Case Law Details
Background
• The taxpayer sold shares of Gujarat Ambuja Cements Ltd (“GACL”) under a share purchase agreement with Holcim Mauritius for a total consideration of Rs.105 per share.
• Further, as per Article 5 of the said agreement, the taxpayer was to receive Rs.1 5 per share towards non-compete undertaking which was included in the above sale consideration.
• The taxpayer also entered into a separate agreement for change in management control of GACL.
• The taxpayer obtained a valuation report whereby the valuer determined the value of non- controlling value of shares at Rs. 74.20 per share.
• The taxpayer, in his return of income disclosed short term capital gain and long term capital gain taking the value of consideration for transfer of shares at Rs.74.20 per share. The taxpayer did not offer the balance consideration of Rs.30.80 per share to tax, being the value assigned to the controlling interest.
• AO took the full value of consideration for transfer of shares at Rs.105 per share and calculated the short term capital gain and long term capital gain accordingly.
• CIT(A) held that controlling interest was a separate asset, which was distinct from the shares and total consideration of Rs.105 per share was required to be apportioned towards price for transfer of shares and price for transfer of controlling interest in GACL. CIT(A) { Relying on Vodafone International 311 ITR 46 (Bom)} directed the AO to take the full value of consideration at Rs.74.2 per share (as indicated in the valuation report) and work out the capital gains accordingly. CIT(A) further held that as controlling interest does not have any cost of acquisition, no capital gain could be computed on transfer of controlling interest.
Contentions of the Taxpayer
• The valuer?s report can be used for the purpose of determining tax liability under the Income-tax Act, 1961 (“the Act”).
• The taxpayer along with other promoters were all along in control of the affairs and management of GACL.
• The requirement of the law such as the Listing Agreement, the SEBI Take Over Code, FIPB and Others clearly demonstrate that transfer of control of a Company is an issue separate and distinct from the question of transfer of shares.
• The consideration of Rs.30.80 per share had to be treated as consideration “for parting with managerial control”. The taxpayer claimed that such sum was not assessable to tax as there was no “cost of acquisition” of the “controlling interest” {Relying on B. C. Srinivasa Shetty 128 ITR 294 (SC)}.
Contentions of the Revenue
• As per Article 2.2 of the share purchase agreement, the consideration for transfer of shares was Rs.105 per share. There was no bifurcation of the amount towards shares without controlling interest and controlling interest.
• The valuation report cannot be relied upon in the Income-tax proceedings.
• Non-compete fee of Rs.15 per share, which forms part of the full value of consideration of Rs.105 per share, is also taxable as per provision of section 28(va) of the Act.
• If it is held that controlling interest is a separate and distinct capital asset capable of being transferred independent of the shares, sale of such capital asset would be taxable u/s.55(2)(a) of the Act.
Observations & Ruling of the Tribunal
• As per law, while analyzing a document what is expressly written therein and the surrounding circumstances are required to be taken into consideration. Nature and character of transactions entered into through such a document could not be determined by the label, which the parties may ascribe to the transaction.
• The Tribunal observed that Article 5 of the share purchase agreement provided that Rs.15 per share was to be paid towards non-compete undertaking which was included in the sale consideration. This amount is asses sable as “business income” u/s 28(va) of the Act and has nothing to do with transfer of controlling interest.
• The argument that “controlling interest” was transferred with the shares was not acceptable as the share purchase agreement had been signed by the Power of Attorney (“POA”) holder. In the absence of the copy of the same, which would determine whether the taxpayer had authorized the POA holder to part with the controlling interest, it would not be assumed that POA holder had parted with the controlling interest, if any, held by the taxpayer. The other circumstances (Articles of Association etc.) support the view that there was no transfer of controlling interest and that as per the taxpayer, „controlling interest? was not part of the capital asset being a share.
• The share purchase agreement itself states the full value of consideration of transfer of shares of GACL to be Rs.90 per share and there would not be a reason for determination of market value of the impugned capital asset being a share.
• Thus the Tribunal held that, Rs.90 per share is to be regarded as consideration for transfer of shares (asses sable as “capital gains”) and Rs.15 per share is to be regarded as non-compete fee (asses sable as “business income”).
Conclusion
• The ruling is based on the specific facts of the case. It may be mentioned that the Tribunal did not give a specific finding on tax ability of transfer of controlling interest.
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