DCIT, CHENNAI V. D.Satish Babu, CHENNAI

ITA 1807/CHNY/2015

• Counselvise Citation: [2016] 121 COUNSELVISE.COM (IT) 2685 (ITAT-CHENNAI)
• Duration Of Justice: 5 month(s) 2 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 13-01-2016
• Appeal Filed By: Department
• Bench Allotted: B
• Next Hearing Date: 09-11-2015
• Assessment Year: 2006-2007
• Appeal Filed On: 10-08-2015
• Court: TRIBUNAL
• Department Lawyers: P RADHAKRISHNAN JCITD R
• Assessee Lawyers: K RAVI
• Keywords: Capital asset; Cost of acquisition
• Section: 147

Judgement Text

, , IN THE INCOME TAX APPELLATE TRIBUNAL B BENCH, CHENNAI ... , . , , BEFORE SHRI N.R.S.GANESAN, JUDICIAL MEMBER AND SHRI A.MOHAN ALANKAMONY, ACCOUNTANT MEMBER ./ I.T.A.NO.1807 /MDS./2015 ( !' #' / ASSESSMENT YEAR :2006-07) DEPUTY COMMISSIONER OF INCOME TAX, CENTRAL CIRCLE-1(1), CHENNAI. VS. SHRI D.SATISH BABU , M/S.INDUS MOBILE DISTRIBUTION P. LTD., 281, TTK ROAD, ALWARPET, CHENNAI-18. PAN AHYPS 1755 K ( / APPELLANT ) ( / RESPONDENT ) $% & ' / APPELLANT BY : MR.P.RADHAKRISHNAN,JCIT,D.R ()$% & ' / RESPONDENT BY : MR.K.RAVI,ADVOCATE * + & ,- / DATE OF HEARING : 09.11.2015 .# & ,- /DATE OF PRONOUNCEMENT : 13.01.2016 / O R D E R PER A.MOHAN ALANKAMONY , ACCOUNTANT MEMBER: THIS APPEAL IS FILED BY THE REVENUE, AGGRIEVED BY THE ORDER OF THE LEARNED COMMISSIONER OF INCOME TAX(A)-6, CHENNA I DATED ITA NO.1807 /MDS/2015 2 24.02.2015 IN ITA NO.153/CIT(A)-6/2013-14 PASSED UN DER SEC.143(3) READ WITH SECTION 147 & SEC. 250 OF THE ACT. 2. THE REVENUE HAS RAISED FOUR ELABORATE GROUNDS I N ITS APPEAL, HOWEVER THE CRUX OF THE ISSUE IS THAT THE REVENUE I S AGGRIEVED BY THE ORDER OF THE LD. CIT (A), WHO HAD ERRED BY HOLDING THAT THE ASSESSEES TRANSACTION OF CONVERTING HIS PROPRIETAR Y BUSINESS INTO A PRIVATE LIMITED COMPANY IS OUTSIDE THE SCOPE OF TR ANSFER AS PROVIDED UNDER SECTION 47(XIV) OF THE ACT AND THEREFORE NOT LIABLE TO BE TAXED UNDER THE HEAD LONG TERM CAPITAL GAINS. 3.1 THE BRIEF FACTS OF THE CASE ARE THAT THE ASSES SEE IS A DIRECTOR IN THE COMPANY M/S.INDUS MOBILE DISTRIBUTORS P. LTD., FILED HIS RETURN OF INCOME FOR THE ASSESSMENT YEAR 2006-07 ON 30.10.20 06 ADMITTING INCOME OF RS.38,49,050/-. INITIALLY THE RETURN WAS ACCEPTED U/S.143(1) OF THE ACT ON 22/07/2007. SUBSEQUENTLY, THE LD. ASS ESSING OFFICER REOPENED THE ASSESSMENT U/S.147 OF THE ACT BY ISSUI NG A NOTICE U/S.148 ON 01.03.2013 AND THEREAFTER THE SCRUTINY A SSESSMENT U/S. U/S.143(3) R.W.S.147 OF THE ACT WAS COMPLETED ON 07 .03.2014 WHEREIN ITA NO.1807 /MDS/2015 3 THE LD. ASSESSING OFFICER BROUGHT TO TAX UNDER THE HEAD LONG TERM CAPITAL GAIN ` 3.47 CRORES BEING THE GOODWILL TAKEN OVER BY THE RESULTANT PRIVATE LIMITED COMPANY ON THE CONVERSION OF THE ASSESSEES PROPRIETARY CONCERN. WHILE DOING SO, THE LD. ASSES SING OFFICER MADE THE FOLLOWING OBSERVATIONS IN HIS ORDER:- IT WAS SEEN FROM THE RELEVANT BALANCE SHEETS OF THE ASSESSEE THAT INTANGIBLE ASSET-GOODWILL WAS SHOWN AS UNDER:- AS AT 31/03/2005 RS.2,06,50,000/- AS ON 27/09/2005 RS.3,47,95,733/- ON A PERUSAL OF THE BALANCE SHEET OF THE ASSESSEE C OMPANY, THE INTANGIBLE ASSET-GOODWILL AMOUNTING TO RS.3,47,95,734/-(AS AT 31/03/2006) WAS SHOWN. THE VALUE OF ASSETS OWNED BY PROPRIETORSHIP CONCERN IS RS.6.90 CRORES WHICH INCLUDED INTANGIBLE ASSET GOODWILL O F RS.3.4 CRORES. AS THE NIL VALUE BAS HAS BEEN TRANSFERRED TO THE COMPANY ALONG WITH GOODWILL OF RS.3.47 CRORES THIS HAS TO BE TREATED AS SLUMP SALE U/S.50B AS NO INDIVIDUAL VALUE HAS BEEN ASSIGNED TO THE ASSETS AND LIABILITI ES AND NET WORTH WITHOUT GOODWILL ALSO NIL. THEREFORE, IT IS CLEAR THAT OUT OF TOTAL VALUE OF ASSETS TRANSFERRED FROM PROPRIETORSHIP CONCERN OF RS.6.90 CRORES, THE VALUE OF GOODWILL WAS SHOWN AT RS.3.47 CRORE. AS THE LIABILITY OF THE PROPRIET ORSHIP CONCERN WAS RS.5.80 CORES, THE NET WORTH OF THE BUSINESS WITHOUT GOODWI LL IS NIL. IN THESE ITA NO.1807 /MDS/2015 4 CIRCUMSTANCES, AS THE COST OF ACQUISITION OF GOODWI LL IS NIL, THE GOODWILL OF RS.3.47 CRORES HAS NOT BEEN OFFERED TO TAX BY THE A SSESSEE. SINCE, THE ENTIRE GOODWILL SHOULD BE TREATED AS L ONG TERM CAPITAL GAIN THE SAID GAIN ADDED TO THE TOTAL INCOME OF THE ASSESSEE. 3.2 ON APPEAL, THE LD. CIT (A) AFTER DELIBERATING THE ISSUE IN DETAIL ARRIVED AT THE FOLLOWING CONCLUSION:- 4.1.2 I HAVE CONSIDERED THE ASSESSEES SUBMISSION AS WELL AS THE CONTENTS OF THE ASSESSMENT ORDER. IN THE PRESENT C ASE, THE ASSESSEE TRANSFERRED THE ENTIRE BUSINESS OF HIS PROPRIETARY CONCERN, AS A GOING CONCERN, TO THE PRIVATE LIMITED COMPANY ON 27.09.20 05, IN WHICH ALL THE ASSETS AND LIABILITIES OF THE PROPRIETARY CONCERN W ERE TAKEN BY THE COMPANY AT THE BOOK VALUE. THE CONSIDERATION WAS PAID TO TH E ASSESSEE BY WAY OF ALLOTMENT OF SHARES OF RS. 1 CRORE. NO OTHER CONSID ERATION WAS RECEIVED BY THE ASSESSEE IN ANY FORM. 4.1.3 THE PROVISIONS OF SEC.47 OF THE ACT EXCLUDE S OME OF THE TRANSACTIONS FROM THE PURVIEW OF TRANSFER FOR THE PURPOSE OF D ETERMINING THE CAPITAL GAINS. ONE OF SUCH TRANSACTIONS IS THE TRANSFER OF BUSINESS OF A PROPRIETARY CONCERN TO A PRIVATE LIMITED COMPANY, AS A GOING CO NCERN WITH ALL ASSETS AND LIABILITIES. IN SUCH A CASE, THE TRANSACTION SH OULD NOT BE RECOGNIZED AS A TRANSFER AND AS A RESULT, NO CAPITAL GAINS WILL ARISE OUT OF SUCH TRANSACTION, SUBJECT TO THE CONDITIONS STIPULATED I N THE STATUTES. THE PROVISIONS OF SEC.47(XIV) ARE REPRODUCED AS UNDER TRANSACTIONS NOT REGARDED AS TRANSFER. ITA NO.1807 /MDS/2015 5 SEC.47. NOTHING CONTAINED IN SECTION 45 SHALL A PPLY TO THE FOLLOWING TRANSFERS (I) (XIV) WHERE A SOLE PROPRIETARY CONCERN IS SUCCEEDED BY A COMPANY IN THE BUSINESS CARRIED ON BY IT AS A RESULT OF WHICH THE SOLE PROPRIETARY CONCERN SELLS OR OTHERWISE TRANSFERS AN Y CAPITAL ASSET OR INTANGIBLE ASSET TO THE COMPANY: PROVIDED THAT (A) ALL THE ASSETS AND LIABILITIES OF THE SOLE PROP RIETARY CONCERN RELATING TO THE BUSINESS IMMEDIATELY BEFORE THE SUCCESSION B ECOME THE ASSETS AND LIABILITIES OF THE COMPANY; (B) THE SHAREHOLDING OF THE SOLE PROPRIETOR IN THE COMPANY IS NOT LESS THAN FIFTY PER CENT OF THE TOTAL VOTING POWER IN TH E COMPANY AND HIS SHAREHOLDING CONTINUES TO REMAIN AS SUCH FOR A PERI OD OF FIVE YEARS FROM THE DATE OF THE SUCCESSION; AND (C) THE SOLE PROPRIETOR DOES NOT RECEIVE ANY CONSID ERATION OR BENEFIT, DIRECTLY OR INDIRECTLY, IN ANY FORM OR MANNER, OTHE R THAN BY WAY OF ALLOTMENT OF SHARES IN THE COMPANY; 4.1.4 THUS, IF THE ENTIRE BUSINESS OF THE PROPRIETA RY CONCERN IS TRANSFERRED TO A PRIVATE LIMITED COMPANY AND THE ASSESSEE RECEIVES THE CONSIDERATION ONLY BY WAY OF SHARES AND THE ASSESSEE CONTINUES TO HAVE 50% OR MORE VOTING POWER IN THE COMPANY, THE TRANSACTION WILL N OT BE RECOGNIZED AS A TRANSFER. IN THE PRESENT CASE ALSO, THE ASSESSEE TRANSFERRED HIS BUSINESS AS A GOING CONCERN WITH ALL ASSETS AND LIABILITIES. THE ONLY CONSIDERATION RECEIVED BY THE ASSESSEE WAS THE ALLOTMENT OF SHARE S. THERE WAS NO OTHER CONSIDERATION RECEIVED BY THE ASSESSEE IN ANY FORM. FURTHER, THE ASSESSEES SHARE IN THE COMPANY IS AT 51% OF THE VO TING POWER IMMEDIATELY AFTER THE TRANSFER OF THE BUSINESS. THE REFORE, THE ASSESSEES TRANSACTION FULFILLED THE REQUIREMENTS OF THE PROVI SIONS OF SEC.47(XIV) OF THE ACT. CONSEQUENTLY, THE ASSESSEES TRANSACTION WILL GET EXEMPTED FROM THE CLASSIFICATION OF TRANSFER FOR THE PURPOSE OF THE LT. ACT AND ACCORDINGLY NO CAPITAL GAINS ARE REQUIRED TO BE COMPUTED ON ACCOUN T OF THE TRANSFER OF THE ITA NO.1807 /MDS/2015 6 PROPRIETARY CONCERN TO THE COMPANY. THEREFORE, THE ASSESSING OFFICER JUSTIFIED IN COMPUTING THE CAPITAL GAINS. 4.1.5 THE NEXT OBSERVATION OF THE ASSESSING OFFICER IS THAT THE GOODWILL SHOWN IN THE BOOKS OF THE ASSESSEE WAS A SELF-GENER ATED ASSET WHERE THE COST OF ACQUISITION IS NIL. THIS OBSERVATION OF THE ASSESSING OFFICER IS NOT CORRECT. AS EXPLAINED BY THE ASSESSEE, THE GOODWILL IS NOT A SELF-GENERATED GOODWILL. THE ASSESSEE HAD BEEN IN THE PROCESS OF B UILDING THE BRAND IMAGE BY INCURRING SUBSTANTIAL AMOUNTS OF ADVERTISE MENT AND OTHER EXPENSES. SOME OF THESE EXPENSES, WHICH HAVE ENDURI NG BENEFITS, WERE CAPITALIZED IN THE BOOKS IN THE FORM OF GOODWILL IN ALL THE YEARS UPTO THE DATE OF TRANSFER OF THE BUSINESS TO THE PRIVATE LIMITED COMPANY (IN FACT, THIS CAN BE SEEN FROM THE ASSESSEES BOOKS OF ACCOUNTS, I.E. AS ON 31.03.2005 THE GOODWILL IN THE BOOKS WAS ONLY RS. 2,06,50,000/ - A ND AS ON 27.09.2005, THE VALUE OF GOODWILL WAS RS. 3,47,95,733/-. THIS C OULD BE POSSIBLE ONLY ON ACCOUNT OF ADDITIONS / FURTHER COSTS INCURRED DURIN G THE PERIOD). ONLY THOSE EXPENSES (ADVERTISEMENT, ETC.) WHICH HAVE IMMEDIATE BENEFIT WERE TAKEN TO THE P&L ACCOUNT AND CLAIMED AS REVENUE EXPENDITU RE. HENCE, THE GOODWILL OF RS.3.47 CRORES APPEARING IN THE BOOKS A S ON 27.09.2005, WAS NOTHING BUT THE EXPENSES INCURRED IN THE FORM OF AD VERTISEMENT AND RELATED EXPENSES WHICH HAVE BEEN CAPITALIZED BY THE ASSESSE E IN HIS BOOKS. THEREFORE, SINCE THE GOODWILL OF RS.3.47 CRORES WAS THE ACTUAL EXPENSES INCURRED AND CAPITALIZED IN THE BOOKS AND SINCE THE SALE VALUE OF THE GOODWILL (BY INCLUDING THE SALE UNDER THE SLUMP SAL E AT BOOK VALUE) WAS ALSO AT RS.3.47 CRORES, THE CAPITAL GAINS WILL ALSO BE RS.NIL. HENCE, THE ASSESSING OFFICERS ACTION OF DETERMINING THE LONG TERM CAPITAL GAINS OF RS.3.47 CRORES ON TRANSFER OF GOODWILL IS NEITHER F ACTUALLY CORRECT NOR JUSTIFIED. ITA NO.1807 /MDS/2015 7 4. BEFORE US THE LD. D.R VEHEMENTLY ARGUED IN SUPPO RT OF THE ORDER OF THE LD. ASSESSING OFFICER BY STATING THAT THE ASSESSEE HAS TRANSFERRED THE GOODWILL OF HIS PROPRIETARY CONCERN TO THE PRIVATE LIMITED COMPANY WHICH WOULD AMOUNT TO TRANSFER RE SULTING IN CAPITAL GAIN CONSIDERING THE PROVISIONS OF SECTION 50B OF T HE ACT AND THEREFORE LIABLE TO BE TAXED UNDER THE HEAD LONG T ERM CAPITAL GAIN. IT WAS THEREFORE ARGUED THAT THE ORDER OF THE LD. ASSE SSING OFFICER MAY BE CONFIRMED. LD. A.R. ON THE OTHER HAND ARGUED IN SUPPORT OF THE ORDER OF THE LD. CIT (A). 5. WE HAVE HEARD BOTH THE PARTIES AND CAREFULLY PE RUSED THE MATERIALS AVAILABLE ON RECORD. THE LD. CIT (A) HAS MADE A CATEGORICAL FINDING IN HIS ORDER THAT THE ENTIRE TRANSACTION IS NOTHING BUT THE CONVERSION OF ASSESSEES PROPRIETORSHIP CONCERN AS A GOING CONCERN INTO A PRIVATE LIMITED COMPANY WHEREIN THE ASSESSEE IS HOLDING 51% OF SHARE CAPITAL WITH VOTING POWER IMMEDIATELY AFTE R CONVERSION. THE ENTIRE ASSETS AND LIABILITIES OF THE ASSESSEES PRO PRIETORSHIP CONCERN ARE ABSORBED BY THE RESULTANT PRIVATE LIMITED COMPA NY. THE ASSESSEE HAS ALSO COMPLIED WITH THE PROVISIONS OF SECTION 47 (XIV) OF THE ACT IN ITA NO.1807 /MDS/2015 8 ALL RESPECTS. CONSIDERING THESE FACTS WHICH COULD N OT BE CONTROVERTED BY THE REVENUE WE ARE OF THE VIEW THAT THE ENTIRE T RANSACTION FALLS OUTSIDE THE AMBIT OF SECTION-45 OF THE ACT. FURTHER , PROVISIONS OF SECTION 50B OF THE ACT WILL NOT BE APPLICABLE IN TH E PRESENT CASE BEFORE US BECAUSE THIS TRANSACTION IS NOT SLUMP SAL E AS ENVISAGED UNDER THE PROVISIONS OF THE ACT. IN THESE CIRCUMSTA NCES, WE FULLY AGREE WITH THE DECISION OF THE LD. CIT (A) AND ACCO RDINGLY, UPHOLD HIS ORDER, 6. IN THE RESULT, THE APPEAL OF REVENUE IS DISMISSE D. ORDER PRONOUNCED ON THE 13 TH JANUARY, 2016 AT CHENNAI. SD/- SD/- ( . . . ) ( N.R.S.GANESAN ) ( . '#$ %' ) (A.MOHAN ALANKAMONY) JUDICIAL MEMBER ACCOUNTANT MEMBER CHENNAI, DATED THE 13 TH JANUARY, 2016. 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