2016 (7) TMI 975 - HC - Income Tax

Goodwill arising on succession - capital balance accounted as goodwill - capital gain computation - transfer - interpretation of Section 47 (xiv) - AO found that the goodwill was never created in the books of the proprietary concern and therefore it never became an asset of the sole proprietary concern which was taken over on such succession also confirmed by CIT-A and ITAT - Held that - after considering that the assessee s capital account in the OPM had the credit balance of ₹ 1,16,05,939/only and the assessee has been allotted fully paid up share capital worth ₹ 3,35,90,640/, we are of the considered opinion that the assessee has got the additional share capital allotment of ₹ 2,29,84,701/without bringing anything to the assignee. Therefore, the prerequisite laid down in section 47(xiv) has not been complied with. It is also pertinent to mention that the cases laws relied on by Ld.AR to justify the case of the assessee are distinguishable on facts as in the cases relied by the Ld.AR, a proper valuation of good will has been done prior to the transfer of assets. In view of that matter, we do not find any justifiable reason to interfere with the order of the Ld.CIT(A) confirming the addition/disallowance made by the AO on this count. We do not think that the Tribunal s view and in the backdrop of the peculiar facts can be termed as perverse or vitiated by any error of law apparent on the face of the record. We do not think any question, much less of interpretation of Section 47(xiv) arises in this appeal. - Decided against assessee

Summary

Issues:
1. Applicability of Section 47(xiv) of the Income Tax Act, 1961 in relation to computation of income from capital gains.
2. Treatment of goodwill generated upon conversion of a sole proprietorship business into a Private Limited Company.
3. Assessment of Capital Gain Tax on short-term capital gain.

Analysis:
1. The appeal raised substantial questions of law regarding the applicability of Section 47(xiv) of the Income Tax Act, 1961. The Tribunal's order was challenged based on the contention that all preconditions for the application of Clause (xiv) had been fulfilled. The appellant argued that the takeover of a sole proprietary concern by a Private Limited Company resulted in the transfer of all assets and liabilities, warranting consideration of the Tribunal's decision.

2. The Tribunal, however, found that the goodwill generated upon the conversion of the sole proprietorship business into a Private Limited Company was not accounted for in the books of the proprietary concern. The Assessing Officer determined that since the goodwill was not recognized in the books of the sole proprietorship, it did not become an asset covered by Section 47(xiv). Consequently, the appellant was held liable to pay Capital Gain Tax on the short-term capital gain, a decision upheld by the First Appellate Authority and the Tribunal.

3. The Tribunal's decision was supported by detailed analysis, citing specific clauses from the deed of assignment between the parties. It was noted that while negotiations included the transfer of goodwill, the agreement did not provide evidence of the actual transfer of goodwill valued at a specific amount. The Tribunal concluded that the appellant had received additional share capital without bringing any corresponding assets, thereby failing to comply with the requirements of Section 47(xiv). The Tribunal distinguished this case from others where a proper valuation of goodwill had been conducted before the transfer of assets.

4. Ultimately, the High Court upheld the Tribunal's decision, stating that the view taken was not perverse or vitiated by any error of law. The Court found no merit in the appeal and dismissed it, leading to the disposal of the related Notice of Motion. The judgment emphasized the importance of factual background and proper accounting treatment in determining the tax implications of business conversions and asset transfers.