M/s. Penta Media Graphics Limited, CHENNAI V. ITO (OSD), CHENNAI

ITA 1768/CHNY/2010

• Counselvise Citation: [2012] 140 COUNSELVISE.COM (IT) 61192 (ITAT-CHENNAI)
• Duration Of Justice: 1 year(s) 7 month(s) 22 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 11-06-2012
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: B
• Next Hearing Date: 23-05-2012
• Assessment Year: 2000-2001
• Appeal Filed On: 20-10-2010
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: DR SIBENDU MOHARANA IRS
• Assessee Lawyers: PUSHYA SITARAMAN SR C OUNSEL; SREE VIDYA S; VARDINI
• Keywords: Business income; Depreciation; Business expenditure; Search and seizure
• Section: 143(3); 10B; 32; 263

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL B BENCH, CHENNAI BEFORE DR. O.K.NARAYANAN, VICE-PRESIDENT AND SHRI V.DURGA RAO, JUDICIAL MEMBER ITA NOS.1780(MDS)/2009, 1768 & 1733(MDS)/2010 ASSESSMENT YEAR : 2000-01 M/S.PENTAMEDIA GRAPHICS LTD., 1-FIRST MAIN ROAD, UNITED INDIA COLONY, KODAMBAKKAM, CHENNAI-600 024. PAN AAACP1647B. VS. THE DEPUTY COMMISSIONER OF INCOME-TAX, CENTRAL CIRCLE V(2)/THE ITO(OSD), COMPANY CIRCLE V(2)/THE DEPUTY COMMISSIONER OF INCOME-TAX, CENT.CLE.III(4), CHENNAI. (APPELLANT) (RESPONDENT) AND ITA NO.1887(MDS)/2010 ASSESSMENT YEAR : 2000-01 THE ASSISTANT COMMISSIONER M/S.PENTAMEDI A GRAPHICS OF INCOME-TAX, VS. LTD., 1-FIRST MAIN ROAD, COMPANY CIRCLE V(2), UNITED I NDIA COLONY, CHENNAI. CHENNAI-600 024. (APPELLANT) (RESPONDENT) ASSESSEE BY : SMT.PUSHYA SITARAMAN, SR. C OUNSEL AND MS.VARDINI AND MS .SREE VIDYA, ADVOCATES DEPARTMENT BY: DR. SIBENDU MOHARANA, IRS, C IT. DATE OF HEARING : 23 RD MAY, 2012 DATE OF PRONOUNCEMENT : 11 TH JUNE, 2012 - - ITA 1780/09, 1768/2010, ETC. 2 O R D E R PER DR.O.K.NARAYANAN, VICE PRESIDENT THIS IS A BUNCH OF FOUR APPEALS. ALL THE FOUR A PPEALS RELATE TO THE ASSESSMENT YEAR 2000-01. 2. THE APPEAL IN ITA NO.1733(MDS)/2010, FILED BY THE ASSESSEE, AND THE APPEAL IN ITA NO.1887(MDS)/2010, FILED BY THE REVENUE, ARE DIRECTED AGAINST THE ORDER OF THE COMM ISSIONER OF INCOME-TAX(APPEALS)-V AT CHENNAI, DATED 13-8-2010 A ND ARISE OUT OF THE REGULAR ASSESSMENT COMPLETED UNDER SECTI ON 143(3) OF THE INCOME-TAX ACT, 1961. THE REGULAR ASSESSMENT W AS COMPLETED ON 31-3-2003. 3. THE APPEAL IN ITA NO.1780(MDS)/2009, FILED BY T HE ASSESSEE, IS DIRECTED AGAINST THE REVISION ORDER OF THE COMMISSIONER OF INCOME-TAX, CHENNAI-III AT CHENNAI, PASSED UNDER SECTION 263 OF THE ACT THROUGH HIS PROCEEDING S DATED 23-3-2005. IN THIS APPEAL, IN FORM NO.36, THE ASSE SSEE HAS MENTIONED THE ASSESSMENT YEAR AS 2001-02, BUT WHILE HEARING - - ITA 1780/09, 1768/2010, ETC. 3 THE CASE, THE PARTIES CONFIRMED THAT THE APPEAL REL ATES TO THE ASSESSMENT YEAR 2000-01. 4. THE APPEAL FILED BY THE ASSESSEE IN ITA NO.1768(MDS)/2010 IS DIRECTED AGAINST THE ORDER OF THE COMMISSIONER OF INCOME-TAX(APPEALS)-V AT CHENNAI, D ATED 13-8-2010 AND ARISES OUT OF THE ASSESSMENT COMPLETE D UNDER SECTION 143(3), CONSEQUENT TO THE REVISION ORDER PA SSED UNDER SECTION 263 OF THE ACT. 5. WE HEARD SMT.PUSHYA SITHARAMAN, THE LEARNED SENIOR COUNSEL, ALONGWITH MS.VARDINI AND MS. SREE V IDYA, ADVOCATES, APPEARING FOR THE ASSESSEE. 6. DR.SIBENDU MOHARANA, THE LEARNED COMMISSIONER O F INCOME-TAX, APPEARED FOR THE REVENUE AND ARGUED THE CASE. 7. FIRST WE WILL CONSIDER THE REVISION APPEAL FILE D BY THE ASSESSEE AGAINST THE ORDER OF THE COMMISSIONER OF I NCOME-TAX PASSED UNDER SECTION 263 OF THE ACT. 8. THE ASSESSEE IS ENGAGED IN THE BUSINESS OF MULTIMEDIA COMPUTER GRAPHICS AND ANIMATION. THE AS SESSEE ALSO HAD BEEN RUNNING A SOFTWARE AND TRAINING DIVIS ION. THIS SOFTWARE AND TRAINING DIVISION WAS HIVED OFF TO ITS SISTER CONCERN - - ITA 1780/09, 1768/2010, ETC. 4 M/S.PENTAFOUR COMMUNICATIONS LTD. (LATER ON RENAMED AS PENTAFOUR TECHNOLOGIES LTD.). THE TRANSFER WAS MAD E THROUGH AN AGREEMENT DATED 23-2-2000. THE CONSIDERATION FO R THE TRANSACTION WAS ` 894.21 CRORES. THIS AMOUNT CONSISTED OF ` 236.76 CRORES TOWARDS FIXED ASSETS, ` 113.64 CRORES TOWARDS NET CURRENT ASSETS AND INVESTMENTS AND ` 544.21 CRORES TOWARDS BRAND VALUE. THE BRAND VALUE RELATED TO THE BRAND NAME PENTASOFT. THE SAID AMOUNT OF ` 544.21 CRORES ALSO RELATED TO TRANSFERRING OF INTELLECTUAL PROPERTY RIGHTS IN THE SOFTWARE DEVELOPED BY THE ASSESSEE AND ALSO TOWARDS NON COMP ETE FEE. 9. IN THE COURSE OF THE ASSESSMENT PROCEEDINGS CONCLUDED ON 31-3-2003 UNDER SECTION 143(3) OF THE INCOME-TAX ACT, 1961, THE ASSESSING OFFICER EXAMINED THE COMPO NENTS AND DETAILS THEREOF IN RESPECT OF THE TRANSFER OF THE S OFTWARE DIVISION MADE BY THE ASSESSEE TO ITS SISTER CONCERN. IN THE AGREEMENT OF SALE, THE INTELLECTUAL PROPERTY RIGHTS TRANSFERRED TO THE SISTER CONCERN ARE EXPLAINED TO BE TRADE NAMES, TRADE MARK S OR SERVICE MARKS TOGETHER WITH THE GOODWILL ASSOCIATED THEREW ITH AND ALSO COPYRIGHTS, TRADE SECRETS, CONFIDENTIAL OR PROPRIET ARY INFORMATION, COMPUTER PROGRAMMES AND ALL OTHER SORTS OF INTANGIB LE RIGHTS AND - - ITA 1780/09, 1768/2010, ETC. 5 PROPERTIES. ON GOING THROUGH THE ABOVE EXPLANATION EMBEDDED IN THE SALE AGREEMENT, THE ASSESSING OFFICER OBSERV ED THAT THERE IS AN ELEMENT OF GOODWILL INCLUDED IN THE TRANSFER PRICE DETERMINED FOR THE TRANSACTION. 10. THE ASSESSING OFFICER ALSO EXAMINED THE ACCOUN TS OF THE SISTER CONCERN M/S.PENTAFOUR TECHNOLOGIES LT D. AS AGAINST THE TOTAL CONSIDERATION PAID BY IT, ` 626,08,80,282/- WAS ACCOUNTED UNDER FIXED ASSETS TOWARDS GOODWILL ON ACQUISITION OF THE SOFTWARE DIVISION. IT IS ALSO STATED IN THE NO TES ATTACHED TO THE ACCOUNTS OF THE SISTER CONCERN THAT THE GOODWIL L AMOUNT OF ` 626.09 CRORES INCLUDED NON COMPETE VALUE OF ` 180 CRORES AND OVERSEAS PRODUCTS, INTELLECTUAL RIGHTS AND BRAND NA ME OF ` 364.21 CRORES. ULTIMATELY, THE AMOUNT PROPER ATTAC HED TO THE GOODWILL HAS BEEN STATED IN ITS ACCOUNTS AS ` 81.88 CRORES. 11. IN ITS COMPUTATION OF INCOME, THE ASSESSEE HAS NOT OFFERED ANY CAPITAL GAINS TOWARDS TRANSFER OF GOODW ILL. THEREFORE, THE ASSESSING AUTHORITY MADE QUERIES TO THE ASSESSE E TO EXPLAIN THE POSITION. IN REPLY TO THE QUERIES MADE BY THE ASSESSING AUTHORITY, IT WAS INFORMED BY THE ASSESSEE THAT THE SISTER CONCERN HAS DEBITED THE CONSIDERATION UNDER THE HEAD GOODW ILL, PENDING - - ITA 1780/09, 1768/2010, ETC. 6 ALLOCATION OF THE EXCESS CONSIDERATION PAID OVER DE PRECIATION VALUE OF THE ASSETS. BUT FOR THIS DIFFERENCE, AS F AR AS THE ASSESSEE IS CONCERNED, THERE WAS NO GOODWILL INCLUD ED IN THE TRANSACTION. THE ASSESSEE EXPLAINED THAT A SUM OF ` 66.9 CRORES RELATED TO DEPRECIATION RESERVE RECEIVED ON TRANSFE R AND THE BALANCE AMOUNT RELATED TO ADDITIONAL CONSIDERATION PAID AGAINST PURCHASE OF THE ASSETS. THE ASSESSEE ACCORDINGLY S UBMITTED BEFORE THE ASSESSING AUTHORITY THAT NO CONSIDERATIO N WAS EXCHANGED FOR TRANSFER OF GOODWILL AS SUCH. 12. THE ABOVE EXPLANATION OFFERED BY THE ASSESSEE WAS NOT ACCEPTABLE TO THE ASSESSING AUTHORITY. HE HELD THAT THE CONSIDERATION ALSO INCLUDED A PORTION ATTRIBUTABLE TO THE TRANSFER OF GOODWILL OF THE SOFTWARE DIVISION OF THE ASSESSE E COMPANY. RELYING ON THE JUDGMENT OF THE HONBLE BOMBAY HIGHC OURT IN THE CASE OF EVANS FRASER & CO. LTD. VS. CIT, 137 ITR 49 3, THE ASSESSING AUTHORITY HELD THAT EVEN IF IT IS IMPOSSI BLE TO ASCERTAIN IN TERMS OF MONEY VALUE OF GOODWILL IN VIEW OF ITS NEBULOUS CHARACTER AND ITS UNCERTAIN NATURE, IT IS POSSIBLE TO VALUE THE GOODWILL BY APPLYING ACCOUNTING STANDARDS AT A CERT AIN MULTIPLE OF THE AVERAGE PROFITS OF THE PAST IN THE BELIEF THAT IF THE BUSINESS IS - - ITA 1780/09, 1768/2010, ETC. 7 CONTINUED IN THE SAME NAME AND STYLE, THE SAME AMOU NT OF PROFITS WOULD BE EARNED IN FUTURE AS WELL. THE ASS ESSING OFFICER, THEREFORE, HELD THAT THIS PRESUPPOSES THAT GOODWILL WOULD FORM PART OF SALE CONSIDERATION WHEN THE SAME BUSINESS I S CONTINUED BY THE TRANSFEREE IN THE SAME MAGNITUDE IN THE YEAR S TO COME. THE ASSESSING OFFICER ALSO RELIED ON THE JUDGMENT O F THE HONBLE SUPREME COURT IN THE CASE OF JOGTACOAL COMPANY LTD. VS. CIT, 36 ITR 521, IN SUPPORT OF HIS PROPOSITION THAT A PO RTION OF THE CONSIDERATION RELATED TO THE TRANSFER OF GOODWILL. 13. ONCE HAVING ARRIVED AT A DEFINITE FINDING THAT GOODWILL ALSO WAS TRANSFERRED BY THE ASSESSEE TO IT S SISTER CONCERN, THE ASSESSING OFFICER PROCEEDED TO COMPUTE THE AMOUNT OF GOODWILL THAT HAS BEEN TRANSFERRED BY THE ASSESSEE TO ITS SISTER CONCERN. THE ASSESSING OFFICER OBSERVED THAT AMONG THE VARIOUS METHODS FOR ACCOUNTING OF THE GOODWILL ACQUIRED, VALUATION BY ADOPTING THE AVERAGE PROFIT OF THE PAS T YEARS IS THE MOST APPROPRIATE AND READYMADE METHOD NORMALLY FOLL OWED IN THE FIELD. HE ALSO OBSERVED THAT GENERALLY THE AVER AGE PROFIT OF PAST FIVE YEARS IS DETERMINED. ACCORDINGLY, HE WOR KED OUT THE - - ITA 1780/09, 1768/2010, ETC. 8 AVERAGE OF THE PROFITS OF FIVE YEARS FROM 1996 TO 2 000. THIS AVERAGE HAS BEEN WORKED OUT AT ` 31,74,40,000/-. 14. THE ASSESSING OFFICER TREATED THE AMOUNT OF ` 31,74,40,000/- AS GOODWILL AND BROUGHT THE SAME TO TAX AS SHORT-TERM CAPITAL GAINS UNDER THE PROVISIONS OF SE CTION 55(2)(A)(II) OF THE ACT. THE ASSESSMENT WAS ACCORD INGLY COMPLETED. 15. THEREAFTER, THE RECORDS OF THE CASE WERE EXAMI NED BY THE COMMISSIONER OF INCOME-TAX, CHENNAI-III AT C HENNAI. HE FOUND THAT EVEN THOUGH THE ASSESSING OFFICER HAS TR EATED ` 31,74,40,000/- AS THE PRICE OF THE GOODWILL, THE Q UANTUM DETERMINED BY THE ASSESSING AUTHORITY WAS NOT CORRE CT. THE COMMISSIONER OF INCOME-TAX FOUND THAT THE ASSESSING OFFICER HAS ADOPTED THE VALUE OF GOODWILL AT THE AVERAGE OF THE FIVE YEARS PROFIT AND NO MULTIPLIER WAS APPLIED TO FOLL OW THE ACCEPTED METHOD OF VALUATION OF GOODWILL. HE, THEREFORE, HE LD THAT THE ASSESSMENT ORDER WAS ERRONEOUS AND PREJUDICIAL TO T HE INTERESTS OF THE REVENUE, AS FAR AS THIS ISSUE OF VALUATION I S CONCERNED. 16. IN THE CONTEXT OF THE GOODWILL, THE COMMISSION ER OF INCOME-TAX FURTHER HELD THAT THE TRANSFEROR COMPANY AND - - ITA 1780/09, 1768/2010, ETC. 9 TRANSFEREE COMPANY BOTH ARE HAVING A COMMON CHAIRMA N AND CEO AND THEY ARE ALL WORKING IN A CLOSELY RELATED M ANNER, THERE IS NO MUCH RELEVANCE IN ATTRIBUTING A SIZEABLE AMOU NT OF THE CONSIDERATION AS NON COMPETE FEE. FACTUALLY SPEAKI NG, THERE WAS NO CASE OF ANY COMPETITION BETWEEN THESE UNITS WORKING UNDER THE SAME MANAGEMENT WITH A COMMON CHAIRMAN AN D CEO. THEREFORE, THE COMMISSIONER OBSERVED THAT THE AMOUNT ATTRIBUTED TO NON COMPETE FEE IS NOTHING BUT A COLO URFUL ARRANGEMENT OF THE ACCOUNTS TO SHADOW OVER THE REAL ITY OF THE TRANSFER OF GOODWILL. THE COMMISSIONER OF INCOME-T AX OBSERVED THAT MANY OF THE COMPONENTS OF THE CONSIDERATION HA VE BEEN TERMED BY THE ASSESSEE AS NON COMPETE FEE, IPR VALU E, BRAND VALUE, ETC. TO EVADE PAYMENT OF CAPITAL GAINS TAX O N THE TRANSFER OF THE SOFTWARE DIVISION FOR THE REASON THAT GOODWI LL ALONE WAS TAXABLE FOR THE ASSESSMENT YEAR 2000-01, COMPARED T O THE TRANSFER OF OTHER INTANGIBLE ASSETS LIKE NON COMPET E FEE, BRAND VALUE, ETC. 17. THE COMMISSIONER OF INCOME-TAX FURTHER EXAMINE D THE TREATMENT GIVEN BY M/S.PENTAFOUR TECHNOLOGIES L TD. IN ITS ACCOUNTS, WHEREIN A SIZEABLE PORTION OF THE CONSIDE RATION HAS - - ITA 1780/09, 1768/2010, ETC. 10 BEEN ACCOUNTED AS GOODWILL. AFTER EXAMINING EVER Y ASPECT OF THE CASE IN A VERY DETAILED MANNER, THE LEARNED COM MISSIONER OF INCOME-TAX CAME TO THE CONCLUSION THAT THE ALLEGED PAYMENT TOWARDS NON COMPETE FEE, IPR ON BRAND/BRAND VALUE, ETC. WAS A FIGMENT OF A CREATIVE ACCOUNTING WITH NO RELEVANCE TO REAL PRICE. HE OBSERVED THAT ALL THESE FIGURES WERE IMAGINARY T O RE-ENGINEER THE BALANCE-SHEET OF THE ASSESSEE AND GROUP COMPANI ES WITH NO CASH FLOW AFFECTED BECAUSE OF CROSS TRANSACTIONS WH ERE ISSUE OF SHARES AT AN EXORBITANT PREMIUM AS A PAYMENT CONSID ERATION FOR ALLEGED SALE. AS AN EVIDENCE TO THIS, HE HAS POINT ED OUT THAT THE AMOUNT RELATING TO THE SALE CONSIDERATION HAS BEEN WRITTEN OFF BY THE ASSESSEE AND THE VALUE OF SHARES HAS COME DOWN BELOW ` 25/-. IT MEANS BRAND VALUE IS NOTHING BUT GOODWIL L. THE COMMISSIONER OF INCOME-TAX OBSERVED THAT IF THE TER MINOLOGY GOODWILL IS USED, THE ASSESSEE WILL HAVE TO PAY C APITAL GAINS TAX ON IT. BUT IF IT IS COUCHED AS NON COMPETE FEE OR IPR, THE ASSESSEE WILL NOT BE LIABLE FOR TAX. HE ALSO OBSER VED THAT THE ACTUAL FUND TRANSFERRED IN THE ENTIRE SCHEME OF TRA NSACTION WAS ONLY ` 58 CRORES. - - ITA 1780/09, 1768/2010, ETC. 11 18. IN VIEW OF THE ABOVE FINDINGS, THE COMMISSIONE R OF INCOME-TAX HELD THAT THE AVERAGE PROFIT OF THE ASSE SSEE HAS TO BE MULTIPLIED BY A REASONABLE FACTOR TO DECIDE THE FAI R VALUE OF GOODWILL AND AS THIS MULTIPLYING EXERCISE HAS NOT B EEN DONE BY THE ASSESSING OFFICER, THE ASSESSMENT ORDER HAS BEC OME ERRONEOUS AND PREJUDICIAL TO THE INTERESTS OF THE R EVENUE. ACCORDINGLY, HE SET ASIDE THAT PORTION OF THE ASSES SMENT ORDER AND DIRECTED THE ASSESSING OFFICER TO EXAMINE THE W HOLE ISSUE AFRESH AND DECIDE THE MULTIPLYING FACTOR BY A REASO NABLE NUMBER OF YEARS OF PURCHASE PRICE FOR THE VALUATION OF GOO DWILL. 19. LIKEWISE, THE COMMISSIONER OF INCOME-TAX ALSO CONCLUDED THAT THE ASSESSING AUTHORITY HAS NOT EXAM INED THE JUSTIFICATION OF THE CONSIDERATION FOR TRANSFER OF IPR. FOR THE REASONS ALREADY STATED IN THE CONTEXT OF GOODWILL, THE COMMISSIONER OF INCOME-TAX DIRECTED THE ASSESSING O FFICER TO RE-EXAMINE THIS ISSUE AS WELL. 20. THIRDLY, THE COMMISSIONER OF INCOME-TAX EXAMIN ED THE EXPENDITURE CLAIMED BY THE ASSESSEE FOR ISSUE O F ESOPS. HE FOUND THAT THE ASSESSING OFFICER HAS NOT AT ALL CONSIDERED THIS ISSUE IN THE COURSE OF ASSESSMENT. ACCORDINGLY, HE SET ASIDE - - ITA 1780/09, 1768/2010, ETC. 12 THIS MATTER WITH A DIRECTION TO THE ASSESSING OFFIC ER TO RE- EXAMINE THE ISSUE IN THE LIGHT OF THE MATERIALS AVA ILABLE ON RECORD. 21. FINALLY, THE COMMISSIONER OF INCOME-TAX SET AS IDE THE ASSESSMENT ORDER WITH A DIRECTION TO THE ASSESS ING OFFICER TO RE-EXAMINE THE ABOVE MENTIONED THREE ISSUES AND GIV E A PROPER FINDING IN ACCORDANCE WITH LAW. 22. IT IS AGAINST THE ABOVE REVISION ORDER THAT TH E ASSESSEE HAS COME IN APPEAL BEFORE US. 23. THE DETAILED GROUNDS RAISED BY THE ASSESSEE IN THE APPEAL ARE EXTRACTED BELOW:- 2. THE CIT ERRED IN PASSING AN ORDER OF REVISION U/S 263 OF THE ACT IN RESPECT OF THE ASSESSMENT OF GOODWILL WHICH WAS SUBJECT MATTER OF AN APPEAL PENDING BEFORE THE CIT(A), PRE-EMPTING THE DECISION OF THE COMMISSIONER(APPEALS) AND RENDERING THE APPEAL INFRUCTUOUS. 3. THE CIT ERRED IN EXERCISING JURISDICTION U/S 263 TO DIRECT THE ASSESSING OFFICER TO ADOPT A MULTIPLIER WITH REGARD TO VALUATION OF GOODWILL, WH EN - - ITA 1780/09, 1768/2010, ETC. 13 THE QUESTION WHETHER THERE WAS A TRANSFER OF GOODWILL AT ALL WAS PENDING IN APPEAL. 4. THE CIT FAILED TO SEE THAT WHERE THERE CAN BE MORE THAN ONE OPINION REGARDING ADOPTING THE NUMBER OF YEARS PURCHASE IN THE MATTER OF DETERMINATION OF VALUE OF GOODWILL, IT CANNOT BE SA ID THAT THE ORDER IS ERRONEOUS AND PREJUDICIAL TO THE REVENUE TO GIVE RISE TO REVERSIONARY POWERS U/S 263 OF THE ACT. 5. THE CIT FAILED TO SEE THAT GOODWILL CAN BE BROUGHT TO TAX ONLY IF IT IS TRANSFERRED AND CONSIDERATION PAID FOR IT. IN THE PRESENT CASE, TH E BUSINESS AS A WHOLE WAS TRANSFERRED, AND THE BREAK UP OF THE TOTAL CONSIDERATION WAS CLEARLY DEMARCATE D BETWEEN FIXED ASSETS, CURRENT ASSETS AND INVESTMENTS, INTELLECTUAL PROPERTY RIGHTS AND NON COMPETE FEE. NO AMOUNT WAS EARMARKED OR RECEIVED FOR GOODWILL. 6. THE CIT OUGHT TO HAVE SEEN THAT THE VERY QUESTION OF WHETHER ANY GOODWILL WAS TRANSFERRED - - ITA 1780/09, 1768/2010, ETC. 14 AND WHETHER CONSIDERATION WAS RECEIVED FOR THE SAME WAS IN DISPUTE, AND THEREFORE, MERE RE- QUANTIFICATION OF THE AMOUNT BY THE ASSESSING OFFIC ER USING A MULTIPLIER WOULD BE POINTLESS. 7. THE ORDER OF THE CIT HAS RESULTED IN SETTING ASIDE OF THE ASSESSMENT ORDER, AND AS SUCH, THE APPEAL FILED BEFORE THE CIT(A) HAS PRACTICALLY BECOME INFRUCTUOUS. THEREFORE THE APPELLANT DOES NOT HAVE A REMEDY ON THE VARIOUS GROUNDS OF APPEAL TAKEN BY IT BEFORE THE CIT(A). 8. THE CIT FAILED TO SEE THAT AS PER THE CBDT CIRCULAR NO.495 DATED 22.9.1987, THE INTENTION TO BRING TO TAX CAPITAL GAINS ON TRANSFER OF GOODWILL IS ONLY TO COVER THOSE CASES WHERE GOODWILL IS ACTUALL Y TRANSFERRED. THOSE CASES WHERE TRANSFER IS NOTIONA L WOULD NOT BE COVERED BY THE AMENDMENT. THUS, THERE CANNOT BE A PRESUMPTION OF TRANSFER OF GOODWILL WHERE THERE IS NO ACTUAL TRANSFER OF GOODWILL. - - ITA 1780/09, 1768/2010, ETC. 15 9. EVEN IF THE GOODWILL WERE TO BE TREATED AS TAXABLE, THE CIT OUGHT TO HAVE SEEN THAT THE INCOME FROM THE BUSINESS FOR THE SUBSEQUENT YEARS, I.E. AFTER THE HIVE OFF IN THE HANDS OF THE TRANSFEREE COMPANY WERE AVAILABLE TO VERIFY WHETHER THE METHOD OF CALCULATION WAS ACCURATE. IF THE SUBSEQUENT YEARS INCOME IS ALSO TAKEN INTO ACCOUNT, IT WILL BE SEEN THAT THE MULTIPLIER ON THE BASIS OF THE PAST YEARS GIVES A VERY DIVERGENT FIGU RE, FAR FROM THE REALITY OF THE SITUATION. 10. THE CIT FAILED TO SEE THAT AS THE TRANSFER OF THE UNDERTAKING WAS TO BE BETWEEN SISTER CONCERNS, AND THE MANAGEMENT WOULD REMAIN WITH THE SAME PERSONS, THE QUESTION OF TRANSFER OF GOODWILL DOES NOT ARISE. THIS IS THE REASON WHY NO PART OF THE CONSIDERATION WAS EARMARKED TOWARDS GOODWILL. 11. THE CIT ERRED IN EXPRESSING A VIEW THAT THE ASSESSING OFFICER WAS RIGHT IN TAKING A PORTION OF THE CONSIDERATION AS GOODWILL, WHEN THAT VERY ISSUE WAS PENDING FOR DECISION BEFORE THE CIT(A). - - ITA 1780/09, 1768/2010, ETC. 16 12. WHEN THE CIT HAS DIRECTED THE ASSESSING OFFICER TO EXAMINE THE ISSUE AFRESH IN VIEW OF THE FACT THAT THE ENTIRE TRANSACTION WAS BASED ON HYPOTHETICAL VALUES FIXED FOR OTHER PURPOSES, HE OUGHT TO HAVE INSISTED ON THE GOODWILL BEING DECIDE D BY A MULTIPLIER. 24. THERE IS A DELAY OF 1671 DAYS IN FILING THIS A PPEAL BEFORE THE TRIBUNAL. THE ASSESSEE HAS FILED A PETI TION PRAYING FOR CONDONATION OF THE DELAY. IT IS THE CASE OF THE AS SESSEE THAT WHEN THE COMMISSIONER OF INCOME-TAX HAS PASSED THE REVISION ORDER UNDER SECTION 263, THE APPEAL OF THE ASSESSEE AGAINST THE ORIGINAL ASSESSMENT WAS PENDING BEFORE THE COMMISSI ONER OF INCOME-TAX(APPEALS). THE ADVICE GIVEN TO THE ASSES SEE WAS THAT AS THE ENTIRE ASSESSMENT ORDER WAS SET ASIDE, NO PREJUDICE IS CAUSED TO THE ASSESSEE AND THE ISSUES CAN BE AGI TATED IN THE CONSEQUENTIAL ASSESSMENT ESPECIALLY IN THE LIGHT OF THE OUTCOME OF THE APPEAL WHICH IS PENDING BEFORE THE COMMISSIO NER OF INCOME-TAX(APPEALS). BY THE TIME, THE ASSESSING OF FICER PASSED A FRESH ASSESSMENT ORDER ON 31-3-2006 TAKING THE VA LUE OF THE GOODWILL AT ` 126 CRORES LIABLE TO TAX AS SHORT-TERM CAPITAL GAI NS. - - ITA 1780/09, 1768/2010, ETC. 17 WHEN THIS ORDER WAS TAKEN IN APPEAL BEFORE THE COMM ISSIONER OF INCOME-TAX(APPEALS), THE IMPRESSION GIVEN TO THE AS SESSEE WAS THAT AS THE ASSESSMENT ORDER WAS PASSED UNDER THE D IRECTION OF THE COMMISSIONER OF INCOME-TAX, THE COMMISSIONER OF INCOME- TAX(APPEALS) MAY NOT INTERFERE IN THE REVISED VALUE OF GOODWILL DETERMINED BY THE ASSESSING OFFICER. IT IS THE CAS E OF THE ASSESSEE THAT IT IS ONLY AT THAT POINT OF TIME THAT THE ASSESSEE WAS ADVISED THE PROPER COURSE OF ACTION TO FILE AN APPEAL BEFORE THE TRIBUNAL AGAINST THE REVISION ORDER ITSELF. IT IS THE CASE OF THE ASSESSEE THAT IT IS BECAUSE OF THESE PROTRACTED PRO CEEDINGS THAT THE DELAY OF 1671 DAYS WAS OCCURRED IN FILING THIS APPEAL BEFORE THE TRIBUNAL. 25. WE CONSIDERED THE GROUNDS FOR THE DELAY, AS EXPLAINED BY THE ASSESSEE. WE FIND THAT THERE IS S UBSTANCE IN THE SUBMISSIONS MADE BY THE ASSESSEE. IT IS NOT TH E CASE THAT THE ASSESSEE HAS NOT PURSUED THE MATTER. EVEN IN TH E ORIGINAL ASSESSMENT, AN ADDITION WAS MADE IN RESPECT OF GOOD WILL. THAT ISSUE WAS PENDING BEFORE THE COMMISSIONER OF INCOME - TAX(APPEALS) AT THAT POINT OF TIME. SO THERE CANNO T BE A CASE THAT THE ASSESSEE HAS EVER ACCEPTED THE STAND OF TH E REVENUE ON - - ITA 1780/09, 1768/2010, ETC. 18 THE QUESTION OF GOODWILL. AS MULTIPLE PROCEEDINGS WERE ALIVE AT THAT POINT OF TIME, THE ASSESSEE HAD IN FACT CHOSEN TO RELY ON ONE COURSE OF ACTION THAT OF REGULAR APPEAL AGAINST THE ORDER OF THE ASSESSING OFFICER AND THEREAFTER, IF NECESSARY, BEF ORE THE TRIBUNAL. 26. IN THE FACTS AND CIRCUMSTANCES OF THE CASE, WE FIND THAT THE DELAY IN FILING THIS APPEAL WAS CAUSED FOR GENUINE REASONS AND NOT BECAUSE OF ANY CALLOUS OR NEGLIGENT ATTITUDE OF THE ASSESSEE. ACCORDINGLY, THE DELAY IS CONDONED A ND THE APPEAL IS ADMITTED ON THE ROLLS OF THE TRIBUNAL. T HEREFORE, THE APPEAL HAS BEEN HEARD AND IS BEING DISPOSED OF ON M ERITS. 27. FROM THE DETAILED DISCUSSION AVAILABLE IN THE REVISION ORDER PASSED BY THE COMMISSIONER OF INCOME -TAX, IT IS SEEN THAT THE ASSESSING OFFICER HAS NOT EXAMINED TH E DIFFERENT ASPECTS OF GOODWILL LIABLE TO BE ATTRIBUTED IN THE CONSIDERATION OF TRANSACTION MADE BETWEEN THE ASSESSEE AND ITS SISTE R CONCERN IN RESPECT OF THE TECHNOLOGY DIVISION. EVEN THOUGH TH E ASSESSING OFFICER HAS TREATED A PART OF THE CONSIDERATION AS PERTAINING TO THE GOODWILL, THE COMPUTATION WAS NOT PROPER. THE ASSESSING OFFICER HAS TAKEN ONLY THE AVERAGE OF THE FIVE YEAR S PROFIT AS THE - - ITA 1780/09, 1768/2010, ETC. 19 VALUE OF THE GOODWILL. THE REGULAR METHOD ACCEPTED IN ACCOUNTANCY IS TO MULTIPLY THE AVERAGE PROFIT WITH A SUITABLE FACTOR OF THREE YEARS OR SO, DEPENDING UPON THE NAT URE AND CIRCUMSTANCES OF THE BUSINESS TRANSFERRED. IF NO M ULTIPLIER IS ADOPTED, IT WAS NECESSARY ON THE PART OF THE ASSESS ING OFFICER TO EXPLAIN THE GROUNDS AS TO WHY THE MULTIPLYING FACTO R SHOULD NOT BE APPLIED TO THE AVERAGE PROFIT OF FIVE YEARS. TH EREFORE, ON THIS GROUND ITSELF, THE COMMISSIONER OF INCOME-TAX IS JU STIFIED IN HOLDING THAT THE ORDER OF THE ASSESSING OFFICER IS ERRONEOUS AND PREJUDICIAL TO THE INTERESTS OF THE REVENUE AS FAR AS THE ISSUE OF VALUATION OF GOODWILL IS CONCERNED. 28. AS RIGHTLY POINTED OUT BY THE COMMISSIONER OF INCOME-TAX, THE ASSESSING OFFICER HAS NOT ANALYSED THE CIRCUMSTANCES LEADING TO THE PAYMENT OF NON COMPETE FEE BY THE SISTER CONCERN TO THE ASSESSEE-COMPANY. THE LOCUS STANDI OF THE PARTIES TO THE TRANSACTION TO FIX AN AMOUNT OF NON COMPETE FEE IS TO BE APPRECIATED IN THE LIGHT OF THE FACT THAT THE ASSESSEE AND SISTER CONCERN ARE UNDER THE COMMON MANAGEMENT OF A COMMON CHAIRMAN AND A COMMON CEO. THE ASSESSEE-COMPANY AN D ITS SISTER CONCERN ARE WORKING IN CLOSE RELATION WITH A LOT OF - - ITA 1780/09, 1768/2010, ETC. 20 INTERLACING OF ACTIVITIES AND INTERLOCKING OF FINAN CE. IN THESE CIRCUMSTANCES, AS RIGHTLY POINTED OUT BY THE COMMIS SIONER OF INCOME-TAX, THE PROMINENT QUESTION TO BE CONSIDERED IS WHETHER THERE IS ANY OCCASION AT ALL TO MAKE OUT A CASE OF PAYING NON COMPETE FEE TO THE ASSESSEE-COMPANY. THE QUESTION IS, IS THERE ANY JUSTIFICATION FOR THE SISTER CONCERN FOR PAYING ANY NON COMPETE FEE TO THE ASSESSEE COMPANY? THE ASSESSEE AND IS ITS SISTER CONCERN MAY HAVE THEIR OWN EXPLANATIONS. BU T, THE ISSUE IS THAT THE ASSESSING AUTHORITY HAS NOT CONSIDERED THIS ASPECT AT ALL. THEREFORE, ON THIS GROUND AS WELL, THE ORDER PASSED BY THE ASSESSING AUTHORITY IS ERRONEOUS AD PREJUDICIAL TO THE INTERESTS OF THE REVENUE. 29. LIKEWISE, THE COMMISSIONER OF INCOME-TAX HAS CATEGORICALLY HELD ON THE BASIS OF EXAMINATION OF T HE TERMS OF THE SALE AGREEMENT THAT THE ASSESSING AUTHORITY HAS NOT EXAMINED IMPORTANT ASPECTS SUCH AS THE CONSIDERATION PAID FO R THE TRANSFER OF INTELLECTUAL PROPERTY RIGHTS AND ALSO THE DEDUCT ION CLAIMED BY THE ASSESSEE IN RESPECT OF ESOP SCHEME. 30. THEREFORE, IN THE FACTS AND CIRCUMSTANCES OF T HE CASE, WE FIND THAT EVEN THOUGH THE ASSESSING AUTHOR ITY HAS - - ITA 1780/09, 1768/2010, ETC. 21 COMPUTED AN AMOUNT ATTRIBUTABLE TO GOODWILL EVEN AG AINST THE CONTENTIONS RAISED BY THE ASSESSEE, THE COMPUTATION OF GOODWILL MADE BY THE ASSESSING AUTHORITY WAS NOT PROPER. LI KEWISE, IN THE MATTER OF NON COMPETE FEE, PAYMENT TOWARDS IPR AND BRAND NAME AND ALSO IN RESPECT OF ESOP, NO DISCUSSION HAS BEEN MADE BY THE ASSESSING AUTHORITY. THESE ARE ALL VER Y IMPORTANT ASPECTS OF THE ASSESSMENTS AS FAR AS THE ASSESSEES FILE IS CONCERNED. THEREFORE, IT GOES WITHOUT SAYING THAT THE ASSESSMENT ORDER IS ERRONEOUS AND PREJUDICIAL TO TH E INTERESTS OF THE REVENUE. 31. IN FACT, AT THE TIME OF HEARING, THE LEARNED S ENIOR COUNSEL HAS RELIED ON THE JUDGMENT OF THE HONBLE M ADRAS HIGH COURT IN THE CASE OF CIT VS. K.G.DENIM, 180 TAXMAN 590(MAD.), TO SUPPORT HER ARGUMENT THAT WHERE TWO VIEWS ARE PO SSIBLE, THE COMMISSIONER OF INCOME-TAX CANNOT REVISE AN ORDER U NDER SECTION 263 OF THE ACT. THE PRINCIPLE HIGHLIGHTED BY THE HONBLE MADRAS HIGH COURT IS A CONSISTENT JUDICIAL VIEW WHI CH IS RELIGIOUSLY FOLLOWED BY ALL ADMINISTRATIVE AND APPE LLATE AUTHORITIES. BUT, AS FAR AS THE PRESENT CASE IS CO NCERNED WE ARE AFRAID THAT THE ABOVE JUDGMENT OF THE HONBLE JURIS DICTIONAL HIGH - - ITA 1780/09, 1768/2010, ETC. 22 COURT IS NOT APPLICABLE, AS THE FACTS IN THE PRESEN T CASE ARE DIFFERENT. IN THE CASE CONSIDERED BY THE HONBLE M ADRAS HIGH COURT, TWO VIEWS WERE POSSIBLE. IT IS IN THE LIGHT OF THAT POSSIBILITY THAT THE HONBLE HIGH COURT HAS HELD THAT REVISION ORDER IS NOT POSSIBLE WHEN TWO VIEWS ARE POSSIBLE AND THE ASSESS ING AUTHORITY HAS APPLIED ONE OF THE POSSIBLE VIEWS. I N THE PRESENT CASE, THERE ARE NO SUCH VIEWS AVAILABLE BEFORE THE ASSESSING OFFICER TO CHOOSE AMONG THEM AS A POSSIBLE VIEW. W HILE DOING THE VALUATION OF THE GOODWILL, THE ASSESSING OFFICE R HAS ADOPTED ONLY THE AVERAGE PROFIT FOR FIVE YEARS WITHOUT ANY MULTIPLIER. THE STANDARD RULE OF VALUATION OF GOODWILL IS TO APPLY A FACTOR OF MULTIPLIER. THERE ARE NO TWO VIEWS ON THIS POINT. IF A MULTIPLIER IS NOT NECESSARY, IT IS THE DUTY OF THE ASSESSING OFFI CER TO STATE IN HIS ORDER AS TO WHY THE SITUATION OF THE PRESENT CA SE IS DIFFERENT AND A DIFFERENT RULE SHOULD BE APPLIED. THEREFORE, THERE IS NO QUESTION OF THE ASSESSING OFFICER CHOOSING ONE OF T HE POSSIBLE VIEWS WHILE MAKING THE VALUATION OF THE GOODWILL. 32. FOR THE SAME REASONS STATED ABOVE, THE DECISIO N OF THE INCOME-TAX APPELLATE TRIBUNAL, BANGALORE B-BENC H, RENDERED IN THE CASE OF INTERNATIONAL SOCIETY FOR KRISHNA CO NSCIOUSNESS - - ITA 1780/09, 1768/2010, ETC. 23 VS. DEPUTY DIRECTOR OF INCOME-TAX(EXEMPTIONS), 15 D TR (BANG)(TRIB) 633., WHICH IS RELIED ON BY THE LEARNE D SENIOR COUNSEL, IS NOT APPLICABLE TO THE PRESENT CASE. 33. THEREFORE, WE FIND THAT THE REVISION ORDER PAS SED BY THE COMMISSIONER OF INCOME-TAX UNDER SECTION 263 OF THE INCOME-TAX ACT, 1961 IS JUST AND PROPER AND, THEREF ORE, THE SAME SHOULD BE UPHELD. 34. THE APPEAL FILED BY THE ASSESSEE IS, THEREFORE , LIABLE TO BE DISMISSED. 35. NEXT WE WILL CONSIDER THE APPEAL FILED BY THE ASSESSEE IN ITA NO.1768(MDS)/2010. THIS APPEAL IS DIRECTED AGAINST THE ORDER OF THE COMMISSIONER OF INCOME-TAX (APPEALS)-V AT CHENNAI, DATED 13-8-2010. THIS APPEAL ARISES OU T OF THE ASSESSMENT COMPLETED UNDER SECTION 143(3) OF THE IN COME-TAX ACT, 196, IN COMPLIANCE WITH THE REVISION ORDER PAS SED BY THE COMMISSIONER OF INCOME-TAX UNDER SECTION 263 ON 23- 3-2005. 36. THE ORIGINAL ASSESSMENT COMPLETED IN THIS CASE UNDER SECTION 143(3) ON 31-3-2003 WAS SET ASIDE BY THE COMMISSIONER OF INCOME-TAX UNDER SECTION 263 THROUG H HIS ORDER DATED 23-3-2005. THE COMMISSIONER OF INCOME-TAX HA S SET - - ITA 1780/09, 1768/2010, ETC. 24 ASIDE THE ASSESSMENT FOR CONSIDERING THE ISSUES OF VALUATION OF GOODWILL, TREATMENT OF NON COMPETE FEE/IPR, BRAND N AME AND TREATMENT OF ESOP. 37. IN OBEDIENCE OF THE ABOVE ORDER OF THE COMMISSIONER OF INCOME-TAX, THE ASSESSING OFFICER I SSUED NOTICE UNDER SECTION 143(2) AND CALLED FOR DETAILS AND EXPLANATIONS FROM THE ASSESSEE. AFTER CONSIDERING THE EXPLANATIONS OFFERED BY THE ASSESSEE, THE ASSESSING OFFICER PROCEEDED TO REDO THE VALUATION OF GOODWILL. THE A SSESSING AUTHORITY HAS ADOPTED THE AVERAGE PROFITS OF THE AS SESSEE FOR THE LAST THREE YEARS, WHICH WORKED OUT TO ` 4,222.33 LAKHS. THE ASSESSING OFFICER FURTHER APPLIED A MULTIPLYING FAC TOR OF 3 YEARS AND FINALLY DETERMINED THE VALUE OF GOODWILL AT ` 12,667 LAKHS. IN THE ORIGINAL ASSESSMENT, THE ASSESSING AUTHORITY HA D VALUED THE GOODWILL AT ` 31,74,40,000/-. AS AGAINST THE SAME, IN THE IMPUGNED ASSESSMENT THE ASSESSING AUTHORITY HAS DET ERMINED THE VALUE OF GOODWILL AT ` 12,667 LAKHS. THIS REVISED AMOUNT OF ` 12,667 LAKHS HAS BEEN BROUGHT TO TAX AS SHORT-TERM CAPITAL GAINS ON SALE OF GOODWILL. - - ITA 1780/09, 1768/2010, ETC. 25 38. THIS REVISED VALUE OF GOODWILL WAS CHALLENGED IN FIRST APPEAL. THE COMMISSIONER OF INCOME-TAX(APPEA LS) DISMISSED THE APPEAL FILED BY THE ASSESSEE WITH THE FOLLOWING CONCLUSIONS:- THE SAME ISSUE HAS COME UP FOR MY CONSIDERATION IN THE APPEAL AGAINST THE ORIGINAL ASSESSMENT ORDER IN THIS CASE. IN MY APPEAL ORDER OF DATE IN ITA NO.156/2007-08 FOR THE A.Y.2000-01, I HAVE HELD THAT: (I) GOODWILL COMPONENT IN THE PRICE FOR THE TRANSFE R OF SOFTWARE DIVISION OF THE ASSESSEE IS TAXABLE AS LON G- TERM CAPITAL GAINS; AND (II) THE GOODWILL IS TO BE VALUED AT THREE YEARS PURCHASE PRICE OF THE AVERAGE PROFITS OF FIVE YEARS , BASED ON THE PROFITS FOR YEARS 1995 TO 1999. I, THEREFORE, HOLD THAT THE ASSESSMENT OF GOODWILL BY THE A.O IS IN ACCORDANCE WITH LAW AND THE GOODWILL VALUE OF ` 67.50 CRORES AS COMPUTED IN THE APPEAL ORDER OF DATE IN ITA NO.156/2007-08 IS TO BE ASSESSED AS CAPITAL GAINS (LONG-TERM) INSTEAD OF - - ITA 1780/09, 1768/2010, ETC. 26 ` 1,26,67,00,000 ADOPTED BY THE A.O IN THE IMPUGNED ASSESSMENT ORDER. THE APPEAL IS DISMISSED. HOWEVER, THE ADDITION ON ACCOUNT OF GOODWILL HAS BEEN GIVEN EFFECT TO IN ITA 156/2007- 08 FOR THE SAME ASSESSMENT YEAR. 39. IT IS AGAINST THE ABOVE THAT THE ASSESSEE HAS COME IN SECOND APPEAL BEFORE US. THE GROUNDS RAISED BY THE ASSESSEE READ AS BELOW:- 1. THE CIT(A) HAS FAILED TO SEE THAT WHEN A DIVISI ON WAS TRANSFERRED TO ITS SISTER CONCERN, THERE WAS NO TRANSFER OF GOODWILL, AND NO PART OF THE CONSIDERAT ION WAS EARMARKED FOR GOODWILL, 2. THE CIT(A) ERRED IN TREATING PART OF THE CONSIDERATION RECEIVED FROM PENTASOFT TECHNOLOGIES LTD. TOWARDS NON-COMPETE FEES AS GOODWILL. 3. THE CIT(A) OUGHT TO HAVE APPRECIATED THAT EVEN I F IT IS TO BE HELD THAT SOME PORTION OF THE CONSIDERA TION IS TO BE TREATED AS GOODWILL, SINCE ONLY THE TRAINI NG DIVISION WAS HIVED OFF, ONLY THE PROFITS FROM THE - - ITA 1780/09, 1768/2010, ETC. 27 TRAINING DIVISION ALONE SHOULD HAVE BEEN TAKEN INTO ACCOUNT FOR THE CALCULATION OF AVERAGE PROFITS. 40. WE CONSIDERED THE ISSUE. IN FACT THE ONLY ISS UE IS THAT OF GOODWILL. THE ASSESSEE-COMPANY HAD TRANSFE RRED ITS SOFTWARE TECHNOLOGY DIVISION TO ITS SISTER CONCERN. THE TOTAL CONSIDERATION STATED WAS ` 894.21 CRORES. NO AMOUNT WAS ATTRIBUTED TOWARDS GOODWILL. BUT AMOUNTS WERE ATTR IBUTED TOWARDS NON COMPETE FEE, SALE OF BRAND NAME, SALE O F IPR, ETC. IN THE ORIGINAL ASSESSMENT THE ASSESSING OFFICER HE LD THAT A PORTION OF THE PURCHASE CONSIDERATION DEFINITELY RE LATED TO GOODWILL. THE ASSESSING OFFICER TREATED A SUM OF ` 31,74,40,000/- AS VALUE OF GOODWILL, BEING THE AVE RAGE PROFIT OF FIVE YEARS FROM 1996 TO 2000. THEREAFTER, THE ASS ESSMENT ORDER WAS REVISED ON THE ABOVE ISSUE AND DIRECTION WAS GI VEN TO THE ASSESSING OFFICER TO APPLY A PROPER MULTIPLIER TO V ALUE THE GOODWILL ON ACCEPTED METHOD OF ACCOUNTANCY. THE AS SESSING AUTHORITY ACCORDINGLY WORKED OUT THE AVERAGE PROFIT OF THE LATEST THREE LAST YEARS 1998, 1999 AND 2000 TO ` 4,222.33 LAKHS. THE MULTIPLIER OF 3 WAS APPLIED AND ULTIMATELY THE GOOD WILL WAS VALUED AT ` 126,67,00,000/-. - - ITA 1780/09, 1768/2010, ETC. 28 41. IN FACT, THE SISTER CONCERN, WHO PURCHASED THE SOFTWARE TECHNOLOGY DIVISION OF THE ASSESSEE COMPANY, M/S.PE NTAFOUR TECHNOLOGIES LTD., HAS STATED IN ITS PUBLISHED ACCO UNTS THAT OUT OF THE CONSIDERATION OF ` 894.21 CRORES, A SUM OF ` 629.09 CRORES RELATED TO GOODWILL. THE TRANSFEREE COMPANY HAS TR EATED A PROMINENT PORTION OF THE CONSIDERATION TOWARDS GOOD WILL. THE ARGUMENT OF THE ASSESSEE THAT THE TRANSFEREE COMPAN Y HAS SHOWN THE AMOUNT TOWARDS GOODWILL ONLY AS AN INTERI M ARRANGEMENT, PENDING APPROPRIATION OF THE CONSIDERA TION AMONG PROPERLY CLASSIFIED HEADS, CANNOT BE ACCEPTED IN IT S ENTIRETY. SOME PORTION OF THAT AMOUNT MAY BE ATTRIBUTED TO OT HER ASSETS AND RIGHTS ACQUIRED BY THE SISTER CONCERN. THE ACC OUNTS OF THE SISTER CONCERN ITSELF IS A DOCUMENTARY EVIDENCE FOR THE REVENUE TO COME TO A FAIR CONCLUSION THAT THE CONSIDERATION DEFINITELY INCLUDED CONSIDERATION TOWARDS GOODWILL. 42. AS RIGHTLY POINTED OUT BY THE COMMISSIONER OF INCOME-TAX IN HIS REVISION ORDER, THE ASSESSEE HAS MADE AN ATTEMPT TO SUPPRESS THE TRUE COLOUR OF THE PAYMENT TOWARDS THE GOODWILL BY STATING THAT PAYMENTS WERE MADE TOWARDS NON COMPETE FEE, IPR ON BRAND/BRAND VALUE, ETC. IN FAC T THE - - ITA 1780/09, 1768/2010, ETC. 29 ASSESSEE AS WELL AS ITS SISTER CONCERN M/S.PENTAFOU R TECHNOLOGIES LIMITED DO HAVE A COMMON CEO AND THE COMPANIES ARE WORKING UNDER A COMMON MANAGEMENT. T HERE IS INTERLACING OF ACTIVITIES AND INTERLOCKING OF FUNDS . THESE GROUP CONCERNS ARE NOT WORKING AT LOGGERHEADS. IN SUCH CIRCUMSTANCES, AS RIGHTLY POINTED OUT BY THE COMMIS SIONER OF INCOME-TAX, THERE IS NO DE FACTO SITUATION WHICH DE MANDS PAYMENT OF NON COMPETE FEE BY THE ASSESSEES SISTER CONCERN TO THE ASSESSEE COMPANY. THIS IS THE SAME CASE WITH I PR ON BRAND/BRAND VALUE, ETC. THESE ARE ALL, AS RIGHTLY HELD BY THE COMMISSIONER OF INCOME-TAX, A FIGMENT OF A CREATIVE ACCOUNTING, WITH NO RELEVANCE TO REAL STATE OF AFFAIRS. IT IS TO BE SEEN THAT INSPITE OF SUCH A MAGNITUDE, THE ACTUAL FUND TRANSM ITTED BETWEEN THE PARTIES WAS ONLY ` 58 CRORES. THE ASSESSEE HAS WRITTEN OFF AMOUNTS TO THE SALE CONSIDERATION THEREBY REDUCING THE SHARE VALUE. IN THESE CIRCUMSTANCES THE ONLY CONCLUSION THAT WE MAY ARRIVE AT IS THAT THE TOTAL CONSIDERATION RECEIVED BY THE ASSESSEE FROM ITS SISTER CONCERN ALSO INCLUDED A PAYMENT TOW ARDS GOODWILL AS WELL. 43. THEREFORE, THE FACTUM OF GOODWILL IS CONFIRME D. - - ITA 1780/09, 1768/2010, ETC. 30 44. NOW, IT IS THE QUESTION OF MODE OF VALUATION. THE ASSESSING OFFICER HAS ADOPTED THE AVERAGE PROFIT OF THE IMMEDIATE PAST THREE YEARS. HE HAS ADOPTED THE MUL TIPLYING FACTOR OF THREE YEARS. BOTH THE VARIABLES ARE EXTR EMELY FAIR. THEREFORE, THERE IS NOTHING FOR US TO INTERFERE IN THE VALUATION OF THE GOODWILL. 45. ACCORDINGLY, WE UPHOLD THE VALUATION OF THE GO ODWILL MADE BY THE ASSESSING AUTHORITY AT ` 126,67,00,00/-. ACCORDINGLY, THE ADDITION OF ` 126,67,00,000/- AS CAPITAL GAINS IS CONFIRMED. 46. BUT WE FIND THAT THE CAPITAL GAIN CANNOT BE HE LD TO BE SHORT-TERM CAPITAL GAINS. THE ASSESSEE WAS IN T HE BUSINESS FOR MORE THAN FIVE YEARS. THE GOODWILL IS A SELF GE NERATED ASSET AND GENERATES ALONGWITH THE COMMENCEMENT OF THE BUS INESS, ESPECIALLY IN THE FIELD OF SOFTWARE TECHNOLOGY. THE REFORE, THE ASSESSING OFFICER IS NOT JUSTIFIED IN TREATING THE CAPITAL GAINS ARISING OUT OF SALE OF GOODWILL AS SHORT-TERM CAPIT AL GAINS. THE CAPITAL GAINS OF ` 126,67,00,000/- MUST BE TREATED AS LONG-TERM CAPITAL GAINS AND TAXED ACCORDINGLY. - - ITA 1780/09, 1768/2010, ETC. 31 47. THIS APPEAL FILED BY THE ASSESSEE IS PARTLY SUCCESSFUL. 48. NEXT WE WILL CONSIDER THE REGULAR ASSESSMENT APPEAL FILED BY THE ASSESSEE IN ITA NO.1733(MDS)/20 10. 49. THE FIRST ISSUE RAISED IS THAT THE COMMISSIONE R OF INCOME-TAX(APPEALS) HAS ERRED IN TREATING THE INTER EST INCOME AS INCOME FROM OTHER SOURCES AND DISALLOWING THE BENEF IT OF SECTION 10B OF THE ACT. IN THE LIGHT OF THE DECISION OF TH E HONBLE DELHI HIGH COURT IN THE CASE OF CIT VS. KOSHIKA TELECOM L TD., 287 ITR 479, IT IS THE CONTENTION OF THE ASSESSEE THAT THE INTEREST INCOME RECEIVED SHOULD BE TREATED AS BUSINESS INCOME AND T HE INTEREST PAID SHOULD BE SET OFF AGAINST THE SAME. THE FIXED DEPOSIT IS MADE FOR MARGIN MONEY AND AS SUCH INTEREST FROM THE SAME SHOULD BE TREATED AS BUSINESS INCOME. SECTION 10B PROVIDES FOR DEDUCTION OF SUCH PROFITS AND GAINS AS ARE DERIVED BY A HUNDRED PERCENT EXPORT ORIENTED UNDERTAKING FROM THE EXPORT OF ARTICLES OR THINGS OR COMPUTER SOFTWARE. THE INTEREST RECEIVED BY THE ASSESSEE ON MARGIN MONEY DEPOSITS WERE NOT GENERATE D OUT OF EXPORT ACTIVITY. THEREFORE, THE ASSESSEE IS NOT EN TITLED TO TREAT THE INTEREST INCOME AS BUSINESS INCOME ELIGIBLE FOR DEDUCTION - - ITA 1780/09, 1768/2010, ETC. 32 UNDER SECTION 10B. THE PRINCIPLES LAID DOWN BY THE HONBLE SUPREME COURT IN THE CASE OF PANDIAN CHEMICALS LTD. VS. CIT, 262 ITR 278, SUPPORT THE VIEW TAKEN BY THE LOWER AU THORITIES. THIS ISSUE IS ACCORDINGLY DECIDED AGAINST THE ASSES SEE. 50. THE CONNECTED ARGUMENT RAISED BY THE ASSESSEE IS THAT THE EXPENDITURE INCURRED FOR EARNING THAT INTE REST INCOME SHOULD BE ALLOWED AS A DEDUCTION WHILE COMPUTING TH E INCOME FROM OTHER SOURCES. THERE IS NO OBJECTION TO THIS. IF THE ASSESSEE PROVES THAT SOME EXPENDITURE IS INCURRED F OR EARNING THAT BANK INTEREST, THAT EXPENDITURE MAY BE DEDUCTE D WHILE COMPUTING THE INCOME FROM OTHER SOURCES. THE ASSES SING OFFICER IS DIRECTED TO LOOK INTO IT. 51. THE NEXT GROUND RAISED BY THE ASSESSEE IS THAT THE COMMISSIONER OF INCOME-TAX(APPEALS) HAS ERRED IN TR EATING THE AMOUNT RECEIVED ON RENTING OUT OF COMPUTERS, INSURA NCE CLAIMS ON DAMAGE TO COMPUTERS, SALE OF SCRAP AND REIMBURSE MENT OF EXPENSES INCURRED FOR AGENTS ABROAD, ETC. AS INCOME FROM OTHER SOURCES, WHEREAS THE SAME SHOULD BE TREATED AS BUSI NESS INCOME, AS THOSE RECEIPTS ARE HAVING CLEAR NEXUS WI TH THE BUSINESS CARRIED ON BY THE ASSESSEE. COMPUTERS ARE INSTALLED - - ITA 1780/09, 1768/2010, ETC. 33 BY THE ASSESSEE FOR THE PURPOSE OF CARRYING ON ITS BUSINESS. ITS BUSINESS IS EXPORT BUSINESS. THEREFORE, INCIDENTAL INCOME ARISING FROM USE OF COMPUTERS, INSURANCE CLAIMS ON DAMAGE TO COMPUTERS, ETC. NEEDS TO BE TREATED AS OPERATIONAL INCOME IN THE NATURE OF BUSINESS INCOME. THIS IS THE CASE WITH T HE SALE OF SCRAP AS WELL. REIMBURSEMENT OF EXPENSES INCURRED FOR AGENTS ABROAD IN FACT REDUCES THE COST IN ASSESSEES HANDS AND, THEREFORE, RESULTING IN OVERALL INCREASE IN BUSINES S INCOME. THEREFORE, THAT ITEM SHOULD ALSO BE TREATED AS BUSI NESS INCOME. ACCORDINGLY, WE DIRECT THE ASSESSING AUTHORITY TO T REAT THE ABOVE STATED AMOUNTS AS PART OF ASSESSEES ELIGIBLE PROFI T FOR DEDUCTION UNDER SECTION 10B. 52. THE NEXT GROUND RAISED BY THE ASSESSEE IS THAT THE COMMISSIONER OF INCOME-TAX(APPEALS) HAS ERRED IN TR EATING THE RENT RECEIVED FROM THE EMPLOYEES WHO OCCUPIED THE Q UARTERS OF THE ASSESSEE AS INCOME FROM OTHER SOURCES. THE ASS ESSING OFFICER HAS TREATED SUCH RENT RECEIVED FROM THE EMP LOYEE- TENANTS AS INCOME FROM OTHER SOURCES AND NOT AS INC OME FROM BUSINESS. - - ITA 1780/09, 1768/2010, ETC. 34 53. THE NATURE OF THE RECOVERY MADE FROM THE EMPLOYEES IS THAT THE RECOVERY GOES TO REDUCE THE S TAFF WELFARE EXPENSES IN THE HANDS OF THE ASSESSEE-COMPANY. THE RENT RECOVERY MADE FROM THE EMPLOYEES IS NOT AN INDEPEND ENT INCOME OR A DIFFERENT SOURCE OF INCOME. THE ASSESS EE IS PROVIDING RESIDENTIAL QUARTERS TO THE EMPLOYEES AGA INST WHICH A NOMINAL RENT IS RECOVERED FROM THEM. THE RECOVERY ULTIMATELY REDUCES THE COST IN THE HANDS OF THE ASSESSEE. THE REFORE, THE RECOVERY IS IN THE NATURE OF BUSINESS INCOME. THIS IS BECAUSE IT REDUCES THE BUSINESS EXPENDITURE. THE LOWER AUTHOR ITIES ARE NOT JUSTIFIED IN TREATING IT AS INCOME FROM OTHER SOURC ES. THE ABOVE PROPOSITION HAS BEEN UPHELD BY THE HONBLE MADRAS H IGH COURT IN THE CASE OF CIT VS. M.A. SATHAR (P) LTD., 226 IT R 910. THE HONBLE COURT WAS FOLLOWING THE EARLIER DECISION OF THEIR LORDSHIPS RENDERED IN THE CASE OF CIT VS. NEW INDIA MARITIME AGENCIES P. LTD., 207 ITR 392. THEREFORE, WE ACCEPT THE CONTEN TION OF THE ASSESSEE AND DIRECT THE ASSESSING AUTHORITY TO TREA T THE RENT RECOVERIES AS BUSINESS INCOME IN THE HANDS OF THE A SSESSEE- COMPANY. THIS ISSUE IS DECIDED IN FAVOUR OF THE AS SESSEE. - - ITA 1780/09, 1768/2010, ETC. 35 54. IN THE LIGHT OF THE ABOVE, THE ALTERNATE GROUN D RAISED BY THE ASSESSEE REGARDING DEDUCTION UNDER SECTION 2 4 DOES NOT SURVIVE. 55. THE NEXT GROUND IS THAT THE COMMISSIONER OF INCOME-TAX(APPEALS) HAS ERRED IN DENYING SECTION 10 B EXEMPTION TO THE AMOUNTS WRITTEN BACK, FAILING TO S EE THAT THE AMOUNTS ARE NOTHING BUT TRADE ADVANCES RELATING TO THE ELIGIBLE BUSINESS AND AS REMISSION OF TRADING LIABILITY IS T O BE TREATED AS INCOME UNDER SECTION 41(1)(A), THE SAME SHOULD BE C ONSIDERED FOR DEDUCTION UNDER SECTION 10B. THE ASSESSING OFF ICER MAY VERIFY THE NATURE OF ADVANCES MADE BY THE ASSESSEE AND IF THEY WERE TRADE ADVANCES, THE SAME SHALL FORM PART OF TH E BUSINESS INCOME ON WRITING BACK. IF SO, THE ASSESSEE IS ENT ITLED FOR DEDUCTION UNDER SECTION 10B ON THIS AMOUNT ALSO. T HE ASSESSING OFFICER IS DIRECTED TO VERIFY THE ISSUE. 56. THE NEXT GROUND RAISED BY THE ASSESSEE IS THAT THE COMMISSIONER OF INCOME-TAX(APPEALS) HAS FAILED TO S EE THAT WHEN A DIVISION WAS TRANSFERRED TO ITS SISTER CONCE RN, THERE WAS NO TRANSFER OF GOODWILL AND NO PART OF THE CONSIDER ATION WAS EARMARKED FOR GOODWILL AND AS SUCH THE QUESTION OF COMPUTATION - - ITA 1780/09, 1768/2010, ETC. 36 OF GOODWILL DOES NOT ARISE. WE HAVE HELD AGAINST T HE ASSESSEE ON THIS ISSUE WHILE DECIDING THE APPEALS IN ITA NOS.1780(MDS)/2009 AND 1768(MDS)/2010. ACCORDINGLY , THIS GROUND IS DISMISSED. 57. THE LAST GROUND RAISED BY THE ASSESSEE IS THAT THE COMMISSIONER OF INCOME-TAX(APPEALS) FAILED TO SEE T HAT IN ANY EVENT UPTO THE ASSESSMENT YEAR 2000-01 THE ENTIRE I NCOME EARNED BY THE STP UNDERTAKING IS EXEMPT UNDER SECTI ON 10B AS A TAX HOLIDAY. THE TAX HOLIDAY BENEFIT APPLIES ONL Y TO THE INCOME EARNED OUT OF EXPORT OF ARTICLES OR THINGS OR COMPU TER SOFTWARE. INCOME ARISING OUT OF SALE OF A BUSINESS DIVISION A ND OTHER ITEMS, ETC. DOES NOT QUALIFY FOR DEDUCTION UNDER SECTION 1 0B. THEREFORE, THIS GENERIC GROUND IS TO BE DISMISSED. 58. THE REGULAR ASSESSMENT APPEAL FILED BY THE ASSESSEE IS PARTLY SUCCESSFUL. 59. NEXT WE WILL CONSIDER THE REGULAR ASSESSMENT APPEAL FILED BY THE REVENUE IN ITA NO.1887(MDS)/201 0. THE ONLY GROUND RAISED BY THE REVENUE IS THAT THE COMMI SSIONER OF INCOME-TAX(APPEALS) HAS ERRED IN TREATING THE CAPIT AL GAINS ASSESSABLE IN THE HANDS OF THE ASSESSEE ON ACCOUNT OF THE - - ITA 1780/09, 1768/2010, ETC. 37 GOODWILL AS LONG-TERM CAPITAL GAINS. ACCORDING TO THE REVENUE SECTION 50 APPLIES AND, THEREFORE, THE CAPITAL GAIN S SHOULD BE TREATED AS SHORT-TERM CAPITAL GAINS. 60. WE CONSIDERED THIS ISSUE. SECTION 50 DOES NOT AUTOMATICALLY APPLY TO AN ASSET ONLY BECAUSE OF THE REASON THAT THE ASSET IS A DEPRECIABLE ASSET. ON THE OTHER HAN D, SECTION 50 APPLIES TO THOSE ASSETS WHICH WERE USED FOR THE PUR POSE OF BUSINESS ON WHICH DEPRECIATION ALLOWANCE WAS ALLOWE D AND THE BLOCK OF ASSESSMENTS REFLECTED THE WRITTEN DOWN VAL UE THEREAFTER. IN THE PRESENT CASE, THERE WAS NO OCCASION TO GIVE ANY ALLOWANCE OF DEPRECIATION ON THE GOODWILL COMPUTED IN THE HANDS OF THE ASSESSEE. THE ASSESSEE HAS BEEN IN BUSINESS FOR A PERIOD OF MORE THAN THREE YEARS. WE HAVE ALREADY H ELD WHILE DECIDING THE APPEAL IN ITA NO.1768(MDS)/2010 THAT T HE CAPITAL GAINS ARE IN THE NATURE OF LONG-TERM CAPITAL GAINS. THEREFORE, THE ISSUE IS DECIDED AGAINST THE REVENUE. 61. THE REGULAR ASSESSMENT APPEAL FILED BY THE REVENUE FAILS. 62. IN RESULT, THE REVISION APPEAL FILED BY THE AS SESSEE IS DISMISSED. THE APPEALS FILED BY THE ASSESSEE IN RE SPECT OF - - ITA 1780/09, 1768/2010, ETC. 38 REGULAR ASSESSMENT AND REVISION ASSESSMENT ARE PART LY ALLOWED. THE REGULAR ASSESSMENT APPEAL FILED BY THE REVENUE IS DISMISSED. ORDERS PRONOUNCED ON MONDAY, THE 11 TH OF JUNE, 2012 AT CHENNAI. SD/- SD/- (V.DURGA RAO) (DR. O.K.NARAYANAN) JUDICIAL MEMBER VICE-PRESIDENT CHENNAI, DATED, THE 11 TH JUNE, 2012. V.A.P. COPY TO: 1. ASSESSEE 2. DEPARTMENT 3. CIT 4. CIT(A) 5. DR 6. GF.