K.V.D.PRASAD RAO vs. THE JT.COMMISSIONER OF INCOME TAX

IN THE HIGH COURT FOR THE STATE OF TELANGANA AT HYDERABAD WEDNESDAY ,THE SEVENTH DAY OF SEPTEMBER rWO THOUSAND AND TWENTY TWO PRESENT .,.APPELLANT -Eetwee n: 1. K.V.D. Prasad Rao, plot No. 77 - Died per LRs 2 to 4 ^ Women's Coop. HOuseing. Society.,- Ro'adlrlo. S, Jubilee Hills , Hyderabad. 2. Smt. K. Praveen Kumar 5/o. t_ate k,v.o. prasad Rao, ag.a-aboii38 y;;;., Plot No.77 women's coop. Housing society, Road N-o. za, .lutl r,lerr irrs, Hyderabad - 500033. 3 smt. K. Hemalatha wo. Late K,v.D. prasad Rao, Aged about 56 years. prot No. 77, Women's Coop. Housing Society , Road- No. 7A , li6iin"f,irr.. Hyderabad - 500033. 4..Ms. Chaitanya D/o. late K.V.d. prasad Rao, aged about 35 years, plot No. 77. I^9T-ul'" Coop. Housing Society, Road No. 7A, Jrbtie" r_r1lr, , nt;juio"o _ 500033. ( Appellate No. 2 to 4 are bro-ught on_record as LRS of the deceased Appelate No 1 vide C.O. dated 04-Ot_20i7 in ilTAMp No. I ;f 201S ) \\l) I l:e -ltrint ('.r,,rissio.er or'lnoome Tax , Range - VI, I]uddha Bha'an. Sccuncre rahuil ..RESPONDENT THE HONOURABLE THE CHIEF JUSTICE UJJAL BHUY,AN AND THE HONOURABLE SRI JUSTICE C.V. BHASKAR REDDY INCOME TAX TRTBUNAL AppEAL NO: 57 OF 2002 Appeal Under Section 260 A of the lncome Tax Act , 1961 aggrieved by the order dated 31-12-2o01 in r.T.A. No. 336 / Hyd / 99 Assessment year 1995 -96 on the file of the court of the rncome Tax Appelate Tribunar , Hyderabad Bench- B Hyderabad . Counsel for the Appellant: M. SRIDHAR Counsel for the Respondent : MS. K. MAMATA CHOUDARY Sr. S.C. for l.T. Dept. The Court macle the following: OROER

.I'HE FION'BLE'IHI., CIIIT-,F IUS-I'ICE UIIAI BHL,YAN AND THE I{)N]BLE SRI IL-STICE C.V.BHASK,{R REDD\' I.T.T.A.No. 57 of 2002 IUDGMENT,T'er:L Hut.,L:r':C,L,r t.,,:: :. h :. !,:, Fleard Mr. M.Sridhar, leamed counsel for the appellant and I\G. K.Mamata Choudhary leamed Senior Standu.rg C-orurse I for the Income Tax Depanment appearing lor the responde nt. 2. This appeal has been iiled bv the assessce .1s rhe appellanr under Section 260- A o{ the Income -i a:r Act, 196 I (briefly 'the Act' hereinafter) assailing the legalitv and validin, o[ the order dated 31..12.2001 passed by thc lncome 'I-ax r\ppelhre r\uthoriry, Hyderabad Bench R', Hyderabad (for shon thc 'l'ribunal) rn I.T.ANo.336/Hrd/ 1999 ior the assessmenr \err. 1')95- 1996. 3. The appeal was admined on 19.08.2C02. [{or.rever, at the time of admission, substantial qucstions \\ere n()l lranred. We find from the paper book that appellanl has prop,rs,:,I rhe following \ questions as substantial questions ()i la$.: a. \X4rether the l'ribtrnal rv.rs corrccr ur l:.. irr construing the non comi:,ctirxrn i\rcemcnr Jr. (,. ll. 199{ \

2 x a Jevicc io avoid ta-* and that ihe corxideration of 8s.8.26 crorcs received thereunrlcr \\.J^\ nor for the restrictive covenant but x'as a considrration paid for acquisiton of shares ? b. \X4rether the Tribunal. .rtter holding that the consideradon received under thc non competition agreement dt. 6.12.L994 u'as for acquirine conrolling interest in the Companv, l\,as conect in lew in holding that the said corsiderarion q-.rs lial',le to c.rpiral gairu ta-x as pan of sale consideration o1' shares contrary to the decision of the jurisdicitnal Hieh Gun reponed in 115 ITR 78 ? 4. Thus, from the above, r.r'e find th.rt rhr. basic question raised bythe appellant is, whether'Iriburul \\'.rs coni('ct in considering the non-competition agreement d.rted 06.11.1994 :rs a clevice to avoid tax and that the consideration oi Rs.ti.l6 cr1)rrs received thereunder was not for the restdctive covenrlnl buL ues I consideration paid for acquisition of sl-rares. 5, At this stage, ure mi1\' :1lso nrdrltron th;rt appellant has not / alleged any perversity by thc 1'nbtrrr.rl s'hile passing tlre order dated I1.12.2001.

J non-conlpeting lec i,onr Sti,'C n'hich rvas in the nature of capital receipt not exigible to t,rx. ]r n,as funher contended that even though the entire share holding of 29,50,000 shares in CBL v,,as agreed to be tramferred to S\\C and its subsidiaries, what could be regarded as actualiv sold during the previous lear relevant to the assessffrent \,car, \\-erl' onlr' the shares which were neither under lock-in-period nor under pledgr'. 9. In thc assessnrcnt procccclings, assessing officer did not accept such contentions ot thr ,rssessee. Ffu held that the so-called non-conlpeting fee rcc.'iveil l,r' the assessee and the co-promoterc was actr.nlll' only a p,rrt ot. the srrle consideration. On that basis, assessing otiicer hcld thet thr shlres x.ere sold @ Rs.43l- per share and not @ 1{s.15l- p('r shrlr-r .rs claimed by the assessee. FIe accordinglv computecl thi: long tcnn capital gains. FIe funher held that nott-ithsurnding tlic lock-irrperiod and the pledge of shares, those mtst br' regaftlcd ls li.rving been sold or trarsferred within the rreaning of Section 2('17) of rlre Act as the entire consideration

5 \\?s rtccived by the xsessee and the co-promoters r'r,ith share certiliciltes Lrruig clelivered to the transferees. 10. \Vhen thc' order of the assessing officer was challenged befon' the fust appellate auhority ;.a., C.ommissioner oi Income Tax (,\ppcals). the first appellate authoriry upheld the decision ot the esscssing officer on both aspects i.e., sale consideration per share ;rnd rl'rc number of shares sold. It was thereafter thar assessee iiled hrrrhe r.rppeal before the Tribunal. 11. '['ribr-rn.rl iramed rwo questions for considemtion: li) \\l,.erher the revenue was justified in adoptinq rhr sale c,rrrridcretion @ Rs.43/- per share for computation of iong l('nrr c.lpital gains on the sale of shares as against tht cl,rinr ot- tir.' rssessc.' that the sale consideration was onh. Rs.15r'- n". sh.rrc ? :rnd iiit \\herher the shares which were under lock-in'p.'ri,rtl or Lrn,lrr i.hclqe to financial companies couicl be rtq.rrtlcil as lr.ir',nq bten transferred within tire me.rnirrg of I

6 I()ng temr capital gains in respect o[ the said shares ? 11. Af'ter a thorough examination of all aspects of the matter, l'ribunal yirle the order dated 31,.12.2N1. took the vieu. th.rt assessing officer was justified in quantifying the sale consideration @ Rs.43/- pershare. That apart, it was also held that palment ol' Rs.8.26 crores as non-competing fee in terrns oi the Ilo t]- c,rrrrpetition agreement darcd 06.12.1994 \\?S part oi the s:le consideration for transfer of 29,50,000 shares solcl to SWL. 'l'ribunal iunher held that the entire transaction rles a shlrn trilrraction entered into onlyto avoid payrnent of thc tax due. l.i. I Iow-eve r, Tribunal held that capital gains tax coulcl not be levicd on the shares under lock-in-period or under pledgc. In other uords, capital gairu tax could be levied only in rel,rtion ro 11.lCC slt,rres and not on 86,100 shares as was done bt' thc rssessing offic.'r. Holding that on 11,L00 shares, the rer.enue ues jtr-stiiicd in .rilopting the sale consideration of Rs.+:/- per share, the ntlner uas rcnr-rnded back to the assessing officer to re-complrte the capit:rl Section 2(+7) of the Act for the pu4roses of computation o[

7 gains tax accordingly. On the balance 75,000 shares rurder lock-in- period or tLnder pledge, libeny qranted t,-, the revenue \\-i1S authorities to lery capital gains tax in the relevant assessment )ear after expiry of the lock-in-period or after No Objection Crniiicate NOq was received from the SEBI or aiter the pledee uas released 1.4. Leamed counsel for the appellant srLbmits that rhc TribLural erred ul upholding the decision of the assessinq ofiic.'r tn quantifying the value of each sharc at Rs.4ll instcad o[ the declared value of Rs.15l-. In this connecti()n. he h.rs placed re]iance on a decision of the Punjab and I{rnanr llish Crurr in CIT vs. Usha Sabool as well as a decisior.r oi thc Sr.rr-rrtrne (irurt rn Shiv Raj Gupta v. CIT2. 15. Refening to the decision ol the Supreme Grun in Shiv Rai Gupta v. CIT (2 supra), he submits that Sr,rpr-e-r1,.' (bun has clarified that commercial expediencv has to be .rdju.iecd irom the / ("^, "t view of the assessee and rhlt the Inconrr. 'fax [)cpartment t lzor;; :z+ rrn eos 2 12021; 11 sr,p..-" Corrrt Cases 5S

cannot enter into tirc thicket oir reasonableness oi amounts paid by the assessee. 76. Rellng on the said decision, he further sLrbrnits that pal.,rnent received as non-competing fee r,rnder a negative covenant was treated as a capital receipt till assessment rear 2CO3-04, u,4rich covers the case at hand and therefore, the sarne \ras nor exigible to tax. 17. On thp other hand, leamed Senior Standurg Counsel for the Income Tax Department has taken us through rhe order passed by the Tribunal and submits that the findings ren.lcrcd by the Tribunal are findings of fact. No question oi lar.v arises on the basis o[ such findings returned by the Tribunal, not to sperk oi any substantial question of law. That apart, appe llant has nor raised any question of perversityvitiating the decision ol the 'I-ribunei. Therefore, the appeal is required to be dismissed. 18. Submissions made by lean.rec'{ r-rolursel for the panies have \ received the due consideration oi thc Clurr. \ ::8::

9 19. Insofar the iint question framed by the Tribunal IS concernecl 2.,,., quantiiication of sale consideration @ Rs.43/- per share Tribunal cramined at length the memorandum of understanding entered into betu,een the assessee and S$(C on 17.C8.1994 and also advened to the frndings retumed by the assessing officer *'orliir.rg out the sale consideration @ Rs.43/- per share as against Rs.1-5/- pcr share shoum bythe assessee. 20. The findings relrrmerl bvthe assessing officer are as follows: Nol- coming to liabiliry for capital gains, Prasad Reo group sold 29.50.000 :rs per deed at the rate of Rs.15l- per sh,ue. fu per the admission, the entie corxideration of Rs.4.+2,C0,000 has been received and distributed to 109 inc{ividu,rls as per their number of shares held. ln .rcldition. Rs.8.26,00,000 paid byS\7C is distributed to mernben oi rhe group at the rate of Rs.28/ per sharr: during the previous year relevant to Assessmenl Yc.rr 1995-96. Accourt copy of Andhm Bank Ac. No. 1il 15 is :rvailable on record showing the rcceiprs and .L-srribution of the said receipt to m!'rrbcr5 rr rhe rate of Rs.4i/- per share (Its.1-1 +Rs.28). \ l I I I I \

:: l():: It goes uithout say'iog that t[Le iuup sum arnount of tu.8.26,00,000/- paid in the guise of compensation is cle.rrl1. an off-shoot of transfer of shares and inextric,rblv linked to th!' number of shares. This beng, the c.rse. the .rllcqed compensation would panalie rhe v.riue oi share price imelf. The actions of the assessee group /zi-.. assessee being given General Pou-er of Attomey b1'all 109 members to undenake transter oi sheres, Rs.S.26 crores being distributed to all members at fu.2[ per share strongly substantiate this fact. it can be seid that the assessee/group is resoning to rcduce/,rxricl the ta-x pliabiliry through a coloureble rler.'ice as entmciated in the case of Mc.Dorvell & Co. (15+ ITR i48). 21. J'hereatter. ()r1 the rlrrr'sli(,rr oi number of shares transferred, assessins oificer held rrs [ollou's: Nou'. tmnsier of rnovable or immovable propefties is contl,cll.'d bv Transfer of Properry fut. Under this Act, trrnsfer ol imrnovable properq/ take place b1' registr.ltion ol document. But as an exception to cont;rin pi-,ssible misuse for delaying crpital gains u-x l-iabilitr. n is held that capital gains tari c.rn be levied for p,.rn perl ormance u/s.53 A of Transfer oi Propern- :\ct. In case of movable propeft).. tr,usfer is co[rplete u.'hen properry is /

il h.rnde.l or.cr and consideration is received. Share is a [-c'cu]ier rnovable properry transfer of q-hich is controlled bi' the C-ompanies Act. For shares, srle/ corrtract is complete when tle broker's note is c\CCutcel. Nerv holder is absolute owner of the shares for t,hich brolrer note is executed in his favour. Shercs change hundred and drousands of hands heiorc they get registered on oners name in the bools ol the company. But at each sege, the holder L rhsolute owner, because he enjop the shares in his cap;rcitY as orrner. In the present case, our of the sold 29,50,000 shares. 21,12,500 are under lockin-period. But the .eller: have received full considerarion for t'rrtire 19.10,000 shares. As per the Memorandum o[ L ndcrstending enrcred between K.V.D.Prasad Reo .urtl live holding companies (BLTYERS) ,rn 11.,.11.1994 page-4, paras-3 &4 it was agreed and n'c<,rrlcti that "in respect of shares r*rich are lock- in- pc r.io.l (2. 1 6,200 +13,9 6,300 -J1,12,500). Mr. Prasad I{.ro & S\\'C rvill jointly malrc endeavours to obtain r lrc \,r ( )bjection of SEBI for transfer of shares. In ',h. .\.('nr the SE.BI, No Objection is recei.r.ed q'ithin i 1 I)c. crnber 1994,I\k. Prasad Rao will an-ange to I, irrhu rt h trenster the said shares in favour of bulers. I {Ll'le\. cr.. in case SEBI's No objection is not l',rrrh.orninq rvithin 31" December 1994, N,lr. Pr.rs.rd {

i:12:i i'.ao n'ill alTange for issue of necessary Pox,ers ol Attomey/other papen granting the Bryen Voting nghts, rights to Dividen&,/Bonus Shares and other dghts in respect of the said shares. $"/hen this aspect was put before the assessee, he explained in his lener dated 16.05.i997 prge-) (page 160 of case frL), .h" passing of the future dividend and voting rights on ghe shares until the share transfer takes place, will have to be treated as a consideration for advance amount paid to us." He rrdded ftuther tlat even if the share transfer ;rpplicirtions are signed by us they will be valid only ior a period of 12 months or dll rhe next book closure date, whichever is earlier. There cannot be any consideration for advances n'ceived. Passing of funre dividends, voting r(hts .rnd right of transfer tantamount to relinquishment of ,rll rights on the shares. \Xhat happens to signed share tr ensfer applications when the bools are closcd Ls ilre ler.ant. As discussed earlier, entry in bools o[ the compf,n\r is never a rwrtter of concem while ta-ring cepir-al gains on sale of shares. This being the case after 31" December 199-1, e, en' right in the share is with buyers, except for the ch,rnge of name in the books of the companv for a snrell rechnical snag of SEBI's No objection. For ell -- -, pmctical purposes, the ownership with all benelits h.rs

::13:: bee, transfenrd. Reliance is placed, in addition to the above facts on Supreme C-oun's decision in the c;rse of CIT Vs. Narang Diary Products (2 1') J IR 478) wher-ein the word 'transfer' has been c'leiLned to include 'ito make over possession of propem' to another, to hand over'. Hence, capital gains are ta-xable in the hands of se[ers er.en for the shares which are in lock-in-period. Here assessee is holding 86,100 shares ior utich he received 80,100 X 43:Rs.i/.02.100. cepital eains on v,rhich are taxable". 22. \When this finding of the assessins officc'r ."ras cl.ralltnged beiore the first appellate authority, the tint :rppell.rte rurhoritv held as iollows: Funher, coming to the point, n herher c.rpit.il gains are liable on the shares u'hich .rrr uncler lock- in- period and under pledge, the appell.rnt has submined before the AO that the temr transler or sale in la*' means valid transfer or valid sale ;rnd if there is no valid sale,/transfer, no profit or gain c.rn ;rccrue. Thc AO has dislodged the above submbsions oi th.' appellant, basing on the provisions o[ the Transfcr ,;i Properq. Act. As rightll. obsen'ed b1 thc AO thet. .rs per the above Act. in the case ol rnovable prop'r1\' trarLsfer is complete rvhen pr-opertv is h.rnded or er'

::l-l:: and consideration is received. Irr thc present clse, out of the 29,50,000 shares sold, 21,12,500 shares u,ere under lock-in-period and under pledge, but selles have received full consideration for the entire shares. The appeilant contends that though the sh;rre scrips were handed over, the assessee had no right to trarsfer the shares and the purchasers \verc not in a position to get the shares transferred Ln their n:rrne. in company share registen, so as to becorue osnen thereof. I am not in agreement uith the abor.,e contention of the appellant. In this rcgerrl. I de rir.e support from the C-ommentary ol Sarnp.rth Ireng.rr's l-aw of Income-tax, *4rerein s'as obsen'ed rel,ring on dre Case l-aw in the cese ol ll:rj:tsiri Rrrbbr'r Produce Co. Ltd. v. CIT (1993) lOi I 1R (,(,.1 th.rr in tlre case of ransfer of shrrres for pLuposes of Section 45 of the Act, as betuecn thc tliulsf L'rols ind the uansferee, the transaction compietc s-hen the share cerdficates are handed or'.'r. It *;rs .rlso commented that the mere f,rct thet rhc conrpenl has not registered the transier ir-r its b,rols rv,.r1rld j11q1l1''\' the claim that the transfer tooli plece tlrlv lrter. Funher, as per sub-sec (3) oi Scc.+ of Sak' of Goods Act "x{rere under a contra.t oi sal..'. thc ptrpenv in the goods is transferred fi<rm sellcr to the [ru]a r. the contract is called as sele". [:Luther' .rr sul,-scc (Z) of Sec 2 of Sale Goods Act '(],rods" me:lns ('\-en'kind (

:: 15:: o{ morlable_ properr,v othe_r^th:n actionable claims and nronel' and incltrdes stocks and shares, growing gr.iss....rr fu per the provisions of Sale of Goods Act, Registration Deed s not a necessary criteria. In this case. the seller h,u handecl over the delivery of all dre shares, and recei.,ed full consideration from tle bupr. Therefore. iollou-ing the provisions of Transfer of Properq- Act and Sale of Goods Act, and also considering the [;ict that the appellant and prcmoters har.e rcceived full sale consideration for entirc 29,50,000 shares. I conclude that ownership with all benefits has been transferred and accordingly, the AO k right in levrinq the capital gains for the shares w'hich r,,'erc urder loc k- in- period and also turder pledge. In vie*' ol' the ebov'e discussion, in my con-sidered vien'. rhe so c;rllec'l .ompensadon received tow,rrds Restricrit.. (ir','en:rnt is nothing but sale consideration in respecr of shrrc,s held bythe assessee and his group encl rh., consideration received on transter o[ sher-e. und.'r lock- in-period and under pledge shoultl eis,r lle t re;rted under the head capital grrins. Thereforc. sincc out of the total shares of , 29,5C,C0C. thc .rppell.rnr r.,'as holding 86,000 shares, the AO is right in conrputing capital gains ar IG.43l- per sharr. s:hich includes value of sale consideration received the r'.tr' oi Rs.lS,/- per share. Accordingly, I uphold the .lecision oi AO in assessing capital gains

:: l6:: @ Rs,27,85,13il- as agairut thc sum of 8,s.48$771- as adrniued by the appeilant. Appeal fails on this point. 23. In the appeal, after considering the pleadings and rival submissions, Tribunal helcl as follols: We are of the vieu. that the Revenue deserves to succeed on the qr,restion of the saie consideration having been r-eceived :rt Rs.4Jl- per share. It is established lari' thar simplv because a deed is produced bv an assessee before the Revenue authorities in support oi a cleim, Revenue authorities need not necessrrdll'rccept thc same. The Revenue need not close its e\rs to the surrounding circumstances, and they .rre ar libcny to see the realfuy behincl the fag.rcle cre.rted bv the assessee as a tax saving me.rsure. r\cturllv. tli:t is rhe dury cast on the Revenuc. For this proposirion, *.e need not go beyond the decision of Apcr C,oun in the case of CIT Vs Dursa Prasad l\Iore (32 ITR 540) wherein, as per the relevant portion o[ the head note (82 ITR) it was held x under: that though .rn .lpp.rr(.nr srarement must b€ corrsidcrctl rcal LLnril ir r'.rs slro,r.n that there \i'as no rcrsons tr, b.,lic. c thar the apparent waS not the rcal, ur e ,.'.L.r * hcrc a parry .relied on selt-sen'ing rtcit.rls in tlrcunrents, it was for that panv to cstahli.h th,. truth of those recitals,

t:17 t: the tlxing .ruthoriries were endtied to look inLo the surrouncling circumstances to find out the realiw o[ such recitals.... \\.t.'n \\e look into the surrounding c ir.-. rurLslances. in the present case we are persuaded to accept the stand of the Revenue that the assessee r"esoned to a tax saving ruse by splining the sale considcntion for 29,50,000 shares agreed to be sold irto trro components uiq; apparent sale consideration of Rs. t-i,/- per share and non-competing fee working orn ro fu.28l- per share. 'lhe letter of intent for seaing up CBL was obt.rinetl .rs early as in July t975, bw the said comp.ln\. could commence commercial production onh on C1.C8. 1 991, that is after a decade and a half. It rool. su.:h a iong time for the company to be ser up and l,ccome operational. If that is tle normal period for ;.'tting up il new unit and if the assessee could olrt.rin onlr' Rs.4.3 crores for parting with rhe conr r>lling interest in the said r.rnit in terms of the \'lcnrrr:nclum of Undentanding dated 17.08.1994, it is in.r'cdiLrie that the assessee received as much :rs Rs.E.l6 crores as non-competing fee in terms of the co\'('n.1nr dated 06.12.1994. Even conceding that rhe .1ssc'j\('(' hes acqtLired a new financial muscle on :rcc( lunr ,r[ s.rle oi 29.50 lakhs shares in quesrion. lnd also rir, crpcrtise ,lnd experienqe through the sening

:: l8:: up ol /CBL and *rere is a new policy of liberalisation in vogr.re rnaking licenses easier to obtain, it is Lnbelicvable thar the assessee and his cGpromorers could achieve norv in four lean what it took them 14 )c.lrs on the e.rrlier occasion, to not on-ly srafl a new unden;rking but to cause a *reat to M/s. Shaw \X/allace through such an undenaking. We have specifically queried the leamed counsel for the .]ssessee, during the course of hearing, on hov,. there is such a wide gap between the ostensible consideration paid by M/s. Shaw W'allace for acquidng controlling interest of CBL and the amounr ellegedly paid as non-competing fee for warding off a future potential threat from the assessee and others. \\re did not receive any convincing arswer. Fhs reply uas rh.rt it rvas a matter of agreement berween the penics and of the thrtat perceprions of M/s. Shau- \\'allace and at any rate the Revenue had no material to question the genuineness of the C,ovenant deted 06.12.1994. L+ also referred to the profit pro jections gii.en in the prospectus of GL and j ustif icd the agreement. It is incredible that M/s.Shaw \flallace thought it [it to p.rr'fu.8.26 crores to ward off a possible tfu-eat br- ..ev oi a nerv beer manufacturing unit in an trnspecified remote future, wherex it had to pa1. onli' Rs.4.l crores to acquire the controlling interest in rn I I

:: l9:: existing unit, which had gone into commercial production. The argument of the leamed cotLnsel tor the assessee that the projection ol proiits after ta-x ior the three years, 1993-94 to 1995-96, as appriscd br Ban-h of India, and mentioned in the prospectus issued on the eve of public issue b1- CBL :rs mentioned herein above, justified the consideration paid only adds support to the stand of the Revenuc that the entire consideration received inclui'e of the so-called non-competing fee of Rs.8.26 cror-es \ras only for acquiring the controlling interest in CBL as the company had that much value. The profits o1. CBL present or future, do not lend any sr.rppon to the non-competing agreement. Same is the posirion $ith r-egard to the possible loss of r',craltv income tcr lvl/s. Shaw \Wallace, if CBL shouid nrarket its onl brands and terminate the marketing :lnlrnqernellts. Flar.-ing obtained the controlling intercst in (lll.. ther have ensured their royalry income or its eqtLivelent and whyshould theyfunher pay non-compering fee ? The above factors, to our mind. do not lencl anr credence to the plea of the leamed counsel for th.' assessee that the amount of Rs.8.26 crol-cs \\'.r.s tonarrds non-competing fee on\,. and not tou'ard-s sale consideration for the shares agreed to be sold br tlre assessee and his co-promoten. \ \

i:20i: The so-callcd. correspondence errtercd into bytLe assessee on his behalf and on behali of his cc> promoters with M/s.Shaw \X/allace ro seftle the tenrx of the non-competing covenanr is, as uged b1'the Ieamed Depanmental Representati\€, totally a mrrke believe. The entire correspondence to our rnind makes a curious reading. V/e have alreadr. extracted it in extenso hereinbefore. It stans with the lener dated 10.11.1994 as of the nature of a normal business query from M/s. Shaw Wallace to the assessee, as to the future plans of the promotets. Ir states t}rat tle transaction of the sale oi sharcs has been corhpleted to mutual satisfiction ol both the panies, and so it would be appropriate that subsequent interest of both the panies ,rrc adequ.rteh' protected. In that context, it inquires uherhcr rhe promoters have any intention of emberking on a similar venture in the near futtLre. The letter pretencls that, as on this date rl;. 1C.l 1.199-+ ,\[/s. Shes. Wallace knew nothing and u'.rnted to know' if the promoters planned to embark on ;r similer tenturt. Irr the reply dated 15.11.199,1, :xscssee rppr-eci.t..s thc query regarding the commenccrnent of mr beer manufacturing unit byhim irnd nlcntror)s thai he had plans to set up a unit for the m.urufacttrre of aluminum carrs. FIe mentions thet altLnrinrun ..urs .1lc used for canrring beer. fruir juices ald other I

::2 I :: beverages and are cost effective and are also likely to have cormnerci;rl appeal. He also mentions that 'in a countrl' like India, s'here consumerism is stiil in its embryonic stage. i sincerely believe that there is very high potential for canned beer and x,'ith my past baciground in the manufacture and sale of beer, I cannot rule out the possibil,iry of mv re-entry into the field ol' manulacture and marketing of beer at an apprrcpriate time in iuture'. In its reply dated 18.11.1994. M,/s. Sharv \X/allace appreciates the decision of the assessee and its frank expression and in the interest o[ the btsiness of the group they required a firm commitrnent and ass urance by the assessee that he w'ould not either by himself or through his tricnds. xsociates etc. start any unit for the manul acture oi beer encl/or take up marketing of beer either produced bv strch units or by procurement from extemal sou(1'es. -['l-rt lcrter earrrestly requested the assessee to loin disctrssion on thc subject so as to amicabll' resohc the issue. In the subsequent lener dated 2+.11.i99-1. it is mentioned by M./s. Shaw Wallace thrrt cenain discussions were heid ot 22.11.199-l end rhe assessee had given his commitment for not c.uning on an]' manrrfacturing or m,rrketing ectivin' for a period of live yean from 08. 12.19')-l subicct ro rheir agreement for a compens:rtion o1 Rs.1 C crores. \\,'hi-le the company \

..)).. agreed that the coiisi.lcratiou u,x f air', considering the maintainable proirt of about Rs.220 lakhs per year which was apprrent irom the appraisal made by the Bank of [ndi;r, thc comp;rny uanted to make 'an ounce of modilication' to proposal. The company mentioned that. nhile the maintainable profia for *rc next five lean werc not disputed, t}re profit proiections should bc appropriately discounted to take into account thc tirne value of money. So M,/s.Shaw \X/allace urged the ,rssessee in the said letter. to agree to r lunp stLm consideration of Rs.8.26 crores. The letter ends rvith an expression of hope that the assessee nould asn:e to the offer, so that proper doculcnts could be clnnrr up to record the deal. fusesse.' endorued his acceptance to the compensrtion oi Rs.8.26 crorcs on the face of this letter irself. To otu- nrind, the arrificialin- oi the language used in this corres ponclenc.' is clident on its face. The entire exercise is to be seen in ilre Light of the same Rs.8.26 crores agrrcd upon .rs earlr'as on 17.08.1994, azi. the fint Mernor:urclun oi Unclentandrrg which came to be frled be[or.' th.' 'llibun.rl b1.the learned counsel ior the .usessee onh at the instance of the Bench. If this C,orrespond.'nie xere not there, one could h;rve possibll'given s,-rnre credt'nce to the story that the sunr of Rs.8.26 crores represented non- /I

..11.. .onrpetinq fee, as agreed in the Memorandum of Undr.rsr:rndinq dated U.ABJ994. \{hen the corrpensrrtion oi Rs.8.25 crores was first agreed upon rs c,u'iv rs on 12.08.1994, arrd subsequendy series of lettcrs u'erc erchanged, and a pretence of negotiations u'.rs enrctcd to culminate in the ultimate deed of .()\'r.narlr drtcd 06.12.1994, ir ;s evident that the pruposc ol this rvhole exercise was only to create a ir,-.a.1e rs held by rhe Revenue. The funher enension ol the sarne restdctive covenant beyond four lean ancl ir-rnher pa\'ments in that conte>rt could also be pert oi the srrme exercise. It is not clear how these p.r\rnents are made in pursuance of the original .rqreern!'nr d.rted 17.08.1994 when it allegedly stands strlrcri:edcd br- the covenant dated 16.12.1994 which (l()c\ n()r provide for enension of t]re covenant. At .rnv r?tc. t he ilrnher paymenrc are not an issue before u\ .rnd \\'(' nc!'d nor dwell upon them It ur;n' :rlso be noticed that in the first r))('rn()r.'rndurn cl.rted 17.08.1994, which we have ertr.rcteil hr'rtin above, in clause (2) thereof, it is nrcruionc.l th:rt the consideration for the purchase ol li).il l.rlihs shrres is (a) Rs.15l- per share palable bclrrre 1l \ovember 1,994 aad (b) lump sunr p;r\rnent ol 1L.8.26 crores ro be paid before l0''' \ovenrl,..r i 991. It is, oi course, metrtioned that the seiti 1',:rrrrcru oi Rs.8.26 crores is on account of non-

..-t i.. .orlpeting iee. llie aliiouiit of Rs.8.26 crores is descnbed as non-comperition fees and also as parr of consideration for the purchas e o{ 29.50 lakhs shares. So. from thc terms of the Memorandum coupled with the subsequent correspondence, r{rich we have refe rred to. it appean that the panies decided to split the sale consideration for 20,50,000 shares into two cornponents, ti<. Rs.15/- per share as sale consideration and Rs.8.26 crores working out to Rs.28/ per share branded as non-competition fee, as e arll- .rs on 17 .A8.1994. In pursuance of this decision, thev entered into subsequent correspondence to crerte an impression of negotiations and to give a colour of genuineness and arm's length trarsaction to the ltunp sunr pawnenr of Rs.8.26 crores in the form o[ non-competing fee, as distinct from simple consirleration for the sale of shares. Actuailr', it appean that this entire rax savhgs dcrice has been hit upon even before 17.08.1994,i.e., .*-hcn thc co-promoterr authorised the assessee to sell the l9,rC,COO shares on 15.06.L994 iaelf. We have aLcerh' extmcted the relevant portion of the said atnhortation. It may be observed that in this .iutlrorisation itself, the co-promorers have visualised a c,rntingencr that the purchaser m(ht irnpose a condirion th.rt " r.r,.e should not do any business of similer nattrre' and so thev had authorised the I

::25:: assessee "to negotiate and colect lump sum fee as compensation for restraint of similar business" E v'idently, the associates of the xsessee had lot o[ foresight ! It is also wonh noticing that the ;rmol,nt of Rs.8.26 crores had been distributed benveen the co- promoters in proponion of their share- holding, which would be the case only if it was pan ol' the sale consideration. There are as man)' as 109 co-promoten and it is incredible that .r[1 the co- promoterc are equally talented to set up a beer manufacturing unit and so, they received ar-rd becanre entitled to a share in the non-competine fee in proponion to their share in the block of sh,rres agreed to be sold. If expenise and t,rlent ire the crterion for the receipt of non-competirrq [ee, the shares in non-competing fee o[ the cGplornotels .ln(l associates cannot be in proponion to rhrir- shan' holding. We also find force in the contenrion o[ the Ieamed Departmental Representati'e rh;rt thc covenanr dated 06.12.1994 contains no penaltr-clru.c for pre- marure termination of the agreem.'nr. -Ihis is possible only if, as we understand, the so-celled non- competing fee is only pan of the compens.tion pairl by M/s. Shaw Wallace for the sharts .rcquired l,r' thern. Flaving purchased the shares, thcv h,rr-e no nrore interest in the terminat ion or non-t('rmin.ltron

::26:: o[ the non-competing agreenrent, and so, thev did not bother to include a penalry clause, applicable in the event o[ premature termination. 24. Thereafter, Tribunal took the viev, that pil)4nr'ni of non- competing fees covering anyterrns of agreement dated 06.12.1994 rras only pan of the sale consideration for transfer ol ]9.50 l;rkh shares sold to S\flG The entire affair uas preplanned; Sale consideration was divided into two components; on(' cornponent of Rs.iSl- per share as per ruling market price ancl the other component represented by non-competing fee ol' Rs.28/- per share; whatever be the anificial division, both th.' components represented sale corsideration for the transicr ol sh,rres. 'lhereiore, the finding of the revenue authoritir.s trcirtinq tlie sale consideration @ Rs.43/ - per share for ri'orking olrr rhc cr;rital gains on the sale of shares transferred by the ,rsscsscc- s'rs rrplrtl.l. 2-5. However, on the question as to u-hcthcr rsscssce r.as liable to capital gains tax in respect of the entirc sh'rrr- holtling of 86,0C0 shares or onlyin respect of 11,100 shares. Tribr.Lr.rel hcld rs [olloris:

::27 ii Ve accordingllr hold drat the capital gains tax cannot be levied in the assessrnent lear r-rnder appeal ir relation tt, th* shares under lock-in-penotl .rn,l/ol rrnder pledge. In other u.ords, the capirrrl g:rins trx can be levied only in relation to 11,100 shares as di-sck>sed b1'the assessee and not on 85,100 shares as done by the assessing officer. On the balance oi 25,000 sharcs of rhe a-ssassee under lock in-period and/or pledgc. the Revenue is free ro lery capital gairu ta.t in the relevlrnt lear, aiier the expiry of lock- rn- period or after thc no-objecrion cenificate has been received from thc SEBI and,/or aJter the pledge is released. In relation to the ll.l00 sh:rres held as sold during the year urder appeal, rhe Revenue is )ustified in adopring the sale consider;rrion of fu.+l/- per share. 26. Setting aside the orrlers c,i thc lo',rer re\-enue authorities, the matter was rcm..lnded back to tl'rc Ass.-ssinq C)fficer to recompute capitalgains on 11,100 shari:s (D lls.1ll- pershare. 27. On careiul consideration trl. thc order passed bythe Tribunal as discussed above, u'e do not lincl ;rnv eror or inJinnirv in the approach adopted b1-the Tril,un.rl to uamrnt inter-ference under Section 260-A of the Act. ()n rhc point of quantificadon of the rice @ Rs.4ll- per slr.1n.. rhcre is conclrrent finding of fact s

::2ll: : by che original authoriry as r,,,cII as by two lorver appellate authorities, which we are not incline'd to intertere u.ith at this stage. 28. Insofar the decisions relicd upon by leamed counsel for the appellant, in CIT v. Usha Saboo (1 supra), v',hich was an appeal fiied by the revenue, PLrnjab and Hrrrrana I lgh Crun took the view that the questions raised uerr qtrc'stions oi fact. Ali the grounds urged by the revenue lere re jecterl br.the said Flgh Coun and the order of the Tribunal r.ras affinlc,-l. 29. In Shiv Raj Gupta v. CIT (J supra), the questions before the Bombay Flgh C-oun in thc .ippc,rl under Section 260A of the Act were as [ol[ous: (A) \X,hether the iTAl' hrs contctlv intelpreted the provisions oi Section -28(ii) of the Income Tax Act, 1961? (B) \X.4rether the ITAT \\'i1s cor-recr in hoiding that receipt o[ Rs 6.6 crores by rhe r espondent- assessee as non-competitive fee ',r'rs .r cepit:rl receipt under Section 28(n) of the Inconre Tes Act and not a revenue receipt as envisagecl il Sectirx 28(i.i) of the ITAct ?

::29 i (Q \Mrethcr the ITAT failed to distinguish between natu, c of capital ard natwe of benefit in commercial serue in respect of amount of Rs 6.6 crores received in r.ierv of rcstrictive covenant of deed d.ted ll-4-lv'r+ ) (D) \\4rerher rhe leamed Judicial Member of TTAT \\'as conecr in recording his difference of opinion drat receipt of Rs 6.6 crores by respondent-assessee was actualh' a colourable exercise to evade tax and same rvas held to be ta-rable under Section 28(if of the Income T:x Act ?" 30. It u'i',s in the context oi the above questions that the Bombay Flgh (bLrrt rctrLmerl th.' finding that the deed of covenant could not be read as a sepilrite rlocument; it was not in its real avatar; and it r.ras in l:act not on non-competing fee at all. Bombay F[gh (i>un senr c,n to hokl that Rs.6.6 crores could not be brought to tax r,mder Section 28(ii)(c) oi the Act, but would have to be treated as a texable capirirl g.rin in the hands of the appellant being pan ol iull vallre of the sale corrsicleration paid for transfer of shares. Ot] the abor.r iactual b.rcktlrop, Supreme Court reiterated the proposition thilt coinnrcrciel expediency has to be adjudged from the point oi vie.r- of thc .rsse ssee . Income Tax Departmenr cannor l i I

::30:: enter inio the thicket oi reasonabletess of the amounts paid by the assessee. 31. Ti.re aforesaid decision of the Supreme C-ourt is clearly distinguishable on the facts of the present case That apart, Tribural has given adequate reasons as to w{ry it had agreed with the computation rnade by the assessing officer quantifying sale consideration @ Rs.43/- per share, which was affirmed bythe first appeliate authoritr,. 32. That apan. as xr have seen from the order of the TribLrnal, the nratter u'as ren'randed back to the assessing officer for re-compurrrion oi capital gains. This order is dated 3L.12.2AA1. T.,r-enrr.'one rears har.e gone-by since then without any stay by this C-orLn. Wc do not know about the status of the subsequent assessrnent order passed iollowing remand. In the circumstances, rle reir-ain irom inte rlering in the appeal. ll. ,,\ppeal is accordinglydismissed. No costs. I , I i

::3 l:: As a seqr-re1, miscellaneous petitions, pending i[ any, stand dismLssecl. SD/. K. SRINIVASA RAO //TRUE COPY/ I JOINT REGISTRAR SECTION OFFICER To, 1. The lncome Tax Appellate Tribunal , Hyderabad Bench B, Hyderabad. 2. The .Ioinl Commissioner of Income Tax ,, Range - \'1, Iluddha llhar.an. Secunderabad. 3 One CC to SRI CHALLA GUNARANJAN Advocate [OpUCj 4 One CC to Ms. K. MAMATHA CHOUDHARY, Senior-SC for't T Dpet 5. Two CD Copies 6. One Spare Copy \\ \ I

HIGH COURT DATED:0710W2A22 1I'E ST4 >.- ai \a 7 ] ,Tl 2927 JUDGMENT ITTA.No.S7 ot 2002 DISMISSING THE ITTA WITHOUT COSTS ^*6'2 /4\