THE issue before the Bench is - Whether payment in consideration of transfer of shares and handing over of management & control of company including termination & modification in terms of management, is liable to be treated as 'such payment' u/s 28(ii)(a). And the answer is YES.
Facts of the case
The assessee an individual, was the Chairman-cum-Managing Director of M/s Central Distillery
and Breweries Ltd. (CDBL), which was engaged in the business of manufacturing and sale of Indian Made Foreign Liquor (IMFL) and beer. The assessee along with his family members, held 1,86,019 shares, constituting 57.29% of the paid-up equity share capital of CDBL. One M/s Shaw Wallace Company Group (SWC Group), a giant in liquor business in comparison to CDBL, offered and purchased through their subsidiaries, 1,86,019 shares out of the total shares held by assessee and his family members at the rate of Rs.30/- per share for Rs.55,83,270/-, by a MOU. The assessee who individually held 12% of the paid-up equity share capital of CDBL also entered into a deed of covenant in his individual capacity with the SWC Group. On the same date, another MOU was executed between the SWC Group and the assessee as an individual with the restrictive covenant to the effect that he would not either directly or indirectly carry on any manufacturing or marketing activities relating to IMFL for a period of 10 years. The assessee as per the MOU received a non-compete fee of Rs.6.60 crores out of which Rs.6 crores were paid upfront and balance was to be paid at later date. Upon verification of returns, the entire non-compete fee of Rs.6.60 crores was treated as a capital receipt and hence, not exigible to tax. The AO recorded statement of assessee on oath u/s 131 and invoking Section 28(ii), held that Rs.6.60 crores ostensibly paid as non-compete fee was nothing but a colourable device and the tax treatment should not be accepted. Accordingly,he brought Rs.6.60 crores to tax. On appeal, the CIT(A) upheld the said addition, relying upon section 28(iv). On further appeal, the Tribunal differed on the taxability of Rs.6.60 crores. In view of the divergence, the matter was referred to a third member of the Tribunal who decided the issue in favour of the assessee.
Having heard the parties, the High Court held that,
++ it is noted that Section 28(iv) would not be applicable and has not been pressed by the Revenue as the said Section applies when an assessee receives any benefit or perquisite arising from a business or in exercise of a profession. In such cases, value of the perquisite, whether convertible into money or not, is chargeable to tax as income under the head of "Profits and gains of business or profession". The present event would not be a case covered by section 28(iv) as the provision does not apply when the payment is monetary. What is taxable u/s 28(iv) is the value of benefit or perquisite, whether convertible in money or not, and not the monetary amount itself, which has been received. At the same moment, it is highly debateable whether the assessed was carrying on a profession or not. A reading of Section 28(i) would elucidate that profits and gains of business or profession, are to be taxed under the similarly worded head of income. However, clauses (ii) to (vii) have a different effect and expand the scope of income chargeable under the head "Profits and gains of business or profession". In a way, they create a deeming fiction and when income falls under any of the specified clauses, it would be treated as income chargeable under the head "Profits and gains of business or profession";
++ the issue of taxability remains unresolved as in the present case the Revenue has submitted and claimed that the nomenclature "non-compete fee" was a smokescreen and a façade, for Rs.6.60 crores represent a part consideration for transfer of shares to the SWC Group and termination of management or modification of the terms and conditions relating thereto. As against this, the case of the assessee was that this payment had nothing to do with handing over of management or transfer of shares, and the amount paid was on account of non-compete fee. Thus the core issue is whether the payment of Rs.6.60 crores, ostensibly stated to be non-compete fee under the MOU, can be treated and regarded as payment covered u/s 28(ii)(a), or consideration paid for transfer of shares. The question raised to be answered is, whether the description of the payment as non-compete fee in the MOU, is unquestionable or can be challenged by the Revenue. It is seen that the words used section 28(ii)(a) relate to "compensation", "other payment due" or "received". The phrase 'in connection with' gives the said sub-clause a wide and broad meaning. However, the payment must be for termination of management or modification of terms and conditions of management to a person who is managing whole or substantially the whole of the affairs of the Indian company. If the payment is on account of non-compete fee, it would not be covered under sub-clause (a) to clause (ii). It is noted by the MOU that the assessee has handed over the management and control of the CDBL to the SWC Group. The same MOU records that the assessee and his family members would co-operate with the SWC Group in arranging for effective registration of transfer of shares and the assessee had further agreed to resign as the Chairman cum Managing Director, and his son had agreed to resign as Joint Managing Director. Thus, the assessee forfeited and gave up the control, charge and management to the SWC Group;
++ the central issue in controversy was whether description of Rs.6.60 crores as non compete fee was binding and unalterable, even if the description was in fact an adroit attempt at artificiality or to transmogrify a taxable event. The thrust and impose of the majority decision of the Tribunal on why Rs.6.60 crores was payment towards non-compete fee is for the reason that the contention that Rs.6.60 crores was substantial and huge and could not be correlated to the salary or other remuneration which the assessee was receiving from CDBL should be rejected as the income tax authorities had no business to challenge the perception of the parties, unless it could be shown that the assessee and the SWC group were in collusion and wanted to defraud the Revenue, but there was no such finding on record. This reason, is inaccurate and fallacious for the reason that the AO and the CIT(A) had clearly recorded that non-compete fee payment was a sham and a façade to avoid payment of legitimate taxes. Thus, the Revenue had questioned and challenged reality of the taxable event as declared. Price per share quoted in the exchanges would not necessarily be the true price of a transaction for purchase of majority shares to acquire controlling interest in a company, which is its competitor. There is case law which holds that when the document is plain and clear, and when the legitimacy and genuineness of the document is not in question, there is no scope to ignore the legal character of the transaction. The right of the assessed to choose a legitimate taxable event must be respected. However, in the present case, there are two MOUs which were executed on the same day and deception and maladroit trickery is alleged. The facts mandated a more comprehensive and thorough examination. The first MOU was for transfer of 57.29% of paid-up equity share capital in CDBL which was considerably large company having about 350 employees and manufacturing IMFL and beer. No doubt, market price of each share was only Rs.3/- per share and the purchase price under the MOU was Rs.30/-, but the total consideration received was merely about Rs.56 lacs. What was allegedly paid as non-compete fee was ten times more, i.e. Rs.6.60 crores. The figure per se does not appear to be a realistic payment made on account of non-compete fee, dehors and without reference to sale of shares, loss of management and control of CDBL. The assessee had attributed an astronomical sum as payment toward non-compete fee, unconnected with the sale of shares and hence not taxable. Noticeably, the price received for sale of shares, it is accepted was taxable as capital gain. The argument of the assessee suffers from a basic and fundamental flaw which is conspicuous and evident. The primary emphasis in the assessee's contention as to character of payment of Rs.6.60 crores based upon euphonious documentation, ignores that the same logic and reasoning could ricochet and negate the justification to transfer controlling shares in CBDL for detritus amount of Rs.56 lacs. CBDL had requisite licenses, permissions and marketing network in place. By purchasing majority shares with controlling interests in CBDL, SWC Group was acquiring a company which was directly competing with them. The price paid for acquiring the majority shareholding, would include consideration paid to procure management rights as well as price paid for acquiring an effective competitor;
++ in view of the decision in of Vodafone’s case and findings on the true and real nature of the transaction camouflaged as 'non-compete fee', there seems no hesitation and reservation in holding that assessee had indulged in abusive tax avoidance. The real and true nature of the transaction or event was the sale of shares and transfer of control and management of CDBL in favour of the SWC Group. The consideration of Rs.6.60 crores was not a fee paid towards non-compete and accordingly, it would not be exempt. However, question still remains whether section 28(ii)(a) should be invoked or it would be appropriate and proper to treat consideration of Rs.6.60 crores as a part of the sale consideration paid by the SWC Group for acquisition of majority shares in CBDL. The latter approach is preferable, but in the alternative. The reason is that transfer of majority shares holding would include consideration receivable towards the controlling interest. The price paid by the SWC Group and received by the assessee was for purchase of shares, including the controlling interest. The price paid would include the right to control and manage CBDL. Any division or bifurcation would result in the court or Revenue stepping into the arm chair of the assessee and the SWC Group for splitting the amounts between capital gains and Section 28(ii)(a). Thus, the SWC Group had acquired by entering into an agreement for purchase of shares, also the controlling interest. It would, therefore, include the price paid for the same. More importantly, it also included the price paid for acquiring control of a competitor, who henceforth would not be a competitor but a part of the SWC Group. The assessee, an individual did not even have a licence to manufacture alcohol. Thus, to hold the two agreements were independent, one related to sale of shares of CBDL and the other a 'non-compete' agreement, would be to ignore reality and treat sham and deceit as a true and real event. Therefore, it is appropriate to treat Rs.6.60 crores as consideration paid for sale of shares, rather than a payment u/s 28(ii);
++ the last issue would be whether Rs.6.60 crores should be taxed in the hands of the assessee as an individual or should be bifurcated as per the shareholding between the assessee and his family members. It is not the case of the assessee that his family members had received any share or part of this payment, but, the entire payment was paid to the assessee. The assessee, having chosen the taxable event, i.e. to receive the entire sale consideration in his name, must therefore bear and face the tax consequence. Thus, the entire amount would be taxed in the hands of the assessee, and would be treated as part of the sale consideration received on transfer of the shares in CDBL, held by him.
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