2017 (2) TMI 860 - HC - Income Tax

Review petition - Internally Generated Goodwill - errors apparent on the face of the record for this court did not refer, in addition to clause (xiv) of section 47, two important sections section 55(2) as also another provision on which he placed reliance, namely, sections 48 and 49 - Held that - Once M/s. Overseas Plastic Moulders was converted into a private limited company in the name and style as M/s. Overseas Plastic Moulders India Private Limited, the business of the appellant was transferred. The appellant received the entire consideration of transfer by way of fully paid up shares of the private limited company. No monetary consideration for transfer of this proprietary business with goodwill was received. That is why section 47(xiv) enabled the appellant to claim a benefit of the goodwill of ₹ 2,29,89,701/-, which was generated as a result of the proprietary business carried out was the plea raised. It is in relation to these facts that the tribunal concurred with the Commissioner of Income Tax (Appeals). It has also referred to the deed of assignment dated 17th September, 2008. It also perused the first and the second Schedule to the agreement, which set out the details and particulars of the immovable and movable assets, to which the assignor is entitled. That did not contain any details as to the valuation of goodwill while arriving at a total value of ₹ 3,35,90,640/-, for which the allotment of 3359064 shares of ₹ 10/- each in the share capital of the assignee was obtained. The general wording in the recitals may cover goodwill, but the assignment deed did not evidence that a goodwill valued at certain figure is transferred. The alleged goodwill was not created in the books of the propriety concern is thus one of the findings. The tribunal holds that the allotment of shares exceeding ₹ 1,16,05,939/- is in the form of excess asset over and above the assets and liabilities of the assignor. That is why it referred to the figures in the books of Account and rendered an opinion that the assessee derived an additional share capital allotment of ₹ 2,29,84,701/- without bringing in anything to the assignee. It is in these circumstances that the pre-requisite in section 47 has not been complied with. The tribunal distinguished the judgments relied upon by holding that in those cases, facts denote that a proper valuation of the goodwill has been done prior to the transfer of the assets. We do not think that by going behind the order again, we can test whether other provisions and the pre-requisite necessary to attract them are present and therefore we must rely on the Hon ble Supreme Court judgment in the case of Commissioner of Income Tax vs. Smifs Securities Ltd. (2012 (8) TMI 713 - SUPREME COURT) and the accounting standards. This is a course impermissible in review jurisdiction. We find no merit in the review petition and it is dismissed.

Summary

Issues:
Review of order in Income Tax Appeal, Errors in application of Income Tax Act sections, Applicability of accounting standards, Compliance with section 47 regarding goodwill transfer.

Review of order in Income Tax Appeal:
The High Court heard a review petition seeking a review of the order passed in an Income Tax Appeal. The tribunal had concurred with the Commissioner of Income Tax (Appeals) regarding the assessment year 2009-10. The review petitioner argued that the court did not refer to important sections of the Income Tax Act, specifically sections 55(2), 48, and 49. The petitioner relied on a Supreme Court judgment to support the claim that the goodwill generated by the transfer of a proprietary concern to a private limited company should be considered in the valuation. However, the respondent contended that the tribunal's finding was not perverse, and section 47(xiv) was upheld as applicable. The court noted the facts related to the conversion of the business into a private limited company and the transfer of the business without monetary consideration. The tribunal found that the alleged goodwill was not created in the books of the proprietary concern, and the share capital allotment exceeded the assets and liabilities of the assignor. The court concluded that it could not reevaluate the provisions and compliance requirements, relying on the Supreme Court judgment and accounting standards. The review petition was dismissed.

Errors in application of Income Tax Act sections:
The review petitioner argued that errors were apparent on the face of the record as the court did not consider sections 55(2), 48, and 49 of the Income Tax Act in relation to the valuation of goodwill. The petitioner contended that the difference between the cost of an asset and the amount paid by the assessee constituted goodwill, affecting the market worth of the assessee. However, the respondent maintained that the tribunal's finding was based on facts and not vitiated by any error of law. The court analyzed the provisions and the facts of the case, ultimately dismissing the review petition based on the tribunal's decision and the lack of merit in reevaluating the matter.

Applicability of accounting standards:
The review petitioner relied on Accounting Standard (AS) 26, specifically paragraph 35, regarding internally generated goodwill to support the claim for a review of the order. The petitioner argued that the goodwill generated by the transfer should have been considered in the valuation process. However, the court found that the alleged goodwill was not evidenced in the assignment deed, and the tribunal's decision was based on the facts presented. The court emphasized that it could not reassess the compliance with section 47 and other provisions based on accounting standards in the review process.

Compliance with section 47 regarding goodwill transfer:
The court examined the compliance with section 47 regarding the transfer of goodwill from a proprietary concern to a private limited company. The tribunal found that the alleged goodwill was not reflected in the books of the proprietary concern and that the share capital allotment exceeded the assets and liabilities of the assignor. The court upheld the tribunal's decision, stating that it could not reevaluate the compliance with section 47 and other provisions in the review process. The review petition was ultimately dismissed based on the tribunal's findings and the lack of merit in revisiting the matter.