PRANAY GODHA ,MUMBAI vs. ACIT CC 5(2), MUMBAI

To understand the nature of transactions entered into by the assessee with Loparex group we need to examine the covenants of shares sale agreement amongst the assessee and Loparex BV . Relevant extracts of the agreement are reproduced herein below as under: "C. The VENDORS have agreed to sell and transfer the KAYGEE SHARES and LOPAREX had agreed to purchase and accept the transfer of the said KAYGEE SHARES at the price and on the terms and conditions hereinafter stated: 3.2 The VENDORS further represent, warrant and covenant as follows: - (a) Each of the Vendors Is the absolute owner of and has clear and marketable right, title and interest in, the KAYGEE shares shows against his/ her/ their/ its name in Annexure -B and the KAYGEE SHARES comprise 50% of the total subscribed and issued equity capital of the company. (C) On completion of the transaction contemplated under this Agreement, LOPAREX shall own 100% of the subscribed and paid-up equity capital of the company.

COMPLETION OF SALE OF KAYGEE SHARES 5.1 The VENDORS agree to sell and transfer and LOPAREX agree to purchase and accept the transfer of the KAYGEE SHARES at a price of Rs.1183.704 per share aggregating to Rs.63,92,00,000 Rupees Sixty-Three Crores and Ninety-Two Lakhs only (The "Price") 6. NON-COMPETE 6.1. The VENDORS covenant with the Company and LOPAREX that any of the VENDORS (and the VENDORS shall ensure that any of their affiliates, shareholders, group companies, Family Members) shall not, for a period of 3 years from the date of this Agreement, either by themselves or through any person, directly or indirectly, in their own capacity or in the capacity of a partner, proprietor, director, 6 to 1187/Mum/2020, 1309 & 1310/Mum/ 2020 Pranay Godha & Ors. employee, contractor, trustee, shareholder, agent, advisor, representatives or other constituent, whether on their own or jointly with others, engage in a business similar to that of the Company or do any of the following acts: a. induces, procure, or endeavour to induce or employ, any person who is an employee (including but not limited to, Manish Jain, Mahesh Divate and Ravindra Yawkar) of or any other service provider to the Company, to leave the employment of, or cease to provide service to, the Company; b. approach, solicit or deal with, in competition with the Company, any person that at any time during the 12 months immediately preceding such date was a customer, client distributor, agent or supplier of the Company; c)seek to interfere with the continuance of the supply of goods or services to the Company or terms of any supply; and d) carry on, engage in or be concerned or interested in (whether as shareholder, lender, director, consultant, principal or as a partner, employee or agent of any person or otherwise), any business or activity which competes with the business and activities in which the Company is engaged. Except that the VENDORS can continue to carry on their existing business of contract toll manufacturing of release liner papers for the customer Mudrika Labels Put. Ltd., as well as manufacturing and marketing/ selling of label stocks (using internally manufactured release liners) as is currently carried out by them under the name and style of M/s Capri Coating Solutions, a partnership firm. VENDORS are in no means limited by this agreement from any external purchases of release liners. The Vendors through Capri Coating Solutions can also, subject to the prior approval of the Company, explore the new business opportunity of only contract toll manufacturing of release liner papers for new potential customers with whom the Company had no business dealings at any time during 12 months immediately preceding the date on which the VENDORS share the details of such new customers and business opportunity with the Company, provided that the VENDORS share the details of such new customers and new business opportunity with the Company. Once the VENDORS share the details of such new business opportunity with the Company, the Company shall give their consent or dissent within a period of 3 working days. In case of dissent, the Company shall also inform the VENDORS the reason for such dissent. It is further agreed between the VENDORS and the Company that the Company shall act in good faith and shall not unreasonably withhold the consent for the new business opportunity being explored by the VENDORS. However, the restrictions on being a shareholder/ director shall not apply in case of any investment by the VENDORS in shares of any listed company so long as their holding does not exceed 5% in each company.

A perusal of the above covenants clearly established the terms and conditions of the transactions and duties and rights of both the parties, without any specific consideration assigned to any of the covenant. It is clearly established that basically the transaction was entered into to buy the shares from assessee and other shareholders of KLIPL.

We have gone through the financials of the KLIPL for the year 2013-14 and 2014-15. The EPS was Rs 124.5/- and Rs 134.07/- respectively. It means purchase price of Rs1183.704/- is 8.82 times of the EPS. This ratio of 8.82 of EPS is not excessive or unreasonable assuming shares of KLIPL would have been listed although they are not. The overall transaction of this share sale looks to be fair and reasonable as evident from the order of the A.O. and the order of Ld. CIT(A).

Now we will analyse the nature of transaction to determine the character of receipts to be assessed. In this regard provisions of proviso to sec 28(va) is relevant which is reproduced herein below as under “Any sum, whether received or receivable in cash or kind, on account of transfer of the rights to manufacture, produce or process any article or thing or right to carry on any business of profession, which is chargeable under the head capital gains” this proviso clearly spelled out an exception to the applicability of sub clause (a) of sec 28(va).

This is established position of law that any such receipt which deprived the transferor from undertaking any transaction in similar business or trade is capital receipt. Such right of assessee is duly covered as capital asset as defined in sec 2(14). On such type of receipt being asset first charge on assessee will be under the head capital gain only. If assessee is not offering such receipt under the head capital gains, then only it is chargeable to tax under sec 28(va). Chargeability of such type of receipt under sec 28(va) was introduced in statute with effect from assessment year 2003-04 with a proviso mentioned supra. Whereas such type of transactions categorically covered by the finance act 1997 i.e., with effect from A.Y 1998-99 through sec 55(2)(a).

From the transactions and covenants of agreement mentioned (supra), it clearly emanates that the business was being carried out by M/s KLIPL and assessee was simply a shareholder and not directly into the business so it can be affirmed that the transactions of assessee with LOPAREX BV was transfer of shares and not of business itself. In this regard we relied upon the decisions of following Hon’ble high court/apex court 9 to 1187/Mum/2020, 1309 & 1310/Mum/ 2020 Pranay Godha & Ors. i) CIT Vs New India Assurance Company Ltd 122 ITR 633 (Mum.) ii) CIT Vs F.X. Periera and Sons (Travancore) Pvt Ltd. 184 ITR 461 (Ker.) iii) CIT Vs West Coast Chemicals and Industries Ltd 46 ITR 135 (S.C) IV) CIT Vs Mugni Ram Bangur and Co 57 ITR 299 (S.C) V) West Coast Electric Supply Corporation Ltd Vs CIT 107 ITR 483 (Mad.) vi) Syndicate Bank Ltd Vs CIT 155 ITR 681 (Kar.) vii) Indian Bank Ltd Vs CIT 153 ITR 282 (Mad.) viii) ACIT vs. Savita N. Mandhana & Ors., ITA No. 3900/Mum/2010 ix) Rohitasava Chand Vs. CIT 306 ITR 242 (Del.) x) CIT Vs. Saroj Kumar Poddar 279 ITR 573 (Cal.) xi) CIT Vs. Shiv Raj Gupta 372 ITR 337 (Del.) 13. The jurisdictional ITAT in the case of similar facts, held in the case of Hami Aspi Balsara Vs ACIT 126 ITD 100, held as under “Admittedly, in the share purchase agreement no consideration was assigned towards non-compete fees and the parties had entered into the share purchase agreement after mutually settling the price of shares. This clause clearly shows that in the purchase price of shares, consideration towards Restraint Clause was embedded. Admittedly, assessee on her own was not carrying on business and it was the company in which she was shareholder was carrying on the business, ... Thus, section 28(va) would be attracted where the assessee was carrying on business and not where assessee only had right to carry on business in the form of capital asset.”

In view of the above facts, pronouncement of Hon’ble High Court and jurisdictional ITAT, we are of the considered view that the assessee had rightly declared income under the head Capital gains. No portion of considerations can 10 ITA No. 1185 to 1187/Mum/2020, 1309 & 1310/Mum/ 2020 Pranay Godha & Ors. be attributed for the purposes of sec 28(va) hence we set aside the finding of Ld. CIT(A)., attributing 5% of the consideration as income covered by sec 28(va).

In the result, appeal filed by the assessee is allowed. ITA No. 1186/Mum/2020 (A.Y. 2016-17) 16. The facts and law applicable to this appeal are similar to (A.Y. 2016-17) (Supra). As the grounds of appeal raised by assessee in this appeal are also similar to ITA No. 1185 mentioned (Supra.), hence our decision in this appeal also applicable Mutatis Mutandis. Hence grounds of appeal raised are allowed.

In the result, appeal filed by the assessee is allowed. (A.Y. 2016-17) 18. The facts and law applicable to this appeal are similar to (A.Y. 2016-17) (Supra). As the grounds of appeal

Ground No-1 and 2, issues raised in these two grounds are already been discussed, analysed and decided in favour of assessee (ITA No. 1186/Mum/2020 (A.Y. 2016-17). Hence in the light of our decisions in assessee’s appeal there is no need to further adjudicate these two grounds of appeal raised by revenue. In view of this, these two grounds became infructuous and accordingly dismissed.

During the AY under consideration assessee has claimed exempted income u/s 10(35) of the act on dividend income received on the units of Religare Invesco Contra Fund (Mutual fund) amounting to Rs 3,09,71,101/-. In addition to this assessee also claimed short term capital loss (STCL) of Rs 4,18.42,536/-. On the sale of abovementioned units of mutual Fund. To verify this transaction A.O. issued notice u/s 142(1), that the said transactions are not hit by the provisions of sec 94(7) of the act.

In order to understand the provisions of Sec. 94(7), the same is reproduced hereunder: “a). any person buys or acquires any securities or unit within a period of three months prior to the record date; b). such person sells or transfers- i. such securities within a period of three months after such date; or ii. such unit within a period of nine months after such date; c) the dividend or income on such securities or unit received or receivable by such person is exempt, then, the loss, if any, arising to him on account of such purchase and sale of securities or unit, to the extent such loss does not exceed the amount of dividend or income received or receivable on such securities or unit, shall be ignored for the purposes of computing his income chargeable to tax." There are 3 essential conditions are laid down to apply the provisions of sec 94(7) of the act as under:

In the assessee’s case, units were purchased much before 3 months period prior to record date, hence condition prescribed in clause (a) of sec 94(7) is not 13 to 1187/Mum/2020, 1309 & 1310/Mum/ 2020 Pranay Godha & Ors. satisfied hence sec 94(7) can’t be applied to the assessee’s case. To substantiate our findings, we are relying on the following decisions of various High Courts and ITAT as under: “i). CIT Vs Shambu Mercantile Ltd. 325 ITR 535 (Del.) ii). CIT Vs Kailash Chandra Dhanuka 252 CTR 109 (M.P) iii). Vijaya Joshi Vs ACIT, ITA No. 979/Del./2013 iv). CIT Vs Walfort Shares and Stock Brokers Pvt Ltd 2019 CTR 409 (Bom.) Judgement of jurisdictional High Court in the case of CIT Vs Alka Bhosle 325 ITR 550 held as under: "From2004, the memoranda explaining, respectively, the finance bill 2001 and 2004, it is evident that the conditions prescribed in clauses (a), (b)and (c) of sub-section (7) are intended to be cumulative in nature. In the circumstances, the appeal by the revenue was lacking in merit and did not raise any substantial question of law. [Para 7]"

The A.O. has not brought any evidence on record about motive of the assessee in indulging the transaction to earn loss. It is also on record that the transactions entered into by the assessee is with the SEBI regulated mutual fund scheme of a very big and reputed asset management company. Even remotely it can’t be assumed that the intentions of the assessee are to earn the loss with the gloves in hand with a reputed AMC.

In the result we are in agreement with a finding of Ld. CIT(A) and sustained the deletions made by him. Hence this ground of appeal filed by revenue is dismissed.

In the result appeal of the revenue is fully dismissed

The facts and law applicable to this appeal are similar to (A.Y. 2016-17) (Supra). As the grounds of appeal raised by revenue in this appeal are also similar to ITA No. 1309 mentioned (Supra.), hence our decision in this appeal also applicable Mutatis Mutandis. Hence grounds of appeal raised are dismissed.