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Income Tax Appellate Tribunal, “SMC” BENCH, MUMBAI
Before: SHRI SHAMIM YAHYA
O R D E R Per Shamim Yahya, A. M.: This appeal by the assessee is directed against the order by the Commissioner of Income Tax (Appeals) dated 06.06.2017 and pertains to the assessment year 2006- 07. 2. The grounds of appeal
read as under:
1. The Ld. Commissioner of Income Tax (Appeals) - 41, Mumbai [hereinafter referred to as the "Ld. CIT(A)"] erred in confirming the order passed by Ld.
(A.Y. 2006-07) Shuklendu A. Baji vs. Dy. CIT A.O. under section 143(3) r.w.s. 254 of the Act determining total income of the Appellant at Rs.35,25,270/- as against returned income of Rs. 10,50,592/- without appreciating the fact and circumstances of the case. The Appellant strongly objects to the additions/deletions made by Ld. A.O. and upheld by Ld. CIT(A) on the following grounds:
2. Treating the 'Long-Term Capital Gain* as 'Business income' unjustified - 24,74,680/- i. The Ld. CIT(A) erred in upholding the action of the Ld. A.O. in bifurcating and treating the part of Long-Term Capital Gain declared by the Appellant on transfer of his business concern i.e. M/s. cogito systems as his Business Income without appreciating the fact that the business was transferred as a going concern. Thus, the treating the part of consideration as Business Income instead of Long term capital gains is unjustified and the same may be deleted. ii. The Ld. CIT(A) failed to appreciate that the Appellant's case falls within the exception carved out by the first proviso to section 28(1)(va) as the Appellant has assigned his business as going concern vide agreement dated 01.04.2005. Thus, the action of the Ld. A.O. in treating part of the capital receipt as business income is not at all justified. Hence, the addition of Rs.24,74,680/- as business income may be deleted.
iii. Without prejudice to the above the Ld. CIT(A) erred in upholding the action of Ld. A.O. in allocating Rs.24,74,680/- towards the non-compete fees to treat the same as business income without appreciating that the Appellant has transferred various other assets also vide agreement dated 01.04.2005. Hence, the addition of Rs.24,74,680/- as business income is not at all justified and the same may be deleted.
3. Restricting the claim of exemption under section 54EC of the Act is unjustified i. The Ld. CIT(A) erred in upholding the action of Ld. A.O. in denying the appellant's claim of benefit of exemption under section 54EC of the Act by treating the capital receipt of Rs.24,74,680/- as business income of the appellant without appreciating that the Appellant satisfies all the condition precedent to claim the same. Hence, restricting the claim of deduction under section 54EC of the Act is unjustified and the same may be deleted.
4. Levy of interest under section 234B and 234C unjustified
(A.Y. 2006-07) Shuklendu A. Baji vs. Dy. CIT The Ld. CIT(A) erred in upholding the action of Ld. A.O. in levying interest under section 234B and 234C of the Act without appreciating that the same are not leviable. The Appellant denies liability to pay the same.
This is the second ground of appeal before the ITAT.
Brief facts of the case are that the assessee is an individual carrying on the business of developing software and dealing in software as proprietor under the name and style of M/s Cogito Systems, since 01/07/1994. In the previous year relevant to Assessment Year 2006-07, the assessee had transferred the business in favour of Cybersole Technologies Pvt. Ltd. (in short 'CTPL') vide agreement dated 01/04/2005 for a consideration of Rs.38,50,000/-. The assessee filed return of income and showed the amount received on transfer of assets of Rs.38,50,000/- as goodwill and the same was invested in the prescribed bonds as referred in section 54EC of the Act, which was claimed as exemption u/s 54EC of the Act. The Assessing Officer was of the view that the said amount cannot be considered as payment in respect of goodwill but it was in respect of sale of commercial rights and for not carrying out any activity in relation to any business. Therefore, the Assessing Officer held that the said consideration was assessable as business income in view of the provisions of section 28(va) of the Act and accordingly, he assessed the said sum of Rs.38,50,000/- as business income and disallowed the claim of exemption u/s 54EC of the Act.
Aggrieved by the order of Assessing Office, the assessee carried the matter in appeal before the CIT(A).
(A.Y. 2006-07) Shuklendu A. Baji vs. Dy. CIT 5. It was submitted before the CIT(A) that the amount received by the assessee on transfer of capital assets and the same is a long term capital gain eligible for deduction u/s 54EC of the Act. It was further submitted before the CIT(A) that the Assessing Officer has wrongly invoked the provisions of section 28(va) of the Act, which are not applicable to the facts of the case of the assessee. The learned CIT(A) after considering the submissions of the assessee, observed that the assessee has sold various business assets and received Rs.38,50,000/- and claimed the same as goodwill u/s 54EC of the Act. Most of the assets sold by the assessee are depreciable assets and sale of such assets should have been offered for taxation as short term capital gains in view of the provision of section 50 of the Act. In that case, the assessee would not be eligible for exemption u/s 54EC as such exemption is allowable in respect of long term capital gain only. The profit on sale of assets vide the said agreement is either assessable as short term capital gains or business income u/s 28(va) of the Act, for the reasons given in the assessment order. In none of these cases exemption u/s 54EC of the Act is allowable. Some small portion of the gain might be attributable to long term capital assets. The CIT(A) observed that the assessee did not provide any such details entire profit is held as assessable as short term capital gain/business income. He further observed that the assessee has not sold the entire business as a going concern and also it cannot be said that it was a slump sale within the meaning of section 50B of the Act. The CIT()A) pointed out that the assessee himself has not made any such claim in the return of income. Finally, the CIT(A) held that the income on transfer of (A.Y. 2006-07) Shuklendu A. Baji vs. Dy. CIT assets vide the impugned agreement is assessable as short term capital gain/business income and, therefore, exemption claimed u/s 54EC of the cannot be allowed. Still aggrieved, the assessee carried the matter in appeal before the Tribunal.
The ITAT noted that the assessee submissions as under: 5. The learned counsel for the assessee has submitted that the amount in question has actually been received by the assessee for transfer of business assets as a going concern. He contended that the case of the assessee, thus, covered by the Proviso (i) of section 28(va) and the profit arising from transfer of business assets is chargeable to tax under the head 'capital gains'. In support of his contention he has relied on the relevant clause of the agreement to transfer placed at page 7 of the paper book. He has also relied on the judgment of Hon'ble jurisdictional High Court in the case of CIT Vs. Ace Builders (P) Ltd. [2006] 281 ITR 210 (Bom.) and contended that the amount in question being chargeable to tax as a 'capital gain', exemption u/s 54EC of the Act is allowable to the assessee.
Considering the above the ITAT vide order dated 16.12.2010 remanded the matter to the assessing officer by holding as under:
We find that since the contentions raised by the learned counsel for the assessee have not been specifically examined either by the AO or by the CIT(A) in the light of the agreement to transfer, we set aside the impugned order of CIT(A) and remit the matter back to the file of the AO with a direction to decide the issue afresh by taking into consideration the submissions made by the assessee and by following the judgment of the Hon'ble Jurisdictional High Court in the case of Ace Builders (P.) Ltd. (supra). The AO is also directed to examine the contention raised by the learned DR relying on the clause 2.13 of the agreement to transfer that amount received by the assessee is partly attributable to non- compete fees and the same to that extent is chargeable as business income u/s 28(va) of the Act.
Pursuant to remand, the Assessing Officer passed the assessment order in this case. The Assessing Officer states that the assessee has determined the consideration
(A.Y. 2006-07) Shuklendu A. Baji vs. Dy. CIT of Goodwill and Intangible Assets (vide Exhibit 1.6(d) of the agreement) at Rs.38.50 lakhs and consideration for computer Equipments and Furniture at Rs.10000 & Rs.20000/- respectively. As regard the computer and furniture, the WDV of these depreciable assets have been shown at Rs.27,145/- and after reducing the WDV of Rs.27,145/- from the consideration received from Cybersole, the balance of Rs.2,855/- has been offered by the assessee for taxation under the head 'Short term capital Gain'.
The Assessing Officer further mentions that neither Goodwill nor intangible assets exists in the balance sheet of the assessee for any of the earlier assessment years.
9. The Assessing Officer further states that the assessee has also not produced any report of an independent expert valuation of business, to arrive at an acceptable value of other intangible assets and goodwill evidencing the facts and circumstances and the method of arriving at goodwill valuation.
On perusal of the Exhibit A-3 of the agreement dated 01.04.2005 furnished by the assessee, the Assessing Officer mentions that it shows a detailed list of the Intellectual property in software, which assets also do not get reflected in the balance sheet of the assessee, but the fact that no such assets exist in the accounts, furnishes little evidence that such assets actually exist. Further, the Assessing Officer states that if these are designated as "intellectual property in software" by the assessee, any claim to this 1 property would carry legitimacy only if registration has been acquired by the assessee in his name, which the assessee has not produced any evidence of the same.
(A.Y. 2006-07) Shuklendu A. Baji vs. Dy. CIT The Assessing Officer has placed reliance on the judgment of Delhi Tribunal in the case of Shri Prashant Bhushan.
The Assessing Officer further mentions that the assessee has apart from the Asset Purchase Agreement dated 01.04.2005, also entered into Comprehensive, Nondisclosure, noncompetition and development, agreement shown as Exhibit 2.13(g), which imposes several restrictions on the assessee. As per Assessing Officer, the assessee has surrendered his rights to conduct his business and exploit his skills, expertise and intangible assets in favour of the company. But the assessee has not assigned any value for non-compete. The Assessing Officer has quoted the section 28(va) in the assessment order.
Further, the Assessing Officer states that the assessee vide agreement dated 01/04/2005 has agreed not to carry out any activity in relation to his business and also not to share his intangible assets, interalia, embedded in his softwares, with any entity, except with the Cybersol Technologies, in fact he has agreed only to use it only for the purposes of the Cybersol Technologies and its business development.
The Assessing Officer further mentions that there being no accepted methodology for such determination and specially as the assessee, despite being accorded an opportunity to suo moto determine such a valuation as he is the best suited for determining such value, willingly does not come forward with (A.Y. 2006-07) Shuklendu A. Baji vs. Dy. CIT determination of such "non-compete" consideration, the A.O. is constrained to determine the valuation within the limits, scope and frame provided by the circumstances. Accordingly, the A.O. has taken 2 times, the last 5 years average profit for determining the goodwill. The A.O. has evaluated the value of goodwill by following certain formula, which is shown in the assessment order. Thus, arriving the average of last 5 years profit being Rs.6,87,660/- determining the goodwill at two times the average amounting Rs. 13,75,320/- which is embedded in the consideration of Rs.38.50 lakhs being invested by the assessee in as provided in section 54EC bonds towards the Long Term Capital gain, hence the amount received as consideration for goodwill as above amounting to Rs.13,75,320/-(restricted) by virtue of provisions of section 54EC investments, is allowed as exemption in computing the taxable income.
After examining the applicability of Ace Builders P Ltd (2006)281 ITR 210 (Bom), as per the directions given by the Hon'ble ITAT, the Assessing Officer states that the depreciable assets recorded by the assessee in the books being Furniture and computer, the gain on sale of which being chargeable as short term capital gains, despite those assets being long term capital assets, the deduction u/s 54EC cannot be allowed on the same as in the return of income, the assessee himself has offered short term capital gain of Rs.2,885/- and has not claimed any deduction u/s 54EC for the investment made by the assessee in the bonds. Based on the facts, the A.O. has allowed the deduction u/s 54EC to the extent of goodwill at Rs. 13,75,320/-.
(A.Y. 2006-07) Shuklendu A. Baji vs. Dy. CIT 15. The Assessing Officer concluded that any receipt over and above the value of goodwill is considered as non-compete fee and is taxable u/s 28(va) of the Act, hence, the goodwill as determined being Rs.13,75,320/- the excess over Rs.38.50 lakhs is essentially towards non-compete fees, which is therefore determined at Rs.24,74,680/- and is brought to tax u/s 28(va) of the IT. Act, as business income.
Against the above order, the assessee appealed before the ld. Commissioner of Income Tax (Appeals). The ld. Commissioner of Income Tax (Appeals) obtained remand report from the Assessing Officer as under:
“The Hon'ble ITAT's direction given in the appellate order includes that the Para 2.13 of the agreement between the assessee and Cybersol should also be considered at the time of assessment In the para 2.13 nowhere it is mentioned that the assessee would be given non-compete fees. The amount of Rs.38.50 lakh is stated to be the amount received for surrendering the goodwill. No breakup, as such, of goodwill value and ‘non-compete fee’ is given in the agreement. The AO by using mathematical formula evaluated the goodwill of amount Rs.13,75,320/- the balance of Rs.24,74,680/- is treated as non-compete fee and brought the same for tax u/s 28(va) of the Act, contrary to the contention of the assessee that there was no non-compete fee paid and the gross amount of Rs, 38.50 lakh was received for the transfer of goodwill only."
Further, the ld. Commissioner of Income Tax (Appeals) observed that the Authorised representative of the assessee has submitted a detailed rejoinder of the remand report. Main points of the rejoinder are as under:
i) The A.R. of the assessee submits that the appellant had not received any amount towards non-compete fees. The Appellant has furnished the copy of agreement wherein it has not mentioned about any amount allocated towards non-compete fees. Hence the addition made by the Ld.AO may be deleted.
(A.Y. 2006-07) Shuklendu A. Baji vs. Dy. CIT ii) The A.R. of the appellant has relied on the decision of Hon'ble Bombay High Court in the case of CIT vs. Govindlal C. Mandhana (HUF) ITXA No.1221 of 2012 dated 14.11.2014. iii) The A.R. of the appellant states that the amount of Rs.38.50 lakhs is stated to be the amount received for surrendering the goodwill. No breakup, as such, of goodwill value and 'non-compete fee' is given in the agreement and hence in the absence of any stipulation provided in the agreement for receipt of non- compete fee, the Ld. A.O. is not at all justified in allocating part of the receipt towards non-compete fees and the same may be deleted. iv) The A.R. of the appellant has relied on the decision of Hon'ble Delhi appellate Tribunal in the case of Hula Rahul Gupta vs. CIT [2012] 17 ITR (T) 366 (Delhi).
I have considered the submissions of the appellant and perused findings of the Assessing Officer in order u/s 143(3) r.w.s. 254. 18. The ld. Commissioner of Income Tax (Appeals) held as under:
9.1 The asset purchase agreement dated 1.4.2005 has various exhibits including exhibit 2.13 (g) titled as “Nondisclosure, noncompetition and Development Agreement”. In other words, the aforesaid agreement at exhibit 2.13(g) has been signed as a part of main agreement. Clause 2.13 (b) and (c) of the main agreement undoubtedly contain non-competition provisions. Further, clause 2.13 (e) of the agreement states as under: "Baji acknowledges that the covenants set forth in this section 2.13 are an essential element of this agreement and that, but for this agreement to comply with these covenants, the company would not have entered into this Agreement. 9.2 The starting line of exhibit 2.13(g) titled as "Nondisclosure, noncompetition and Development Agreement" is as under: “In consideration and as a condition of this agreement and my employment by Cybersol Technologies Pvt. Ltd. (the " Company"), I hereby agree with the company as follows:" Thereafter various non-competition conditions are mentioned.
(A.Y. 2006-07) Shuklendu A. Baji vs. Dy. CIT 9.3 The Tribunal has directed to examine contention raised by the DR relying on clause 2.13 of the agreement to transfer that amount received by the assessee is partly attributable to non-compete fees and the same to that extent is chargeable as business income u/s 28(v) of the Act. 9.4 It is also a fact that no consideration has been assigned towards non- compete fees in the agreement separately. Rs. 38.80 lakhs has been mentioned as consideration of the sale by Cognito to Cybersol of the purchased assets subject to the assumption by CyberSol of the assumed liabilities. Purchased assets as per Exhibit A include all of the properties, rights, interest and ether tangible and Intangible assets of Cognito, Goodwill of Cogito is one item of several purchased assets. 9.5 In view of above, I find that the AO has carried out the direction of the Tribunal's order dated 16.12.2010. The appellant has filed submission along with some case laws that the AO cannot assign any value to non-compete fees when the same is not specified in the agreement. The AO does not have to adjudicate this new line of submission but he has to simply follow the direction of the Tribunal which clearly directs to examine whether amount received by the assessee is partly attributable to non-compete fees and the same is chargeable as business income u/s 28 (va). When the agreement contains specific non-compete conditions without which it has been mentioned emphatically that signing of the agreement was not possible, the AO was justified to work out the value of non-compete fees in the composite consideration. The appellant has not pointed out any defect in the methodology adopted by the AO to determine the value of non-compete fees with supporting documents. 9.6 Further, the transfer of business as going concern took place through the agreement and not merely the right to conduct the business . Hence, the case does not fall in first proviso to section 28(1)(va). In view of above, the AO's action is upheld including addition of Rs.24,74,680/- as/business income and denial of exemption u/s 54EC on the said amount/AII the grounds of the appellant are rejected.
Against the above order, the assessee is in appeal before the ITAT.
I have heard both the counsel and perused the records. The ld. Counsel of the assessee submitted that the assessee has sold the concern as a going concern and the (A.Y. 2006-07) Shuklendu A. Baji vs. Dy. CIT entire receipt was liable to be taxed under the head ‘capital gain’. He further placed reliance upon following case laws:
CIT vs. Govindlal C. Mandhana (HUF) ITXA No. 1221 of 2012 dated 14.11.2014 ACIT v. Savita Mandhana [IT Appeal No. 3900 (Mum.) of 2010]
The ld. Counsel of the assessee further pleaded that the proviso (1) to section 28(va) is applicable and hence the amount received is chargeable under the head ‘capital gain’ in accordance with the above said case laws.
Per Contra, the learned departmental representative relied upon the order's of the authorities below. He submitted that the assessing officer in accordance with the direction of the ITAT has examined the overall agreement and thereafter bifurcated the amount received between goodwill and non-compete fee. Learned departmental representative further submitted that the assessee has not submitted any document to enable the assessing officer to bifurcate the receipts between goodwill and non- compete fee. The assessing officer has adopted the best possible manner of determining the value of goodwill and non-compete fee respectively.
The ld. Departmental Representative further submitted that section 28(va) is applicable. Hence, exception in proviso 1 is not applicable.
Upon careful consideration, I note that section 28(va) and the proviso thereto reads as under:
Profits and gains of business or profession.
(A.Y. 2006-07) Shuklendu A. Baji vs. Dy. CIT 28. The following income shall be chargeable to income-tax under the head "Profits and gains of business or profession",— (va) any sum, whether received or receivable, in cash or kind, under an agreement for— (a) not carrying out any activity in relation to any business or profession; or (b) not sharing any know-how, patent, copyright, trade-mark, licence, franchise or any other business or commercial right of similar nature or information or technique likely to assist in the manufacture or processing of goods or provision for services: Provided that sub-clause (a) shall not apply to— (i) any sum, whether received or receivable, in cash or kind, on account of transfer of the right to manufacture, produce or process any article or thing or right to carry on any business or profession, which is chargeable under the head "Capital gains"; (ii) any sum received as compensation, from the multilateral fund of the Montreal Protocol on Substances that Deplete the Ozone layer under the United Nations Environment Programme, in accordance with the terms of agreement entered into with the Government of India.
Now upon careful consideration of the agreement and the facts and circumstances of the case, I note that the assessee in this case by way of this agreement has ineffect agreed not to carry out any business. Hence, this will clearly fall under the proviso 1 of section 28(va). The Assessing Officer himself has observed that the agreement and its various clauses constrict the freedom of the assessee to conduct any business. In such circumstances, in my considered opinion, the authorities below have erred in holding that the impugned amount is not capital gain.
(A.Y. 2006-07) Shuklendu A. Baji vs. Dy. CIT This proposition is duly supported by the decision in the case of Savita Mandhana (supra), wherein the tribunal had concluded as under:
Respectfully following the esteemed views of the coordinate bench, with which we are in respectful agreement, we hold that the amounts held to be attributable to non compete obligations are taxable as capital gains and not as business income. To this extent, we hold that the order of the CIT(A) is indeed vitiated in law, and, to that extent, that grievance of the assessee must be upheld There is no dispute that the assessee has already included entire consideration for sale of shares, including what could be attributed to non compete obligations, as capital gains. In this view of the matter, the exercise of bifurcation between consideration attributable to sale of shares and for non compete obligations is rendered academic and infructuous. We may also add V that it is not even in dispute that the assessee before us was not actively engaged in the business and so far as the assessee actively engaged in the business is concerned, it has been stated at the bar that income attributable to non compete obligations has been offered to tax as business income, but then, given the uncontroverted position that the assessee was not actively engaged in business, it is not really necessary to examine that aspect of the matter any further. The stand of the assessee, in treating entire consideration received on sale of shares as taxable under the head 'capital gains' must therefore be upheld.
6. For the detailed reasons set out above, and respectfully following the coordinate bench in Homi Apsi Balsara's case (supra), we hold that the entire consideration has been rightly offered to tax under the head capital gains. The partial relief granted by the CIT(A), by reducing the quantum of amount attributable to non compete obligations, is thus rendered academic and infructuous. The grievance and the stand of the assessee, on the other hand, is upheld.
Accordingly, in the background of the aforesaid discussion and precedent I hold that the amount involved is to be treated as chargeable as capital gain and hence the assessee succeeds on this account and the consequence thereof shall follow.
(A.Y. 2006-07) Shuklendu A. Baji vs. Dy. CIT In the result, this appeal by the assessee stands allowed.
Order pronounced in the open court on 05.02.2018 Sd/- (Shamim Yahya) लेखा सद�य / Accountant Member मुंबई Mumbai; �दनांक Dated : 05.02.2018 व.�न.स./Roshani, Sr. PS आदेश क� ��त�ल�प अ�े�षत/Copy of the Order forwarded to : अपीलाथ� / The Appellant 1. ��यथ� / The Respondent 2. आयकर आयु�त(अपील) / The CIT(A) 3. आयकर आयु�त / CIT - concerned 4. �वभागीय ��त�न�ध, आयकर अपील�य अ�धकरण, मुंबई / DR, ITAT, Mumbai 5. गाड� फाईल / Guard File 6. आदेशानुसार/ BY ORDER,