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2009 Supreme(Mad) 3080
High Court of Judicature at Madras
THE HONOURABLE MR. JUSTICE K. RAVIRAJA PANDIAN & THE HONOURABLE MR. JUSTICE M.M. SUNDRESH
P.V. Chandran
Versus
The Assistant Commissioner of Income-tax, Circle II
Tax Case (Appeal) No.1903 of 2008
Decided on: 10-08-2009
For the Petitioner:V. Ramachandran, Senior Counsel, Anitha Sumanth, Advocate.
For the Respondent: J. Naresh Kumar, Standing Counsel for Income Tax Department
The main legal point established in the judgment is that any amount received, not excluded from the ambit of income, is taxable as income, emphasizing the broad connotation of the term 'income'. The court held that the surplus amount realized from the sale of shares constituted income and was chargeable to tax under the head of income from other sources.
Headnote:
Income Tax - Assessment of Income - Section 143(1), 143(2), 143(3) - Escrow Agreement - Capital Receipt - Windfall - Income from Other Sources - Taxability
Fact of the Case:
The appellant, Ambika Cotton Mills Limited, received a substantial sum of Rs.2, 74, 12,446/- from the sale of shares as per an escrow agreement. The assessing authority treated the amount as income, rejecting the appellant's claim that it was a capital receipt. The Commissioner of Income Tax (Appeals) concluded that the appellant's primary objective was to gain control of the company, and the gain derived was incidental and not in contemplation at the time of the transaction. The Tribunal held that the income earned was a well-planned and calculated deal with the desire to earn profit.
Finding of the Court:
The court found that the surplus amount realized by the appellant from the sale of shares was a calculated move and could not be regarded as a windfall. The court held that the profit on the sale of shares constituted income and was chargeable to tax under the head of income from other sources.
Issues: The primary issue was whether the amount received from the sale of shares under an escrow agreement should be treated as income or a capital receipt. The court also considered the appellant's contention that the receipt could be treated as casual income or a windfall, not subject to taxation.
Ratio Decidendi: The court held that the surplus amount realized by the appellant from the sale of shares constituted income and was chargeable to tax under the head of income from other sources. The court emphasized that the term 'income' is of the widest amplitude, and any amount received that is not excluded from the ambit of income is taxable.
Final Decision: The court dismissed the Tax Case Appeal, upholding the Tribunal's order that the sum received from the sale of shares was taxable as income from other sources.
K. Raviraja Pandian, J.
1. This appeal is filed against the order of the Income Tax Appellate Tribunal dated 26.09.2008 made in ITA No.1374 of 2008. The appeal was admitted on the following substantial question of law:
"Whether on the facts and circumstances of the case, the Income Tax Appellate Tribunal is right in law in confirming the assessment of a sum of Rs.2, 74, 12,447/- as income?"
The appellant Ambika Cotton Mills Private Limited originally incorporated on 010. 1988 and later changed to Ambika Cotton Mills Limited on 06.09.1994. There were three group of promoters, viz., P.V. Chandran (the appellant herein), P.K. Ganeshwar, and M. Rathnaswamy. The appellant had 19% share holding in the company while the group of P.K. Ganeshwar and M. Rathnaswamy had 38% share holding. The business of the company was that of operating spinning mills. As of 2005, the company had the bank liability to the tune of approximately Rs.140.00 crores. In the said circumstances, the company proposed to increase the share capital. After negotiations with Unit Trust of India Investment Advisory Services, the appellant allotted to them 8, 75,000 equity shares of the face value of Rs.10 each and at a premium of Rs.175/- per share, as evidenced by the agreement dated 19.05.2005. On 19.05.2005, the shares were allotted to the Unit Trust of India Investment Advisory Services Limited at the premium of Rs.175/- per share. The allotment was at a discount of approximately Rs.60/-per share against the trading in stock exchange on that date. At that time, certain differences arose between two groups of promoters, viz., the appellant group and the group comprising of P.K. Ganeshwar and M. Rathnasamy. Finally, a resolution was arrived at through the intervention of UTI Venture Funds Management Company Private Limited, the Manager for the Unit Trust of India Investment Advisory Services Ltd. As per the agreement, the UTI Venture Funds Management Company Private Limited would facilitate the sale of the whole shares held by the two dissenting promoters P.K. Ganeshwar and M. Rathanasamy comprising approximately 21,99,000 shares at an average price of Rs.250/- per share. It was accepted that the appellant would continue with the company and assume the management. Thus, the appellant, with a view to settle the dispute, had assured the dissenting promoters, to realise the price of Rs.250/-per share, with the assurance that in the event of the realisation being less than Rs.250/- per share the appellant will compensate to the extent of shortfall. The parties agreed that the bank of Nova Scotia, having its branch office at Coimbatore would act as an Escrow agent in respect of the above transactions. Accordingly, an escrow agreement was entered into on 24.08.2005. As per the escrow agreement, the appellant would assure the sale realisation at the rate of Rs.250/-per share to the dissenting promoters and in the event of a shortfall, such shortfall would be made good by the appellant. If there was any excess realisation over and above Rs.250/-, that would be taken by the appellant. The shares were sold at a higher price and thus, the appellant received Rs.2, 74, 12,446/- for the assessment year 2006-07.
2. The appellant filed a return of income on 30.10.2006 admitting income of Rs.1, 18, 33,346/-. An intimation under section 143(1) of the Act was issued on 06.02.2007. The assessment was taken up for scrutiny by issue of notice under section 143(2) of the Act and the order of assessment under section 143(3) of the Act was passed on 02.01.2008 treating the amount received by the appellant as income by rejecting the claim of the appellant that the receipt is capital in nature. The appellant filed an appeal before the Commissioner of Income Tax contesting the assessment of the said sum and also a sum of Rs.17, 50,000/- which was disallowed rejecting the claim of the appellant that the sum was expended on professional services. The assessment was confirmed by the Comm
