Non compete fees on transfer is chargeable to tax as business income and transfer of share at face value as part of family settlement cannot treat as transfer

Court :
INCOME TAX APPELLATE TRIBUNAL

Brief :
The assessee companies in the present cases along with some other entities were promoters of a company namely M/s. Dawn Mills Co. Ltd. and were holding 52.60 percent shares of the said company. They agreed to transfer their shares and controlling interest in M/s. Dawn Mills Co. Ltd. as per the shares purchase agreement dated 24.11.2005. As per the said agreement, the shares were agreed to be sold at a price of Rs.4,642/- per share. In addition, a sum of Rs.1,161/- per share was received by the transferor of shares including the assessees companies towards ‘non-compete fees’. The said amount received on account of ‘non-compete fees’ was considered by the assessees as part of the sale consideration for transfer of shares while computing the capital gains arising on transfer of shares and the same was offered to tax @ 10% without indexation. This claim of the assessees was examined by the A.O. and the same was found to be not acceptable by him for the elaborate reasons given in the assessment orders. He held that the ‘non-compete fees of Rs.1,162/- per share received by the assessees companies was not part of the consideration for sale of shares of M/s. Dawn Mills Co. Ltd. but the same constituted ‘business income’ chargeable u/s.28(va) of the Act. On appeal, the Ld. CIT (A) agreed with the A.O. that the consideration of Rs.1,161/- per share received by the assessees companies on account of ‘non-compete fees’ did not represent part of the sale proceeds of shares of M/s. Dawn Mills Co. Ltd. He, however, held relying on some Tribunal’s decision that the ‘non-compete fees’ received by them were chargeable to tax as ‘capital gains’ and not ‘business income’. In the case of Ruia Apparels Pvt. Ltd. (ITA No. 6147/M/2010), the Ld. CIT(A), however, took a different view holding that the amount of non-compete fees was chargeable to tax as business income. Aggrieved by the orders of the Ld. CIT (A) on this issue, the assessees and the revenue both have raised their respective grievances in the present appeals filed before the Tribunal

Citation :
Sterling Re-rolling Mills Pvt. Ltd., State Bank Building Annexe Bank Street, Fort Mumbai -400 023 .....…. Appellant PAN: AABCS 1149 N Vs Asst. Commissioner of Income-tax-2(3), Aayakar Bhavan, Mumbai .....… Respondent ITA No.3388/Mum/2010 (Assessment year: 2006-07)Asst. Commissioner of Income-tax-2(3), Aayakar Bhavan, Mumbai .....…. Appellant Vs M/s. Sterling Re-rolling Mills Pvt. Ltd.,State Bank Building Annexe Bank Street, Fort Mumbai -400 023 .....…. Appellant ITA No.2588/Mum/2010 (Assessment year: 2006-07) ITA No.2792/Mum/2010 (Assessment year: 2006-07) Ruia Stud Farms Pvt. Ltd., Ruia Industries Pvt. Ltd., State Bank Building Annexe Bank Street, Fort Mumbai -400 023 .....…. Appellant PAN: AAACR 7200 C PAN: AAACR 1950 R Vs Asst. Commissioner of Income-tax-2(3)/ Addl. Commissioner of Income-tax -7(2) Aayakar Bhavan, Mumbai .....… Respondent