R. Jayasimha Babu, J.:— Though the assessees are different, the assessment year is also different, the substantial question referred to us at the instance of the assessees being common these references are being disposed of by a common order. The assessment year is 1983-84 and the question referred to us is as to whether any part of the sale consideration received by them for the sale of their shares in Anglo French Textiles Limited and Best and Co. (Pondicherry) Private Limited, is to be excluded from the computation of long-term capital gains on the ground that part of the consideration does not represent the value of the shares sold but constitutes the consideration, for the sale of right to control the company with the aid of the shares sold.
2. The shares held in these two companies by one or the other of these assessees who are all members of the family of one C.R Rajendran were agreed to be sold by them and others with the said Rajendran acting on their behalf to one Ganesh Narayan Jattiya under an agreement dated July 6, 1981. By that agreement, the shares held by the vendors in Anglo French Textile Limited were agreed to be sold at the rate of Rs. 601 per share and the shares held by them in Best and Co. (Pondicherry) Pvt. Ltd., were agreed to be sold at Rs. 935 per share, according to the assessees. The then prevailing market value of those shares as on the date of sale was Rs. 219 per share in Anglo French Textiles Ltd., and Rs. 185 per share of Best and Co. (Pondicherry) Pvt. Ltd. The Income-tax Officer computed the difference between the value of the shares received by the assessees at the agreed sale price, and the cost of acquisition of those shares and treated the same as long-term capital gains and accordingly assessed that sum to tax.
3. The assessee had unsuccessfully contended before the Income-tax Officer that the sale price did not wholly pertain to the value of the shares held by them and part of the amount received by them was the consideration for the transfer of the controlling interest of those companies to the vendees as it had been agreed that the directors from Rajendran's group would resign from the boards of the two companies and before doing so, induce the nominees of the vendees. That argument was rejected by the Assessing Officer. In appeal, the same argument was repeated before the Commissioner and the Appellate Tribunal by the assessees, with the same result.
4. The assessees thereafter sought these references and the same point which has been urged before the authorities below has been urged before us by learned counsel for the assessee. It was submitted by counsel that the price received by the assessees for their shares was very much above the prevailing market price for those shares, and the difference between the market price then prevailing and the amounts actually received could not properly be regarded as part of the price for the shares that were sold, as had those shares been sold in the open market, the shares would have fetched only the market price then prevailing and no more. The amount received by the assessees in excess of the market price, it was contended by counsel, represented the consideration for the transfer of the conrolling interest for which there was no cost of acquisition and that amount therefore could not be subjected to levy of tax.
5. Learned counsel relied upon the decision of the Patna High Court in the case of Raghubar Narain Singh v. Commissioner Of Income-Tax., [1984] 147 ITR 447, wherein the court held that the price received by the vendor who happened to be the managing director and who had agreed under the agreement of sale to delegate his power to the vendee was not the consideration for the sale of the shares alone and that part of the consideration was the price for the delegation of powers and, therefore, that price was not to be taken into account while computing the capital gains on the shares. With great respect, we are unable to subscribe to the view that the powers of the managing director of a company could be sold in that manner, and that such illegal sale would entitle the assessee to claim exemption from tax on capital gains arising from the sale of the shares.
6. The argument for the assessees that the controlling interest in the company is capable of being transferred separately, apart from the transfer of shares is wholly untenable. The fact that the vendor has controlling interest and is in a position to place the vendee in control of the company by transferring all his shares or such part as would enable the vendee to exercise control over the company with the aid of the shares so transferred would only enhance the value of the shares transferred. The price paid by the vendee for acquisition of such shares remains the price of those shares though the price so paid is higher than the market price. Controlling interest is but an incidence of the shareholding and has no independent existence. Similar view was taken by the Madhya Pradesh High Court in the case of Smt. Maharani Ushadevi v. CIT, [1981] 131 ITR 445, wherein also it was pointed out that the controlling interest in a company is an incident arising from holding of a particular number of shares in the company and that such controlling interest cannot be transferred without transferring shares.
7. It is by reason of control over the shares, that the person controlling those shares is enabled to exercise control over the management. It is when he is in a position to control the management, that the interest held by him in the company is generally referred to as controlling interest. Without control over the shares there can be no question of any controlling interest. It is only by virtue of the ownership of the shares that the composition of the board of directors of the company can be controlled by exercise of the voting rights attached to those shares for the purpose of electing or removing a director. It is by reason of the control from within the board of directors that it is possible to co-opt the directors of the choice of the person holding the controlling interest.
8. The price paid for the shares by the vendee is therefore the price paid for acquiring the shares and the entire consideration is required to be considered for the purpose of computing the capital gains in the hands of the assessees.
9. The assessees had themselves realised this position even when they entered into the agreement of sale of the shares. Clause 11 of that agreement reads as under: “The aforesaid sale price of the shares in Anglo French at the rate of Rs. 601 per share has been arrived at on the basis of the audited accounts of Anglo French as at December 31, 1980, furnished by the vendors to the purchaser and copies whereof are annexed hereto.” Whatever may be the market price, the price paid for the shares was the price which the vendee willingly was prepared to pay and had paid. The amount so paid had in fact been determined on the basis of the audited accounts of the company. The Tribunal is therefore right in upholding the orders of the Commissioner and the Income-tax Officer who had rightly assessed the sum mentioned in the assessment orders as long-term capital gains arising out of the sale of the shares held by the assessees in these two companies.
10. Our answer to the question that has been referred to us is in the affirmative, against the assessees, and in favour of the Revenue. The Revenue shall be entitled to costs in the sum of Rs. 3,000 (rupees three thousand) payable in one set.