2019 (4) TMI 668 - AT - Income Tax

Long term capital gain - transfer of Internal Audit and Risk Consultancy practice (IARC) to company - client relationship and goodwill‟ - capital receipt - Entitled to deduction under section 54EC - HELD THAT - Assessee has transferred it capital assets as defined u/s 2 (14) it cannot be said that the above sum received by the assessee is a capital receipt which is not chargeable to tax. According to us, the assessee has transferred capital asset, therefore, it is chargeable to tax under the head capital gain. It can also not be considered as a non-compete fees because in the agreement through which the assessee has received INR 29 Lacs does not talk about the non-compete conditions. For the same the assessee has entered into another agreement for which INR 1,600,000 have been paid by the buyer to the assessee, which has been offered by them as a non-compete fees as business income. As the above client list and contract relationship is been built by the assessee over past 30 years it can also not be held to be a short-term capital asset but they are a long-term capital asset. Now the 2nd question arises about the cost of acquisition of these assets. The assessee has not purchased the reassessment are self-acquired therefore according to the provisions of section 55 (2) (a) (ii) the cost of the acquisition of these essential be taken to be nil. Therefore INR 2,900,000 on by the assess is chargeable to tax under the head capital gain and the cost of acquisition being nil. Therefore, INR 2,900,000 cannot be taxed as non-compete fees and also cannot be considered as capital receipt but is chargeable to tax under the head capital gains. As the assessee has made an investment in the specified bonds and capital gain has arisen to the assessee from transfer of a long-term capital asset, assessee is also eligible for exemption under that section. Disallowance as bonus paid to the partners - HELD THAT - The remuneration payable was to be mutually agreed between the partners from time to time further in para number 10 on interpretation of clause 2 of the supplementary deed the honourable high courts held that conjoint reading of clause 7 of the partnership deed dated 01/05/1976 and clause 1 and 2 of the supplementary partnership deed dated 01/04/1992 conditions of section 40(b)(v) are not satisfied. The honourable High Court held so because there was no manner of quantifying the amount payable to the partners. In the impugned case before us, the assessee has clearly mentioned the amount payable to each of the partner as bonus. Hence, the revenue‟s reliance on the above decision is misplaced. Further in another decision of relied upon by the learned authorised representative in VAISH ASSOCIATES 2015 (8) TMI 855 - DELHI HIGH COURT wherein a supplementary deed was executive on 01/08/2009 was considered to be effective from 01/04/2009 for assessment year 2009-10. Accordingly, the disallowance of rupees for 972773/ made by the learned AO because of bonus/remuneration paid to the partners is not sustainable. Therefore we reverse the order of the learned CIT A and direct the AO to delete the above addition.

Summary

Issues Involved:
1. Treatment of ?29,00,000 received for the sale of "client relationship and goodwill" as business income or capital gain.
2. Disallowance of ?49,72,773 out of the bonus paid to partners under Section 40(b) of the Income Tax Act.

Issue-wise Detailed Analysis:

1. Treatment of ?29,00,000 Received for the Sale of "Client Relationship and Goodwill":
The primary issue was whether the ?29,00,000 received by the assessee for the sale of "client relationship and goodwill" in the Internal Audit and Risk Consultancy (IARC) practice should be treated as business income or capital gain. The assessee claimed it as a capital receipt and sought exemption under Section 54EC of the Income Tax Act. The Assessing Officer (AO) and the Commissioner of Income Tax (Appeals) [CIT(A)] treated it as business income under Section 28(va) of the Act, considering it a non-compete fee.

The Tribunal examined the agreement between the assessee and the buyer, M/s Protivity Consulting Private Limited, which defined "client relationship and goodwill" as the purchased assets. The Tribunal noted that the assessee had transferred the client relationships and goodwill, which are capital assets under Section 2(14) of the Act. The Tribunal concluded that the ?29,00,000 received was for the transfer of these capital assets and not as a non-compete fee, as there was a separate agreement for non-compete fees amounting to ?16,00,000, which was already offered for taxation under Section 28(va).

The Tribunal held that the ?29,00,000 should be treated as long-term capital gain, with the cost of acquisition being nil under Section 55(2)(a)(ii). Consequently, the assessee was entitled to exemption under Section 54EC, as the capital gain was invested in specified bonds. Therefore, the Tribunal allowed this ground of appeal partly in favor of the assessee.

2. Disallowance of ?49,72,773 Out of the Bonus Paid to Partners:
The second issue concerned the disallowance of ?49,72,773 out of the bonus paid to the partners. The AO disallowed the bonus, arguing that the original partnership deed did not specify the manner of computing the bonus, and the supplementary partnership deeds were executed retrospectively. The CIT(A) upheld this disallowance.

The Tribunal examined the partnership deeds and supplementary deeds. The original partnership deed dated 29/09/2006 allowed for the payment of bonus but did not specify the amount or manner of computation. However, the supplementary deeds dated 18/11/2010 and 31/03/2011 quantified the bonus payable to each partner. The Tribunal noted that these supplementary deeds applied for the entire financial year 2010-11 and were executed within the same financial year.

The Tribunal concluded that the bonus payments were in accordance with and authorized by the partnership deeds. It held that the supplementary deeds, which quantified the bonus, were valid and applicable for the entire financial year. The Tribunal distinguished the case from the Delhi High Court's decision in Sood Bridge Associates vs CIT, where the partnership deed did not quantify the remuneration.

Based on this analysis, the Tribunal reversed the CIT(A)'s order and directed the AO to delete the disallowance of ?49,72,773. Thus, this ground of appeal was allowed in favor of the assessee.

Conclusion:
The Tribunal partly allowed the appeal of the assessee, treating the ?29,00,000 received for the sale of "client relationship and goodwill" as long-term capital gain eligible for exemption under Section 54EC and reversing the disallowance of ?49,72,773 out of the bonus paid to partners.