2016 (8) TMI 418 - AT - Income Tax

Long Term Capital Gain arising out of the transfer of goodwill - Held that - The assessee has entered into development agreement with M/s Krishna Reddy Constructions to develop the land under their families disposal. In that process, they agreed to receive developmental goodwill of ₹ 65 lakhs, out of which ₹ 10 lakhs were received during previous AY and balance ₹ 55 lakhs during the current AY 2009-10. The main issue before us is, whether these receipts of ₹ 55 lakhs are in the nature of advance or goodwill. Also, whether the goodwill is separate from the development of land. It is fact that the assessee had received ₹ 65 lakhs as goodwill, (not refundable). Whether mere receipts of ₹ 65 lakhs as goodwill amounts to transfer as separate assessable asset is the main query. In our considered view, the goodwill is generated only because the assessee had entered into the development agreement not otherwise. Hence, the assets under consideration are composite assets linked to development of land. Hence, it cannot be separated. In this case, assessee had received the goodwill and handed over the land for development. The payment of goodwill is prior condition for handing over of land for development. This being the case, the expression goodwill is nothing but part performance towards development of land. It has to be part and parcel of the purchase consideration accepted for the whole project. Till the project is complete, the payment will remain as advance towards the project. As explained, the term goodwill cannot be viewed or assessed separately. It can be assessed along with the other purchase consideration received by the assessee, when the actual ownership passes to the buyers. In this situation, payment received as goodwill cannot be charged to tax even though it is received during this AY. We need to consider the actual performance of the whole contract rather than actual receipt of part payment. In view of the above discussion, in our considered view, the goodwill receipt is only an advance and can be chargeable to tax as part of total sale consideration, when the ownership get transferred. Hence, addition made by the AO is deleted. As regards the addition towards income from other sources AR has not argued during the appeal proceedings on this addition and, therefore, this ground is dismissed as not pressed.

Summary

Issues:
1. Addition of Long Term Capital Gain on transfer of "goodwill"
2. Addition of income under the head "other sources"

Analysis:

1. Addition of Long Term Capital Gain on transfer of "goodwill":
The Assessing Officer (AO) made an addition of &8377; 32,50,000 as Long Term Capital Gain arising from the transfer of "goodwill" by the assessee and his brother. The AO assessed 50% of the goodwill in the hands of the assessee. The assessee contended that the goodwill received was in the nature of an advance and not a separate asset for capital gains tax. The CIT(A) upheld the addition of &8377; 27,50,000, received during the current year, as taxable capital gains. The CIT(A) emphasized that the goodwill was part of the total consideration for the transfer of property and not a separate advance. The Tribunal, after considering the arguments, held that the goodwill receipt was an advance towards the total sale consideration and should not be taxed separately. The Tribunal concluded that the goodwill was linked to the development agreement and part of the composite assets related to the land development project. Therefore, the addition made by the AO was deleted.

2. Addition of income under the head "other sources":
The AO also added &8377; 3,12,000 as income under the head "other sources." During the appeal proceedings, the assessee did not contest this addition. As a result, this ground was dismissed as not pressed. The Tribunal did not delve further into this issue due to the lack of arguments from the assessee.

In conclusion, the Tribunal partly allowed the appeal of the assessee by deleting the addition of Long Term Capital Gain on the transfer of "goodwill" while dismissing the addition of income under the head "other sources" as not contested. The judgment emphasized that the goodwill receipt was part of the total sale consideration and should not be taxed separately, considering it as an advance towards the land development project's total sale consideration.