2018 (7) TMI 739 - AT - Income Tax

Retirement Fees - capital gain - acquiring management rights by the assessee company of two schemes acquired - Held that - In B.C. Srinivasa Shetty (1981 (2) TMI 1 - SUPREME COURT) held that goodwill generated in newly commenced business cannot be described an asset within the meaning of section 45 of the Act and the transfer of good-will initially generated in a business does not give rise to a capital gain for the purpose of Income Tax. As per amended provisions contained u/s 55(2)(a) of the Act extracted above w.e.f. 1.4.2003 are applicable to the instant case. For the purpose of section 48 & 49 cost of acquisition in relation to a capital asset being goodwill of a business shall be taken as nil. When the assessee company had undisputedly been running 14 schemes, out of which 12 schemes were floated by it and two schemes were acquired from J.F. Mutual Funds during the Financial Year 2002-03 for a consideration of ₹ 88,29,925/- and the said consideration paid by the assessee for acquisition of rights to manage asset was in the nature of payment for acquiring the right/license to manage to schemes, the same mere capitalized as intangible asset and claimed depreciation @ 25%, the transfer of whole business by the assessee in terms of agreement dated 3.6.2004 to the Principal Asset Management Company and Principal Trustee Company Ltd. by virtue of the agreement, the consideration of ₹ 53768659/- received by the assessee is for transfer of the management rights to the transferee free company which cannot be treated as Retiring fees because while acquiring management rights by the assessee company of two schemes acquired from J.F. Mutual Funds, assessee itself admitted by claiming the depreciation on the consideration of ₹ 88,29,925/- @ 25% with Written Down Value of such right at ₹ 49,66,833/- as on 31.3.2005. When the assessee itself has admitted acquisition of management right qua two schemes acquired from J.F. Mutual funds as intangible assets, the assessee is estopped by its own act and company from denying the management rights transfer for a consideration of ₹ 5,37,68,659/- transfered by it to Principal Mutual Funds as intangible asset/goodwill. Findings returned by the Ld. CIT(A) granting relief to the assessee, that no capital gain is leviable on the retirement fees received by the assessee in this case is not sustainable in the eyes of the Law, hence, reversed and the findings returned by AO are hereby restored.

Summary

Issues Involved:
1. Taxability of compensation received for transferring the business of Investment Management.
2. Determination of the cost of acquisition or cost of improvement for capital gains computation.
3. Classification of compensation as business income under section 28(va)(a) of the IT Act.
4. Treatment of retirement fees and ongoing expenses for tax purposes.

Detailed Analysis:

1. Taxability of Compensation Received for Transferring the Business of Investment Management:
The Revenue contended that the compensation received by the assessee for transferring the business of Investment Management to Principal Asset Management Company should be taxable. The CIT(A) had earlier ruled in favor of the assessee, stating that since the cost of acquisition or improvement could not be determined, the capital gains computation mechanism fails, and hence no capital gains tax is leviable. The Tribunal, however, reversed this decision, stating that the compensation received should be treated as capital gains, considering the provisions of section 55(2)(a) of the Act.

2. Determination of the Cost of Acquisition or Cost of Improvement for Capital Gains Computation:
The CIT(A) had relied on the Supreme Court decision in B.C. Srinivasa Shetty, which held that if the cost of acquisition cannot be determined, the asset transfer does not result in capital gains. However, the Tribunal noted that the amendment to section 55(2)(a) effective from 01.04.2003, which includes the 'right to carry on any business' as a capital asset with a cost of acquisition taken as nil, overrides this precedent. Consequently, the Tribunal held that the capital gains tax is applicable.

3. Classification of Compensation as Business Income under Section 28(va)(a) of the IT Act:
The Revenue argued that the compensation should be considered business income under section 28(va)(a) as it was received for not carrying out the business. The Tribunal, however, did not find it necessary to address this issue in detail, as the primary determination of the compensation as capital gains under section 55(2)(a) was sufficient to resolve the dispute.

4. Treatment of Retirement Fees and Ongoing Expenses for Tax Purposes:
The assessee had received retirement fees and claimed it as a capital receipt not chargeable to tax, while the Revenue treated it as taxable under capital gains. The Tribunal upheld the Revenue's view, reversing the CIT(A)'s decision. Additionally, the Tribunal remanded the issue of disallowance of ongoing expenses back to the CIT(A) for fresh consideration, following a non-speaking order by the CIT(A) and the Tribunal's earlier decision in the assessee's case for A.Y. 2003-04.

Conclusion:
The Tribunal ruled in favor of the Revenue on the primary issue of capital gains taxability, reversing the CIT(A)'s decision. The issue of ongoing expenses was remanded back to the CIT(A) for a fresh decision. The appeal filed by the Revenue for A.Y. 2005-06 was dismissed as not maintainable due to the identical appeal already decided by the Tribunal.