Consideration bifurcated for negative covenants in share purchase agreement is not chargeable to tax
Case Law Details
Punjab & Haryana High Court held In the case of CIT vs. Smt. Usha Saboo that although the agreement did not bifurcate the consideration towards the various covenants in the agreement, the assessee was entitled to bifurcate the same and apportion a part thereof towards the negative covenants. The matter in our view is covered in the respondents’ favour by the judgment of the Supreme Court in the case of Commissioner of Income Tax, Madras v. Best and Co. (Private) Ltd. 1966 Income Tax Reports (60) 11. This is also the view taken by several other High Courts. On facts we have held that the amount of 100/- out of 400/- apportioned towards the negative/restrictive covenants was infact on the conservative side.
Facts of the Case
Groz Beckert Saboo Ltd. was a joint venture between the assessee i.e. Saboo group and M/s Theodor Groz & Sohne & Ernst Beckert Nadelfabrik Commandit Gesellschaft, a partnership firm in Germany (Groz Beckert group). The Saboo group and Groz Beckert group held 40% and 60% shares of the equity capital of Groz Beckert Saboo Ltd. respectively. Disputes arose between two groups leading to the Saboo group filing a petition for oppression and mismanagement under sections 397 and 398 of the Companies Act, 1956. The petition was dismissed. The Saboo group filed an appeal under section 10F of the Companies Act, 1956 before Delhi High Court. The matter was ultimately settled in terms of a Share Purchase Agreement dated 21.01.1993. Rs. 400/- was stated to be the consideration for the sale of all the shares held by the Saboo group to the Groz Beckert group. The agreement also contained restrictive/negative covenants given by the Saboo group. The respondents contended that they were entitled to apportion a sum of Rs. 100/- out of Rs. 400/- as consideration for the negative covenants. This claim was rejected by the Assessing Officer and the C.I.T. (A) but was allowed by the order of the ITAT.
Contention of Assessee
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