KARTHICK CHILAKA,CHENNAI vs. ITO, INTERNATIONAL TAXATION WARD-1(1), CHENNAI

Karthick Chilaka, The Income Tax Officer, C/o Hymavathy Chilaka, Vs. International Taxation Ward- 234 Shrea Farms, ECR Road, 1(1), Kanathur, Chennai-603 112. Chennai. [PAN: AIPPC 4894H] (अपीलाथ�/Appellant) (��यथ�/Respondent) अपीलाथ� की ओर से/ Appellant by : Shri N. Arjun Raj, Advocate ��थ� की ओर से /Respondent by : Shri A. Sasi Kumar, CIT सुनवाई की तारीख/Date of Hearing : 18.02.2025 घोषणा की तारीख /Date of : 28.02.2025 Pronouncement आदेश / O R D E R PER S.R. RAGHUNATHA, A.M : This appeal filed by the assessee is directed against the order passed by the learned Commissioner of Income Tax (Appeals)-16, Chennai, [hereinafter “the CIT(A)”] for the assessment year 2014- 15, vide order dated 20.06.2023.

“1. The order of the CIT(Appeals) 16 dated 20.06.2023 vide DIN & Order No. ITBA/APL/M/250/2023-24/1053821065(1) for the above-mentioned Assessment Year is contrary to law, fact and in circumstances of the case.

2. The CIT(Appeals) 16 erred in sustaining the addition of Rs. 6,30,04,834/- being the presumed component quantified from the transaction of sale of shares Kailash Shipping Private Limited to Apollo Logic P. Ltd by invoking Section 28(va) of the Act without assigning proper reasons and justification.

3. The CIT(Appeals) 16 failed to appreciate that transaction of sale of shares had no component of non compete and further ought to have appreciated that the presumption of non compete agreement based on the documents scrutinised by the Revenue mechanically was wrong, erroneous, incorrect, invalid, unjustified and not sustainable both on facts and in law.

8. The CIT(Appeals) - 16 failed to appreciate that the determination of fair market value by the JAO by following the method of NAV method, which is nothing but book value was incorrect and suffered from multiple errors thereby vitiating the addition made in terms of section 28(va) of the Act.

Aggrieved by the order of AO u/s.143(3) r.w.s.263 of the Act dated 14.06.2019 the assessee preferred an appeal before the Ld. CIT(A)-16, Chennai.

4. Before the Ld. CIT(A) the assessee stated that the AO erred in adopting FMV of Rs.46.91 per share to arrive at a reduced share consideration of Rs.6,33,28,500/- as against the actual share consideration of Rs.12,63,33,334/- received by the assessee. Further the assessee stated that AO ought to have known that the entire consideration received by the assessee is only towards the cost of the shares and no separate value for the Non Compete Fee was agreed in the share purchase and shareholders agreement dated 18.03.2013. The assessee also submitted that the AO has erred in valuing the shares at Net Asset Value Method at Rs.46.91 per share as against the DCF Method employed by the assessee, thereby arriving at a reduced share sale consideration of Rs.6,33,28,500/-. After perusal of the submissions made by the assessee, the Ld.CIT(A) was not convinced and dismissed the appeal by passing an order dated 20.06.2023 by upholding the order of the AO. Aggrieved by the order of the Ld.CIT(A) the assessee is before us.

5. The Ld.AR for the assessee assailing the action of the Ld.CIT(A) stated that the Ld.CIT(A) has erred in accepting the Fair Market Value of shares of the Company arrived by the AO on the basis of Net Asset Value Method as against the DCF Method adopted by the assessee. Further, the Ld.AR stated that there is no value fixed in the shareholders agreement for Non Compete Clause and hence bifurcating the sale consideration of shares towards value of shares and Non Compete Fees is not in accordance with law. The Ld.AR also stated that the other shareholder and brother of the assessee Sri.Kamal Chilaka, who was a CEO of the Company and has entered into a separate agreement dated 07.05.2013 with the buyer to act as a CEO in lieu of Non Compete Fees agreed for a separate consideration.

6. The Ld.AR stated that assessee’s brother was a CEO and also a shareholder of the company who was holding 15,00,000 shares. The Ld.AR further submitted that the assessee’s brother case has already been remitted back to the files of Ld.CIT(A) by this Tribunal for fresh adjudication and the outcome of the decision of that case is squarely applicable to the assessee’s case and hence prayed for remitting back to the files of the Ld.CIT(A).

7. Per contra, the Ld.DR supported the orders of the lower authorities.

The Ld. CIT(A) was pleased to confirm the order of the AO u/s.143(3) r.w.s.263 of the Act. The Ld.AR pointed out that the assessee’s brother Sri.Kamal Chilaka’s case for the AY.2014-15 has been restored back to the files of Ld.CIT(A) by this Tribunal vide its order in dated 10.05.2023.

9. We note that in the said order the Tribunal has restored the appeal to the files of the Ld.CIT(A) to reconsider the issue of reopening and also to deal with the merits. Since the issue involved in both the cases are identical, we are of the opinion that the issue of non-compete fees if any has to be first decided in the hands of the brother of the Assessee Mr.Kamal Chilaka who was the key managerial person and who had entered into a separate CEO agreement. In such circumstances, we deem it fit to remand the issue to the file of the First Appellate Authority to await the outcome of the appeal pending in the case of Mr. Kamal Chilaka and decide the appeal in the case of the Assessee afresh after granting an opportunity to the Assessee. In the event of the appeal in the case of Mr. Kamal Chilaka being allowed on the legal ground of validity of re-opening, the present case may be adjudicated independently on the issues raised on merits. Needless to say, all other arguments of the Assessee on the valuation of the shares and the correctness of assigning a component out of the sale consideration as non-compete fees especially in the absence of separate agreement shall be left open to be agitated before the First Appellate Authority. With the above directions, we remand the issue to the file of the Ld. CIT(A) by allowing the related grounds of appeal of the Assessee.