2011 (6) TMI 198 - AT - Income Tax

Provision of section 55(2)(a) - Since, the assessee had never sold its right to carry on the business of software development or its right to carry on any business and it merely sold a specific sales contract with a client, which is routine outsourcing in all businesses and in the present case, only a specific contract has been outsourced - Further find that the expression from section 55(2)(a) of the Act which is applicable in the instant case right to manufacture, produce or process any article or thing , and the case of the assessee clearly fell within the purview of section 55(2)(a) of the Act and there is no doubt that the amount received on the sale of the MOU was clearly taxable as per specific provision of the Act - The said expression in section 55(2)(a) of the Act was inserted by the Finance Act, 1997 with effect from 1-4-1998 and hence the contention of the assessee that the amendment to section 55(2)(a) bringing the transfer of commercial right to capital gain tax is effective from the assessment year 2003-04 and 2002-03, is not correct - Do not find any infirmity in the order of the CIT (A) in upholding the order of the Assessing Officer - Decided against the assessee.

Summary

Issues:
1. Interpretation of the transfer of commercial rights through a Memorandum of Understanding (MOU) for taxation purposes.
2. Applicability of section 55(2)(a) of the Income Tax Act.
3. Determination of capital gains tax on the transfer of specific sales contract with a client.

Issue 1: Interpretation of the transfer of commercial rights through a Memorandum of Understanding (MOU) for taxation purposes:
The appeal pertains to the assessment year 2002-03, where the Assessing Officer reopened the assessment upon noting the sale of commercial rights for a consideration of Rs. 31,75,000. The key contention was whether the transfer of rights through the MOU attracted capital gains tax. The CIT (A) held that the assessee did not sell the right to carry on any business but a specific sales contract with a client, which falls under routine outsourcing. The CIT (A) concluded that the amount received on the sale of the MOU was taxable under specific provisions of the Act. The assessee argued that the capital asset transferred must possess a cost of acquisition for capital gains tax to apply. However, the authorities found that the assessee did not sell its right to carry on any business, but a specific contract, and therefore, the capital gains tax was applicable.

Issue 2: Applicability of section 55(2)(a) of the Income Tax Act:
The CIT (A) referred to section 55(2)(a) of the Act, which defines the "right to manufacture, produce or process any article or thing." The CIT (A) found that the assessee's case fell within the purview of this section, leading to the conclusion that the amount received on the sale of the MOU was taxable as per the specific provision of the Act. The authorities emphasized that the expression in section 55(2)(a) was inserted with effect from 1-4-1998, making the transfer of commercial rights subject to capital gains tax.

Issue 3: Determination of capital gains tax on the transfer of specific sales contract with a client:
The crux of the matter was whether the transfer of a specific sales contract with a client constituted a capital asset subject to capital gains tax. The authorities held that the assessee did not sell its right to carry on any business but a specific contract with a client. This specific contract was considered routine outsourcing in all businesses. Consequently, the authorities upheld the imposition of capital gains tax on the amount received from the sale of the MOU. The assessee's argument regarding the cost of acquisition for the asset sold was dismissed, as it was deemed that the capital gains tax was applicable based on the nature of the transfer.

In conclusion, the Appellate Tribunal upheld the order of the CIT (A) and dismissed the appeal filed by the assessee, affirming the imposition of capital gains tax on the transfer of the specific sales contract through the MOU.