CIT vs. Usha Saboo (P&H High Court)

The High Court had to consider whether, although the agreement for sale of shares did not bifurcate the consideration towards the various covenants in the agreement, the assessee was entitled to bifurcate the same and apportion a part thereof towards the negative covenants and claim that the same is not taxable. HELD by the High Court:

(i) It is difficult to understand how the mere fact that the parties have not apportioned the consideration between the two assets which were being dealt with by this agreement can make any difference to the rights of the parties. The position might have been different if the market value of the shares could not be ascertained. Then it might be said that it is difficult to put a proper value upon the shares and to put a proper value for the consideration. But when the market value is available and when it is known for what price these shares could be purchased or sold, there is no difficulty whatsoever in the apportionment.

(ii) The value to be ascribed to each transaction must obviously depend upon the evidence and the facts in each case. The tax of whatever nature, must be levied on the basis of the true value of the asset of the transaction and not merely on the basis of the value ascribed to it by the assessee. Indeed, the view to the contrary could cause severe prejudice to the revenue itself. To accept the contention would enable assessees to ascribe artificial values to assets enabling them to avoid tax.

(iii) The agreement indicated two distinct assets, namely, the negative covenant and the shares are independent and distinct assets. It was possible to have a separate and independent agreement in respect of each of them. The agreement in terms of the negative covenant contained in Clause 5.5 did not flow out of the agreement to sell the shares. Each of these agreements could have been arrived at independent of the others. Each of the agreements could have been arrived at without and even in the absence of the other. The negative covenant could have been agreed to by the members of the Saboo group without having sold their shares and the members of the Saboo group could have sold their shares without agreeing to the negative covenants. It was therefore not only permissible but necessary to apportion the consideration towards each of the assets provided of course it is possible to ascertain a value of each of the assets.

(iv) The observations in Vodafone International Holdings BV vs. Union of India (2012) 6 SCC 613 cannot be read in isolation. Moreover, even these observations do not support Ms. Dhugga’s submission that merely because the written agreement entered into between the parties does not bifurcate the consideration and apportion the same, the authorities and/or the assessees are precluded from doing so. Indeed, the issue, as it arises before us, was not considered by the Supreme Court. The Supreme Court considered the aspect in an entirely different context. The Supreme Court did not hold that even if it had come to the conclusion that the case concerns sale of share and other assets, there could be no bifurcation and apportionment of the consideration stipulated merely because the Share Purchase Agreement did not itself bifurcate the consideration qua the independent components. Our view is, therefore, not inconsistent with the judgment in Vodafone’s case (supra). As we noted earlier, this is the view of a Bench of three learned Judges of the Supreme Court in Commissioner of Income Tax, Madras v. Best and Co. (Private) Ltd. 1966 Income Tax Reports (60) 11, which dealt with the very point in issue before us. We are, therefore, in any event bound by the judgment in CIT v. Best and Co. P. Ltd. (supra).