2012 (4) TMI 86 - HC - Income Tax

Assessment under scrutiny - assessee had transferred as per the agreement goodwill to client which AO contested that it cannot be treated as a capital receipt and be treated as a revenue receipt and brought to tax under the head Profit and Gains of Business Held that - - if the entire agreement is read as a whole there is no transfer of Goodwill at all - acquirer has not acquired the business name/brand name which is the main ingredients of Goodwill - said consideration is paid for sale, transfer and assigning the business, the network and benefits and obligations of pending contracts of the business and commercial rights associated with - consideration paid is not for the goodwill but it is for the assets, properties and rights of the transferor hence treated as capital receipt - in favour of assessee. Loss on shares disallowed by the assessing officer by invoking the explanation to Section 73 of the Act as the same amounted to speculative loss - Held that - Section 73 deals with loss and speculative business - If a Company whose gross total income consists mainly of income which is chargeable under the heads Interest on securities , the Income from house property , Capital gains and Income from other sources and if such Company indulges in purchase and sale of shares then by a deeming provision that it is carrying on the speculation business is not attracted - Section 73 is not attracted and the assessing authority committed an error in disallowing the said deduction claimed by the assessee in favour of assessee.

Summary

Issues:
1. Treatment of consideration paid for the transfer of business assets as capital receipt.
2. Classification of loss incurred in the sale of shares as speculative loss under Section 73 of the Income Tax Act.

Analysis:

Issue 1:
The primary contention in this case revolved around the treatment of consideration paid for the transfer of business assets. The assessing officer initially held that a portion of the consideration amounting to Rs. 2,02,25,000/- should be treated as a revenue receipt and brought to tax under the head "Profit and Gains of Business." However, the appellate authority differed, stating that this amount should be considered a capital receipt. The Tribunal concurred with the appellate authority, emphasizing that the consideration was paid for the transfer of the business, network, pending contracts, and commercial rights, not specifically for goodwill. Since there was no transfer of goodwill established, the Tribunal concluded that the consideration was for capital assets and, therefore, not taxable as revenue. The Tribunal's decision was upheld, emphasizing that the consideration was for the transfer of assets and not goodwill, leading to the dismissal of the appeal.

Issue 2:
Regarding the classification of the loss incurred in the sale of shares as speculative loss under Section 73 of the Income Tax Act, the Tribunal analyzed the provisions of Section 73 and the explanation provided therein. The explanation to Section 73 clarifies the circumstances under which a business would be deemed speculative. In this case, the Tribunal noted that the company's main sources of income were from the sale of cylinders, business income, and capital gains, with the loss from the sale of shares forming a minimal part of the total income. As a result, the Tribunal concluded that Section 73 did not apply, and the assessing authority erred in disallowing the deduction claimed by the assessee. Consequently, the substantial question of law related to this issue was also resolved in favor of the assessee, leading to the dismissal of the appeal.

In conclusion, the High Court upheld the Tribunal's decisions on both issues, emphasizing that the consideration for the transfer of business assets was a capital receipt and that the loss from the sale of shares did not qualify as speculative under Section 73. As a result, the appeal was dismissed, and the judgments in favor of the assessee were maintained.