Shri K. Srikanth Vs ACIT (ITAT Chennai)
Conclusion: Reassessment was justified by the income tax department against former Indian Cricket Team Captain Krishnamachari Srikanth and non compete fee of Rs. 7.50 crores was exempt from tax being capital receipt; payment of Rs. 4.25 crores was made by assessee to ‘Indian Bank’ to settle loan availed by ‘Aditya Leather Exports Private Limited’ which was in default , out of non compete fee earned by assessee assessee was not entitled for deduction by way of diversion by overriding title as there was no charge held by ‘Indian Bank’ and there was merely a compromise entered into by assessee with Indian Bank voluntarily to pay defaulted loans availed by said ‘Aditya Leather Exports Private Limited’ .
Held: Assessee was engaged in the business of modelling, cricket commentary, journalism, consulting and BPCL dealership. Assessee was a renowned cricketer of international fame and was at one point of time part of Indian/National Cricket team and later also rose to become Captain of Indian Cricket Team. Appeal revolved around taxability of gains arising from sale of share of the Company ‘Kris Srikkanth Sports Entertainment Private Limited’ held by assessee and his minor sons , to three entities belonging to Pentamedia Group of Concerns and the alleged claim of the assessee that it entered into non-compete agreement with these purchasing entities and an amount of Rs. 7.50 crores was received towards non-compete fee by assessee for not competing with these entities for a period of six years and the same could not be brought to tax for impugned ay:2001-02 as amendment in Section 28 of the 1961 Act wherein clause (va) was inserted by Finance Act, 2002 w.e.f. 01.04.2003. Further there was a claim of the assessee that income to the tune of Rs. 4.25 crores being allegedly diverted by overriding title to ‘Indian Bank’ owing to bank loan availed by a company namely ‘Aditya Leather Exports Private Limited’ in which the assessee was Director and also guarantor for the said loan which claim of deduction was repelled by Revenue. Further, assessee was also claiming that assessee only received Rs. 12 crores under the agreement as against stated consideration of Rs. 15 crores and an amount of Rs. 3 crores was never realized by the assessee and hence same could not be brought to tax. Thus, all these appeals were heard together and were adjudicated by common order. AO observed that these claims of assessee were found to be not correct and hence in view of AO the income of assessee had escaped assessment hence concluded assessment were reopened by issuance of notice u/s.148. AO observed that assessee had received a sum of Rs. 7.5 Crs. allegedly to compensate loss of the assessee as he was asked not to compete with company to whom the shares of the assessee and his minor children’s were sold . But AO was not satisfied with clauses in the agreement filed by assessee as there was no specific clause in agreements as to what assessee was doing earlier and also that it was not indicated as to what were the present activities of the company which purchased the shares. AO also observed that mere made to believe agreements were entered into by assessee with Pentamedia Group Concerns to enable recipient of the money to avoid tax on the same and there was no specific restriction on assessee to do professional activity parallel with the company. The second issue was with respect to receipt of Rs. 4.25 crs. which was claimed by assessee to have been paid to the Indian Bank for clearing bank dues AO observed from the details furnished by assessee that the amount has not gone directly to the Indian bank and amount was received by assessee and thereafter it was utilized by assessee for paying to the banker to discharge his liability and hence the same could not be called as diversion of income by overriding title. AO observed that these receipts by assessee from the company could not be said to be diverted by overriding title. It was observed by AO that there were some dues payable to Bank by one company namely ‘Aditya Leather Exports Private Limited’ in which assessee was Director and the bank had attached his shares of other companies also. AO observed that these dues were with reference to other companies and not in individual capacity of the assessee and hence there is no overriding title under which the assessee has not received the money. It was held that reopening of concluded assessment by AO invoking provisions of Section 147 was justified. The sale consideration of Rs. 7.50 crores was duly received for sale of shares of ‘Kris Srikanth Sports Entertainment Private Limited’ which was to be brought to tax under provisions of 1961 Act including Section 60-64 of the 1961 Act. Non compete fee of Rs. 7.50 crores was exempt from tax being capital receipt; payment of Rs. 4.25 crores was made by assessee to ‘Indian Bank’ to settle loan availed by ‘Aditya Leather Exports Private Limited’ which was in default , out of non compete fee earned by assessee which already held to be exempt from tax and now it was academic whether there was any diversion of income by overriding title or not. In any case for completeness, assessee was not entitled for deduction by way of diversion by overriding title as there was no charge held by ‘Indian Bank’ and there was merely a compromise entered into by assessee with Indian Bank voluntarily to pay defaulted loans availed by said ‘Aditya Leather Exports Private Limited’ . Thus, the payment to Indian Bank was merely an application of income and that too of an exempt income; the question of taxability of Rs. 3 crores which was not received by assessee was again an academic question as already held that this non receipt of Rs. 3 crores was on account of non compete fee which was held to be exempt income.
FULL TEXT OF THE ITAT JUDGEMENT
These four appeals filed by assessee as well Revenue are all for assessment year 2001-02 and are taken up together as common issues are involved in these four appeals and hence these appeals were heard together and are disposed off by this common order. The appeal in ITA no. 1015/Chny/2012 is an assessee’s appeal while appeal in ITA no. 1324/Chny/2012 is Revenue’s appeal, and these cross appeals are both for ay: 2001-02 against appellate order dated 27.03.2012 passed by learned Commissioner of Income-tax(Appeals)-III, Chennai (hereinafter called “the CIT(A)”) , the appellate proceedings before learned CIT(A) has arisen from an assessment order dated 31.12.2008 passed by learned Assessing Officer (hereinafter called “the AO”) u/s 143(3) read with Section 147 of the 1961 Act. . The appeal in ITA no. 307/Chny/2010 is filed by assessee against an revisionary order dated 22.01.2010 passed by learned Commissioner of Income-tax, Chennai-I, Chennai u/s 263 of the Income-tax Act,1961 for ay: 2001-02 holding that re-assessment framed by learned Assessing Officer u/s 143(3) read with Section 147 of the 1961 Act , vide reassessment order dated 31.12.2008 is erroneous so far as prejudicial to the interest of Revenue for reasons stated therein in the revisionary order. The appeal in ITA no. 1016/chny/2012 is filed by assessee for ay: 2001-02 which has arisen from appellate order dated 27.03.2012 passed by learned CIT(A) , which appeal has arisen before learned CIT(A) from consequential assessment order dated 08.11.2010 passed by AO u/s 143(3) read with Section 263 of the 1961 Act.
2. The grounds of appeal raised by assessee as well Revenue in memo of aforesaid appeals filed with Income-Tax Appellate Tribunal, Chennai (hereinafter called “the Tribunal”) with respect to all these four appeals for ay: 2001-02 , read as under:-
a) Grounds in ITA No.1015/Chny/2012 for ay: 2001-02(Assessee’s Appeal)
“1. The order of The Commissioner of Income Tax (Appeals) III, Chennai – 600 034 dated 27.03.2012 in I.T.A.No.420/08-09/A.III for the above mentioned Assessment Year is contrary to law, facts, and in the circumstances of the case.
2. The CIT (Appeals) erred in sustaining the re-assessment framed for the above mentioned Assessment Year without assigning proper reasons and justification.
3. The CIT (Appeals) failed to appreciate that the re-assessment under consideration was passed out of time, invalid, passed without jurisdiction and not sustainable both on facts and in law.
4. The CIT (Appeals) failed to appreciate that there was absolutely no ‘reason to believe’ on the escapement of income in the recording of reasons while assuming jurisdiction u/s 147 of the Act and consequently ought to have appreciated that the consequential framing of the re-assessment was wrong, incorrect, unjustified, erroneous and not sustainable both on facts and in law.
5. The CIT (Appeals) went wrong in recording the findings in this regard in para 5 of the impugned order without assigning proper reasons and justification.
6. The CIT (Appeals) erred in sustaining the recomputation of Long Term Capital Gains arising or accruing as a result of sale of shares in so far as the exclusion of the garnishee payment from the cost of acquisition/cost of improvement/expenses incurred in relation to transfer without assigning proper reasons and justification.
7. The CIT (Appeals) failed to appreciate that the recomputation of Long Term Capital Gains arising or accruing as a result of sale of shares in so far as the exclusion of the garnishee payment from the cost of acquisition/cost of improvement/expenses incurred in relation to transfer was wrong, incorrect, unjustified, erroneous and not sustainable both on facts and in law,
8. The CIT (Appeals) failed to appreciate that the discharge of encumbrance/lien was erroneously included as part of sale consideration and ought to have appreciated that in the light of the decision of the Jurisdictional High Court referred to, such exclusion in the computation of Long Term Capital Gains was sustainable in law.
9. The CIT (Appeals) went wrong in recording the findings in this regard in paras 7.3 & 7.3.1 of the impugned order without assigning proper reasons and justification.
10. The CIT (Appeals) failed to appreciate that the scope of section 48 of the Act was not considered while erroneously sustaining the exclusion of the garnishee payment to Indian Bank in the computation of Long Term Capital Gains and further ought to have appreciated that the evidence placed on record clearly demonstrated the fact of encumbrance as well as the fact of such payments directly made to M/s Indian Bank.
11. The CIT (Appeals) failed to appreciate that the theory of diversion by overriding title even though brought to his notice as well as in the assessment proceedings, non consideration of the said legal theory to the facts of the case would vitiate their action in re-computing Long Term Capital Gains.
12. The CIT (Appeals) failed to appreciate that there was no proper opportunity given before passing the impugned order and any order passed in violation of the principles of natural justice is nullity in law.
13. The CIT (Appeals) failed to appreciate that the recomputation of Long Term Capital Gains in any event was wrong, incorrect, unjustified, erroneous and not sustainable both on facts and in law.
14. The Appellant craves leave to file additional grounds/arguments at the time of hearing.”
b) Grounds in ITA No.1324/Chny/2012 for ay: 2001-02(Revenue’s appeal)
“The order of the Learned CIT(Appeals) is contrary to law and facts of the case.
1. The Learned CIT(Appeals) erred in deleting the non compete fee of Rs.7.5 crores treated as sale consideration received in respect of sale of shares by the Assessing Officer;
2.1 The Learned CIT(A) ought to have appreciated the fact that the assessee did not show any evidence other than the Memorandum and Articles of Association of Krish Srikanth Sports Entertainment P Ltd., and there was no specific clause in the agreement regarding the nature of activities carried out by the assessee and the activities which the assessee was refrained from carrying out in future;
2.2 It is submitted that the assessee had been appointed as Director in the Penta Media Group of Companies (Tarachantini Financial Services, ABN Services P Ltd., Foresee Financial & Consultancy P Ltd.) to which the shares of KSSEPL were sold by the assessee;
2.3 The CIT(Appeals) ought to have appreciated the fact that the investment made by Penta Media Group in KSSEL was stated to be Rs.45 crores and it was a joint venture initially promoted by the assessee and the proposal was to build a sports complex as annexe to Mayajaal and Mayajaal Complex was promoted for indoor entertainment and the sports complex was proposed as outdoor entertainment as on 31.03.2005;
2.4 It is submitted that the factual position as on 31.03.2005 proves that as agreed between the parties, the assessee was not refrained from carrying out any activity since he was appointed as one of the Directors of the said company to carry out the Proposal of Sports Complex at Mayajaal and entered into a Joint Venture Agreement with Penta Media, which clearly shows that the assessee within a period of six years engaged in the business activity;
2.5 The CIT(Appeals) ought to have appreciated the fact that the impugned amount was only part of sale consideration received in the form of non-compete fee liable for long capital gains.
2.6 It is submitted that the non compete fee was only a nomenclature to avoid tax as held in the Apex Court’s decision in the case of S.A. Builderes reported in 288 ITR 1.
2.7 It is submitted that the decision relied upon by the CIT(A) in the case of M/s Guffic chem Pvt. Ltd vs CIT (332 ITR 602) cannot be applied to the facts of the case since the issue is not whether to treat the non compete fee as capital or revenue receipt.
3. For these and other grounds that may be adduced at the time of hearing, it is prayed that the order of the Ld.CIT(A) may be set aside and that of the Assessing Officer may be restored.”
c) Grounds in ITA No.307/Chny/2010 for ay: 2001-02(Assessee’s appea)
“1. The order of The Commissioner of Income Tax, Chennai-I, Chennai – 600 034 dated 22.1.2010 in C.No.218(36)/CIT-l/263/2009-10 for the above assessment year is contrary to law, facts, and in the circumstances of the case.
2. The CIT erred in passing the order u/s 263 of the Act in directing the Assessing Officer to re-examine the computation of Long Term Capital Gains as well as to reexamine the eligibility of the deduction u/s 54F of the Act without assigning proper reasons and justification.
3. The CIT failed to appreciate that the jurisdiction assumed u/s 263 of the Act on the facts of the case was wrong, incorrect, unjustified, erroneous and not sustainable both on facts and in law.
4. The CIT failed to appreciate that hence the order under consideration was passed out of time, invalid, passed without jurisdiction and not sustainable both on facts and in law.
5. The CIT failed to appreciate that in any event the findings on the adoption of sale consideration in the computation of Long Term Capital Gains were wrong, incorrect, unjustified, erroneous and not sustainable both on facts and in law.
6. The CIT failed to appreciate that in this regard the reply dated 5.11.2009 was not taken into consideration in proper perspective inasmuch as non realization of the amount of Rs.3 Crores on the facts of the case ought to have been taken note of and further ought not to have been tinkered with in the assumption of jurisdiction of revisional powers in the passing of the impugned order.
7. The CIT failed to appreciate that the findings recorded in this regard in para 3 of the impugned order were wrong, incorrect, unjustified, erroneous and not sustainable both on facts and in law.
8. The CIT failed to appreciate that the Doctrine of Merger on the facts of the case was totally brushed aside and hence the order under consideration was erroneous and invalid.
9. The CIT failed to appreciate that in the process of directing the Assessing Officer to adopt the sale consideration at Rs.15 Crores in the computation of Long Term Capital Gains, the principles of ‘diversion of income by overriding title’ was totally brushed aside and overlooked in giving such direction in the impugned
10. The CIT failed to appreciate that the direction to examine the correctness of the claim of deduction u/s 54F of the Act in the computation of Long Term Capital Gains was wrong, incorrect, unjustified, erroneous and not sustainable both on facts and in law.
11. The CIT failed to appreciate that the deduction u/s 54F of the Act in the computation of Long Term Capital Gains was correct and proper and further failed to appreciate that the said claim was correctly accepted in the scrutiny
12. The CIT failed to appreciate that in any event the re-assessment order dated 12.2008 was subjected to the extra ordinary jurisdiction of the Madras High Court under Article 226 of the Constitution of India and the Writ Petition filed to challenge the reopening proceedings on the facts and in the circumstances of the case is still pending for decision.
13. The CIT failed to appreciate that in the light of the above fact and in the light of the interim order(s) passed by the Hon’ble High Court in W.P.No.49683/2006, the order of revision under consideration was bad in law.
14. The CIT failed to appreciate that there was no proper opportunity given before passing the impugned order and any order passed in violation of the principles of natural justice is nullity in law,
15. The Appellant craves leave to file additional grounds/arguments at the time of hearing.”
d) Grounds in ITA No.1016/Chny/2012 for ay: 2001-02(Assessee’s Appeal)
“1. The order of The Commissioner of Income Tax (Appeals) III, Chennai – 600 034 dated 27.03.2012 in I.T.A.No.283/10-11/A.III for the above mentioned Assessment Year is contrary to law, facts, and in the circumstances of the case.
2. The CIT (Appeals) erred in sustaining the order giving effect to the revision order passed by the CIT for re-computing the Long Term Capital Gains arising or accruing as a result of transfer of shares without assigning proper reasons and
3. The CIT (Appeals) failed to appreciate that the determination of sale consideration at Rs.15 Crores as against the determination of sale consideration as Rs.12 Crores in the computation of Long Term Capital Gains was wrong, incorrect, unjustified, erroneous and not sustainable both on facts and in law.
4. The CIT (Appeals) failed to appreciate that having not disputed the fact of non receipt of Rs.3 Crores from the transaction under scrutiny, inclusion of the said amount as part of the sale consideration in the recomputation of Long Term Capital Gains was wrong, incorrect, unjustified, erroneous and not sustainable both on facts and in law.
5. The CIT (Appeals) failed to appreciate that the order of revision passed by the CIT u/s 263 of the Act has not become final and ought to have appreciated that the further appeal against the said revision order is pending before the ITAT, Chennai Bench for decision.
6. The CIT (Appeals) failed to appreciate that having not cross verified with the purchasers, inclusion of the said amount of Rs.3 Crores as part of the sale consideration in the recomputation of Long Term Capital Gains was erroneous and invalid.
7. The CIT (Appeals) went wrong in recording the findings in this regard in para 5 of the impugned order without assigning proper reasons and justification.
8. The CIT (Appeals) failed to appreciate that the appeal proceedings being legally considered as continuation of assessment proceedings, the non consideration of the correct facts in the said Appellate Proceedings would vitiate his action in sustaining the adoption of sale consideration as Rs. 15 Crores as against Rs.12 Crores in the recomputation of Long Term Capital Gains.
9. The CIT (Appeals) erred in sustaining the levy of interest charged u/s 234A, 234B and 234C of the Act in the computation of taxable total income without assigning proper reasons and justification.
10. The CIT (Appeals) failed to appreciate that there was no proper opportunity given before passing the impugned order and any order passed in violation of the principles of natural justice is nullity in law.
11. The Appellant craves leave to file additional grounds/arguments at the time of hearing.”
3. Since common issues are involved in all these four appeals , these appeals were heard together and are now disposed off by this common order.
4. First we will take up cross-appeals filed by assessee and Revenue in ITA 1015/Chny/2012 & in ITA No.1324/Chny/2012, both for ay: 2001-02. Briefly stated facts of the case are that the assessee is engaged in the business of Modelling, Cricket Commentary, Journalism and Consulting & BPCL Dealership. The assessee filed his return of income with Revenue for impugned ay: 2001-02 on 28.03.2002 , declaring an income of Rs. 20,42,510/- . The said return of income was processed by Revenue u/s.143(1) of the 1961 Act and admittedly no scrutiny assessment u/s 143(3) of the 1961 Act was originally framed by Revenue.
The AO observed from enclosures of the return of income filed by assessee with Revenue that assessee has sold shares held in his name, minor children and wife, during the impugned year under consideration. It is stated that the amounts transacted as Restricted covenants arises on the course of sale of shares and hence the same cannot be claimed to be independent of the transaction to be allowed as an exempted income under the provisions of the 1961 Act or capital receipt not chargeable to tax. The AO observed that the assessee has not offered Rs. 4.25 Crs. from the sale proceeds of the shares claimed it to be payment towards overriding garnishee attachment on the shares by Indian Bank . The AO observed that it is not an encumbrance attached to the shares.
The AO observed that the assessee has sold his shares as well shares of his minor children’s and wife’s shares in Kris Srikkanth Sports Entertainment Private Ltd. To Pentamedia Group Concerns. The gist of agreement and the amount received by assessee are reproduced as under:
“Agreement I. As per the agreement, the assessee entered into an agreement with M/s. FORSEE FINANCIAL AND CONSULTANCY SERVICES PRIVATE LIMITED, No.1, Ramakrishna street, 7th Floor, T. Nagar, Chennai-17. The purchaser propose to purchase 1/3rd of issued, subscribed and paid up shares in KRIS SRIKKANTH SPORTS ENTERTAINMENT PRIVATE LIMITED, (Formerly known as A.A. International Private Limited) from the various shareholders in their name.
The company was promoted by the assessee who had necessary expertise and contacts relating to the said business and the business,of the company was wholly promoted and developed by the assessee.
As per the agreement, the assessee shall not carry on either by himself or in association with any other person or persons or associate or involve directly or indirectly with any other company, firm or person in a business similar to that carried on by M/s. KRIS SRIKKANTH SPORTS ENTERTAINMENT PRIVATE LIMITED, for a period of 6 years.
In consideration of the above agreement, the purchaser has paid a sum of Rs.2. 5 crore (Rupees Two Crores and fifty Lakhs only).
Agreement 2. The assessee entered into an agreement with M/s. TARACHANTHINI SERVICES PRIVATE LIMITED, No. 15, Main Road, Mahalingapuram, Chennai-600 034. The purchaser propose to purchase 1/3rd of issued, subscribed and paid up shares in KRIS SRIKKANTH SPORTS ENTERTAINMENT PRIVATE LIMITED, (Formerly known as A.A.International Private Limited) from the various shareholders in their name.
The company was promoted by the assessee who had necessary expertise and contacts relating to the said business and the business of the company was wholly promoted and developed by the assessee.
As per the agreement, the assessee shall not carry on either by himself or in association with any other person or persons or associate or involve directly or indirectly with any other company, firm or person in a business similar to that carried on by M/s. KRIS SRIKKANTH SPORTS ENTERTAINMENT PRIVATE LIMITED, for a period of 6 years.
In consideration of the above agreement, the purchaser has paid a sum of Rs.2. 5 crore (Rupees Two Crores and fifty Lakhs only).
Agreement 3. The assessee entered into an agreement with M/s. AM FINANCIAL SERVICES PRIVATE LIMITED, No. 13, Rani Annadurai Street, Raja Annamalaipuram, Chennai-600 028. The purchaser propose to purchase 1/3rd of issued, subscribed and paid up shares in KRIS SRIKKANTH SPORTS ENTERTAINMENT PRIVATE LIMITED, (Formerly known as A.A.International Private Limited) from the various shareholders in their name.
The company was promoted by the assessee who had necessary expertise and contacts relating to the said business and the business of the company was wholly promoted and developed by the assessee.
As per the agreement, the assessee shall not carry on either by himself or in association with any other person or persons or associate or involve directly or indirectly with any other company, firm or person in a business similar to that carried on by M/s. KRIS SRIKKANTH SPORTS ENTERTAINMENT PRIVATE LIMITED, for a period of 6 years.
In consideration of the above agreement, the purchaser has paid a sum of Rs.2. 5 crore (Rupees Two Crores and fifty Lakhs only).
Agreement 4. The agreement was entered into Minor. Anirudaa Srikkanth, son of Krishnammachari Srikkanth, aged 14 years represented by Mother and Natural Guardian Mrs. Vidyaa Srikanth and with M/s. TARACHANTHINI SERVICES PRIVATE LIMITED, No. 15, Main Road, Mahalingapuram, Chennai-600 034.
It was agreed to transfer 1,25,000/- shares to TARACHANTHINI for consideration of Rs.2. 5 crores. (Rupees Two Crores and fifty Lakhs only).
Agreement 5. (i) The agreement entered into by Minor. Adityaa Srikkanth son of SRIKKANTH
(ii) Minor Anirudaa Srikkanth, son of Krishnammachari Srikkanth, aged 14 years represented Guardian Mrs. Vidyaa Srikanth,
(iii) Krishnammachari Srikkanth son of C.R. Krishnammachari, the assessee,
(iv) Vidyaa Srikkanth, wife of K Krishnammachari Srikkanth, the shareholders of KRIS SRIKKANTH SPORTS ENTERTAINMENT PRIVATE LIMITED, (Formerly known as A.A.International Private Limited).
And M/s. ABN FINANCIAL SERVICES PRIVATE LIMITED, No. 13, Rani Annadurai Street, Raja Annamalaipuram, Chennai-600 028.
In consideration for the shares proposed to be transferred, ABN agreed to pay a sum of Rs.2.5 crores (Rupees Two Crores and fifty Lakhs only) towards the consideration for the purchase of 1,25,000 shares held by the shareholders of KRIS SRIKKANTH SPORTS ENTERTAINMENT PRIVATE LIMITED.
Agreement 6. This agreement was entered into by Minor.Adityaa Srikkanth son of Krishnammachari Srikkanth, aged about 17 years represented by Father and Natural Guardian Krishnammachari Srikkanth.
And
M/s. FORSEE FINANCIAL AND CONSULTANCY SEVICES PRIVATE LIMITED, No.1, Ramakrishna Street, 7th Floor, T. Nagar, Chennai-600 017.
M/s. FORSEE agrees to pay a sum of Rs.2. 5 crores (Rupees Two Crores and fifty Lakhs only) towards the consideration for the purchase of 1,25,000 shares of KRIS SRIKKANTH SPORTS ENTERTAINMENT PRIVATE LIMITED, (Formerly known as A.A. International Private Limited.
The AO observed that the assessee has received a sum of Rs. 12 Crs. for transfer of the shares and details of payments received by the assessee through banking channel and the details of payments as furnished by assessee was re-produced by AO in its assessment order, as under:
