Sterling Rerolling Mills (P.) Ltd. v. Asstt. CIT

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The Tax Publishers2013 TaxPub(DT) 0475 (Mum-Trib) : (2013) 049 (II) ITCL 0384 INCOME TAX ACT, 1961 --Head of income--Business income or capital gains Non-compete fees received on saled of shares--Assessee-companies were promoters of company 'D' and were holding 52.60 per cent shares of the said company. They transferred their shares and controlling interest in company 'D' to a third party. Apart from sale consideration of shares, they received certain sum on account of non-compete fees and the said amount was considered by assessees as part of the sale consideration for transfer of shares. Assessing officer held that the said non-compete fees constituted business income chargeable under section 28(va). Commissioner (Appeals) treated the same as capital gain chargeable under section 45. On appeal before Tribunal, assessing officer submitted that if the compensation is paid for 'not carrying out any activity in relation to any business', which the transferor is not carrying on, the same would be chargeable under section 28(va)(a). If a receipt is considered as payment for not carrying on business which the transferor is already carrying on then it would be regarded as capital gain, being transfer of a capital asset viz., right to carry on business. Since the person who was carrying on the business was company 'D' which was transferor of the business and the assessee companies were only associated with the transferor-company 'D' being promoters/shareholders, accordingly, assessees were not carrying on the business, therefore, the non-compete fees received by them was chargeable to tax as 'business income'. Assessees submitted that they were having controlling interest in company 'D' and they were not the persons associated with the transferor but they themselves were the 'transferor' consequently, the sum received by them, being the transferor for not carrying on the business which they were already carrying on would be regarded as capital gain. *Held:* If the transferor is not already carrying on business then what he receives as non-compete fees is the consideration only for 'not carrying out any activity in relation to any business', which would be covered by the provisions of section 28(va) with effect from 1-4-2003. Since the transferor of the business was company 'D' which was actually in the business therefore, the payment of non-compete fees to the assessee-companies viz., promoters/shareholders by the party taking over the company would be chargeable as business income under section 28(va). Income Tax Act, 1961, Section 28(va) Income Tax Act, 1961, Section 45 INCOME TAX ACT, 1961 --Capital gains--Transaction regarded as transfer under section 47(iv)Transfer of shares at face--Assessee claimed value loss on account of sale of shares of company 'S'. It furnished relevant details showing that those shares were sold, at face value, however, it could not satisfactorily explain the reason for selling the shares at face value. It was only explained that the said shares were transferred as a part of the family settlement between the two groups of the family who were holding shares in the various group companies. In the absence of relevant details and documents, assessing officer held that transfer of shares at face value as a part of the family settlement could not be regarded as 'transfer' and invoking the provisions of section 47(iv), he disallowed the loss by treating the same as a notional loss. On appeal before Commissioner (Appeals), assessee submitted that the shares of the company 'S' were not sold at market price and the valuation report of the CA indicated that the said company had no reserves and was a loss making BIFR company. Assessing officer submitted that the net worth of the said company was not negative as the said company had issued right shares at Rs. 25 per share Commissioner (Appeals) confirmed the disallowance made by assessing officer. On appeal before the Tribunal, assessee submitted that Commissioner (Appeals) was not justified in assuming that the net worth of the said company was not negative by relying on the share price of right issue. Assessee further submitted that it was also not a case of transfer of shares by assessee to its subsidiary company and assessing officer, therefore, was not justified to invoke the provisions of section 47(iv) to treat the loss claimed by the assessee as a 'notional loss'. *Held:* Since assessee had placed documentary evidences to show that the net worth was negative at relevant time and said company was referred to BIFR, therefore, matter was remitted back for deciding the issue in the light of submission made by assessee and documentary evidences placed on record. SUBSCRIBE FOR FULL CONTENT

The Tax Publishers2013 TaxPub(DT) 0475 (Mum-Trib) : (2013) 049 (II) ITCL 0384

INCOME TAX ACT, 1961

--Head of income--Business income or capital gains Non-compete fees received on saled of shares--Assessee-companies were promoters of company 'D' and were holding 52.60 per cent shares of the said company. They transferred their shares and controlling interest in company 'D' to a third party. Apart from sale consideration of shares, they received certain sum on account of non-compete fees and the said amount was considered by assessees as part of the sale consideration for transfer of shares. Assessing officer held that the said non-compete fees constituted business income chargeable under section 28(va). Commissioner (Appeals) treated the same as capital gain chargeable under section 45. On appeal before Tribunal, assessing officer submitted that if the compensation is paid for 'not carrying out any activity in relation to any business', which the transferor is not carrying on, the same would be chargeable under section 28(va)(a). If a receipt is considered as payment for not carrying on business which the transferor is already carrying on then it would be regarded as capital gain, being transfer of a capital asset viz., right to carry on business. Since the person who was carrying on the business was company 'D' which was transferor of the business and the assessee companies were only associated with the transferor-company 'D' being promoters/shareholders, accordingly, assessees were not carrying on the business, therefore, the non-compete fees received by them was chargeable to tax as 'business income'. Assessees submitted that they were having controlling interest in company 'D' and they were not the persons associated with the transferor but they themselves were the 'transferor' consequently, the sum received by them, being the transferor for not carrying on the business which they were already carrying on would be regarded as capital gain. Held: If the transferor is not already carrying on business then what he receives as non-compete fees is the consideration only for 'not carrying out any activity in relation to any business', which would be covered by the provisions of section 28(va) with effect from 1-4-2003. Since the transferor of the business was company 'D' which was actually in the business therefore, the payment of non-compete fees to the assessee-companies viz., promoters/shareholders by the party taking over the company would be chargeable as business income under section 28(va).

Income Tax Act, 1961, Section 28(va)

Income Tax Act, 1961, Section 45

INCOME TAX ACT, 1961

--Capital gains--Transaction regarded as transfer under section 47(iv)Transfer of shares at face--Assessee claimed value loss on account of sale of shares of company 'S'. It furnished relevant details showing that those shares were sold, at face value, however, it could not satisfactorily explain the reason for selling the shares at face value. It was only explained that the said shares were transferred as a part of the family settlement between the two groups of the family who were holding shares in the various group companies. In the absence of relevant details and documents, assessing officer held that transfer of shares at face value as a part of the family settlement could not be regarded as 'transfer' and invoking the provisions of section 47(iv), he disallowed the loss by treating the same as a notional loss. On appeal before Commissioner (Appeals), assessee submitted that the shares of the company 'S' were not sold at market price and the valuation report of the CA indicated that the said company had no reserves and was a loss making BIFR company. Assessing officer submitted that the net worth of the said company was not negative as the said company had issued right shares at Rs. 25 per share Commissioner (Appeals) confirmed the disallowance made by assessing officer. On appeal before the Tribunal, assessee submitted that Commissioner (Appeals) was not justified in assuming that the net worth of the said company was not negative by relying on the share price of right issue. Assessee further submitted that it was also not a case of transfer of shares by assessee to its subsidiary company and assessing officer, therefore, was not justified to invoke the provisions of section 47(iv) to treat the loss claimed by the assessee as a 'notional loss'. Held: Since assessee had placed documentary evidences to show that the net worth was negative at relevant time and said company was referred to BIFR, therefore, matter was remitted back for deciding the issue in the light of submission made by assessee and documentary evidences placed on record.