2016 (5) TMI 329 - AT - Income Tax

Addition u/s 69C - whether the writing off the goodwill has resulted in the siphoning of funds of the company and covered u/s 69C - Held that - Our answer to the above question is negative. We are in agreement with the submissions of ld.AR that writing off the goodwill during the year has not resulted in any kind of tax evasion as it is undisputed tact the assessee has purchased the ongoing business for a consideration of ₹ 86.69 crores, and bought asset the worth ₹ 21.12 crores on slump sale and transferring the difference amount to goodwill account There is no colourable transaction and nothing has been brought on record that money has been siphoned to achieve any benefit or to give any benefit to the seller party. Further the payment of the said acquisition was made by cheque through the bank account of the assessee maintained with the CITY Bank, Mumbai . Even otherwise, the goodwill written off has been added back and the adjusted in the profit which was claimed as exempt u/s 10A of the Act, which the assessee was undisputedly entitled to. We are, therefore, of the considered opinion that the finding of the ld.CIT(A) and that of the AO are not correct on facts and are without any basis. Further addition made under the provisions of section 69C of the Act is also not correct as section 69C can only be invoked only when the source of any investment was not explained which is clear from the language used in the section 69C reproduced above. Thus, the order of ld.CIT(A) suffers from serious factual and legal infirmity and cannot be sustained. Accordingly, the AO is directed to delete the addition - Decided in favour of assessee

Summary

Issues Involved:
1. Confirmation of addition under Section 69C of the Income Tax Act.
2. Non-opportunity and non-issuance of show cause notice.
3. Non-consideration of additional evidence by CIT(A).
4. Allegation of adopting a colorable device for tax avoidance.
5. CIT(A) not passing a speaking order.

Detailed Analysis:

1. Confirmation of Addition under Section 69C:
The primary issue revolves around the confirmation of an addition of ?66,87,55,158 by the CIT(A) as made by the AO under Section 69C of the Income Tax Act. The assessee had acquired a business undertaking for ?86.69 crores, with net assets valued at ?20.11 crores, resulting in a goodwill amount of ?66.87 crores. The assessee wrote off this goodwill as impaired, charging it to the profit and loss account. The AO added this amount to the income under Section 69C, suspecting it as a colorable device for siphoning funds. However, the Tribunal found that the transaction was genuine, the payment was made through proper banking channels, and the goodwill write-off was duly disclosed and added back in the computation of income, thus not resulting in any tax evasion.

2. Non-opportunity and Non-issuance of Show Cause Notice:
The assessee contended that the AO did not provide an opportunity or issue a show cause notice regarding the applicability of Section 69C during the assessment proceedings. The Tribunal noted this procedural lapse but focused on the substantive issue of whether the addition under Section 69C was justified.

3. Non-consideration of Additional Evidence by CIT(A):
The assessee argued that the CIT(A) did not consider the additional evidence submitted to prove that Section 69C was not applicable. The Tribunal reviewed the evidence, including the business purchase agreement and bank statements, and concluded that the goodwill write-off was a legitimate accounting entry and not a colorable device.

4. Allegation of Adopting a Colorable Device for Tax Avoidance:
The AO and CIT(A) alleged that the assessee adopted a colorable device for tax avoidance by writing off the goodwill. The Tribunal disagreed, stating that the transaction was transparent, the payment was made through the bank, and the goodwill write-off did not result in any tax benefit since the profits were exempt under Section 10A.

5. CIT(A) Not Passing a Speaking Order:
The assessee claimed that the CIT(A) did not pass a speaking order and merely confirmed the AO's addition. The Tribunal found that the CIT(A)'s order lacked detailed reasoning and was not based on a thorough examination of facts and evidence.

Conclusion:
The Tribunal concluded that the addition under Section 69C was not justified as the transaction was genuine, the payment was made through proper banking channels, and the goodwill write-off was duly disclosed and added back in the computation of income. The Tribunal directed the AO to delete the addition of ?66,87,55,158. The appeal of the assessee was allowed, and the Tribunal's decision in ITA No.2350/Mum/2015 was applied mutatis mutandis to the present case. The appeals of the assessee were allowed, and the order was pronounced in the open court on 23rd March 2016.