MR. SUNIL GOYAL,NOIDA vs. ITO, NEW DELHI

Per Anadee Nath Misshra, AM

(A) This appeal has been filed by Assessee against the impugned appellate order dated 29.01.2010 passed by Learned Commissioner of Income Tax (Appeals)-VIII, New Delhi, [“Ld. CIT(A)”,for short] pertaining to Assessment Year 2006-07, on the following grounds:

“1. On the facts and in the circumstances of the case the CIT(A) has erred both on facts and in law in upholding the impugned illegal order of the ITO dated 31.12.2008 instead of vacating the same and the impugned orders cannot be sustained. 2. The CIT(A) had conducted hearing till 06.15 PM on 29.1.2010 and the impugned order could not have been passed by him on the same day Page 1 of 42

ITA No.- 719/Del/2010 Shri Sunil Goyal. and the impugned order appears to have already been prepared and kept ready and the various factual and legal submissions contained in the submissions with case law filed on 27.1.2010 and explained on 29.1.2010 from 3.00 PM to 6.15 PM had been altogether disregarded and all the binding decisions of the Supreme Court and the High Courts referred to and relied upon by the appellant had not been followed and hence the impugned order is totally unsustainable and unauthorised both on facts and in law.

ITA No.- 719/Del/2010 Shri Sunil Goyal. derived and no jurisdiction is vested in the lower authorities to shift and split the consideration for transfer of shares held as capital asset as business income and sections 14 and 45 do not empower the revenue to do so.

(A.1) During the appellate proceedings in Income Tax Appellate Tribunal (“ITAT”,

for short), the assessee summarized the aforesaid grounds of appeal into concise

grounds of appeal, which are reproduced as under:

“1. On the facts and in the circumstances of the case the CIT(A) has erred both on facts and in law in upholding the impugned illegal order of the ITO dated 31.12.2008 and the entire disputed illegal demand of tax and interest as well as penalty attributable to the perverse change in the head of income and rate of tax resorted to by the revenue is arbitrary and unauthorised by law and hence liable to be quashed in this appeal.

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ITA No.- 719/Del/2010 Shri Sunil Goyal. relied upon by the appellant had not been followed and hence the impugned order is totally unsustainable and unauthorised both on facts and in law.

(B) Assessment Order under Section 143(3) of Income Tax Act, 1961 (“I.T. Act”,

for short) was passed on 31.12.2008. In this Assessment Order income amounting

to Rs. 1,32,11,569/- offered by the assessee in the return of income as long term

capital gain was split into two parts by the Assessing Officer (“AO”, for short). In

respect of the first part, amounting to Rs. 17,92,544/-, the AO accepted the

assessee’s claim for long term capital gain. An assessed correspondence amount to

Rs. 17,10,906/- as long term capital gain by allowing index cost of Rs. 81,638/-.

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However, the remaining amount of Rs. 1,15,00,663/- was assessed as income of business or profession. Relevant portion of the Assessment Order dated 31.12.2008 is reproduced as under:

“3. During the course of assessment proceedings, it was observed that the assessee has claimed the following and the same are being dealt with separately as discussed on the basis of facts and material on record.

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(C) The Assessee filed appeal before the Ld. CIT(A). Vide impugned appellate order

dated 29.01.2010 of Ld. CIT(A) confirmed the action of the AO on this point. The

relevant portion of order dated 29.01.2010 of Ld. CIT(A) is reproduced as under:

“2. The first issue which falls for consideration relates to an addition of Rs 1,15,00,663/- made by the AO treating part of consideration of Rs {.,32,11,569 received by the appellant during the year under consideration as a result of sale of 24800 shares of M/s Momentum India (P) Ltd,

2.1 Briefly stated, the facts of the case are that "Shri.Sunil Goyal, the appellant is a technically qualified .person and has lot' of expertise ami experience at Ms conimand.Thereforein 'order to accomplish/realize his dreams, he alongwith his associates namely, Shri Pankaj Aggarwal & Sliri Pramod Saint (all the three persons referred to as Management Vendors in the future references) promoted a company known as M/s Momentum India (P) Ltd (MIPL) in short and in terms of share holders V agreement dated 01-04-2000, he was granted 9900 shares of the said, company. Thereafter, in due course more shares were acquired by him as bonus shares and at the time of agreement with M/ S Newell & Budge Holdings Ltd (N & B), Edinburgh,UK he was holding 248000 shares of MIPL.

2.1.1 Apart front being share holder, he was also in the employment of the company and was closely associated/engaged in the software development, which was the main, probably only, activity of MIPL.

2.1.2 As mentioned earlier, on 21-10-2004, the assessee alongwith other associates entered into an agreement with M/s Newell & Page 9 of 42

ITA No.- 719/Del/2010 Shri Sunil Goyal. Budge Holdings Ltd, wherein apart from the management vendors, namely, the appellant Shri Pankaj Aggarwal & Shri Pramod Saini, Citi Corp Finance (India) Ltd was also a party in the capacity of financial vendor.

2.1.3 As per the terms and conditions set out in the agreement the appellant sold his entire holding of 248000 shares to M/s Newell & Budge Holding Ltd which were transferred to the buyer in two installments i.e. 223200 shares in F.Y.2004-05 assessable in assessment year 2005-06 and balance 24800 shares in F.Y.2005- 06 which are subject matter of present appeal. As per the agreement while the sale price of 223200 shares sold in the F.Y.2004-0S was fixed at Rs 72.28 per share, the sale price of 24800 shares was determined at Rs 536,02 per share. However, the sale price of Rs 536.02 per share was subject to fulfillment of certain conditions/observance of certain restrictions placed on the appellant assessee, discussion of which will be made at appropriate stage in this order.

2.1.4 As regards shares sold by the appellant during the F.Y.2004-05, the sale consideration was disclosed by him as capital gains and the same was accepted by the department. In the year under consideration also the assessee disclosed the entire consideration of Rs 1,32,11,569/- as capital gains only. However, this time the Ld.AO disagreed with the appellant and instead of accepting the entire sum of Rs 1,32,11,569. he accepted only a sum of Rs 17,10,906/- calculated at the rate of Rs 72.28 per share as in the last year as capital gains and balance of Rs 1,15,00,663/- was treated by him as income from business or profession in terms of section 28(va) of the Act.

2.2 For the sake of convenience, the findings recorded by the Ld.AO in this regard are being extracted as below –

ITA No.- 719/Del/2010 Shri Sunil Goyal.

3.1 The assessee was asked to furnish the details regarding the sale of these shares to M/s Newell Sc Budge Holdings Ltd (N & B Holdings Ltd), Edinburgh, UK. In the previous year 200-06. The assessee has filed the sale and purchase agreement among M/s Newell & Budge Holdings Ltd and the share holders of M/s Momentum India Pvt Ltd. This agreement relates to the, sale and purchase of the entire issued share capital of Momentum India Pvt Ltd. The agreement is dated 21/10/2004 and it is signed by the assessee alongwith the purchaser, financial vendor and the management vendors. As per this agreement, the assessee has agreed to sell his entire share holding of 248000 shares held by him in MIPL alongwith other key persons namely Sh.Pankaj Aggarwal and Sh, Pratnod Saini. The agreement also specifies the consideration (Para 3.1 to 3.10), details regarding conduct of business (Para 6.1 to 6.5) and warranties and undertakings by the vendors (Para 7.1to7.13). The agreement also discusses in details regarding the protection of goodwill (Para 10.1 to 10.13). It is specifically stated in the agreement that no modification or alteration shall be enforceable except by an agreement in writing duly executed by all the party. Schedule 1A and IB to the agreement give the details of the share capital, directors of MIPL and schedule of payment to the assessee and other key persons called (management vendors’.

3.2 Consequent to the above agreement, the assessee has received the payments. Most of . the payments have been received in financial year 2004- 05. Total no. of shares sold by the assessee in F.Y. 2004*05 is 223200, This is 90% of the total share holding of the assessee. These .shares have been sold at the rate of Rs 72,28/-per share. Total consideration received has been shown Rs 1,61,32,896/-(2232O0 x 72.28). The assessee has computed and shown capital gains on the above sales consideration in the A.Y 2005-06.

3.3 In the current A.Y i.e. 2006-07, the assessee has however shown sale price per share at Rs 536.02/, viz 2004-05 & 2005-06. This is in spite of the fact that the original agreement .as discussed in Para 3.2 above, was a single agreement, related to the sale of entire share capital of MIPL and did not allow any alteration/modification without any further agreement in writing executed by all parties ( no such subsequent agreement has been furnished by the assessee). Therefore, the transaction value per share should have been uniform, even if the payments were spread over a two financial period.

3.4 Here is pertinent to discuss the skill level, technical expertise and the role of the assessee in the affairs of M/s Momentum India Pvt Ltd (the company whose shares were sold). The assessee is a key director of MIPL. He has started the company along with two other persons namely Sh. Pankaj Aggarwal & Shri Pramod Saini (all three referred to as management vendors in the sale purchase agreement.

3.5 Vide, shareholders agreement dated 01/04/20 the assessee was granted Page 11 of 42

ITA No.- 719/Del/2010 Shri Sunil Goyal. 9920 shares of MIPL. The remaining shares were acquired by way of Bonus shares. Some debentures were also converted into equity shares and as on 28/5/2005, the total no. of shares held by the assessee were 248000. All these shares have been sold by the assessee to M/s N & B Holdings Ltd, UK. The main purpose of stalling the company was to develop software products and to provide consultancy in this regard. The primary purposes of the company have been stated as to undertake software consultancy and services for export market, internet and internet based training, Multimedia based training, development of websites and. multimedia based titles etc. The shareholders agreement dated 01/04/200 makes it amply clear that the enterprises is a closely held company with complete control in the hands of three persons (management Vendors) including the assessee.

Further, reference to the sale purchase agreement entered in between M/s N & B Holdings Ltd and M/s MIPL, clearly brings out the fact that this agreement has to be implemented as one document and there is no scope for enhanced rate payment in respect of the shareholdings of the assessee and other management vendors. Para 22.1 of the agreement states under-

“ 22.1: This agreement, the disclosure letter and the other documents to be delivered at completion in accordance with Part 2B of the schedule contain the entire agreement between the parties or any of them with respect to the transactions contemplated in this agreement and shall ( save where there has been a fraudulent misrepresentation) supersede all prior proposals, representations, agreements and negotiations relating thereto whether written, oral or implied, between the parties or any of them or their respective advisers pr any of them and no modification or alteration of this agreement shall be enforceable except by an amendment in writing duly executed by all the parties hereto or, in the case of a waiver, duly executed by the party waiving compliance”,(No subsequent agreement has been furnished).

3.7 Considering the facts discussed above, it is amply clear that the assessee is one of the key person who is in the overall management control of M/s MIPL. He has acquired the shares of MIPL without making any substantial payment and on the basis of his technical and management expertise. The sale of his shares in MIPL was initially made at the rate of Rs 72,28/- per share in the FY 2004-05. However, the sale price per share has been increased to Rs 536.02/- in the FY 2005-06. This is in spite of the fact that the same agreement forms the basis of the sale of all the shares held by the assessee. Therefore, the only conclusion that could be drawn is that the excess amount of Rs 463,74/-(536.02- 72.28) per share received by the assessee is on account of the technical expertise of the assessee in the field of software development. This amount has been received for not carrying out activities in relation to the business of MIPL and for not sharing know - how, copyright, patent or any other business or commercial right of similar nature or . information or technique/technology related to the softwares Page 12 of 42

ITA No.- 719/Del/2010 Shri Sunil Goyal. tools being developed by MIPL. Effectively, the excess payment of Rs 463.74/- made to the assessee by N& B Holdings Ltd, is to restrain the assessee from indulging in competition or sharing information with business rivals. Hence, this consideration is chargeable to Income Tax under the head “Profits & Gains of Business or Profession’ as per the provision of section 28(va) of the IT Act, 1961”. 2.3 Being aggrieved by the aforesaid action of the AO, the assessee is in present appeal.

As regards applicability of provisions of section 28(va) of the Act, the case of the Ld. counsels is that the action of the AO in so far as he wanted to split the consideration in two parts, i.e. capital gains and business income was not in accordance with the law. The Ld. counsels further submit that the conditions/restrictions placed on the management vendors were only with a view to ensure that the business to be conducted by M/s Newell & Budge Holdings Ltd should not get affected in the initial years of take over and it should rest at that and no further reading into the clauses of agreements is required. In furtherance of these arguments, the Ld. counsels have also made detailed written arguments as under-

‘ Arguments of Assessing Officer Rebuffed 1. The basic assumption of Ld. A.O. that as per the agreement, it could have been amended only by a subsequent agreement is contrary to record. Para 22 of the agreement (reproduced at page 5 of Assessment order) clearly provides that an amendment in writing can be introduced in the agreement. There had been a gross misinterpretation of the agreement by Ld. A.O. in this regard.

ITA No.- 719/Del/2010 Shri Sunil Goyal. be transferred in first and second part after initial shares (please refer part IB and 9 of the schedule to the agreement) consideration was fixed at GBP 3,00,000 each (please refer definitions of First Additional Consideration and second Additional Consideration in part 7 of the schedule) translating into price of GBP 6.67 per share. Similarly, Part 7 and 8 of the schedule to the agreement also prescribes the method of computation of consideration for other parts of shares in MIPL totaling 76000 shares including 12,400 of the assessee. The consideration could have varied from “0” to GBP 5,50,000 or maximum up to GBP 7.24per share.

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ITA No.- 719/Del/2010 Shri Sunil Goyal. matter viz. any sum received/ receivable under an agreement for “not carrying out any activity in relation to any business” or not sharing any know-how, patents, copyrights, any other commercial or business rights of similar nature, etc. In present case, there is no mention of any such payment in the agreement. 7. Further, if the approach adopted by Ld. A.O. is upheld then it means that when the assessee sold its shares for Rs. 72.28 per share, there was no element of consideration for technical expertise of the assessee in it and that too when these shares accounted for 90% of the total shares. It also follows that if the assessee would have transferred only 90 % of his holding to the N & B, he was not bound by the alleged non-compete clause since there is no consideration for it in Rs. 72.28 as per Ld. A.O. It would be complete misinterpretation of the agreement. 8. It may please be appreciated that any benefit that had, is being or will accrue to the company would be reflected in the prices of its shares. The price of the impugned shares has been fixed on basis of such conditions only that contemplates the higher price due to high future earning capacity. For the purchase of 12,400 shares mentioned in Para 3.3 and 3.4, it was necessary for the assessee to be in employment of MIPL Naturally, it was decided by N & B that if the assessee continues on the roll of -MIPL, he will be able to bring in further value to the company. This fact is a matter of record and is very well accepted by the assessing officer also in Ms order also that the assessee had added very significant values to the, company and he is one of the key persons in the overall management control of MIPL Thus, N & B offered high rate for the remaining shares. Similarly it may please be seen that higher rates for other part of shareholding were also based on better performance of the company in the forthcoming period. Therefore, even the commercial logical of the higher price is also explicit though the parties are free to determine their own commercial terms whatsoever. 9. There is no dispute regarding the fact that the subject matter of the agreement is only the transfer of shares. The only capital asset that has been transferred is the shares. The consideration stipulated in the agreement is against such shares only. That being so, there is no question of any gains other that capital gain on sale of these shares. 10. The only consideration stipulated in the agreement is against the sale of the shares. Nowhere is any mention in the agreement that the consideration is for any thing other than shares. 11. There Is a mention of term “management vendor” in the agreement which simply implies that the individual sellers (including the assessee) were also in the control of the affairs of the company. Page 15 of 42

ITA No.- 719/Del/2010 Shri Sunil Goyal. This is a normal right attached to shareholding. In any case, no consideration has been paid for such right separately. And further, in any case, even transfer of management rights would have also attracted capital gains only. Thus, viewed from any angle, the transaction would have resulted in capital gain only. 12. The increase in price for the impugned shares is only due to the different mechanism of calculation adopted in the agreement. 13. The capital gain on the sale of impugned shares has been duly disclosed in Return by the assessee. 14. An agreement has to be read in its entirety. The net result of the agreement is that shares have exchanged hands for a consideration subject to terms and conditions fixed between parties. If a part of the consideration is taxable in one year and other in another year or if there is some difference in consideration for different .parts of shares, then it does not follow that they are separate and are not part of same agreement or have separate nature. In present case, there is a transfer of assets and there is a consideration for it. There is no consideration for any other thing. 15. It is the prerogative of the assessee and parties to commercial agreements to decide their terms and consideration. Unless there is specific enumeration in the law that a particular consideration shall be treated in a particular manner, the will and intention of the parties shall prevail. For different parts pricing can be done differently by the parties. 16. Your good self would kindly appreciate that it is also trite law that apparent shall not to be disturbed unless there is evidence for proving beyond doubts that apparent is not real. Mere surmises are not sufficient to assume that apparent is not real. 17. In the present case there is not even single evidence on record by which it can be even presumed that consideration had been paid for any thing other than shares. 18. There is no where any mention in any of the agreement which even remotely suggests that payment is for any thing other than for shares. 19. It has been himself mentioned by Ld. AO that in tax law there is no equity. Nothing can be read into and nothing is to be implied. But very approach of Ld. AO in the case is to presume the facts. 20. There is mention of by Ld, AO that he is empowered to go behind apparent and look into real. Indeed so, but then the onus to prove

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ITA No.- 719/Del/2010 Shri Sunil Goyal. that apparent is not real would be upon AO only. In present case, there is nothing on record which says that any payment has been made for not carrying any activity in relation to business or for not sharing any IPR, It is mere and pure assumption. 21. There is mention of by Ld. AO of colorable device being used. But Ld. A.O, had failed to prove what colorable device has been used and how. It is a bald allegation without basis and substance. Here the subject matter is an agreement between a Non resident third party and share holders of an Indian company including a reputed* financial vendor. The agreement has been subject to scrutiny by RBI and FEMA authorities and has been executed only after obtaining their pettnission. There is not an iota of evidence for allegation of Ld. A.O, that payment has been received for not carrying any activity in relation to business or for not sharing any IPR, In such circumstances, how the agreements specifically approved by Enforcement Authorities like RBI can be said to be a colorable device. It is just a pure bald allegation. Similarly, observation of Ld. AO regarding letter dt. 10.11.2004 of N & B forwarding the amendments in agreements follows from his misunderstanding that .agreement could not have been amended leading him to conclude that a third party evidence is manipulated. No doubt that transaction has been completed before schedule, but it does not follow ftom it that documents are manipulated. In fact, this supports the genuineness of the document since in actual, the transaction ' was completed before schedule and if assessee was to file any manipulated document, he would have filed such documents which match with what had been actually done. In any case, completion of a transaction before schedule does not mean that agreement is manipulated. There is one point in the agreement which says like this that if there is a change in the management/ shareholding of N&B, then the entire share left (with the management vendor) will be sold in that particular year of such change Since the N&B was taken over by Sopra group in the FY 2005-06, henceforth the entire shareholding left by the vendor was taken by sopra group in FY 2005-06 so the payment was received in the same year. 22. Ld, A.O, has mis-appreciated the fact in stating that consideration received varies from the consideration worked out in revised part IB. It may please be seen that consideration in part IB are only tentative and qualified and secondly that consideration is in GBP and there would always be foreign exchange value differences. In revised schedule, exchange rate has been presumed at 82.3 Rs/ GBP whereas Page 17 of 42

ITA No.- 719/Del/2010 Shri Sunil Goyal. actual rate would certainly differ. However, what is undisputed fact is that assessee has received Rs. 536.02 per share for impugned shares sold. 23. Similarly, if consideration actually received differs slightly from agreement, then it does not follow that agreement is manipulated. In any case, the tax has to be levied on foil value of consideration received less cost of acquisition and any change in consideration does not alter character of income the least.

Thus, action of Ld, AO in altering the character of income is neither here nor there and it is prayed that the said action may please be set at naught”.

- Letter filed on 6-11 - 2009

ITA No.- 719/Del/2010 Shri Sunil Goyal. business income taxable u/s 28(va), on the ground, that the employee share holders; were required to stay in the company for at least two years and only because of this clause the AO drawn the interference, but the same is not correct, disregarding the fact the director/ employee shareholders but was for all the share holders. There was no discrimination under the contract for all the share holders. It is only ITO who wants to make such unlawful discrimination not permissible in law. It was the fact, that the price of share will increase because of stay of particular employees those who were involved in the completion of particular project for which they were paid the ^ Salary, But the price of shares, which was in fact, was increased for all the share holders ' whereas no salary was paid, to other share holders, 4. Thus increased, price per share to the employee/director shareholders and other share holders were paid for their holdings not for any other reason. And sum paid to the employee directors on account of their employment was in the form of salary and which was declared correctly in the return of income filed and tax was paid accordingly. Hence the correct interpretation to the entire agreement is: if, the persons involved into the development of particular work will stay in to the company for more two years the company will earn the profit and the earning per share will go up, which will lead to increase in the price per share not only of employee share holders but of all the shares of all the si tare holders irrespective of their employment. If the same employees will not stay into that software company, the company will be compelled to employ other employees, may lead to extra cost or non completion of work which may lead to loss to the company, and accordingly the price share may come down. 5. Further to understand the price per share it is very important, especially in case of a software company, the price of share is very much dependent or have direct relation with the earnings of the company and earnings are very much influenced by the man power of that company so as to increase the profits of that company and ultimately the price of share of all the share holders. Therefore it was it obvious that if the man power will stay with company profits will increase and accordingly price of shares of all the shareholders will increase with no discrimination i.e. not only of the employee share holders but of all the shareholders those who have invested their fund as venture capital in to a software company to earn, the profit from investment in to that company. The case of Satyam Computers is with us to understand the importance of the employees. 6. Further the profits from the sale of shares at the same price by Investment Company how it was treated by Income Tax Page 19 of 42

ITA No.- 719/Del/2010 Shri Sunil Goyal. Department i.e. whether it was a capital gains or as business profit is all depend on various factors as provider under Income Tax Act and the business of that company. A flat or land sold by DLP is treated as a part of the turnover but flat sold by an individual may/cannot be considered as business income, and same way if anybody holding shares as stock in trade then it is business income and if as an investment it is certainly capital gain which is further to be divided in to two parts one is short term and other is long term depending on the period of holding of a capital asset/share. 7. Therefore the order passed by the AO cannot be sustained/upheld. It is prayed accordingly. -summary of arguments filed vide letter dated 29-01 -2010 4. I have given a careful thought to the submissions and arguments made on behalf of the appellant and have also gone through findings recorded by the Ld.AO. On consideration, I find that the issue involved here essentially relates to the treatment of sale consideration received by the appellant as a result of sale of 24800 shares at the rate of Rs 536.02 per share as against Rs 72.28 per share sold in the immediately preceding financial year. The view taken by the Ld.AO is thuhas per the terms & conditions set out in the sale and purchase agreement dated 21-10-2004 the difference between Rs 536.02 per share and Rs. 72.28 per share was in consideration of appellant's technical expertise and his commitment to not to carry out any activity in relation to business and non disclosure of technical know-how, copyright, patent or any other business or commercial rights of similar nature. Therefore, in his opinion, the consideration at the rate of Rs 463.74 per share was assessable as business income under the head income from business or profession and consideration at the rate of Rs 72.28per share was only to be taxed as . capital gains. On the other hand, the case of the appellant is that the sale consideration has been received by the appellant as a composite amount and the AO has no legal authority to split it in two parts. Therefore, as per the Ld.counsels for the appellant the action of the Ld. AO is not sustainable in law. On consideration, I find that the action of the AO is being contested by the Ld.counsels mainly on account of the followings-

(i) It is a fact that the assessee has sold all the impugned shares at the rate of Rs 536.02 per share which is a clear and unambiguous and undisputed fact. (ii) Non compliance with some of the terms of agreement would not by itself alter the nature of income. The assessee held shares as capital assets and that asset was only sold by Mm and is subject matter of discussion, (iii) It is undisputed position of law that the consideration received as a result of sale/transfer of a capital asset is taxable as capital gains only. (iv) There is no merit in the AO's argument regarding uniform transaction

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ITA No.- 719/Del/2010 Shri Sunil Goyal. value and non amendment of the agreement as the same is not only factually incorrect but also is irrelevant. (v) There is no basis for the AO to hold that the difference in the consideration per share transferred in different years was in consideration of assessee’s technical expertise in the field of software development and thus the same was chargeable u/s 28(va) of the Act, as there is no such clause in the agreement. May be that association of the appellant with MIPL would have increased its profits but that would not change the character of receipts in the hands of the appellant. (vi) Section 28(va) has no applicability to the facts of the present case as there is no mention in the agreement that any payment made to the appellant was for not carrying out any activity in relation to any business or not sharing any know-how, patents, copyrights, any other commercial or business rights of similar nature etc. (vii) The Ld,AO himself has accepted sale consideration of 90% of shares in the preceding years as capital gains only and therefore, he was not permitted to treat part of the sale consideration, as capital gains and part of it as business income. (viii) The AO has failed to appreciate that the higher purchase price in the year under consideration was fixed keeping in view the high future earning capacity of MIPL and for this purpose only the stipulation with respect to assessee’s continued employment with MIPL was made integral part of the agreement. (ix) The term management vendors used in. the agreement simply implies that the individual sellers (including the assessee) were also in the control the affairs of MIPL and nothing more should be read into it. Even otherwise, transfer of management rights would have attracted capital gains only. Thus, viewed from any angle, the transactions would have resulted gains only. (x) The increase in the price of impugned shares was only due to different mechanism of calculation adopted in the agreement and' the said agreement has to be read in its entirety. The net result of the agreement is that what have exchanged for consideration was shares only,, which is a capital, asset in the hands of the vendor and would therefore be taxable as capital gains only. (xi) It is the prerogative of the parties to the agreement to decide upon their terms and considerations and unless there is any stipulation to the contrary the will and intention of the parties shall only prevail. There is no bar in the law on fixing different phases for the different years. (xii) It is trite law that apparent shall not be disturbed unless there is evidence for proving that apparent is not real. Admittedly, in the present case there is not even a single evidence on record which can suggest that consideration had been paid for any thing other than shares. (xiii) It may be noted that the subject matter is an agreement between a non resident third party and share holders of an Indian Company

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ITA No.- 719/Del/2010 Shri Sunil Goyal. including a reputed financial vendor. The agreement was a subject matter of scrutiny by RBI and FEMA authorities and was executed only after their approval. (xiv) There is no iota of evidence to suggest that payment was received by the appellant for not carrying on any activity in relation to business or for not sharing any IPR and therefore, the AO was not justified in stating that the drafting of various clauses of agreements was a colorable device. Thus, in the absence of any evidence the averment made by the AO remains a bald allegation. 4.1 Before coming to the various submissions made on behalf of the appellant and findings recorded by the Ld. AO, it may be beneficial to make a reference to the various clauses of the purchase agreement executed by the management vendors, and M/s Newell & Budge Holdings Ltd, as the same would enable us in putting the things in right perspective. Therefore, the relevant clauses of the agreement are being extracted below as under-

Sale and purchase 2.1 “Subject to the terms and conditions of this Agreement and in reliance of the warranties of the vendors and in consideration of the Consideration to be paid hereunder by the purchaser, each of the vendors, as the legal and beneficial owner, shall sell to the Purchaser and the Purchaser shall purchase from the Vendors, the sale Shares set opposite his name in column 4 of Part IB of the Schedule, with all rights and privileges attached to them at the Completion Date, free and clear of all and any Encumbrances.”

3.1 Subject to the terms of this Agreement, the consideration for the sale and purchase of the Sale shares shall comprise the consideration.

3.2 Upon completion of the matters referred to in paragraphs 1,2, and 3 of sub- Part A of Part 2B of the Schedule, and in consideration for sale and transfer of the Initial shares, the Purchaser shall pay the Initial consideration to the Vendors in the amounts shown in column. 5 of Part IB of the Schedule.

3.3 In consideration for sale and transfer of the first anniversary shares, the Purchaser shall pay the first additional Consideration to the Vendors (in the proportions set out in column 6 of Part IB of the Schedule) on the First Additional Consideration Payment date subject to the conditions and deductions set forth below.

(i) Full 100% of the First Additional Consideration shall be payable to the Vendors (in the proportions set out in column 6 Page 22 of 42

ITA No.- 719/Del/2010 Shri Sunil Goyal. of Part IB of the schedule) On the first additional Consideration Payment Date in the event all three Management vendors are in the employment of the Purchaser’s group on the first Additional consideration Payment Date,

(ii) In the event either of Sunil Goyal or Pramod Saini are not in the employment of the Purchaser’s Group but the other two Management Vendors are in the employment of the Purchaser’s group on the first Additional consideration Payment Date, then only 75% of the first Additional Consideration shall be payable to the Vendors, other than Sunil Goyal or Pramod Saini ( as the case may be) (in the proportions amongst the other Vendors as set out in column 6 of Part IB of the schedule, as suitably adjusted) on the first Additional consideration Payment Date.

(iii) In the event both Sunil Goyal or Pramod Saini are not in the employment of the Purchaser’s Group but Pankaj Aggarwal is in the employment of the Purchaser’s group on the First additional Consideration Payment date, then only 50% of the first Additional consideration shall be payable to the Vendors, other than Sunil Goyal and Pramod Saini (in the proportions amongst Pankaj Aggarwal and the financial Vendor as set out in column 6. of Part IB of the Schedule, as suitably adjusted) on the First Additional consideration Payment date.

(iv) The first Additional consideration shall not be payable in the event Pankaj Aggarwal is not in the employment of the Purchaser’s Group on the First Additional Consideration Payment Date, notwithstanding that either or both of the other Management vendors are in the employment of the Purchaser’s Group on such date.

Notwithstanding anything contained herein, in. the event any one or more Management Vendor is not in the employment of the Purchaser’s Group on the First Additional Consideration Payment Date as a result of material breach of the service contracts) by the Target or the Purchaser Group or as a result or the termination of the Service Contract by the company (Other than as a result of breach by the relevant Management vendor of the terms of his Service Contract) by giving six months written notice pursuant to clause 2 of the Service contract, then no deduction shall be made in the First Additional Consideration as a result of such non-continuance in employment of such Management Vendors(s).

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ITA No.- 719/Del/2010 Shri Sunil Goyal. 3.4 In consideration, for sale and transfer of the Second Anniversary, the purchasers shall pay the second additional Consideration to the Vendors (in the proportions set out in column 7 of Part IB of the Schedule) on the Second additional consideration Payment Date subject to the conditions and deductions set forth below:

(i) Full 100% of the Second Additional Consideration shall be payable to the Vendors (in the proportions set out in column 7 of Part IB of the Schedule) on the Second Additional Consideration Payment Date in the event all three Management vendors are in the employment of the Purchaser’s group on the Second additional consideration Payment Date'.

(ii) In the event either of Sunil Goyal or Pramod Saini are not in the employment of the Purchaser’s Group but the other two Management Vendors are in the employment of the Purchaser’s group on the first Additional consideration Payment Date, then only 75% of the first Additional Consideration shall be payable to the Vendors, other than Sunil Goyal or Pramod Saini (as the case may be) (in the proportions amongst the other Vendors as set out in column 6 of Part IB of the schedule,*as suitably adjusted) on the first Additional consideration Payment Date.

(iii) In the event both Sunil Goyal or Pramod Saini are not in the employment of the Purchaser’s Group but Fankaj Aggaiwal is in the employment of the Purchaser’s group on the First additional Consideration Payment date, then only 50% of the first Additional consideration shall be payable to the Vendors, other than Sunil Goyal and Pramod Saini (in the proportions amongst Fankaj Aggarwal and the financial Vendor as set out in column 6 of Part IB of the Schedule, as suitably adjusted) on the First Additional consideration Payment date.

(iv) The second Additional consideration shall not be payable in the event Pankaj Aggarwal is not in the employment of the Purchaser’s Group on the Second Additional Consideration Payment Date, notwithstanding that either or both of the other Management vendors are in the employment of the Purchaser’s Group on such date.

Notwithstanding anything contained herein, in the event any one or more Management Vendor is not in the employment of the Purchaser’s Group on the Second Additional Consideration Payment Date as a result of material breach of

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ITA No.- 719/Del/2010 Shri Sunil Goyal. the service contraet(s) by the Target or the Purchaser Group or as a

(iv) the company ceasing to be a private limited company for any reason whatsoever; or

(v) Further of any special rights to third parties allowing those third parties to take or veto from taking any decisions or which may have a material effect on or of the business of the Company, including, to discontinue the business, or remove or appoint directors to the board of the company,

3.7 The Purchaser shall pay to the Vendors (in the proportions set out in column 9 of Part IB of the Schedule) on the Third Consideration Additional Shares and shall pay to the vendors (in the proportions set' out in column 10 of Part IB of the Schedule) the Fourth additional Consideration for the fourth consideration additional shares to the Management Vendors ( as determined by Part 8 of the Schedule)) on the Third additional Consideration Payment date and the Fourth additional Consideration Payment Date, respectively. Provided, however, that a Management Vendor shall not be eligible to receive its share of the third additional consideration or the fourth additional Consideration in the event such Management Vendor is not in the employment of the Purchaser’s Group on the Third Additional Consideration Payment Date or the Fourth additional Consideration Payment Date (as the case may be) for any reason whatsoever, except in the event arty such Management Vendor is not in the employment of the Purchaser’s group on such date as a result of material breach of, the relevant Management Vendor’s Service Contract by the relevant employing member of the Purchaser Group or unless such Management Vendor has been served with a notice under clause 2 of the Service Contract by the company or the Purchaser (other than as a result of breach by the relevant Management Vendor of the terms of his Service Contract).

3.8 In the event the Purchaser has made a claim against the Management Vendors under the Warranties or under the Indemnities or against the Financial Vendors under rite representations and warranties contained in Clause 7.1 and the claim has been agreed or determined or a final and non- appealable judgment has been obtained on or prior to the First Additional Consideration Payment Date or the Second Additional Consideration Payment Date or the Third Additional Consideration Payment Date or Fourth additional Consideration Payment Date or the Earn out Consideration Payment Date (as the case may be) (a “Settled claim”), and the concerned Management Vendors or Financial Vendor have/ has not paid to the Purchasers all sums due to the Purchaser from much Management vendor or financial Vendor in respect of the settled claim on or prior to the First Additional Consideration Payment Date or the Second Additional Consideration Payment Date or the

Page 25 of 42

ITA No.- 719/Del/2010 Shri Sunil Goyal. Fourth additional Consideration Payment Date or the Earnout Consideration Payment Date (as appropriate), the Purchaser shall be entitled to set off any sums due to it such concerned Management Vendors or financial vendor pursuant to the settled claim together with interest on such sum (such interest accruing at the Rate in the period between (1) the later of the date of agreement or determination of the claim and (2) the date of set off herein under) (the “Settled claim amount”) against the First Additional Consideration or the Second additional Consideration or the third additional consideration payment date or the Fourth additional Consideration Payment Date or the Earnout Consideration (as appropriate) payable to such concerned Management Vendors or financial Vendor and the amount of the First additional Consideration or the Second additional Consideration or the third additional consideration payment date or the Fourth additional Consideration Payment Date or the Earnout Consideration (as appropriate) shall be suitably reduced by the Settled Claim Amount.

4.1 The purchase and sale of the initial shares shall be completed of the officers of the Purchaser’s solicitors (or' of such other place as the Parties may agree) on the completion Date when the Parties shall each - comply with their respective obligations set out in Part 28 of the Schedule subject to the fulfillment of the Conditions Precedent.

4.2 The Purchaser shall not be obliged to complete of any of the initial shares unless all of the initial Shares are sold and purchased simultaneously.

4.3 In the event of non satisfaction of the conditions Precedent on or before 120 days from the date hereof, the purchaser, the Management vendor, the financial vendor may terminate the Agreement, without any liabilities to the other patties. Provided that, in such event:

4.3.1 The provisions of clause 17 (Notices), clause 19 (Costs and expenses) and 21 (Governing Law and jurisdiction) will survive the terms of this agreement.

4.3.2 The Purchaser shall (and shall ensure that its employees and representatives shall return all confidential, information and (b) treat any and all Confidential information as confidential and shall not disclose such information to any other person:

4.3.3 For a period of five (5) years from the date hereof the Purchaser shall not directly or indirectly (i) solicit for Page 26 of 42

ITA No.- 719/Del/2010 Shri Sunil Goyal. employment or employ, any individual who is currently engaged in the employment with the company; or (ii) solicit, any current customer of the company (other than NASSCOM); and

4.3.4 The confidentially obligations contained in clause 4.3.2,above shall survive for a period not exceeding 5 (five years from the date hereof.

4.4 Provided however that, notwithstanding anything contained herein, in the event this Agreement is terminated pursuant to clause 4.3. above, each Party shall bear its own costs and expenses in connection with the preparation and negotiation of this Agreement and in preparing and negotiating this Agreement and any other documents referred to In this Agreement.

4.4 The purchase and sales of the First Anniversary shares, the Second anniversary shares, the third consideration Additional Shares, the Fourth Consideration Additional shares and the Earnout shares shall he completed of the offices of the Purchaser’s Indian solicitors (or at such other place as the Parties may agree) on the First additional consideration Payment Date, Second Additional Consideration Payment Date, the Third additional Consideration Payment Date, Fourth Additional consideration Payment date and the Earnout Consideration Payment Date , respectively. The provisions of Part 2B of the Schedule shall, to the extent applicable, apply mutatis mutandis to completion of each of the aforesaid transfer of shares.

7.3 The Management vendors hereby jointly and severally warrant and represent to and undertake with the purchaser that the warranties, both as at the date of this Agreement and. at the Completion Date;

7.3.1 Save as fully and fairly disclosed in the Disclosure Letter, are true and accurate in all respects;

7.3.2 Are not and are not to be affected or limited by any previous or other disclosure express or implied, written or oral to the Purchaser, its officers or representatives of professional advisers or by any investigation made by or on behalf of the purchaser into the affairs of any members of the Target group or by any information of which the Purchaser or its agents have knowledge (actual or constructive); and

7.3.3 Shall not be any respect be extinguished or affected by Completion.

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ITA No.- 719/Del/2010 Shri Sunil Goyal. 7.5 For the avoidance of doubt it is expressly agreed and declared that save for the disclosure Letter, no letter, document or other communication shall be deemed to constitute a disclosure for the purposes of the Warranties.

7.6 The Vendors undertake not to made and will procure (to the extent that they are able) that no other person claiming under or through any of them will made any claim against any member of the Group or any officer or employee of any member of the Target Group on whom they may have relied before entering into any term of this Agreement or in the preparation of the Disclosure Letter in respect of any claim under this Agreement or any omission from or statement in the Disclosure Letter.

7.7 Each of the Warranties shall be construed as separate and independent and save as expressly otherwise provided shall not be limited by reference to any other such warranty or by anything in this Agreement.

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ITA No.- 719/Del/2010 Shri Sunil Goyal. clauses 10.1.1. and 10.1.2 of this clause) for the period of two (2) years next following the date of this Agreement, directly or indirectly entice, solicit or endeavour to entice or solicit away from the Target Group any person who is a director or employee of such company engaged in its management. or the management of any of its branches or in a sales capacity or otherwise in a commercially sensitive position (whether or not such person would commit any breach of his contract of employment or engagement by reason of laving the service of such company) nor knowingly employ or aid or assist in or procure the employment by any other person, firm or company of any such person; 10.1.4. (without prejudice to the generality of the provisions contained in clauses 10,1.1. and 10,1.2) for the period of two (2) years next following the date of this agreement, not do any act or thing likely to have the effect of causing any customer or any suppliers of goods or services to any of the Target Group or other person dealing with the Target on a regular basis to cease to deal with the target Group either at all or in part or on the terms on which he had previously dealt with the Target Group or likely to have the effect of causing any person having a contract or arrangement with the Target Group to breach, terminate or modify that contract or arrangement; 10.1.5. Not any time following the Completion Date in connection with any business use the name of the Target, Target Group or the word “Momentum” or any names, words or initials similar to or likely to be confused with it except that Momentum Infocare Pvt. Ltd shall continue to have the right to use its current name. 10.1.6. The covenantors by their execution hereof hereby agree that having regard inter alia to the price paid by the Purchaser for the Sale shares, the restrictions contained in this clause are reasonable and necessary for the protection of the legitimate interests of the Purchasers and that having regard to those circumstances those covenants do not work harshly on them. 12. Effect of completion 12.1 Any provision of this Agreement and any other documents referred to in it which is capable of being performed after but which has not been performed at or before completion and all warranties and the indemnities, covenants, representations and undertakings contained in or entered into pursuant to this Agreement shall remain in full force and effect notwithstanding Completion. It is clarified that the warranties are . deemed to be made as of the date of this Agreement and on completion and shall not be deemed to be made subsequently”.

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ITA No.- 719/Del/2010 Shri Sunil Goyal. 5. Thus, it may be seen that there are specific stipulations in the various clauses of the agreement to the effect that the additional consideration i.e. difference between Rs 536,02 per share and Rs 72.28 per share would depend on fulfillment of certain conditions including that the management vendors including the appellant remain in the employment of the purchaser’s group on the payment dates. For instance, clause 3.3(H) clearly states that in the event of Sunil Goyal or Pramod Saini being not in the employment of the purchaser’s group they will not get any additional consideration. Similar stipulations are available in clauses 3.4(11) & 3.7 etc. Therefore, there is no substance in the appellant’s claim that the entire consideration was received only in lieu of sale of shares by Mm. The language used in clauses 3.3,3-4 & 3.7 is unambiguous and clearly states that, first, second, third and fourth installments of additional consideration was to be paid on respective payment dates, only if the appellant was in the employment of purchaser’s group, meaning thereby that no amount in excess of Rs 72.28 per share was payable to the appellant, if he does not remain in the employment of the purchaser group. As stated earlier, the appellant is a technically qualified person and has vast expertise and rich experience at his command which would help increase the profitability of the purchaser group. It was for this reason only that the purchaser group wanted to ensure appellant’s continued association with MIPL so as to reap benefits of Ms knowledge, technical expertise and experience. Therefore, the payment of additional consideration was, in a way, sharing of the profits earned by the purchaser’s group because of valuable support extended by the appellant. In fact, this has been admitted in Para 5 of the written . submissions filed on behalf of the appellant on 6-11-2009 as reproduced in Para 3 above. In the circumstances, I do not find any merit in the submissions made on behalf of the appellant that the entire consideration was relatable only to the sale of shares, as the facts clearly stated in the agreement do not support it.

5.1 Further, the appellant alongwith other management vendors has undertaken to not, even remotely, provide any financial, technical or other support to any business which competes directly or discreetly with any business carried on by the target group. Simultaneously, he has also undertaken to not to divulge or otherwise, use any secrets, trade secrets, confidential knowledge or information concerning the business, finance or affairs of the target group. Therefore, a cumulative reading of clauses 3,7.3 &10 regarding consideration, restrictions put on/warranties undertaken by the management vendors and protection of goodwill clearly suggests that the enhanced payment of consideration was for and in lieu of exploitation of expertise, technical know-how and experience controlled by the management vendors including the appellant. I have already stated in the initial stages of this order that MIPL was created by the appellant with his other two associates so as to utilize their technical knowledge, expertise and experience for commercial gains. At the same time, the purchaser group also wanted to ensure that the said technical

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ITA No.- 719/Del/2010 Shri Sunil Goyal. expertise, knowledge and experience remains available to them so as to exploit the same for commercial gains and for this purpose only additional payment of consideration was agreed upon to be paid to the management vendors including the appellant. This view of mine is further supported by the notes given below the table containing calculation of sale consideration, as available on pages 106 & 107 of the paper book filed by the appellant, which read as under-

“CCPs Compulsorily convertible preference shares � As per the provisions of the sale and purchase agreement entered between the transferors and the transferee, consideration of first anniversary shares and the second anniversary shares is dependent on the continuance of Pankaj Aggarwal, Sunil Goyal and Pramod Saini in the employment of MIPL and or any of the affiliate of the Investor company till the date of such payment and can be 100%, 75%, 50% or 0% -of the amounts stated above depending on tile continues employment of one or more of the above persons. � As per the provisions of the sale and purchase agreement entered between the .transferors and amortization ( EBIDTA, as defined in the sale and purchase agreement ) earned by MIPL for the twelve month period ending March 31,2005 and can vary between 0% to 10,0% of the amounts stated above. � As per provisions of the sale and purchase agreement entered between the transferors and the transferee, consideration of third additional shares and the fourth additional shares is depended on the earnings before interest, taxes, depreciation and amortization (2005EBIDTA and 2006 EBIDTA, as defined in the sale and purchase agreement) earned by MIPL for the twelve months periods ending October 31, 2005 and October 31,2006. and can vary between 0% to 100% of the amounts stated above”.

5.2 Therefore, the receipt of Rs 1,15,00,663/- has to be seen in the light of cumulative essence/import of various statements/stipulations made in the purchase agreement. This view further strengthen when we go to part IB of schedule forming part of the main agreement wherein the calculation of additional consideration has been made with reference to “EBIDTA Percentage”. The EBIDTA has been defined to mean profits of the target i.e. MIPL for a period of 12 months (reference invited to part 8 of schedule available on pages 97 & 98 of the paper book).

5.3 At this stage, it may be relevant to make a reference to section 28(va) which reads as . under-

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ITA No.- 719/Del/2010 Shri Sunil Goyal. Any sum, whether received or receivable, in cash or kind, under an agreement for-

(a) not carrying put any activity in relation to any business; or

(b) not sharing any know-how, patent, copyright, trade mark, license, franchise or any other business or commercial right of similar nature or information or technique likely to assist in the manufacture or processing of goods or provision for service.

5.4 When the fact situation of the present case is seen in terms of clauses (a) & (b) of section 28(va) the IT Act, there remains no doubt that the stipulations/restrictions placed on the appellant in terms of purchase agreement dated 21-10-2004 are identifiable with the items covered by the aforesaid clauses. Since an elaborate discussion has already been made with reference to the various undertakings, warranties and restrictions undertaken/ placed on the appellant in the forgoing paragraphs, the same are not being repeated here.

There is also no merit in the appellant’s argument that the law does not permit the taxing authorities to split the sale consideration into two parts and tax part of it as capital gains and the balance as income from business or profession. As elaborated earlier, this division of consideration is stipulated in the agreement itself and therefore, there is no requirement either for the AO or for the undersigned to do it nor there is a need to read into the various clauses of purchase agreement. It is not the revenue authorities which are intending to not to accept the apparent, but it is the appellant who is not willing to accept the clear .statement of the fact that additional consideration was in lieu of exploitation of his expertise, technical knowledge and experience for commercial gains and the same was also, dependent on EBIDTA which is directly linked with the aforesaid attributes of the appellant.

5.5 As regards, Ld. Counsel’s argument that other stake holders including financial vendor have also been paid consideration at the rate of Rs 536.02 per share, on consideration the same has also not been found to have much relevance so far as the appellant’s case is concerned. Firstly, the Ld. Counsel could not explain as to how and what treatment has been given to the sale consideration in the case of the financial vendor. Secondly, majority of shares were held by the financial vendor as Compulsorily Convertible Preference shares (CCPS) and the arrangement between the erstwhile management of MIPL and financial vendor has not been made available to the undersigned. Thirdly, the agreement in question does not spell out as to how the other liabilities and assets were to be dealt with by the purchaser’s group. Therefore, in the absence of all these material information, no cognizance of this argument can be taken at this stage.

5.6 In view of the above discussion, I am in total agreement with the AO that the excess amount of Rs 463.74 per share was received by the appellant on account of exploitation of Ms technical expertise in the

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ITA No.- 719/Del/2010 Shri Sunil Goyal. field of software development coupled with Ms a commitment to not to carry out activities in relation to business and for not sharing know - how, copyright, patent or any other business or commercial right of similar nature or information or technique related to software development wherein MIPL was engaged. I also hold that the cases relied upon by the Ld.AO support Ms action. It is the settled position of law that while dealing with tax matters the authorities are not supposed to put on blinkers but they should make honest and sincere attempts to examine the material placed before them and then reach logical conclusions. Therefore, the decision of the Ld.AO, being based on real import of the various statements in the purchase agreement, deserves to be upheld. 5.7 Accordingly, the addition of Rs 1,15,00,663/- is being sustained.”

(C.1) `This present appeal filed by the assessee against the aforesaid impugned

appellate order dated 20.01.2010 of Ld. CIT(A). During appellate proceedings in ITAT,

assessee filed Paper Book containing the following particulars:

“1. Copy of acknowledgment of return and computation of income of the assessee for the A.Y. 2006-07.

I-Copy of the sale and purchase agreement among N&B Holdings Ltd. Amd Momentum India Pvt. Ltd. dated 31.10.2004 and 10.11.2004.

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ITA No.- 719/Del/2010 Shri Sunil Goyal. (C.2) The assessee also field a compilation of cases relied upon, containing copies

of the following orders:

“1. CIT VS D.P. SANDHU BROS. CHEMBUR (P) LTD. (2005) 273 ITR 1 (S.C.)

(C.3) Further the assessee filed a synopsis which is reproduced as under:

“The above two appeals filed by the revenue and the assessee in the appeals indicated above involve common issues for decision and have been clubbed together for being heard and decided. Both appeals relate to the Assessment Year 2006-07 for which the previous year was F.Y. 2005-06. The appeal No. 2918/Del/2011 filed by the revenue against Pramod Saini is against the order of the Commissioner of Appeals-XXX dt. 29.3.2011 in appeal No. 279/2008-09 whereby the Commissioner of Appeal allowed the appellant’s claim and held that the long term capital gain earned by the assessee was rightly offered for tax under the head ‘Capital Gain’ and should be taxed u/s. 112 at 20% as claimed by the assessee. While rejecting the stand of the revenue that the capital gain could be split into capital gain and business income as wrongly adopted by the AO. The ITA No. 719/Del/2010 is directed against the order of the CIT(A)-VIII dt. 29.1.2010 in Appeal No. 172/08-09 for A.Y. 2006-07 holding that the long term capital gain of Rs. 1,32,11,569/- shown by the assessee could be assessed as business income to the extent of Rs. 1,15,00,663/- and the balance alone is taxable as long term capital gain as claimed by the assessee. The objective of the revenue in both cases was to impose higher burden of tax on the assessee by treating the amount assumed as business income as taxable at the rate of 30% as against 20% applicable to long term capital gain u/s. 112. The computation of income as well as consideration for transfer of shares held as long term capital asset by both the assesses have been accepted by the revenue. The entire Page 34 of 42

ITA No.- 719/Del/2010 Shri Sunil Goyal. amount of consideration for sale of shares held by both the assessee in the same company had been accepted as correct and assessed as long term capital gain even in the preceding year for both. The assessment orders in both cases have adopted the share price of Rs. 72.28 per share, as was adopted in the preceding year and the excess of sale price over 72.28 per share has been treated as business income to impose higher rate of tax although the income computed by the assessee as well as the revenue is the same. Thus the short issue in both cases is whether the income rightly taxed and taxable as long term capital gain as offered by the assessee could be split partly to be taxed as long term capital gain and the balance as business income in the hands of the assessee.

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ITA No.- 719/Del/2010 Shri Sunil Goyal. 5. It is pointed out that there was an agreement dt. 21.10.2004 by which the shares held by the appellants as well as two other shareholders were sold at the price agreed upon under the contract to M/s. Newell & Budge Holdings Ltd., Scotland. The percentage of shares held by each share holder and the price for sale are indicated in Schedule Part IB to the agreement. It may be noted that Pankaj Agarwal who held 7,44,000 shares (41.33%) has been allowed the tax on long term capital gain at 20% offered by him and no dispute has been raised by the revenue. Both Sunl Goyal and Pramod Saini held 2,48,000 shares each (i.e. 13.78% each) and in both their cases the sale consideration for the shares in the year under dispute has been sought to be taxed substantially as business income to impose higher burden of tax. The fourth shareholder i.e. Citicorp Finance(India) Limited does not appear to have been subjected to any variation in the assessment as per the income tax proceedings in these two cases as no indication is given by the revenue in this regard.

i) CIT Vs. D.P. Sandhu Bros. Chembur (P) Ltd. (2005) 273ITR 1 (SC) ii) United Commercial Bank Ltd.Vs.CIT (1957) 32 ITR 688(SC) iii) East India Housing and Land Development Trust Ltd. Vs.CIT(1961) 42 ITR 49 (SC) Page 36 of 42

ITA No.- 719/Del/2010 Shri Sunil Goyal. iv) CIT Vs. Chugandas & Co. (1964) 55 ITR 17(SC) v) S G Mercantile Corporation Vs. CIT (1972) 83 ITR 700 (SC)

ITA No.- 719/Del/2010 Shri Sunil Goyal. tobe rejected as being devoid of merit. The appeal filed by Sunil Goyal against the impugned orders against him deserves to be allowed with consequential relief.

It is prayed accordingly.”

(D) We have heard both sides. We have perused the materials on record. In the second ground of concise Grounds of appeal, it has been contended by the assessee that the Ld. CIT(A) had conducted hearing till 6:15 PM on 29.01.2010 and the

impugned order could not have been passed by him on the same day and the impugned order

appears to have already been prepared and kept ready and the various factual and legal

submissions contained in the submissions with case law filed on 27.1.2010 and explained on

29.1.2010 from 3.00 PM to 6.15 PM had been altogether disregarded and all the binding

decisions of the Supreme Court and the High Courts referred to and relied upon by the

appellant had not been followed and hence the impugned order is totally unsustainable and

unauthorised both on facts and in law. The fact alleged by the assessee in this ground, that hearings before Ld. CIT(A) had taken placed till 6:15 PM on 29.01.2010 has not been disputed from the side of Revenue at the time of hearing before us. When the hearing has taken placed till 6:15 PM on 29.01.2010; then it is contrary to all human probabilities that a detailed and lengthy order [such as the impugned order dated 29.01.2010 passed by Ld. CIT(A)] can be passed on the same day; unless the order is already prejudged and a premeditated order is kept ready and unless the Ld. CIT(A) had already decided the issue even before the hearing took placed on 29.01.2010. This is a gross violation of the principle of natural justice. The Ld. CIT(A) is required to first hear the assessee and then decide the issue in dispute; rather than prejudging the issue even before the hearing takes place and passing a premeditated order.

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ITA No.- 719/Del/2010 Shri Sunil Goyal.

(D.1) Moreover, in Ground 5 of the concise grounds of appeal, the assessee has alleged hostile discrimination against the assessee vis-à-vis other shareholders who had also transferred their share held as capital asset, and at the same price, which had been duly accepted by Revenue in their cases. It is contended by the assessee in this ground of appeal that Revenue cannot discriminate between one shareholder and another in regard to transactions for transfer of shares when such transfer of shares takes place under the same agreement simultaneously by all of them.

(D.2) At the time of hearing before us, the fact alleged by the assessee, that there is discrimination against the assessee, and that on identical facts and circumstances the assessee has been picked up for hostile assessment whereas two other shareholders [namely, Mr. Pankaj Agarwal and M/s Citicorp Finance (India) Ltd.] have not been subjected to similarly hostile assessment by Revenue; was not disputed from the side of Revenue. From perusal of records, including the Assessment Order as well as impugned Appellate Order of Ld. CIT(A), we find no mention or justification, as to why, in the case of the assessee substantial part of income offered as long term capital gain has been assessed as business income whereas on identical facts and circumstances income of the aforesaid two other shareholders under the head long term capital gain has been fully accepted by Revenue.

(D.2.1) In these facts and circumstance, as discussed in foregoing paragraphs (D), (D.1) and (D.2); we are of the view that the impugned appellate order dated 29.01.2010 of Ld. CIT(A) cannot be sustained at present and that the Ld. CIT(A) needs

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ITA No.- 719/Del/2010 Shri Sunil Goyal.

to pass a fresh order taking into account the facts stated by assessee in aforesaid Grounds 2 and 5 of Concise Grounds of appeal taken by the assessee in the appeal filed by the assessee in ITAT. Accordingly, we set aside the impugned appellate order dated 29.01.2010 of Ld. CIT(A) and direct him to pass fresh order after providing opportunity of being heard to the assessee and dealing with the issue, why in the case of the assessee substantial portion of long term capital gain has been assessed as business income whereas on identical facts and circumstances, the claim of long term capital gain by the aforesaid other two shareholders has been accepted by Revenue. The fresh order to be passed by the Ld. CIT(A) should be passed after giving due consideration to the submissions made by the assessee, instead of passing a premeditated order, prejudged even before the actual hearing take place. This appeal is disposed of in accordance with the aforesaid directions. The impugned order dated 29.01.2010 of Ld. CIT(A) stands set aside with the direction to the Ld. CIT(A) to pass a fresh order, taking into account our aforesaid observations and directions. For statistical purposes, the appeal is partly allowed.

Order is pronounced in the Open Court on 26/11/19.

Sd/- Sd/- (AMIT SHUKLA) (ANADEE NATH MISSHRA) JUDICIAL MEMBER ACCOUNTANT MEMBER

Dated: 26/11/19. Pooja/-

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ITA No.- 719/Del/2010 Shri Sunil Goyal. Copy forwarded to: 1. Appellant 2. Respondent 3. CIT 4. CIT(Appeals) 5. DR: ITAT

ASSISTANT REGISTRAR ITAT NEW DELHI

Date of dictation

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ITA No.- 719/Del/2010 Shri Sunil Goyal. Date on which the typed draft is placed before the dictating Member Date on which the typed draft is placed before the Other Member

Date on which the approved draft comes to the Sr. PS/PS

Date on which the fair order is placed before the Dictating Member for pronouncement Date on which the fair order comes back to the Sr. PS/PS Date on which the final order is uploaded on the website of ITAT

Date on which the file goes to the Bench Clerk

Date on which the file goes to the Head Clerk

The date on which the file goes to the Assistant Registrar for signature on the order

Date of dispatch of the Order

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