Sh. Sumeet Taneja v. Commissioner Of Income Tax, Chandigarhand Another

Income Tax Appeal No.293 of 2012(O&M) IN THE HIGH COURT OF PUNJAB AND HARYANA AT CHANDIGARH (1) Income Tax Appeal No.293 of 2012(O&M) Date of Order:22[nd] August, 2013 Sh. Sumeet Taneja ...Appellant Versus Commissioner of Income Tax, Chandigarhand another. ..Respondents (2) Income Tax Appeal No.294 of 2012(O&M) Ms. Supneet Kaur Khurana and others ...Appellants Versus Commissioner of Income Tax, Chandigarhand another. ..Respondents CORAM: HON'BLE MR. JUSTICE RAJIVE BHALLA HON'BLE MR. JUSTICE DR. BHARAT BHUSHAN PARSOON Present:Mr. Alok Mittal, Advocatefor the appellant(s).Ms. Urvashi Dhugga, Advocate,for the respondents. RAJIVE BHALLA, J. C.M.No.31322-CII of 2012 Prayer in this application is to implead the legalrepresentatives of Harbir Singh Khurana, who is stated to have passedaway on 01.07.2011. In view of averments in the application and the argumentsaddressed by counsel for the appellants, the application is allowed, andlegal representatives mentioned in paragraph 2 of the application areimpleaded as appellants in place of Harbir Singh Khurana, deceased. The amended memorandum of parties is taken on record. Income Tax Appeal No.293 of 2012 By way ofthis order, we shall decide Income Tax Appeal Nos.293 and 294 o f 2012, as they relate to the same transaction and involve adjudication of the same questions. Facts are beingtaken from Income Tax Appeal No.294 of 2012. The appellants, challenge orders dated 26.12.2008(Annexure A-1), 14.10.2009 (Annexure A-2) and 08.06.2012(Annexure A-3), passed by the Assessing Officer, Commissionerof Income Tax (Appeals) and the Income Tax Appellate Tribunal,Chandigarh Bench-'B', Chandigarh, respectively, for theassessment year 2006-2007. The appellant-Harbir Singh Khurana (sincedeceased), admittedly purchased 47500 equity shares of M/sExcel Callnet Private Ltd., at the rate of Rs.10/- each on28.03.2002, i.e., for Rs.4,75,000/-. The aforesaid shares weresold in May, 2005 to M/s Pugmarks Interweb Private Ltd. by wayof a share-purchase agreement, dated 26.05.2005. Theappellant, filed his return of income for the assessment year2006-07 disclosing an income from Short Term Capital Gain ofRs.2,10,900/- and income from Long Term Capital Gain ofRs.38,40,000/-, besides income from other sources. The casewas selected for scrutiny and notice was issued under Section143(2) of the Income Tax Act, 1961 (hereinafter referred to as'the Act'). The Assessing Officer, after considering the entirematter including replies filed and documents placed on record,by the appellant, held that income from Long Term Capital Gainshall be treated as business income of the assessee under Section 28(va) of the Act. The Assessing Officer, in essence,negatived the appellant's plea that the sale of shares, was amere transfer of share holdings and not a transfer or purchaseof business activities of the assessee. The appellant filed anappeal, which was dismissed by the Commissioner of IncomeTax (Appeals) (hereinafter referred to as the 'CIT(Appeals), on14.10.2009. The appellant, thereafter, filed an appeal before theIncome Tax Appellate Tribunal (hereinafter referred to as 'theITAT'), which was also dismissed. Section 28(va) of the Act. The Assessing Officer, in essence,negatived the appellant's plea that the sale of shares, was amere transfer of share holdings and not a transfer or purchaseof business activities of the assessee. The appellant filed anappeal, which was dismissed by the Commissioner of IncomeTax (Appeals) (hereinafter referred to as the 'CIT(Appeals), on14.10.2009. The appellant, thereafter, filed an appeal before theIncome Tax Appellate Tribunal (hereinafter referred to as 'theITAT'), which was also dismissed. Counsel for the appellant submits that the impugnedorders are illegal, and void as Income Tax authorities haveignored the explanation added to Section 2(14) of the Act,introduced with retrospective effect to clarify that “property”includes any rights in or relation to an Indian Company”including right of management or control or any other rightswhatsoever. The explanation clearly places the disputedtransaction, within Section 2(14) and, therefore, cannot betreated as a business transaction or income from business, soas to place it within Section 28(va) of the Act. The findingsrecorded by authorities, to the contrary, are based upon amisreading of the sale-purchase agreement and primaryreliance upon the non-compete clause to hold that the sale-purchase agreement is a transfer of business and not a meresale of equity shares. It is argued that the approach of the respondents is clearly illegal and void and gives rise to thefollowing substantial questions of law:- “(i) Whether in facts and circumstances of thecase, the action of the ld. Authorities belowhave erred in holding that the sale of theequity shares as stock in trade does notfall within the ambit of Section 2(14) of theIncome Tax Act despite the express“explanation” added by the legislature inthe said section vide the Finance Act 2012with retrospective effect? (ii) Whether in facts and circumstances of thecase, the ld. Authorities below have erredin holding that amount received for sale ofshares is on account of Non-CompeteCovenants contained in Article 8 of theSale Purchase Agreement by ignoring thefact that the same has been received onaccount of transfer of shares and noconsideration whatsoever has been paidtowards the said Non-compete Covenantand the price settled between the partieswas only the marked price of the shares?(iii) Whether in fact and circumstances of the -5- case, the authorities below erred inignoring the fact that the assessee was not doing any business in the company, hewas merely drawing a salary and it was thecompany, Excel Callnet Pvt. Ltd which was doing the business of call centers, hencethe sale of shares could not fall within theambit of section 28(va)? (iv) Whether in fact and circumstances of thecase, the action of the authorities below,case, the action of the authorities below, the impugned orders Annexures A-1 to A-3are legally sustainable in the eyes of law?”are legally sustainable in the eyes of law?” Counsel for the revenue submits that findings of factrecorded by the Assessing Officer, affirmed by the CIT(Appeals)and the ITAT, do not give rise to any substantial question of lawmuch less the questions of law framed by the appellant. Aperusal of the agreement leaves no manner of doubt that thetransaction involves sale of the entire business as is not asimple transfer of shares. The Assessing Officer, the CIT(Appeals) as well as the ITAT have examined each and everyclause of the agreement and have only, thereafter, recordedfindings of fact that amount received by the appellant would beincluded in his business income. As regards the explanation of Section 2(14) of the Act, it is argued that the said explanation does not apply to theappellant as the matter in dispute pertains to the assessmentyear 2006-07. We have heard counsel for the parties, perused theimpugned orders as well as the substantial questions of law. As regards the explanation of Section 2(14) of the Act, it is argued that the said explanation does not apply to theappellant as the matter in dispute pertains to the assessmentyear 2006-07. We have heard counsel for the parties, perused theimpugned orders as well as the substantial questions of law. The Assessing Officer, after perusal of the agreementrecorded a finding of fact that the agreement, though, classifiedas an agreement for purchase of shares envisages purchase ofbusiness or rather purchase of business assets. The AssessingOfficer has referred to various clauses of the agreement, thattransfer all pervasive control of business from the assessee tothe purchaser, to the complete and absolute exclusion of theassessee. The Assessing Officer has also referred to a non-compete clause in the agreement while holding against theassessee. The findings so recorded, have been affirmed by theCIT (Appeals) as well as by the ITAT. It would, therefore, benecessary to reproduce a relevant extract from the order passedby the ITAT, but before doing so, it would be appropriate to pointout that the essential dispute in the present case is whethertransfer of shares by the assessee is transfer of a capital assetwithin the meaning of Section 2(14) of the Act or a transfer ofbusiness that falls within the ambit of Section 28(va) of the Act.A relevant extract from the order passed by the Tribunal readsas follows:- Income Tax Appeal No.293 of 2012(O&M) “10. The only issue arising in the present appeal isin respect of the treatment of the amountreceived on sale of equity shares of the privatelimited company held by the assessee, whichwere transferred during the year underconsideration. The plea of the assessee inrespect of the said transaction is that it is a meresale and purchase of investment held by theassessee and consequently gain arising on thesaid transaction is to be assessed under thehead income from capital gains.in respect of the treatment of the amountreceived on sale of equity shares of the privatelimited company held by the assessee, whichwere transferred during the year underconsideration. The plea of the assessee inrespect of the said transaction is that it is a meresale and purchase of investment held by theassessee and consequently gain arising on thesaid transaction is to be assessed under thehead income from capital gains. After recording as above, the ITAT proceeded to narrate the facts, which we need not to reproduce, referred toArticles 2, 3, 4.2, 4.3, 5 and 6 of the agreement, which relate totransfer of shares, a non compete clause that restrains theassessee from day to day management of the company, aclause requiring the assessee to hand over responsibilities tothe purchaser including employee data base, customer supportetc., and other relevant factors held that the agreement has allthe attributes of a transfer of business. A relevant extract readsas follows:- “16. Taking into consideration the entirety of factsand circumstances of the case and agreemententered into between the parties as referred toand circumstances of the case and agreemententered into between the parties as referred to narrate the facts, which we need not to reproduce, referred toArticles 2, 3, 4.2, 4.3, 5 and 6 of the agreement, which relate totransfer of shares, a non compete clause that restrains theassessee from day to day management of the company, aclause requiring the assessee to hand over responsibilities tothe purchaser including employee data base, customer supportetc., and other relevant factors held that the agreement has allthe attributes of a transfer of business. A relevant extract readsas follows:- “16. Taking into consideration the entirety of factsand circumstances of the case and agreemententered into between the parties as referred toand circumstances of the case and agreemententered into between the parties as referred to by us in the paras hereinabove, it is apparentthat the transaction in question was in thenature of purchase of business by the incomingcompany. The transaction entered into betweenthe assessee before us as shareholder of M/sExcel Callnet Private Limited and the MnagingDirector of M/s Pugmarks Interweb Pvt. Ltd. wasnot merely for the transfer of shares of thecompany but was in fact transfer ofmanagement of the company to the purchaserwith aq rider of non interference by the sellerswho were the Directors of the company.Reference is made to the Article 2.1 of theagreement dated 26.3.2005 wherein the selleri.e. the assessee before us was refrained fromday to day management of the business fromthe date of the agreement. In addition, theseller i.e. The shareholders of the companywere to hand over the Employee Database,Products Database,m customer support, NewClienmt proposals in pipeline. Other prospectsand customer's database. Payment Recoveryand Customer. Management case, contract,verbal commitments, Banking information, Income Tax Appeal No.293 of 2012(O&M) -9- software/licences and any other property thatwas acquired under the tenure of the Sellersworking with the Company. Because of thecomplexity of the handing over operation by theseller i.e. the shareholders of the company tothe Managing Director of the new company.The parties entered into agreement on26.3.2005 and had completed the process on24.7.2005. If it was mere sale of the investmentby way of shareholding by the assessee thenthe said exercise was not required. Even thesale consideration agreed upon between theparties including the consideration on account ofnon-compete convenant was paid in installmentover a period of time. Further the transfer ofshares in effect translated into renunciation ofmanagement by the seller Directors in favour ofthe purchaser which is apparent from Article5.1.1. of the agreement which enunciated thedelivery of effective resignation in writing by theDirectors as part of the activities of thecompletion. The next point under considerationis the non compete covenants agreed uponbetween the parties as per Article 8. Under which article 8.4 clearly stated the seller agreenot to engaged in asny call centre, businessprocess outsourcing or IT enabled servicesbusiness in the States of Chandigarh, Punjab,Haryana or Himachal Pradesh within a radius of100 K.ms from Chandigarh for a period of 2years from the date of this agreement. Furthernon compete covenants imposed as restrictionupon the seller Directors to directly or indirectlysolicit a business that the company has donesince its inception without prior writtenpermission of the company. Under Article 8.10there was renunciation of brand equity of thecompany by the seller will not take advantage ofthe brand equity of the company by using anynames, logos, trademarks partnerships,affiliations, names etc. As per para 8.11 thesellers cannot use domains that contain theword Excel and would not use or claim thedomain namewww.Excel.netom. Article 9 of theagreement further refer to non solicitation ofemployees covenant whereby the seller will notdirectly or indirectly solicit, hire employee,induce or attempt to induce any present or future employee of the company or thepurchaser. 17. In view thereof we are in agreement with theorders of the authorities below that thetransaction in question was not mere transfer ofcapital asset within the meaning of section 2(14)of the Act but was in fact transfer of business asit was the assessee who was prevented fromdoing business.”orders of the authorities below that thetransaction in question was not mere transfer ofcapital asset within the meaning of section 2(14)of the Act but was in fact transfer of business asit was the assessee who was prevented fromdoing business.” A perusal of Sections 2(14) and 28(va) of the Actincluding the explanation to Section 2(14) relied by the appellantdoes not enable us to record an opinion contrary to the opinionrecorded by the Assessing Officer, affirmed by the CIT (Appeals)and the ITAT. The mere fact that the agreement contains a non-compete clause, payment in respect whereof may not bechargeable to tax in accordance with the aforesaid provisions,does not enable us to hold that the agreement between theassessee and the purchaser is anything other than a transfer ofthe business of the assessee. A cursory perusal of theagreement between the assessee and the purchaser leads to asingular conclusion that the agreement is not an innocenttransfer of share holdings that would place it within section 2(14)of the Act read with the explanation but a transfer of thebusiness with all pervasive control being entrusted to the Income Tax Appeal No.293 of 2012(O&M) purchaser to the complete and absolute exclusion of the sellerwhether as a share holder or for its management and control.The findings recorded by authorities under the Act that transferof shares, evidences, a transfer of business, in our consideredopinion are based upon a correct factual interpretation or theclauses of the agreement. The impugned orders do not sufferfrom any error of law or give rise to any substantial question oflaw as would require interference. As a consequence, theappeal is dismissed with no order as to costs. (RAJIVE BHALLA) JUDGE 22[nd] August, 2013 (DR. BHARAT BHUSHAN PARSOON)nt JUDGE