assessee. Indeed, the viewto the contrary could cause severe prejudice to the revenue itself. To accept thecontention would enable assessees to ascribe artificial values to assets enablingthem to avoid tax. 18.As noted by the Division Bench in Baijnath Chaturbhuj’s case, —the agreement indicated two distinct assets namely the shares and the managingagency. In the case before us the negative covenant and the shares areindependent and distinct assets. It was possible to have a separate andindependent agreement in respect of each of them. The agreement in terms ofthe negative covenant contained in Clause 5.5 did not flow out of theagreement to sell the shares. Each of these agreements could have been arrivedat independent of the others. Each of the agreements could have been arrived atwithout and even in the absence of the other. The negative covenant could havebeen agreed to by the members of the Saboo group without having sold theirShares and the members of the Saboo group could have sold their shareswithout agreeing to the negative covenants. It was therefore not onlypermissible but necessary to apportion the consideration towards each of theassets provided ofcourse it 1s possible to ascertain a value of each of the assets. 19.A Bench of three learned Judges of the Supreme Court inCommissioner of Income Tax, Madras v. Best and Co. (Private) Ltd. 1966 19.A Bench of three learned Judges of the Supreme Court inCommissioner of Income Tax, Madras v. Best and Co. (Private) Ltd. 1966 ITA No. 557 of 2006 : 14 : Income Tax Reports (60) 11,dealt with this very issue. Havingfound that apartfrom giving up the agency, the parties had also entered into restrictivecovenants, the Supreme Court held :- 6seseeseeeeeeeee. WE, therefore, hold that the comagreed to be paid was not only in lieu of the giving up of the)agency but also for the assessee accepting a restrictive covenantfor a specific period. In the present case, the covenant was an independent|obligation undertaken by the assessee not to compete with the|new agents in the same field for a specified period. It came intooperation only aiter the agency was terminated. It was wholly|un-connected with the assessee's agency terminated. We,|therefore, hold that that part of the compensation attributableto the restrictive covenant was a capital receipt and hence not.assessable to tax. The next question is whether the compensation paid isseverable. If the compensation paid was in respect of twodistinct matters, one taking the character of a capital receiptand the other of a revenue receipt, we do not see any principlewhich prevents the apportionment of the income between thetwo matters. The difficulty in apportionment cannot be asround for rejecting the claim either of the revenue or of theaSSECSSCEsuch an apportionment was sanctioned by courts in|Wales (H.M. Inspector of, Taxes v. Tilley , Carter v. Wadman|(H.M. Inspector of Taxes and T. Sadasivam v. Commissioner ofIncome-tax, Madras. In the present case apportionment of the|compensation has to be made on a reasonable basis between|the loss of the agency in the usual course of business and the|restrictive covenant. The manner of such apportionment has|perforce to be left to the assessing authorities.” (emphasis supplied).| The judgment 1s a complete answer to Ms. Dhuggas’s submission. | 2().Ms. Suri, then relied upon a judgment of the Division Bench of Madras High Court inParry and Co. Ltd. v. Deputy Commissioner ofIncome| Tax and another 2004 Income Tax Reports 177.In that case, the assessee was| engaged in trading and service activities as cleaning and forwarding agents etc. Pursuant to certain agreements, a company named HMM Ltd. engaged theassessee as its selling agent in case of diverse products. The agreements wererenewed. The parties, however, entered into an agreement for pre-maturetermination of the selling agency/distribution arrangement. The HMM Ltd.agreed to pay certain amounts in installments in consideration of the assessee’saccepting the pre-mature termination of the agreement. In considerationthereof, the assesseeinter-aliqagreed not to accept or engage itself in anyselling/distribution arrangements of any products of any other manufacturer aswould compete with the said food products and/or the said toiletries. Theassessee had also agreed to other clauses such as a confidentiality clause. Theassessee received the amounts due under the agreement. The Assessing officertreated the same as revenue receipts which were taxable. The Commissioner ofIncome Tax confirmed the order. The Tribunal held 20% of the totalcompensation as attributable to the restrictive covenant and obligations anddirected that the amount be taken as a capital receipt and not liable to tax as.income under section 28(11)(c) of the Act and deleted the addition to thatextent. The question in the assessee’s appeal to the High Court was whether thecompensation would restrict the capital receipt or the revenue receipt. TheHigh Court held that the compensation was in consideration of the pre-maturetermination of the selling agency/distributorship agreement and also in respectof the restrictive covenants. Relying upon the judgment of the Supreme Courtinthe case ofCIT v. Best and Co. P. Ltd. [1966/60 TTR II(SC),the DivisionBench upheld the apportionment. © 21.Ms. Suri also relied upon the judgment of the Division Bench ofPatna High Court 1nRaghubar Narain Singh v. Commissioner ofIncome Tax, 1984 Income Tax Reports 447,We will refer to this judgment shortly whilereferring to a judgment cited by Ms. Dhugga. © 2).The submission that the assessee 1s not entitled to apportionmenttowards the price of the shares and price of the restrictive covenants merelybecause the Share Purchase Agreement itself did not bifurcate the same, 1srejected. Where the agreement between the parties indicates that the lump-sumconsideration was in respect of two or more promises, it 1s liable to bebifurcated and apportioned between each of the assets. At times bifurcationoperates in favour of the assessee and at times in favour of the revenue. Inwhose favour it operates 1s irrelevant. In such cases, the consideration must beapportioned towards each of the assets if 1t 1s possible to do so. 23.Ms. Dhugga on the other hand relied upon the judgment of aDivision Bench of Madras High Court inVenkatesh (Minor) and others vy.Commissioner ofIncome Tax 2000 (243) ITR 367 Madras. The question beforethe High Court under reference was whether any part of the sale considerationreceived by the assesses for the sale of their shares was to be excluded from thecomputation of the long-term capital gains on the ground that part of theconsideration does not represent the value of the shares sold but constitutes theconsideration for the sale of right to control the company with the aid of theShares sold in two companies-Anglo French Textiles Ltd. and Best & Co.(Pondicherry) Pvt. Ltd. The shares were held by all the assessees who belongedto the same family. The shares were sold in two companies at the rate of601/- per share and935/- per share, although the prevailing market value of|those shares was/219 and185 per share. The Income Tax Officercomputed the difference between the value of the shares received by theassessees under the agreement and the cost of acquisition of these shares and treated the same as long-term capital gains and accordingly assessed that sumto tax. The Income Tax Officer rejected the assessee’s contention that the saleprice did not wholly pertain to the value of the shares held by them and thatpart of the amount received by them was the consideration for the transfer ofthe controlling interest of those companies to the vendees which was evidencedby the fact that the assessees who were Directors would resign from the boards.of two companies and induced the vendees companies. Ms. Dhugga relied upon the following observations of the Division Bench:- “The argument for the assessees that thecontrolling interest in the company is capable of being|transferred separately, apart from the transfer of|shares is wholly untenable. The fact that the vendor|has controlling interest and is in a position to place|the vendee in control of the company by transferring|all his shares or such part as would enable the vendeeto exercise control over the company with the aid of|the shares so transferred would only enhance the|value ot the shares transterred.The price paid by the}vendee for acquisition of such shares remains theprice of those shares though the price so paid is higherthan the market price. Controlling interest is but an|incidence of the shareholding and has no independentexistence.Similar view was taken by the Madhya|Pradesh High Court in the case of|Smt. MaharantUshadevut v. CIT [1981] 131 ITR 445wherein also it.was pointed out that the controlling interest in a)company is an incident arising from holding of a'particular number of shares in the company and that|such controlling interest cannot be transferred withouttransferring shares.” The judgment does not support Ms. Dhugga’s contention that if due to the negative covenants the price of the share is higher, it still 1s a part of The judgment does not support Ms. Dhugga’s contention that if due to the negative covenants the price of the share is higher, it still 1s a part of shares. The controlling interest may well be a part of the value of the shares forit emanates and is dependent upon the shares themselves. As held by theDivision Bench, the controlling interest 1s an incidence of the shareholding andhas no independent existence. We have already held that the negative covenantwas a distinct right independent of the right of ownership of the shares. Thecase 1S, therefore, clearly distinguishable from the one before us. D4.The Division Bench then referred the judgment of the Patna HighCourt 1n-Raghubar Narain Singh v. Commissioner ofIncome Tax 1954 Incomelax Keports 44/7wherein it was held that the price received by the vendor whohappened to be the Managing Director and who had agreed under theagreement to delegate his power to the vendee was not the consideration for thesale of the shares alone and that part of the consideration was the price for thedelegation of the power and therefore, was not to be taken into account whilecomputing the capital gains of the shares. The Division Bench differed with theview of the Patna High Court to the effect that the powers of the ManagingDirector could be sold in such a manner and held that such illegal sales wouldnot entitle the assessees to claim exemption of tax on capital gains arising fromthe sale of shares. We are not concerned with such a case at all and therefore,do not express any opinion regarding the same. Suffice it to note, however, thatthe Division Bench of the Madras High Court did not hold that theconsideration cannot be apportioned even 1f the Court comes to the conclusionthat two distinct assets are sold. The Division Bench of the Patna High Court.endorsed the principle of bifurcation and apportionment. | 25.Ms. Dhugga then relied upon the following observations of theMadhya Pradesh High Court inSmt. Maharani Ushadevi v. Commissioner ofIncome Tax, M.P. 1981 Income Tax Report, Vol. 131, 445)6 ITA No. 557 of 2006 : 19 : Now, the Tribunal has found that theassessee had in fact paid the price of Rs. 100 per share|when the assessee acquired the block of 42,000 shares ofthe company. It is true that the Tribunal has also found|that the market price of the shares of the company at thematerial time was Rs. 76. But, if for acquiring a block of42,000 shares the assessee was in fact required to pay|Rs, 100 per share, then so far as the assessee was.concerned, the cost of acquisition of each share was Rs.100. The Tribunal, however, held that the sum of Rs. 100did not represent the cost of acquisition of shares to the.assessee because, the assessee acquired, in addition to.the shares, a controlling interest in the company and,|therefore, the excess amount paid by the assessee over|the market price of the share represented the price of.controlling interest. This view of the Tribunal proceeds onthe assumption that controlling interest is a distinct|capital asset which can be acquired or transferred.independently of the shares. We see no justification for|the view. Controlling interest is an incidence arising from|holding a particular number of shares in a company. It|cannot be separately acquired or transferred. It flows|from the fact that a number of shares are held by alperson. If for acquiring that number of shares, a person isrequired to pay more than the market price of a share|and if the transaction is genuine, as has been found in|the present case, then, really speaking, the cost of|acquisition of the block of shares purchased by the|assessee is that which she has in fact paid for holding|that block.” The other decision relied upon by the Tribunal isBainath Chaturbhuj v. CIT [1957] 31 ITR 643 (Bom). In)that case, it was found that the consideration received by the assessee was really a composite consideration for the|transfer of shares and the assignment of managing|agency. No doubt, there can be a case of composite|consideration but in that case there should be two!distinct assets, each capable of being acquired or' transferred separately. In our opinion, " controlling|interest " by itself cannot be acquired or transferred. It is an incidence arising out of holding a particular number otshares and if for holding that number the assessee was|required to purchase a block of 42,000 shares at the price.of Rs. 100 for each share then Rs. 100 would, in our'opinion, be the cost of acquisition of the share so far as|the assessee is concerned. For these reasons, our answer,to the question refrained by us in M.C.C. No. 411 of 1976)is in the negative and against the department.” 26.These observations do not support Ms. Dhugga’s submission. TheDivision Bench only held that the controlling interest 1s an incidence arisingfrom holding a particular number of shares in the company and cannot beseparately acquired or transferred. It 1s an incidence or a consequence of theholding of the said shares. In fact, the judgment is against Ms. Dhugga’s submission as theDivision Bench accepted the view taken by the Division Bench of BombayHigh Court inBaijnath Chaturbhuj‘s case(supra). The Division Bench held as_|under:- The other decision relied upon by theTribunal is Baijnath Chaturbhuyj v. CIT [1957] 31 ITR 643(Bom). In that case, it was found that the consideration|received by the assessee was really a composite.consideration for the transfer of shares and the'assignment of managing agency. No doubt, there can be a|case of composite consideration but in that case there|should be two distinct assets, each capable of being|acquired or transferred separately. In our opinion, |"controlling interest" by itself cannot be acquired or'transferred. It is an incidence arising out of holding a|particular number of shares and if for holding that|number the assessee was required to purchase a block of42,000 shares at the price of Rs. 100 for each share then|Rs. 100 would, in our opinion, be the cost of acquisition| ITA No. 557 of 2006 : 21 : ot the share so far as the assessee is concerned. For thesereasons, our answer to the question refrained by us in|M.C.C. No. 411 of 1976 is in the negative and against thedepartment.” The Division Bench, therefore, infact accepted the view that even|in the case of composite consideration there can be apportionment providedtwo distinct assets each capable of being acquired or transferred separately aresold or purchased. DT.Lastly, Ms. Dhugga relied upon the following observations of theSupreme Court 1n|Vodafone International Holdings BV vs. Union of India|(2012) 6 SCC 613 (167.As stated, CGP was treated in the Hutchisonstructure as an investment vehicle. As a general|rule, in a case where a transaction involves|transfer of shares lock, stock and barrel, such a|transaction cannot be broken up into separate.individual components, assets or rights such as|right to vote, right to participate in companymeetings, management rights, controlling rights,|control premium, brand licences and so on as|shares constitute a bundle of rights. (SeeCharanyitLal ChowdhuryV~:Union of India{AIR 1951 SC 41 :)(1950) 1 SCR 869] ,Venkatesh~V~.CIT-|{(2000) 243ITR 307 (Mad)| and|Mahaqrant UshadevVeCIT(1981) 131 ITR 445 (MP)| .) Further, the HighCourt has tailed to examine the nature of the!following items, namely, non-compete agreement,|controlpremium, calland|putoptions,consultancysupport,customerbase,brand|licences, etc. 168.On facts, we are of the view that theHigh Court, in the present case, ought to have|examined the entire transaction holistically. VIH|has rightly contended that the transaction in|question should be looked at as an entire package. ITA No. 557 of 2006 : 22 : The items mentioned hereinabove, like, control|premium, non-compete agreement, consultancy|support, customer base, brand licences, operating|licences, etc. were all an integral part of the|holding subsidiary structure which existed for|almost 13 years, generating huge revenues, as|indicated above. Merely because at the time of exit|capital gains tax becomes not payable or exigible|to tax would not make the entire “Share sale~?(investment)1a sham ora tax avoidant. 169,The High Court has failed to appreciatethat the payment of US $11.08 billion was forpurchase of the entire investment made by HTIL inIndia. The payment was for the entire package.|The parties to the transaction have not agreed|upon a separate price for the CGP share and for|what the High Court calls as “other rights and|entitlements” (including options, right to non-compete, control premium, customer base, etc.).|Thus, it was not open to the Revenue to split thepayment and consider a part of such payments for|each oft the above items. The essential character ofthe transaction as an alienation cannot be altered|by the form of the consideration, the payment ofthe consideration in instalments or on the basis|that the payment is related to a contingency,(Coptions”, in this case), particularly when thetransaction does not contemplate such a split up. 170.Where the parties have agreed for alump sum consideration without placing separate|values for each of the above items which go to|make up the entire|investment in participation>merely because certain values are indicated in thecorrespondence with FIPB which had raised the|query, would not mean that the parties had agreedfor the price payable for each of the above items.The transaction remained a contract of outright|sale of the entire investment for a lump sum|consideration |see Commentary on|Model Tax Convention on Income and on Capital(OECD, 28-1-2003) as also the judgment of this Court in|CITVi.Mugneeram Bangur and Co.|AIR 1966 SC 50 :|(19695) 97 ITR 299] |. Thus, we need to look atJ?the entireownershipSTCrulctu setup|by|Hutchison as aisingle consolidated bargainand|interpret the transactional documents, while|examining the offshore transaction of the nature|involved in this case, in that light.” Convention on Income and on Capital(OECD, 28-1-2003) as also the judgment of this Court in|CITVi.Mugneeram B