P.S.SHEKAR,CHENNAI vs. DCIT, CHENNAI

आदेश / O R D E R

Per A. Mohan Alankamony, AM:-

(iii) The Ld.CIT(A) has erred in confirming the order of the Ld.AO, who had made addition of Rs.9,31,529/- invoking the provision of Section 14A of the Act.

During the course of assessment proceedings, it was observed by the Ld.AO that the assessee had offered Rs.1,22,93,556/- as long term capital gains with respect to the transfer of his shareholding in the company M/s. Indotech Transformers Pvt. Ltd. The assessee had further claimed expenditure of Rs.2,75,848/- towards the transaction. On perusing the nature of transaction, the Ld.AO was of the view that the amount of Rs.1,22,93,556/- received by the assessee was towards non-compete fees and not towards transfer of shares. Therefore the Ld.AO, came to a conclusion, that provisions of Section 28(va) will be applicable in the case of the assessee and accordingly the amount received by the assessee has to be treated as ‘income from business’ and not long term capital gain as claimed by the assessee. Accordingly he treated the long term capital gain of Rs.1,22,93,556/- declared by the assessee as ‘income from business’. Further the Ld.AO denied the benefit of deduction of Rs.2,75,848/- towards expenditure incurred for the transfer of shares, since the assessee could not substantiate the same.

4.1 The assessee carried the matter on appeal before the Ld.CIT(A). On perusing the facts of the case, the Ld.CIT(A) made the following observations:- “4.4 The appellant was a Whole Time Director in M/s.Indo- Tech Transformers Limited (hereinafter referred to as 'the Company'). The company is engaged in the business of manufacturing power and distribution transformers. The company had an authorised share capital of Rs.153,000,000/- (Rupees One Hundred and Fifty Three Million) divided into 15,300,000 (Fifteen Million and Three Hundred Thousand) equity shares, and the issued and paid up share capital of the company as on the date of Share Purchase Agreement on 04.12.2008 was Rs.106,200,000/- (rupees One Hundred and Six Million) divided into 10,620,000/- (Ten Million and Six Hundred and Twenty Thousand) Equity Shares which are listed on the Bombay Stock Exchange and National Stock Exchange.

4.5 . The appellant and his family members and HUF were the promoters of the company holding a total of 5,771,625 fully paid Equity Shares of Rs.10/- each as registered, legal and beneficial owner, constituting 54.35% of the issued, subscribed and paid up equity share capital of the company as on the date of the agreement. The appellant was a whole time Director of the company, with his brother Shri P.S. Jagadish being another whole time Director and, his father Shri P.E. Subramaniam being the Chairman-cum-Managing Director of the Company. The appellant was holding 23.16% of the shares of the company.”

4.2 Further, the Ld.CIT(A) observed as follows:- 4.10 The total shareholdings, and the consideration received by the appellant as submitted during this appeal is as under:

Particulars Appellants' Share (in Rs.) No. of shares Held 13,36,500 Consideration @ 406 (A) 54,26,19,000/- Interest Added from 2,84,04,542/- Escrow (B) Total A + B 57,10,23,542/- Non-Compete Fee @ 10,42,47,000/- Rs.78/- per share Non-Compete Fee Received 1,22,93,556/- during A.Y.2011-12 4.3 Thereafter the Ld.CIT(A) arrived at the following conclusion:-

“4.16 In the light of the aforementioned judicial decisions, here are the undisputed facts in appellant's case: a) The appellant was a whole time Director of the Company. b) The appellant and his family were the promoters of the Company holding 53.6 per cent of issued and paid up equity shares. c) The appellant himself was holding 23.16% of equity shares. d) The appellant and other promoters entered into a Non- Corporate and Non Solicitation Agreement with the Mexican Company. e) The Non Compete Fee was decided at Rs.78/- per share.

4.16.1 In the light of the decision of Hon'ble Supreme Court in the Guffic Chemicals (P) Ltd. (Supra) on the applicability of Section 28(va) from A.Y.2003-04 onwards and the decisions of Hon'ble Bombay High Court in Arun Toshniwal Case (Supra) and that of Ld. Mumbai Tribunal in Ramesh D. Tainwala case (Supra) wherein the Non Compete Fees paid to promoters were held to be taxable under Section 28(va) of the Act, I find no infirmity in the decision of the AO in bringing the impugned amount to tax under Section 28(va) of the Act. As such, the appellant's appeal on this ground fails.”

4.4 Before us, the Ld.AR vehemently argued stating that the assessee had received the amount towards transfer of his shares and therefore the amount received should be treated as long term capital gain and not ‘income from business’. He further claimed that if the bench is in not agreement with the submission of the assessee, one more opportunity may be provided to the assessee to argue his case before the Ld.AO, since the Ld.AO had not examined the issue taking in to consideration of all the documents / agreements presented before him. The Ld.DR on the other hand, relied on the orders of the Revenue authorities and argued in support of the same, and further requested for confirming the Orders of the Revenue.

4.5 From the facts of the case which are clearly brought out by the Ld.CIT(A) in his order, it appears that the assessee have received non-compete fee, the yardstick of which is determined at Rs.78/- per share transferred by the assessee amounting to Rs.1,22,93,556/-. The Ld.CIT(A) further relying on the decision of the Hon’ble Apex court and Hon’ble Bombay High Court (supra) came to a conclusion that in such transaction provisions of Section 28(va) of the Act would be applicable and accordingly held the amount received by the assessee as business income.

We do not find any infirmity in the order of the Ld.CIT(A) in this issue. From the facts as brought out by the Ld.CIT(A), it is clear that the assessee has received non-compete fee which is determined as Rs.78/- per share. Just because the yardstick was fixed for computing the non-compete fee at Rs.78 per share would not mean that the amount of Rs.78/- per share received by the assessee attributes towards transfer of shares. In fact, as rightly pointed out by the Revenue, it attributes towards non- compete fee only. Therefore, the orders of the Revenue do not call for any interference. However, since the Ld.AR has claimed before us that the Ld.AO has not discussed the facts of the case, vividly in his order, though the Ld.CIT(A) has referred to the relevant agreements made by the assessee towards the transfer of share, which is apparent from their respective orders, the question arises whether all the documents referred by the Ld.CIT(A) in his order was before the Ld.AO for appreciation of facts at the time of passing of his Order. Therefore, in the interest of justice, we hereby remit back the matter to the file of Ld.AO, thereby providing him with an opportunity to examine the agreements and other relevant documents and if the facts found by the Ld.CIT(A) does not call for a change, reinstate his earlier Order, otherwise pass appropriate order as per merit and law.

4.6 Further on perusing the order of the Ld.CIT(A), we find that the assessee has not raised the ground with respect to disallowance of expenditure of Rs.2,75,848/-. However, since the main issue in the appeal is being remitted back, in the interest of justice, we hereby remit this issue also back to the file of Ld.AO for fresh consideration.

During the course of scrutiny assessment proceedings, it was noticed by the Ld.AO that the assessee had claimed expenditure of Rs.7,56,905/-(Non STT paid) and Rs.1,74,624/- (STT paid) which is attributable towards the investment made in ASK investments for earning dividend income which is exempt from tax. Therefore the Ld.AO invoking the provisions of Section 14A of the Act disallowed those expenditures as allowable deduction. On appeal, the Ld.CIT(A) confirmed the order of the Ld.AO by agreeing to his view. Before us no fresh materials or arguments were advanced by the Ld.AR, other than what was placed before the Revenue on the earlier occasions. Further from the facts of the case, it is clear that the assessee had made investments for earning exempt income. Therefore, the provisions of Section 14A of the Act would be applicable in the case of the assessee. Accordingly, the expenditure for making

Order pronounced on the 30th June, 2017 at Chennai.