Kolkata ITAT: No segregation of amount paid for a share attributable to transfer and ‘controlling interest’ – The whole amount is to be taxed

ACIT, Kolkata v. R.K.B.K. Fiscal Services, decided on 3^rd February, 2011

I.T.A.No. 770/KOL/2010, inter-alia

Assessment Year: 2006-07

Question/s before the Hon’ble Tribunal:

(1) Whether the transaction in question involved in addition to and apart from the transfer of shares a transaction of transfer of controlling interest by the assessee namely the promoter group to Holcim and there was transfer of control of the company.

(2) If the answer to the first is in the affirmative, on the principles of apportionment what value out of the composite consideration received to be apportioned as value received for the transfer of controlling interest?

(3) Whether the value of controll ing interest is liable to capital gains tax?

Relevant facts: The assessee, in his return of income, disclosed short term capital gain of Rs.3,77,02,504/- and long term capital gain of Rs.7,27,34,858/- from off market transactions of sale of shares of M/s. Gujarat Ambuja Cements Ltd. to Holderind Investment Limited through their Authorized Representative, Mr. Paul Hungentobler (hereinafter referred to as Holcim Mauritius). Though pursuant to agreement with Holcim and the assessee [ assessee being one of the various parties, who entered into a joint agreement with Holcim ] the full value of consideration was Rs.105/- per share, it was contended by the assessee before the AO that the value of share was only Rs.74.20 per share and the balance of Rs.30.80 was paid for parting with the managerial control. In support of the above contention the valuation report prepared by Deloitte Haskins & Sells was also submitted. It was contended by the assessee that only Rs.74.20 could be taken as sale consideration received for transfer of shares and the balance amount of Rs.30.80 could not be taxed as the same was on account of transfer of capital asset which had no cost of acquisition.

Upholding the appeal of the department, the Hon’ble Tribunal held that:

Para 22.12: “In the facts and circumstances of the case, we are of the considered opinion that the amount received by the assessee for the said non-compete undertaking is squarely covered by section 28(va) of the Act.. It has nothing to do with transfer of controlling interest. We, therefore, hold that in terms of said agreement Rs.15/- per share is assessable as income under the head ‘business’ as per provision of section 28(va) of the Act.”

Para 22.16: “As regards the full value of consideration of transfer of shares of M/s.GACL as per agreement dated 28-01-06, the agreement itself states the same to be Rs.90/- per share. It has not been disputed by the ld. AR for the assessee that full value of sale consideration has no relationship with ‘market value’ of the capital asset. Thus, there is no question of determination of market value of impugned capital asset being share. In this view of the matter, the valuer’s report as submitted by the assessee has no relevance for adjudication of the issue at hand.”

Para 22.18: “We, therefore, hold that :-

a. The full value of consideration for transfer of impugned shares is Rs.90/- per share for the purpose of calculation of capital gains;

b. Rs.15/- per share is to be assessed as income under the head’ business’ as per section 28(va)”

The decision is available here.