In the present case assessee is famous cricketer and former captain of Indian cricket team K. Srikanth.
Assessee along with his minor son and wife held shares of a private limited company where majority of shares were held by minor sons of assessee and assessee was holding only 125 shares and a deal was undertaken by assessee to sell majority stake in the company i.e. around 99% to another company viz. Penta Media Group of Companies in which assessee was a director.
The consideration for such shares was fixed at 15 crores out of which 7.5 crore was received as non compete fees, so that assessee does not enter into same business for 6 years and remaining 7.5 crore towards shares. Out of total consideration 3 crores was never received.
Assessee was also director in one another company where a loan was taken from Indian Bank and assessee was the guarantor of loan. As company was not able to repay the loan assessee was asked to repay the same which was fixed at 4.25 crore.
Now assessee while calculating his income said that he has not received 3 crore out of total 15 crore therefore the total consideration received was Rs. 12 crores out of which 7.5 crores was non compete fees and hence capital receipt and not chargeable to tax and out of the remaining amount assessee has paid 4.25 crore directly towards bank and hence same should be allowed as deduction and only the balance figure should be taxed as income.
AO rejected the claim of assessee of non compete fees being capital receipt on the basis that there was no clear mention of the business of purchasing company and since assessee was a director in that company as well it is well planned tax evasion scheme rather than an actual non compete fees. However based on the agreement Tribunal rejected this claim of AO.
Now, the tribunal in its observation said that the majority stakes were held by the minor sons of the assessee and assessee has no right to use the money of minor sons without the order of the court even though he is the natural guardian of minor son as per provisions of The Hindu Minority and Guardianship Act, 1956 especially to provisions of section 8.
Also, the minor son were not the guarantor of the loan of another company and hence any payment to bank won’t be reduced from their consideration.
Therefore Tribunal was of the view that Rs. 3 crore and Rs. 4.25 crore would be reduced from Non-compete fees of Rs. 7.5 crores which was already exempt and hence no further deduction was to be allowed to assessee.
Thus, the share of consideration received by minor was to be clubbed in the hands of assessee as income of minor child and need to be taxed without any of the above deduction.
Summary of the decision of Hon’ble Tribunal is as follows:
(a) We uphold reopening of concluded assessment by AO invoking provisions of section 147 of the 1961 Act.
(b) We hold that sale consideration of Rs. 7.50 crores was duly received for sale of shares of ‘Kris Srikanth Sports Entertainment Private Limited’ which is to be brought to tax under provisions of 1961 Act including section 60-64 of the 1961 Act.
(c) We hold that non compete fee of Rs. 7.50 crores was exempt from tax being capital receipt.
(d) We hold that payment of Rs. 4.25 crores was made by assessee to ‘Indian Bank’ to settle loan availed by ‘Aditya Leather Exports Private Limited’ which was in default, out of non compete fee earned by assessee which we have already held to be exempt from tax and now it is academic whether there was any diversion of income by overriding title or not. In any case for completeness, we hold that the assessee was not entitled for deduction by way of diversion by overriding title as there was no charge held by ‘Indian Bank’ and there was merely a compromise entered into by assessee with Indian Bank voluntarily to pay defaulted loans availed by said ‘Aditya Leather Exports Private Limited’ . Thus, the payment to Indian Bank was merely an application of income and that too of an exempt income.
(e) The question of taxability of Rs. 3 crores which was not received by assessee is again an academic question as we have already held that this non receipt of Rs. 3 crores was on account of non compete fee which is held to be exempt income.
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