DCIT, Circle - 2, Kolkata, Kolkata V. M/s. Netguru Ltd., Kolkata

ITA 1456/KOL/2010

• Counselvise Citation: [2015] 120 COUNSELVISE.COM (IT) 9046 (ITAT-KOLKATA)
• Duration Of Justice: 4 year(s) 5 month(s) 23 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 06-01-2015
• Appeal Filed By: Department
• Bench Allotted: A
• Assessment Year: 2006-2007
• Appeal Filed On: 14-07-2010
• Court: TRIBUNAL
• Department Lawyers: K L KANAK JCITLDSR
• Assessee Lawyers: I BANERJEE FCA LD
• Keywords: Opportunity of being heard; Wholly owned subsidiary

Judgement Text

, A , , IN THE INCOME TAX APPELLATE TRIBUNAL A BENCH : KOLKATA ( ) , 1 , [BEFORE HON BLE SHRI SHAMIM YAHYA, AM & HON BLE SHRI GEORGE MATHAN, JM] I.T.A NO. 1456 /KOL/201 0 A.Y 200 6 - 07 D.C.I.T ,CIRCLE - 2 KOLKATA VS. M/S. NETGURU LTD PAN: AABCR 51 [ APPELLANT ] [ R RESPONDENT ] APPELLANT BY : SHRI K.L KANAK , JCIT/LD/SR.DR RESPONDENT BY : SHRI I.BANERJEE, FCA, LD.AR /DATE OF HEARING : 06 - 01 - 2015 /DATE OF PRONOUNCEMENT: 06 - 01 - 2015 / ORDER , SHRI SHAMIM YAHYA, ACCOUNTANT MEMBER TH IS APPEAL BY THE REVENUE IS DIRECTED AGAINST THE ORDER OF THE LD.CIT (A) DATED 26/03/2010 PERTAINING TO ASSESSMENT YEAR 200 6 - 07 . 2. THE GROUNDS OF APPEAL RAISED BY THE REVENUE READ AS UNDER : - 1. TH AT ON THE FACTS AND CIRCUMSTANCES OF THE CASE, THE LD.CIT(A) ERRED IN HOLDING THAT THERE WAS NO INCIDENCE OF CAPITAL GAIN ASSOCIATED WITH TRANSFER OF GOODWILL DESPITE THERE BEING SPECIFIC MENTION OF THE SAME IN THE AGREEMENT FOR SALE. 2. THAT ON THE FACTS AND CIRCUMSTANCES OF THE CASE THE LD.CIT(A) ERRED IN NOT GIVING COGNIZANCE TO THE FACT THAT THE ASSESSEE IN ITS OWN SUBM ISSION HAD STATED THAT 51% OWNERSHIP OF SOLD PRODUCTS LAY WITH THE ASSESSEE AND DID NOT REQUIRE FURTHER ELABORATION. 3 . BRIEF FACTS OF THE CASE ARE THAT THE ASSESSEE COMPANY IS A WHOLLY OWNED SUBSIDIARY OF A US BASED COMPANY. THE ASSESSEE COMPANY WAS S OLD BY ITS HOLDING COMPANY TO ANOTHER COMPANY IN USA NAMED M/S. BENTLEY SYSTEMS INC. IN THIS REGARD THE AO HAS MADE THE IMPUGNED ADDITIONS BY OBSERVING AS UNDER: - 2. MR. AMIT KR. DAS, CEO AND CHAIRMAN OF THE ASSESSEE COMPANY WAS ASKED DURING THE COURSE O F HEARING AS TO WHY NO CAPITAL GAINS HAS NOT BEEN SHOWN WITH RESPECT TO THE GOODWILL RELATED TO THE SALE OF BUSINESS AND STAAD PRODUCT LINE WHICH WAS SOLD ALONG WITH THE STAAD PRODUCT LINE TO M/S. BENTLEY SHOWN ON ASSETS ALSO INCLUDED CAPITAL GAINS ON S ALE OF GOODWILL. THEREFORE, IT IS ESTABLISHED BEYOND REASONABLE DOUBT THAT ASSESSEE NO DOUBT HAS ITA NO . 1456/KOL/2010 - A - AM M/S. NETGUR LTD 2 TRANSFERRED THE GOODWILL RELATED TO STAAD PRODUCT LINES TO M/S. BENTLEY SYSTEMS INC. BUT NO CAPITAL GAINS WAS SHOWN ON ACCOUNT OF TRANSFER OF GOODWILL. THEREF ORE, FOLLOWING T HE NORMAL METHOD OF CALCULATING, THE GOODWILL OF THE BUSINESS OF THE COMPANY AS ON NOVEMBER 17,2005 ARISING ON SALE OF BUSINESS AND STAAD PRODUCT LINES TO PRIVATELY HELD BENTLEY SYSTEMS INC ( BENTLEY ) PURSUANT TO THE TERMS OF AN ASSET PURCHASE AGREEMENT DATED AS ON AUGUST 19, 2005 IS AS UNDER: AVERAGE ANNUAL NET PROFIT BEFORE TAX FOR PRECEDING 2 YEARS X 3 YEARS PURCHASE OF SUCH AVERAGE PROFIT: FINANCIAL YEAR NET PROFIT BEFORE TAX (RS) 2003 - 04 1,36,56,388 2004 - 05 29,11,735 TOTAL 1,65,68,123 AVERAGE PROFIT = RS.1,65,68,123 / 2 = RS.82,84,061 GOODWILL = RS.82,84,061 X 3 = RS.2,48,52,1 84 HOWEVER, THE SOFTWARE VIZ STAAD PRODUCT LINES, THAT WAS SOLD TO BENTLEY, WAS A JOINT PROPERTY OF NETGURU LTD AND NETGURU USA. HENCE, 51% OF THE AFORESAID GOODWILL VALUE I.E 51% OF RS.2,48,52,184/ - IS COMPUTED AT RS.1,26,74,614/ - IS TREATE D AS VALUE OF GOODWILL OF THE ASSESSEE TRANSFERRED TO BENTLEY SYSTEMS INC. ALONG WITH THE STAAD PRODUCT LINES. IN THE LIGHT OF THE FACT THAT THE ASSESSEE WHILE SELLING THE SOFTWARE VIZ STAAD PRODUCT LINES HAS ALSO TRANSFERRED THE GOODWILL PORTION TO T HIS SOFTWARE VIZ STAAD PRODUCT LINES AND FAILED TO BRING THE CONSIDERATION RECEIVED ON ACCOUNT OF SALE OF GOODWILL IN THE BOOKS OF NETGURU LTD. THEREFORE, AS PER THE WORKING ABOVE THE CONSIDERATION FOR THE SALE OF GOODWILL OF RS.1,26,74,614/ - IS ADDED TO T HE RETURNED INCOME AND THE ASSESSMENT IS COMPLETED ACCORDINGLY. 4. AGAINST THE ABOVE ORDER, THE ASSESSEE APPEALED BEFORE THE LD.CIT(A). THE LD.CIT(A) AFTER CONSIDERING THE SUBMISSIONS OF THE ASSESSEE DELETED THE ADDITIONS BY OBSERVING AS UNDER: - I HAVE CONSIDERED BOTH THE ASSESSMENT ORDER AND THE WRITTEN SUBMISSION OF THE LD.A/R . THE ORDER OF THE A.O IS BRIEF AND DOES NOT ELABORATE ON THE ISSUE. THE NEXUS BETWEEN THE APPELLANT AND BENTLEY SYSTEMS HAS NOT BEEN ELABORATED UPON. THE A.O S ASSESSMENT ORDER IS SILENT ON THE SALES AGREEMENT BETWEEN BENTLEY AND THE APPELLANT (VIDE OF THE WRITTEN SUBMISSION). THE FACTS AS NARRATED BY THE LD.A/R HAVE NOT BEEN ANSWERED IN THE ASSESSMENT ORDER. AN ASSUMPTION OF 51% OWNERSHIP WOULD REQUIRE A MORE DETAILED ANA LYSIS. THE AO S BRIEF DISMISSAL AND CONCLUSION DOES NOT PRECLUDE FROM THE FACTS WHICH HAVE BEEN DETAILED IN THE SUBMISSION. THIS ADDITION ON ACCOUNT OF GOODWILL IS THEREFORE UNWARRANTED. THE SAME IS THEREFORE DELETED. 5. AGAINST THE ABOVE ORDER THE REVE NUE IS IN APPEAL BEFORE US. 6. WE HAVE HEARD BOTH THE LD. COUNSEL AND PERUSED THE RECORD. WE FIND THAT IN THIS CASE THE ASSESSEE COMPANY W AS SOLD BY ITS USA BASED H OLDING COMPANY , M/S NETGURU TO M/S. BENTLEY ITA NO . 1456/KOL/2010 - A - AM M/S. NETGUR LTD 3 SYSTEMS INC., USA . THE AO IN HIS ASSESSMENT O RDER OBSERVED THAT THERE WAS NO CAPITAL GAIN SHOWN ON ACCOUNT OF TRANSFER OF GOODWILL. IN THIS CONNECTION HE HAS MADE AN ADDITION OF RS.1,26,74,614/ - ON ACCOUNT OF SALE OF GOODWILL. THE LD.CIT(A) H A S DELETED THE SAME BY HOLDING THAT THE AO HAS NOT ELAB ORATE LY DISCUSSED ON THE ISSUE. WE FIND THAT THE LD.CIT(A) HAS NOT PROPERLY APPRECIATED THE ISSUE INVOLVED IN THE APPEAL. THE LD. COUNSEL OF THE ASSESSEE HAS SUBMITTED BEFORE US THAT THERE WAS , IN FACT , COMPUTATION AND ALLOCATION OF CAPITAL GAIN BY THE HOLDING COMPANY. AS PER COMPUTATION SUBMITTED IN ASSESSEE S PAPER BOOK PAGE 3 THE CAPITAL GAIN ALLOCATED BY THE HOLDING COMPANY TO THE ASSESSEE WAS TO INR RS.9,462,776/ - . WE FIND THAT BOTH THE AUTHORITIES BELOW HAVE NOT APPRECIATED THE SIGNIFICANCE OF T HE TRANSACTION OF GOODWILL AND HAVE NOT TAKEN INTO ACCOUNT ALL THE DOCUMENTS, WHICH WERE FURNISHED BY THE LD. COUNSEL OF THE ASSESSEE IN THE SHAPE OF PAPER BOOK BEFORE US. IN OUR CONSIDERED OPINION THE MATTER NEEDS TO BE REMITTED TO THE FILE OF THE AO FO R DENEVO EXAMINATION OF THE ISSUE INVOLVED WITH REFERENCE TO THE DOCUMENTS FILED BY THE LD. COUNSEL OF THE ASSESSEE BEFORE US. IN THIS REGARD THE HON BLE APEX COURT IN THE CASE OF KAPURCHAND SHRIMAL VS. CIT REPORTED IN 131 ITR 451 (SC) HAS HELD THAT AN A PPELLATE AUTHORITY HAS THE JURISDICTION AS WELL AS THE DUTY TO CORRECT THE ERROR IN THE PROCEEDINGS UNDER APPEAL AND REMIT THE ISSUE IF NECESSARY WITH APPROPRIATE DIRECTIONS TO THE AUTHORITY AGAINST WHO SE DECISION THE APPEAL IS PREFERRED TO DISPOSE OF WH OLE OR ANY PART OF THE MATTER AFRESH , UNLESS PROHIBITED BY STATUTE. ACCORDINGLY, WE REMIT THIS ISSUE TO THE FILE OF THE AO. NEEDLESS TO ADD THE ASSESSEE SHOULD BE GRANTED ADEQUATE OPPORTUNITY OF BEING HEARD . 7 . IN THE RESULT, THE APPEAL OF THE REVENUE STANDS ALLOWED FOR STATISTICAL PURPOSE . ORDER PRONOUNCED IN THE OPEN COURT ON 06 - 01 - 2015 \ SD/ - SD/ - [ 1 , ] [ , ] [ GEORGE MATHAN , JUDICIAL MEMBER] [ SHAMIM YAHYA, ACCOUNTANT MEMBER / DATED: 06 - 01 - 2015 ITA NO . 1456/KOL/2010 - A - AM M/S. NETGUR LTD 4 / COPY OF THE ORDER FORWARDED TO: 1 . /APPELLANT - DCIT,CIR - 2,P - 7 CHOWRINGHEE SQ, KOL. 2 / RESPONDENT : M/S. NETGURU LTD E2 - 4, BLOCK GP, SECTOR V,SALT LAKE, KOL - 91. 3 . / CIT, 4 . ( )/ CIT(A), 5 . / DR, KOLKATA BENCHES, KOLKATA *PP/SPS [ / TRUE COPY] / BY ORDER, /ASSTT REGISTRAR