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Income Tax Appellate Tribunal, B BENCH: CHENNAI
Before: SHRI GEORGE GEORGE K, HONBLE & SHRI S.R. RAGHUNATHA, HONBLE
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.
The ground of appeal raised by the assessee are as under:
“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.
The CIT(Appeals) 16 failed to appreciate that the directions issued in the revision order passed under Section 263 of the Act dated 21.03.2019 were not followed in the effect giving order passed on 14.06.2019 as well sustained erroneously in the impugned order and in this regard ought to have appreciated that Fair Market Value of the shares transferred backed by the valuation report furnished by the appellant being not questioned /challenged, the presumption of receipt of Non Compete fee in such circumstances should be reckoned as bad in law.
The CIT(Appeals) - 16 failed to appreciate that the Fair Market Value of the shares transferred was established to be on par with the sale value of the said shares, the decision to value the shares at Rs. 46.91/- per share based on Net Asset Value method so as to justify the differential sum as Non Compete Fee was wrong, erroneous, incorrect, invalid, unjustified and not sustainable both on facts and in law.
The CIT(Appeals) 16failed to appreciate that having not examined the purchasers' book treatment, the presumption of non compete fee in the said transaction based on wrong valuation of Fair Market Value of the shares should be reckoned as nullity in law.
The CIT(Appeals) - 16 failed to appreciate that in any event, the report on the calculation of Fair Market Value of the shares by an independent valuation report obtained from G. Venkatesan & Co was correct and wherein the Fair Market Value per share was computed by adopting the Discounted Cash Flow Method in terms Rule 11 UA(2) (b) of the Income Tax Rules, 1962 which was completely overlooked and brushed aside by giving wrong reasons, thereby negating the findings in relation thereto.
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.
The CIT (Appeals) - 16failed to appreciate that findings from para 6 of the impugned order were wrong, erroneous, incorrect, invalid, unjustified and not sustainable both on facts and in law.
The CIT(Appeals) 16failed to appreciate that the entire re- computation forming part of the effect giving assessment order was wrong, erroneous, incorrect, invalid, unjustified and not sustainable both on facts and in law. 11. The CIT(Appeals) 16 failed to appreciate that there was no effective/proper opportunity given before passing the impugned order and any order passed in violation of the principles of natural justice is nullity in law.”
The brief facts of the case are that the assessee is a non- resident and filed his return of income for the A.Y. 2014-15 admitting a total income of Rs.8,95,26,600/-. This includes long term capital gain of Rs.8,11,82,220/- on the sale of his shareholding in the Company, Kailash Shipping Services Private limited to Apollo Logic solutions ltd. The assessment was completed u/s.143(3) of the Act on 28.12.2016 accepting Long Term Capital Gain declared. Later the CIT (International Taxation) Ward 1(1), Chennai initiated revision proceedings u/s.263 observing that the AO has failed to examine whether the total consideration of Rs.12,63,33,324/- received by the assessee is inclusive of the consideration made towards the Non Compete Clause at Para 7, Page 32 of the Share purchase and shareholders agreement dated 18.03.2013. Therefore, the assessment was set aside by the CIT U/s.263 of the Act with the directions to AO to reframe the assessment by allowing the capital gains to the extent of Fair Market Value of the shares so transferred and bringing the amount over and above the FMV to tax under the head Business Income in terms of provisions of Section 28(va) of the Act. Accordingly, the ITO reframed the assessment as under without giving an opportunity to the assessee to being heard. Sale Consideration admitted 12,63,33,334/- Less: Consideration to the extent of FMV of 6,33,28,500/- 13,50,000 shares at Rs.46.91 per share (Net Asset Value Method) Balance Non Compete Fees treated as Business 6,30,04,834/- Income U/s.28(va)
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.
We have heard the rival contentions, perused the material available on records and gone through the orders of the authorities below. It is admitted fact that the assessee along with his brother and mother who were equal shareholders of the company M/s.Kailash Shipping Services Private Limited has sold entire equity shares of the company to M/s.Apollo Logic Solutions Limited by entering into share transfer and shareholders agreement. Further the assessee’s brother Sri.Kamal Chilaka entered a separate agreement to act as a CEO of the company after the completion of share transfer. The assessee had offered the sale consideration of Rs.12,63,33,334/- for long term capital gain after claiming the eligible deduction. The assessment was completed u/s.143(3) of the Act on 28.12.2016 accepting Long Term Capital Gain declared by the assessee. Subsequently, the CIT (International Taxation), Ward 1(1), Chennai initiated revision proceedings u/s.263 of the Act observing that the AO has failed to examine whether the total consideration of Rs.12,63,33,324/- received by the assessee is inclusive of the consideration made towards the Non Compete Clause at Para 7, Page 32 of the Share purchase and shareholders agreement dated 18.03.2013. Therefore, the assessment was set aside by the CIT U/s.263 of the Act with the directions to AO to reframe the assessment by allowing the capital gains to the extent of Fair Market Value of the shares so transferred and bringing the amount over and above the FMV to tax under the head Business Income in terms of provisions of Section 28(va) of the Act. Accordingly, the ITO reframed the assessment as under without giving an opportunity to the assessee to being heard. Sale Consideration admitted 12,63,33,334/- Less: Consideration to the extent of FMV of 13,50,000 6,33,28,500/- shares at Rs.46.91 per share (Net Asset Value Method) Balance Non Compete Fees treated as Business Income 6,30,04,834/- U/s.28(va)
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.