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2012 (7) TMI 688 - AT - Income TaxCapital receipt or revenue receipt - Compensation as business profit u/s 28(va) - discontinuance of her proprietary business - slump sale u/s 2(42C) - held that - The assessee, in fact, is correct in contending that the case is covered by the Proviso (i) to section 28(va). - This Proviso, it is seen, as applicable to the facts of the present case, provides that section 28(va)(a) shall not apply to any sum received on account of transfer of a right to carry on business, which is chargeable as capital gains. Herein, as discussed in the preceding paras, what was transferred was a right to carry on business and that being so, application of the main section 28(va)(a) is foreclosed and forbidden, by the use of the words shall not in the Proviso.
Issues Involved:
1. Whether the compensation of Rs. 1,20,00,000/- received by the assessee was a business receipt chargeable under section 28(va) of the I.T. Act or a capital receipt liable to capital gains. Issue-wise Detailed Analysis: 1. Nature of Compensation Received: The primary issue was whether the compensation of Rs. 1,20,00,000/- received by the assessee for discontinuing her proprietary business was a business receipt chargeable under section 28(va) of the I.T. Act or a capital receipt liable to capital gains. The assessee, who was engaged in providing consultancy in Civil Engineering, transferred her business to ICT-SD Engineering Consultants Pvt. Ltd. The AO contended that the compensation was for not carrying out any business activity in relation to the business and thus chargeable under section 28(va) as business income. However, the CIT(A) and the Tribunal found that the compensation was for the transfer of the business as a going concern, inclusive of goodwill, and thus was a capital receipt liable to capital gains under section 50B of the Act. 2. Agreement Analysis: The agreement dated 4.12.2007 between the assessee and ICT-SD Engineering Consultants Pvt. Ltd. detailed that the total enterprise value of the proprietary business, including goodwill, empanelments, receivables, work in progress, and other rights, was Rs. 1,20,00,000/-. The Tribunal noted that the business was transferred as a going concern and not merely discontinued. The AO's observation that the compensation was for not carrying out any business activity was incorrect as the agreement and subsequent actions indicated a transfer of business. 3. Application of Section 28(va) vs. Section 50B: The Tribunal emphasized that the sum received was not for not carrying out any activity in relation to any business but was for the transfer of the business itself. According to section 28(va), any sum received for not carrying out any activity in relation to any business is chargeable as business income unless it is for the transfer of a right to carry on business, which is chargeable under the head 'capital gains'. The Tribunal held that the compensation received was for the transfer of the business and thus fell under the purview of section 50B, making it a capital receipt. 4. Computation and Exemption: The assessee computed long-term capital gains under section 50B and claimed exemption under section 54F by investing in a residential property. The Tribunal found that the assessee had correctly computed the capital gains and fulfilled the conditions for exemption under section 54F. The AO's addition of Rs. 1,20,00,000/- as business income was thus not justified. 5. Precedents and Legal Interpretation: The Tribunal referred to the CBDT Circular No. 779 and relevant case laws, including "ACIT v. B.V. Raju" and "CIT v. Media World Publications Pvt. Ltd.," which supported the view that the transfer of a business as a going concern for a lump-sum consideration is a slump sale liable to capital gains tax under section 50B, not business income under section 28(va). Conclusion: The Tribunal concluded that the compensation received by the assessee was for the transfer of her business as a going concern, inclusive of goodwill, and thus was a capital receipt liable to capital gains tax under section 50B. The addition made by the AO under section 28(va) was deleted, and the appeal filed by the Department was dismissed.
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