ELITE ORGO CHEM P. LTD, NAVI MUMBAI V. ACIT 10(3), MUMBAI

ITA 2291/MUM/2010

• Counselvise Citation: [2015] 120 COUNSELVISE.COM (IT) 9400 (ITAT-MUMBAI)
• Duration Of Justice: 4 year(s) 11 month(s) 2 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 25-02-2015
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: F
• Next Hearing Date: 09-07-2013
• Assessment Year: 2006-2007
• Appeal Filed On: 23-03-2010
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: RAJESH RANJAN PRASAD
• Assessee Lawyers: P J PARDIWALA
• Keywords: Capital asset; Business income; Capital receipt
• Section: 143(3); 28

Judgement Text

F IN THE INCOME TAX APPELLATE TRIBUNAL F BENCH, MUMBAI BEFORE SHRI R.C. SHARMA, ACCOUNTANT MEMBER & SHRI VIVEK VARMA, JUDICIAL MEMBER ./ I.T.A. NO.2291 /MUM/2010 ( / ASSESSMENT YEAR : 2006-2007 ELITE ORGO CHEM PVT. LTD., ELITE HOUSE, MAHESH, C WING, SECTOR 15, CBD BELAPUR, NAVI MUMBAI 400 614. / VS. ASSTT. COMMISSIONER OF INCOME TAX 10(3), AAYAKAR BHAVAN, M.K. ROAD, MUMBAI. ./ PAN : AAACE 7656 H ( / APPELLANT ) .. ( / RESPONDENT ) A PPELLANT BY SHRI P.J. PARDIWALA & MS. VASANTI PATEL R E SPONDENT BY : SHRI RAJESH RANJAN PRASAD / DATE OF HEARING : 13-1-2015 / DATE OF PRONOUNCEMENT : 25-2-2015 [ !' / O R D E R PER R.C. SHARMA, A.M . : THIS IS AN APPEAL FILED BY THE ASSESSEE IS DIRECTED AGAINST THE ORDER OF LD. CIT - 22, MUMBAI DATED 21-01-2009 FOR THE A.Y. 2006-07 IN THE MATTER OF ORDER PASSED U/S 143(3) OF THE INCOME TAX ACT, 1961 . 2. THE ONLY GRIEVANCE OF ASSESSEE RELATE TO TREATME NT OF NATURE OF RECEIPT ON TRANSFER OF GOODWILL, WHETHER CAPITAL RECEIPTS O R REVENUE RECEIPTS. 3. RIVAL CONTENTIONS HAVE BEEN HEARD AND RECORD PER USED. IN THE COURSE OF SCRUTINY ASSESSMENT, THE A.O. OBSERVED THAT ASSESSE E M/S ELITE ORGOCHEM P. LTD. (EOPL) WAS APPOINTED AS EXCLUSIVE DISTRIBUTOR OF G.N. RESOUND (GNRS), A ITA 2291/M/10 2 DENMARK BASED COMPANY FOR DISTRIBUTION OF ITS PRODU CTS IN INDIA FOR THE LAST 8 YEARS. AND MR. BINU RAINA (VR) AND MR. VIKRAM PAUL (VP), DIRECTORS, FOUNDERS HAVE THROUGH EOPL OPERATED THE BUSINESS OF DISTRIBU TING AND REPAIRING HEARING AID PRODUCTS OF GNRS AT VARIOUS LOCATIONS I N INDIA. AN AGREEMENT BETWEEN EOPL AND GNRS TOOK PLACE IN THE PREVIOUS YE AR RELEVANT TO AY 2006- 07, WHEREBY THE ASSESSEE COMPANY (EOPL) TRANSFERRED ITS ENTIRE BUSINESS TO GNRS FOR CONSIDERATION OF RS. 11,19,10,935. THE ASS ESSEE COMPANY IN ITS RETURN OF INCOME CLAIMED THE AMOUNT AS CAPITAL RECE IPT AND ACCORDINGLY OFFERED CAPITAL GAIN ON THIS AMOUNT. THE ASSESSEE F URTHER HAS INVESTED THIS AMOUNT IN THE BONDS ISSUED BY REC AND HAS CLAIMED T HE DEDUCTION U/S 54EC OF THE INCOME TAX ACT. 3. DURING THE SCRUTINY PROCEEDINGS THE ISSUE OF 'GO ODWILL' WAS UNDER DISCUSSION. THE ASSESSEE WAS ASKED TO SUBMIT AS TO WHY THE AMOUNT SO RECEIVED ON ACCOUNT OF TRANSFER OF 'GODDWILL' SHOUL D NOT BE CONSIDERED AS INCOME FROM BUSINESS'. THE ASSESSEE HAS MADE SUBMI SSION ON THIS ISSUE VIDE LETTER DATED 22.9.2008. IT WAS SUBMITTED THAT ASSES SEE HAD ENTERED INTO AGREEMENT WITH GNRS INITIALLY ON 16-7-1997 WHICH WA S FURTHER EXTENDED BY AGREEMENT DATED 1-8-2003 FOR DISTRIBUTION OF PRODUC TS OF GNRS ON PRIBNCIPAL TO PRINCIPAL BASIS. AS PER AGREEMENT ASSESSEE WAS ENTITLED TO FIX RESALE PRICE OF THE SAID PRODUCT. AS PER TERMS OF AGREEMENT ASS ESSEE WAS TO ADVERTISE, MAKE PUBLICITY OF THE PRODUCT. ASSESSEE WAS ALSO U NDER OBLIGATION OF CARRY OUT REPAIRS AND AFTER SALE SERVICE. THE ASSESSEE HA S MADE REFERENCE TO THE FOLLOWING CLAUSES OF AN AGREEMENT, I.E. CLAUSE NO. G, II) CLAUSE NO. 1.1, CLAUSE NO. 2.1, CLAUSE NO. 2.2, CLAUSE NO. 2.3, CLA USE NO. 2.4 & CLAUSE NO.2. 6 TO INDICATE THAT THERE WAS TRANSFER OF GOODWILL A ND AMOUNT SO RECEIVED WAS IN THE NATURE OF CAPITAL RECEIPT LIABLE TO TAX AS C APITAL GAINS RATHER THAN AS BUSINESS INCOME. FURTHER THE AUTHORIZED REPRESENTAT IVE OF THE ASSESSEE DURING SCRUTINY PROCEEDINGS SUBMITTED THAT THE AMOU NT HAS BEEN DECIDED AS PER THE MUTUAL AGREEMENT BETWEEN THE SELLER & .THE PURCHASER. ITA 2291/M/10 3 4. IN THE ASSESSMENT ORDER, THE A.O. OBSERVED THAT ASSESSEE WAS IN RECEIPT OF RS. 11,19,10,935/- WHICH IT HAD SHOWN AS GOODWI LL IN THE COMPUTATION OF INCOME AND SHOWN CAPITAL GAIN ON THIS AMOUNT. A.O. FURTHER NOTED THAT IN COMPUTATION OF INCOME THE ASSESSEE HAS TAKEN PURCHA SE VALUE OF THE GOODWILL AT ZERO AND THE ENTIRE RECEIPTS HAVE BEEN SHOWN AS CAPITAL GAIN AND ALSO INVESTED AN AMOUNT OF RS. 9.96 CRORES IN BONDS ISSU ED BY REC AND CLAIMED DEDUCTION U/S 54EC. A.O. ASKED THE ASSESSEE AS TO WHY THE SAID GOODWILL SHOULD NOT BE TREATED AS BUSINESS INCOME. THE ASSES SEE HAD FILED ITS EXPLANATION DATED 22-09-2008 WHICH WAS REPRODUCED B Y A.O. IN THE ASSESSMENT ORDER IN PARA 6, PAGE 3. A.O. NOTED THA T GOODWILL IS GENERALLY USED TO DENOTE THE BUSINESS ARISING FROM CONNECTION AND REPUTATION AND ITS VALUE IS WHAT CAN BE GOT FOR THE CHANCE OF BEING AB LE TO KEEP THAT CONNECTION AND IMPROVE UPON IT BUT IT IS WELL ESTABLISHED THAT THERE IS NO PRESUMPTION THAT EVERY BUSINESS UNDERTAKING HAS GOODWILL. A.O. ALSO VIEWED THE AGREEMENT BETWEEN EOPL AND GNRS WHICH TOOK PLACE IN THE PREVI OUS YEAR RELEVANT TO A.Y. 2006-07. A.O. ALSO VERIFIED PARA 2 OF THE AGR EEMENT WHICH STATED THAT EOPL TRANSFERS AND ASSIGNS THE GOODWILL TO GNRS ABS OLUTELY AND FOREVER FROM THE DATE HEREOF AND THIS AGREEMENT SHALL BENEFIT GN RS OR ANY SUCCESSORS AND ASSIGNS OF GNRS AND SHALL BE BINDING UPON THE SUCCE SSORS AND ASSIGNS OF EOPL AND AGREED BOTH THE PARTIES THE PAYMENT OF CON SIDERATION OF USD 2,570,000 (US DOLLARS TWO MILLION FIVE HUNDRED SEVE NTY THOUSAND ONLY). A.O. ALSO NOTED THAT CLAUSE REFERRED BY THE ASSESSE E NOWHERE SPELLS OUT THE EXACT NATURE OF GOODWILL AND THE CLAUSES ARE GENE RAL IN NATURE AND NO CONNECTION WITH THE ACTUAL VALUE OF GOODWILL DETERM INED. A.O. REJECTED CLAIM OF ASSESSEE REGARDING CAPITAL RECEIPT RELYING ON TH E DECISION IN THE CASE OF RUSTOM CAVASJEE COOPER VS. UOI (1970) 40 COMP. CAS 325 AND GUZDAR KAJORA COAL MINES LTD. VS.CIT (1972) 85 TR 599. THE A.O. FURTHER NOTED THAT ASSESSEE HAS NOT BEEN ABLE TO ASCERTAIN WITH THE EV IDENCE THE CONTENTION ABOUT THE GOODWILL AND ACCORDINGLY TREATED THIS REC EIPT AS COMPENSATION ITA 2291/M/10 4 WHICH IS TAXABLE U/S 28(VA) OF THE I.T. ACT. THE A. O. NOTED THAT IT MERELY DEPRIVED THE ASSESSEE OF A TRADING REVENUE FOR THE PERIOD OF 2 YEARS, LEAVING IT FREE TO DEVOTE ITS ENERGIES AFTER THE END OF PERIOD OF 2 YEARS TO CARRY ON THE REST OF THE BUSINESS. A.O. THEREFORE HELD THAT COMPENSAT ION RECEIVED DID NOT REPRESENT THE PRICE RECEIVED FOR LOSS OF CAPITAL AS SET, BUT AT THE MOST CAN BE SAID AS AN ADVANCE RECEIVED BY THE ASSESSEE WITH RE GARD TO THE INCOME THAT HE COULD HAVE EARNED. IT WAS FURTHER STATED BY A.O. TH AT JUST BECAUSE ASSESSEE HAS USED THE TERM GOODWILL, IT DOESNT MEAN THAT AM OUNT IN QUESTION WOULD BECOME GOODWILL. ACCORDINGLY THE RECEIPT ON ACCOUNT OF GOODWILL WAS ASSESSED UNDER THE HEAD PROFITS AND GAIN FROM BUSINESS UND ER THE PROVISIONS OF SECTION 28(VA) OF THE INCOME TAX ACT, 1961 IN PLACE OF ASSESSEES CLAIM OF CAPITAL RECEIPT LIABLE TO TAX UNDER THE HEAD OF CAP ITAL GAINS. 5. BEFORE THE LD. CIT(A) IT WAS SUBMITTED BY THE AS SESSEE THAT BECAUSE OF THE INCREASE IN TURNOVER SINCE SO MANY YEARS AND IN CURRING HUGE EXPENDITURE FOR INCREASE IN THE TURNOVER, THE ASSESSEE HAD GENE RATED GOODWILL. HOWEVER THE LD. CIT(A) DID NOT AGREE WITH ASSESSEES CONTEN TION AND HE OBSERVED THAT INCREASE IN TURNOVER ITSELF DOESNT GENERATE ANY GO ODWILL SINCE THE BRAND NAME GNRS FOR SELLING THE HEARING AID BELONGED TO THE PA RENT COMPANY ITSELF AND IT WAS NEVER PROPERTY OF THE ASSESSEE COMPANY. IN VIEW OF THIS, THE LD. CIT(A) HELD THAT THE INCOME RECEIVED HAS RIGHTLY BEEN TAXE D BY THE A.O. AS PER THE LD. CIT(A) THE ASSET IN THE NAME OF GOODWILL HAS NEVE R APPEARED IN THE BALANCE SHEET OF THE ASSESSEE AND HENCE THE COMPENSATION RE CEIVED CANNOT BE STATED TO BE IN LIEU OF THE GOODWILL TRANSFERRED BY THE AS SESSEE. THE ASSET WHICH IS NOT OWNED BY THE ASSESSEE CAN NEVER BE TRANSFERRED. THE ASSESSEE CANNOT TERM ANY RECEIPT AS GOODWILL AND CLAIM IT AS CAPITA L RECEIPT. 6. IT WAS SUBMITTED BEFORE THE LD. CIT(A) THAT THE ASSESSEE HAD CEASED ITS SOURCE OF EARNING I.E. USINESS OPERATION ITSELF IS CANCELLED WHICH HAS RESULTED INTO STERLISATION OF DISTRIBUTION REVENUE YIELDING ASSET. THE LD. CIT(A) REJECTED ITA 2291/M/10 5 ASSESSEES CONTENTION AND HELD THAT THE COMPENSATIO N RECEIVED WAS ONLY IN LIEU OF ITS PROSPECTIVE INCOME FOR TWO YEARS DURING WHICH THE SAID BUSINESS WAS BANNED BY THE PARENT COMPANY, HENCE IT HAS TO B E TAXED UNDER THE HEAD BUSINESS INCOME ONLY. FURTHER, THE LD. CIT(A) NOTED THAT WHAT WAS TRANSFERRED BY THE ASSESSEE COMPANY IS THE BUSINESS AND NOT THE PHYSICAL ASSETS AND HENCE THERE CANNOT BE ANY QUESTION OF CAPITAL GAINS . 7. RIVAL CONTENTIONS HAVE BEEN CONSIDERED AND RECOR D PERUSED. WE HAVE ALSO DELIBERATED ON THE JUDICIAL PRONOUNCEMENTS REF ERRED BY LOWER AUTHORITIES IN THEIR RESPECTIVE ORDERS AS WELL AS CITED BY THE LD. A.R. AND LD. D.R. DURING THE COURSE OF HEARING BEFORE US IN THE CONTEXT OF F ACTUAL MATRIX OF THE INSTANT CASE. WE HAVE ALSO CAREFULLY GONE THROUGH THE TERMS AND CONDITIONS OF THE AGREEMENT EXECUTED BY THE ASSESSEE WITH GNRS ON 16- 7-1997 AS WELL AS 1-08-2003 WITH REGARD TO EXCLUSIVE DISTRIBUTORSHIP GIVEN TO THE ASSESSEE FOR SALE AND MARKETING OF GNRS PRODUCTS. WE HAVE ALSO CAREFULLY GONE THROUGH THE AGREEMENT EXECUTED ON 12-8-2005 ENTERED BY THE ASSESSEE WITH GNRS PURSUANT TO WHICH GNRS TOOK OVER THE ASSESSEES SAI D BUSINESS OF DISTRIBUTION NETWORK ETC., DIFFERENT CLAUSES OF WHI CH PROVIDE FOR ASSIGNMENT/TRANSFER OF GOODWILL BY ASSESSEE TO GNRS FOR WHICH THE ASSESSEE WAS TO RECEIVE RS. 11,19,10,935/- AS A CONSIDERATIO N FOR SUCH TRANSFER OF GOODWILL. THROUGH THIS AGREEMENT, THE ASSESSEE WAS ALSO IN RECEIPT OF RS. 43,85,687./- FOR NON-COMPETE COVENANT. THE AMOUNT RECEIVED ON ACCOUNT OF ASSIGNMENT/TRANSFER OF GOODWILL WAS OFFERED BY ASSE SSEE AS CAPITAL RECEIPT LIABLE TO TAX UNDER THE HEAD CAPITAL GAINS. THE A MOUNT RECEIVED FOR NON- COMPETE COVENANT WAS OFFERED BY ASSESSEE AS BUSINES S INCOME AND SAME WAS ACCEPTED BY A.O. THE CONTROVERSY IN THIS APPEAL REV OLVES AROUND THE AMOUNT RECEIVED ON TRANSFER OF GOODWILL, WHETHER AMOUNTS T O CAPITAL RECEIPT LIABLE TO TAX UNDER THE HEAD CAPITAL GAINS OR INCOME FROM BUSINESS OR PROFESSION. ITA 2291/M/10 6 8. FROM THE RECORD WE FOUND THAT THE ASSESSEE, EOPL HAD BEEN APPOINTED AS EXCLUSIVE DISTRIBUTOR OF GN RESOUND, A DENMARK B ASED COMPANY (GNRS) FOR DISTRIBUTION OF PRODUCTS NAMELY HEARING INSTRUM ENTS, ASSISTIVE LISTENING DEVICES IN INDIA BY GNRS. MR. VINOO RAINA, MR. VIKR AM PAL, HAVE THROUGH THE ASSESSEE, OPERATED THE SAID BUSINESS OF DISTRIBUTIO N OF THE SAID PRODUCT INCLUDING CARRYING OUT REPAIRS AND AFTER SALES SERV ICE OF THE SAID PRODUCT OF GNRS AT VARIOUS LOCATIONS IN INDIA. THE ONLY BUSINE SS ACTIVITY CARRIED OUT BY ASSESSEE WAS RELATED TO THE DISTRIBUTION OF SAID PR ODUCT OF GNRS. FOR THIS PURPOSE, THE ASEESSEE HAD ENTERED INTO EXCLUSIVE DI STRIBUTOR AGREEMENT WITH GNRS INITIALLY ON 16.7.1997 AND WHICH WAS FURTHER E XTENDED BY THE AGREEMENT DATED 1.8.2003. THE SAID DISTRIBUTION AGR EEMENT WHICH WAS ENTERED INTO WITH GNRS WAS ON PRINCIPAL TO PRINCIPA L BASIS AND THE TERMS AND CONDITIONS OF THE SAID AGREEMENT STIPULATED THAT TH E ASSESSEE WAS ENTITLED TO FIX RESALE PRICE OF THE SAID PRODUCT AND THAT ASSES SEE WAS RESPONSIBLE FOR THE PUBLICITY, ADVERTISEMENT EXHIBITIONS, FOR MAINTAINI NG THE TRADE SECRETS AND FOR CARRYING OUT REPAIRS AND AFTER SALE SERVICES OF THE SAID PRODUCT. FROM THE RECORD WE FOUND THAT OVER A PERIOD OF 8 YEARS, THE ASSESSEE HAD DEVELOPED A DISTRIBUTION NETWORK FOR THE SAID PRODUCT OF GNRS D UE TO THE EXPERIENCE AND SKILL DEVELOPED BY THE ASSESSEE, AND IT HAD ACQUIRE D THE EDGE IN THE FIELD OF MARKETING AND DISTRIBUTION OF THE SAID PRODUCT OF G NRS. THESE INTANGIBLE ASSETS WERE SELF-GENERATING ASSET IN THE NATURE OF GOODWILL. THE SAID DISTRIBUTOR AGREEMENT WAS TERMINATED BY AGREEMENT D ATED 12/08/2005 ENTERED INTO BETWEEN THE GNRS AND THE ASSESSEE, PUR SUANT TO WHICH GNRS TOOK OVER THE ASSESSEE'S SAID BUSINESS OF DISTRIBUT ION NETWORK ETC. AS PER THE SAID AGREEMENT DATED 12.08.2005, THE ASSESSEE WAS P AID BY GNRS CONSIDERATION OF RS. 11,19,10,935/- FOR THE ASSIGNM ENT /TRANSFER OF THE GOODWILL AND AMOUNT OF RS. 43,85,687/- FOR NON-COMP ETE COVENANT. THUS THE DISPUTE BEFORE US REVOLVES AROUND TAXABILITY OF AMO UNT WHICH WAS RECEIVED ON ACCOUNT OF GOODWILL WHICH WAS ASSIGNED/TRANSFERRED TO GNRS UNDER THE SAID AGREEMENT DATED 12.8.2005. IN RESPECT OF CONSIDERAT ION RECEIVED ON ACCOUNT OF ITA 2291/M/10 7 NON-COMPETE COVENANT, THE SAME HAS BEEN OFFERED BY ASSESSEE AS BUSINESS INCOME AND A.O. HAS ACCEPTED THE SAME. AFTER GOING THROUGH VARIOUS CLAUSES OF AGREEMENT AND KEEPING IN VIEW THE FACTS AND CIRC UMSTANCES OF THE CASE, WE FOUND THAT OVER THE YEARS THE ASSESSEE HAD DEVELOPE D NETWORK FOR MARKETING AND DISTRIBUTION OF SAID PRODUCT OF GNRS ALL OVER I NDIA. THE BUSINESS WHICH WAS CARRIED OUT BY THE ASSESSEE WAS CONFINED TO DIS TRIBUTION OF SAID PRODUCT OF GNRS. THERE IS NO DISPUTE TO THE FACT THAT ASSES SEE'S MARKETING SKILL, SELLING AND DISTRIBUTION ACTIVITIES CONSTITUTED VER Y IMPORTANT FUNCTION OF THE BUSINESS OF ASSESSEE. OVER THE PERIOD OF 8 YEARS, T HE ASSESSEE HAD CAPTURED HUGE MARKET AND INCREASED SUBSTANTIAL TURNOVER. AS PER THE TERMS OF AGREEMENT ENTERED ON 16-7-1997 & 1-8-2003, THE ASSE SSEE WAS ALSO REQUIRED TO PROVIDE AFTER-SALES SERVICES INCLUDING REPAIRING OF THE INSTRUMENTS, AND FOR THAT PURPOSE THE ASSESSEE HAD ENGAGED QUALIFIED AND SKILLED TECHNICIANS. AS PER MATERIALS PLACED ON RECORD, WE FOUND THAT OVER A PERIOD OF LAST 8 YEARS, ASSESSEE HAD APPOINTED VARIOUS SUB-DISTRIBUTORS ALL OVER INDIA FOR THE SAID PRODUCTS OF GNRS. IN VIEW OF THE ABOVE FACTS, GOODW ILL HAD BEEN CREATED OVER THE PERIOD OF EIGHT YEARS. THEREAFTER THE AMOUNT RE CEIVED ON TRANSFER OF THIS GOODWILL WAS CAPITAL IN NATURE LIABLE TO CAPITAL GA INS TAX. 8. IT IS AN UNDISPUTED FACT THAT THE ASSESSEE HAD B EEN A DISTRIBUTOR OF GNRS'S SAID PRODUCT FOR LAST 8 YEARS AND THE ASSESS EE HAD SPECIALIZED KNOWLEDGE, BUSINESS SKILL, EXPERIENCE FOR MARKETING OF THE SAID PRODUCT AND REPUTATION WITH THE RESULT GOODWILL HAD BEEN CREATE D OVER THE YEARS. THEREFORE CONSIDERATION RECEIVED ON TRANSFER/ASSIGNMENT OF TH E SAID GOODWILL WAS ON ACCOUNT OF TRANSFER OF CAPITAL ASSET AND WAS CHARGE ABLE TO TAX UNDER THE HEAD 'CAPITAL GAINS' AND NOT AS BUSINESS PROFIT, UNDER T HE PROVISION OF SECTION 28(VA). IT WAS HELD BY THE HON'BLE SUPREME COURT IN THE CASE OF CIT V. B. C. SRINIVASAN SHETTY, 128 ITR 294, THAT GOODWILL IS A CAPITAL ASSET AND THE AMOUNT RECEIVED ON TRANSFER OF GOODWILL AS PER PROV ISIONS OF SECTION 55(2)(A) OF THE INCOME TAX ACT, 1961, WOULD BE CHARGEABLE TO IN COME TAX UNDER THE HEAD ITA 2291/M/10 8 'CAPITAL GAINS'. IN SECTION 55(2)(A), IT HAS BEEN R ECOGNIZED THAT THE GOODWILL IS A CAPITAL ASSET FOR THE PURPOSE OF COMPUTATION OF C APITAL GAINS. 9. FOLLOWING ARE SOME OF THE TERMS AND CONDITIONS OF THE SAID AGREEMENT DATED 12.8.2005 FOR TRANSFER OF GOODWILL AND NON-CO MPETE AGREEMENT WHICH DEMONSTRATES THAT THE ASSESSEE HAD AGREED FOR TRANS FER OF GOODWILL WHICH WAS CREATED ON ACCOUNT OF BUSINESS OF MARKETING NETWORK AND DISTRIBUTION RELATING TO THE SAID PRODUCT OF GNRS OVER A LONG PERIOD OF 8 YEARS. CLAUSEG 'IN THE LAST 8 (EIGHT) YEARS, THE FOUNDERS HAVE THR OUGH EAPL, AND AT THE EXPENSE OF EOPL GENERATED AND MAINTAINED SIGNIFICANT GOODWI LL (DEFINED BELOW) WHICH IS CRUCIAL TO EOPL'S BUSINESS. IT IS AGREED BY AND BET WEEN GNRS AND THE FOUNDERS THAT UPTO TERMINATION OF THE RELATIONSHIP BETWEEN G NRS AND EAPL, SUCH GOODWILL SHALL BE TRANSFERRED TO GNRS WHO SHALL THE REAFTER LICENSE THE SAME TO THE COMPANY IN ACCORDANCE WITH THE TERMS HEREOF. ' DEFINITIONS: 'BUSINESS OF THE COMPANY MEANS THE BUSINESS OF THE COMPANY WHICH CONSISTS OF MANUFACTURING, DISTRIBUTING AND REPAIRING GNRS H EARING AIDS.' BUSINESS INFORMATION' INCLUDES WITHOUT LIMITATION, TECHNICAL OR FINANCIAL OR BUSINESS INFORMATION PROPRIETARY OR INTERNAL INFORMATION REL ATED BOTH PRODUCTS OR SERVICES OF EOPL, BUSINESS (DEFINED BELOW) INCLUDING INFORMA TION RELATED TO TRADE SECRETS, BUSINESS STRATEGIES, MARKETING PLANS, PROCUREMENT R EQUIREMENTS, PURCHASING, MANUFACTURING, CUSTOMERS, DEALERS, DISTRIBUTORS, CO MPETITORS, EMPLOYEES, BUSINESS AND CONTRACTUAL RELATIONSHIPS, BUSINESS FO RECASTS, SALES AND MERCHANDISING, PROCESS/ FLOW CHARTS, BUSINESS MODEL S AND ALL SUCH OTHER ALLIED AND ANCILLARY INFORMATION WHICH BY ITS NATURE OR TH E CIRCUMSTANCES IS CONNECTED TO CARRYING ON THE EOPL BUSINESS. EOPL BUSINESS MEANS THE ERSTWHILE BUSINESS OF ECP L CONSISTING OF MANUFACTURING, DISTRIBUTING AND REPAIRING GNRS BEAR ING AIDS IN INDIA. GOODWILL INCLUDES WITHOUT LIMITATION THE REPUTAT ION, PATRONAGE, INTELLECTUAL PROPERTY RIGHTS (DEFINED BELOW) AND BUSINESS INFORM ATION CREATED, ACQUIRED, DEVELOPED AND MAINTAINED BY THE FOUNDERS AND EOPL A ND ASSOCIATED, WHETHER DIRECTLY OR INDIRECTLY, WITH THE EOPL BUSINESS.' ''INTELLECTUAL PROPERTY RIGHTS' INCLUDES OTHER THAN TRADEMARKS, PATENTS, COPYRIGHTS, REGISTERED DESIGNS, ALL OTHER IDEAS, DE SIGNS, CONCEPTS, TECHNIQUES, PRACTICES DISCOVERIES, INVENTIONS, PROCEDURES, SPEC IFICATIONS, DATA, MEMORANDA, DOCUMENTATION AND OTHER MATERIALS, THAT ARE FIRST C ONCERNED, ACQUIRED, CREATED OR REDUCED TO PRACTICE BY EOPL, AND/ OR THE FOUNDER S IN CONNECTION WITH ITA 2291/M/10 9 CARRYING ON EOPL, BUSINESS AND/ OR EMBODIED, UNDERL YING OR REDUCED TO PRACTICE IN THE EOPL BUSINESS AND FURTHER INCLUDES ALL MORAL RIGHTS AND ANY DERIVATIVE WORK, IMPROVEMENT, EXTENSION, REVISION, MODIFICATION, TRANSLATION, ABRIDGEMENT, CONDENSATION, EXPANSION, COLLECTION, C OMPILATION, ERROR CORRECTION, OF THE AFORESAID.' CLAUSE-2.2OF TRANSFER OF GOODWILL AND LICENSE THERE OF TO THE COMPANY 'EOPL AND THE FOUNDER HEREBY DECLARE AND CONFIRM TH AT ON AND FROM THE DATE HEREOF, THEY HAVE NO RIGHT, TITLE, INTEREST OR BENE FIT WHATSOEVER INTO, OVER OR UPON THE GOODWILL HEREBY TRANSFERRED AND ASSIGNED BY EOP L TO GNRS. EOPL AND THE FOUNDERS FURTHER COVENANT, DECLARE AND CONFIRM THAT THEY HAVE, PRIOR TO EXECUTION OF THIS AGREEMENT, TERMINATED ALL OTHER A RRANGEMENTS/AGREEMENTS FOR CONCURRENT USE/LICENSED USE OF THE GOODWILL OR ANY PART OF IT, BY ANY OTHER PARTY WHO MAY HAVE ENJOYED THE USE OF THE GOODWILL PURSUA NT TO ANY SUCH ARRANGEMENTS/ AGREEMENTS MADE / EXECUTED BY EOPL.' CLAUSE 3.1- 'EOPL AND THE FOUNDERS REPRESENT AND WA RRANT AS FOLLOWS; (A) THAT EOPL UNTIL THE DATE HEREOF WAS THE SOLE PR OPRIETOR OF THE GOODWILL AND WAS ENTITLED TO ALL RIGHTS OF EVERY CHARACTER IN TH E GOODWILL AND THAT ECPL AND THE FOUNDERS HAVE FULL RIGHT AND AUTHORITY TO EXECU TE THIS AGREEMENT AND TRANSFER THE RIGHTS HEREBY CONVEYED AND THE CONSENT OF NO OTHER PERSON OR ENTITY IS REQUIRED OR NECESSARY. (B) THAT EOPL AND/OR THE FOUNDERS ARE NOT SUBJECT T O ANY OBLIGATION OR DISABILITY THAT WILL OR MIGHT HINDER OR PREVENT THE FULL COMPLETION AND PERFORMANCE BY EOPL AND/ OR THE FOUNDERS OF THE COV ENANTS AND CONDITIONS STIPULATED HEREIN. (C) THAT THE GOODWILL UNTIL THE DATE HEREOF HAS NOT INFRINGED AND DOES NOT IN ANY WAY INFRINGE UPON THE COPYRIGHT, TRADEMARK, PATENT OR ANY OTHER RIGHTS OF ANY OTHER PERSON, (D) THAT THE GOODWILL AND ALL OTHER RIGHTS THEREIN HAVE IN NO WAY BEEN SOLD, MADE SUBJECT TO A SECURITY INTEREST, GRANT, ARRANGE MENT OR AGREEMENT THAT MIGHT CONFLICT OR INTERFERE WITH THE COMPANY'S COMPLETE E NJOYMENT OF THE GOODWILL FROM THE DATE OF INCORPORATION OF THE COMPANY. (E) THAT THE USE OF THE GOODWILL BY GNRS OR ITS ASS IGNS WILL NOT IN ANY WAY INFRINGE UPON ANY RIGHTS OF ANY PERSON AND THAT EOP L AND/ OR THE FOUNDERS HAVE NOT AND WILL NOT TAKE ANY ACTION WHICH MIGHT P REVENT OR IMPAIR THE EXERCISE OF ANY RIGHTS ASSIGNED HEREBY, ' 10. PLAIN READING OF THE VARIOUS CLAUSES OF THE AGR EEMENT CLEARLY INDICATES THAT THERE WAS A TRANSFER OF GOODWILL FOR WHICH CON SIDERATION OF RS. 11,19,10,935/- WAS PAID AND SEPARATE CONSIDERATION OF RS. 43,85,687/- WAS ITA 2291/M/10 10 PAID FOR NON- COMPETE CLAUSES, WHICH WAS OFFERED BY ASSESSEE AS REVENUE RECEIPTS. FROM THE VARIOUS CLAUSES OF THE ABOVE AGR EEMENT, IT IS CLEAR THAT ENTIRE BUSINESS OF ASSESSEE WAS TRANSFERRED AND THE RE WAS AN IMPAIRMENT OF THE CAPITAL STRUCTURE OR PROFIT MAKING APPARATUS, T O THE EXTENT OF BUSINESS SPECIFIED IN THE SAID AGREEMENT. IT IS WELL SETTLED BY SUPREME COURT IN THE CASE OF OBEROI HOTEL (P) LTD. V. CIT 236 ITR 903THA T WHEN THERE IS A LOSS OF SOURCE OF INCOME, TO THE ASSESSEE, AND THAT RIGHT I S DETERMINED FOR A CONSIDERATION THE SAME IS A CAPITAL RECEIPT. THE HO NBLE SUPREME COURT HELD THAT IT WAS NOT FOR SETTLEMENT OF RIGHTS UNDER A TR ADING CONTRACT, BUT THE INJURY WAS INFLICTED ON THE CAPITAL ASSET OF THE AS SESSEE AND GIVING UP THE CONTRACTUAL RIGHT ON THE BASIS OF THE PRINCIPLE AGR EEMENT HAD RESULTED IN THE LOSS OF SERVICE OF THE ASSESSEE'S INCOME. THE RECEI PT WAS HELD TO BE A CAPITAL RECEIPT. 11. SIMILAR VIEW WAS ALSO TAKEN BY THE HON'BLE SUPR EME COURT IN CIT V. BOMBAY BURMAH TRADING CORPN. LTD. (1986) 161 ITR 38 6 BY HOLDING THAT THE COMPENSATION RECEIVED FOR IMMOBILIZATION, STERILIZA TION, DESTRUCTION OR LOSS, TOTAL OR PARTIAL, OF A CAPITAL ASSET WOULD BE A CAP ITAL RECEIPT. IF A SUM REPRESENTED PROFIT IN A NEW FORM, THEN THAT WOULD B E INCOME BUT WHERE THE AGREEMENT RELATED TO THE STRUCTURE OF THE ASSESSEE S PROFIT MAKING APPARATUS AND AFFECT THE CONDUCT OF THE BUSINESS, THE SUMS RE CEIVED FOR CANCELLATION OR VARIATION OF SUCH AGREEMENT WOULD BE CAPITAL RECEIP T. 12. FROM THE RECORD WE FOUND THAT THE ASSESSEE HAD SPECIAL MARKETING SKILL WITH A REPUTATION IN THE FIELD OF DISTRIBUTION OF S AID PRODUCT, WHICH ASSESSEE WAS PROHIBITED FROM CARRYING ON AFTER THIS AGREEMEN T. THIS ARGUMENT AMOUNTS TO STERLISATION OF THE VERY PROFIT MAKING APPARATUS OF THE ASSESSEE. THUS THE COMPENSATION RECEIVED FOR IMMOBILIZATION, STERLISAT ION, DESTRUCTION OR LOSS OF PROFIT MAKING APPARATUS WOULD BE CAPITAL RECEIPT. M ERELY BECAUSE THE ASSESSEE WAS SELLING PRODUCT OF GNRS AND DID NOT HA VE ITS OWN TRADE MARK ITA 2291/M/10 11 THE SAME WILL NOT MAKE ANY DIFFERENCE ON SPECIAL MA RKETING SKILL OF THE ASSESSEE WITH REPUTATION AND IT CANNOT BE CONSTRUED THAT THE ASSESEE HAD NOT CREATED GOODWILL. BY VIRTUE OF THE SAID AGREEMENT, THE SOURCES OF EARNING OF INCOME HAS BEEN EXTINGUISHED, ACCORDINGLY THE SAID RECEIPT WAS IN THE NATURE OF CAPITAL RECEIPT IN THE HANDS OF THE ASSESSEE WH ICH WAS OFFERED AS CAPITAL GAINS. 13. THE AGREEMENT DATED 12.08.2005 FOR TRANSFER OF GOODWILL CLEARLY DEMONSTRATES THAT GNRS HAS ACKNOWLEDGED THE FACT TH AT ASSESSEE HAD CREATED GOODWILL AND ACCORDINGLY AGREED TO PAY THE SAID CONSIDERATION. THE BASIS ON WHICH SUCH GOODWILL WAS RECOGNIZED IS ALRE ADY DEMONSTRATED BY GNRS AND THEREFORE THE CIT (APPEALS) WAS NOT JUSTIF IED IN SIMPLY DISBELIEVING THE TERMS AND CONDITIONS OF THE SAID AGREEMENT IN A BSENCE OF ANY INDICATION THAT THE AGREEMENT IN QUESTION IS MAKE BELIEF AGREE MENT. IN THIS CONNECTION, DECISION OF CALCUTTA HIGH COURT IN THE CASE OF CIT VERSUS ARUNDUA, 180 ITR PAGE 494 CAN BE RELIED ON WHEREIN HON'BLE CALCUTTA HIGH COURT HAS HELD THAT AFTER BOTH THE PARTIES TO THE AGREEMENT HAVE UNDERS TOOD THE AGREEMENT IN CERTAIN WAY, AND ACTED UPON THAT AGREEMENT, THEN IT IS NOT OPEN TO THE ASSESSING OFFICER TO GIVE ANOTHER INTERPRETATION. S IMILAR VIEW HAS BEEN TAKEN BY DELHI HIGH COURT IN THE CASE OF D. S. BIST & SON S VERSUS CIT, 149 ITR 276 AND IN THE CASE OF CIT VERSUS DD INDUSTRIES LIMITED , 323 ITR 596. 14. NOW COMING TO THE DECISION OF LD. CIT (APPEALS) FOR UPHOLDING THE ADDITION MADE UNDER THE PROVISIONS OF SECTION 28(VA ) OF THE INCOME TAX ACT, HE HAS RELIED ON THE DECISION OF BOMBAY HIGH COURT IN THE CASE OF JOHN D'SOUZA VERSUS CIT, 226 CTR 540. THE SAID DECISION IS DISTINGUISHABLE ON FACTS AND NOT APPLICABLE TO THE CASE OF THE PRESENT ASSESSEE. THE BOMBAY COURT ON THE FACTS OF THE SAID CASE HELD THAT THE A SSESSEE IN THE SAID CASE WAS A TRESPASSER WHO WAS NOT THE OWNER OF ANY ASSET AND THERE WAS NO TRANSFER OF CAPITAL ASSET DURING THE PREVIOUS YEAR. ALL THAT HA S BEEN AGREED BY THE ITA 2291/M/10 12 ASSESSEE WAS THAT HE WILL ABSTAIN HIMSELF FROM CARR YING OUT ANY ACTIVITY RELATING TO FISH FARMING IN THE PONDS LOCATED IN TH E SAID LAND AND THEREFORE RECEIPT OF RS. 25,00,000/- WHICH WAS RECEIVED BY TH E ASSESSEE UNDER THE AGREEMENT CANNOT BE SAID TO BE PROFIT ARISING FROM TRANSFER OF CAPITAL ASSETS AND ACCORDINGLY WAS TAXABLE UNDER THE PROVISIONS OF SECTION 28(VA) OF THE I. T. ACT. 15. FOR TAXING THE AMOUNT RECEIVED ON TRANSFER/ASSI GNMENT OF GOODWILL UNDER THE HEAD CAPITAL GAINS, THE RELEVANT PROVISIO NS OF SUB SECTION (2) OF SECTION 55 ARE AS UNDER: FOR THE PURPOSE OF SECTIONS 48 AND 49 (COST OF ACQ UISITION) (A) IN RELATION TO A CAPITAL ASSET BEING GOODWILL OF A BUSINESS OR A TRADE MARK OR BRAND NAME ASSOCIATED WITH BUSINESS OR A RIGHT T O MANUFACTURE PRODUCE OR PROCESS ANY ARTICLE OR THING OR RIGHT TO CARRY O N ANY BUSINESS, TENANCY RIGHTS, STAGE CARRIAGE PERMITS OR LOOM HOURS. (B) PROVISION OF CL. (VA) OF SECTION 28 FOR TAKING RECEIPTS UNDER THE HEAD PROFITS AND GAINS OF BUSINESS OR PROFESSION READS AS UNDER : (A) NOT ANY SUM, WHETHER RECEIVED OR RECEIVABLE, IN CAS H OR KIND UNDER AN AGREEMENT FOR CARRYING OUT ANY ACTIVITY IN RELAT ION TO ANY BUSINESS; OR (B) NOT SHARING ANY KNOW HOW PATENT COPYRIGHT TRADE MAR K LICENCE, FRANCHISEE OR ANY OTHER BUSINESS OR COMMERCIAL RIGH T OF SIMILAR NATURE OR INFORMATION OR TECHNIQUE LIKELY TO ASSIST IN THE MANUFACTURE OR PROCESSING OF GOODS OF PROVISION FOR SERVICES. PROVIDED THAT SUB-CLAUSE (A) SHALL NOT APPLY TO: ANY SUM WHETHER RECEIVED OR RECEIVABLE IN CASH OR K IND ON ACCOUNT OF TRANSFER OF THE RIGHT TO MANUFACTURE, PRODUCE OR PROCESS ANY ARTICLE OR THING OR RIGHT TO CARRYON ANY BUSINESS WHICH IS CHARGEABLE UNDER THE HEAD CAPITAL GAINS. 16. FROM THE COMBINED READING OF SECTIONS 55(2) AND SEC 28(VA), IT IS CRYSTAL CLEAR THAT IF THE ASSESSEE GIVES UP RIGHT TO CARRYO N ANY ACTIVITY IN RELATION TO BUSINESS , THE SAME WOULD BE REVENUE RECEIPT. AS AGAINST THA T IF THE ASSESSEE GIVES UP THE RIGHT TO CARRYON ANY BUSINESS THE CONSIDERATION RECEIVED WOULD ITA 2291/M/10 13 BE CAPITAL IN NATURE. AS SUBMITTED EARLIER THAT BY VIRTUE OF THE SAID AGREEMENT FOR TRANSFER/ ASSIGNMENT OF GOODWILL THE ASSESSEES SOURCE OF EARNING OF INCOME HAS BEEN EXTINGUISHED, THUS THERE WAS STERLI SATION OF ASSESSEES VERY PROFIT MAKING APPARATUS. ACCORDINGLY, THE SAID RECE IPT IS A CAPITAL RECEIPT IN THE HANDS OF THE ASSESSEE. THE ASSESSEE HAD OFFERED THE SAID CAPITAL RECEIPT UNDER THE HEAD CAPITAL GAINS, AND UNDER NO CIRCUM STANCES THE SAID AMOUNT CAN BE BROUGHT TO TAX UNDER SECTION 28(VA) OF THE I .T. ACT, 1961. 17. IN THE RESULT, APPEAL OF THE ASSESSEE IS ALLOW ED. ORDER PRONOUNCED IN THE OPEN COURT ON 25 TH FEBRUARY, 2015. !' # $% &! ' 25-2-15 ( ) SD/- SD/- (VIVEK VARMA) (R.C. SHARMA) JUDICIAL MEMBER ACCOUNTANT MEMBER $ 5 MUMBAI ; &! DATED 25-2-2015 [ .6../ RK , SR. PS ! '#$% &%# / COPY OF THE ORDER FORWARDED TO : 1. / THE APPELLANT 2. / THE RESPONDENT. 3. 7 () / THE CIT(A) 8,, MUMBAI 4. 7 / CIT -4, MUMBAI 5. :;( 66<= , <= , $ 5 / DR, ITAT, MUMBAI H BENCH 6. (?@ A / GUARD FILE. ' / BY ORDER, : 6 //TRUE COPY// (/') * ( DY./ASSTT. REGISTRAR) , $ 5 / ITAT, MUMBAI