Consideration received on Termination of Call Option Agreement that Relinquishes Purchase of Shares is Transfer under Income Tax Act Taxable as Capital Gains: ITAT [Read Order]

The Chennai Bench of Income Tax Appellate Tribunal (ITAT) held that according to the Income Tax Act, 1961 the consideration received upon terminating a call option agreement that foregoes the purchase of shares is a transfer and is subject to capital gains tax.

The assessee in this case is M/s. Sindya Securities & Investments Pvt. Ltd. The assessee was mainly incorporated for the sale and purchase of 2G license indirectly by way of aforesaid activity. The intention of the assessee company was to be examined to find out whether the income received on cancellation of call option agreement was a business activity or not.

The Assessing Officer (AO) passed the assessment order which was challenged by the Revenue under its revisionary power.

The Principal Commissioner of Income Tax (PCIT) noted that as per call option termination agreement, the assessee received the sum in relation to the non-compete and non-solicit obligations. As per the provisions of Section 28(va)of the Income Tax Act, the aforesaid sum was to be treated as business income and not as capital gains as offered by the assessee. The assessment as business income would imply higher tax outgo for the assessee.

The Departmental Representative submitted that the assessee was mainly incorporated for the sale and purchase of 2G license indirectly by way of aforesaid activity. The intention of the assessee company was to be examined to find out whether the above income received on cancellation of call option agreement was a business activity or not.

But he contended that the AO simply accepted the returned income without examining the true nature of the activity carried out by the assessee. It is clearly established that the said activity of the assessee was only to earn profit by termination of its right and the same, therefore, was to be taxed as business receipts only.

The Authorised Representative of the assessee (AR) submitted that the call options being the right to purchase shares of Aircel Limited clearly fall within the purview of the term ‘capital asset’. There is transfer of profit earning apparatus of the company and hence the consideration has to be treated as capital in nature.

The consideration so received by the assessee pursuant to the termination of the call option agreement resulting in relinquishment of the right to purchase the shares of Aircel Ltd. will have to be treated as a transfer under Section 2(47) of the Income Tax Act exigible to tax under Section 45 of the Income Tax Act.The cost of the acquisition of the right would be deemed to be ‘nil’ in terms of Section 55(2)(b) of the Income Tax Act. Therefore, the computations made by the assessee under the head ‘capital gains’ was correct.

Further the AR stated that the assessee company was established for the purpose of investing in shares of Aircel Ltd. and it was in that connection that the call option agreement was entered into. The termination of the call option relinquishes the right of the assessee company to buy shares of Aircel Ltd. in favour of another entity. It does not debar the assessee company from investing in the shares of Aircel Ltd. Thus, there is no element of non-compete obligation inherent in the agreement which would trigger the provisions of Section 28(va)of Income Tax Act as alleged in the impugned order.

The Bench comprising of Mahavir Singh, Vice President and Manoj Kumar Aggarwal, Accountant Member observed that the consideration was not received for not carrying out of any activity in relation to any business or profession. Neither there was a bar on the assessee to purchase further shares of Aircel Ltd.

Therefore, the provisions of Section 28(va) of Income Tax Act would not apply. The termination of the call option merely relinquishes the right of the assessee company to buy shares of Aircel Ltd. There is no element of non-compete obligation inherent in the agreement which would trigger the provisions of Section 28(va) of the Income Tax Act as alleged in the impugned order.

Thus, considering the fact and circumstances of the case, the impugned order is unsustainable in law and liable to be quashed and hence the original assessment framed by AO was restored.

Hence, appeal of the assessee was allowed.

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