2005 (12) TMI 247 - AT - Income Tax

Summary

Issues Involved:
1. Deletion of addition of Rs. 1.25 crores as technical know-how fee.
2. Deletion of addition of Rs. 36,16,139 as compensation for non-competing.
3. Confirmation of disallowance of Rs. 33 lakhs as compensation for expected orders under negotiation.

Detailed Analysis:

1. Deletion of Addition of Rs. 1.25 Crores as Technical Know-How Fee:
The revenue contended that the CIT (Appeals) erred in deleting the addition of Rs. 1.25 crores being technical know-how fee, arguing that there was no provision in the Act to tax it. The Assessing Officer treated this receipt as goodwill, a self-generated asset with a cost of acquisition as nil, thus treating it as a long-term capital gain. The CIT (Appeals) held that the amount was received for the sale of the right to manufacture or process an article, which was not taxable at that time. The Tribunal noted that the technical know-how was not reflected in the balance sheet and came into existence only at the time of signing the transfer agreement. The Tribunal concluded that this was a colorable device to evade tax, and the consideration termed as technical know-how was actually goodwill, which is taxable. Thus, the order of the CIT (Appeals) was reversed, treating the Rs. 1.25 crores as goodwill.

2. Deletion of Addition of Rs. 36,16,139 as Compensation for Non-Competing:
The revenue argued that the CIT (Appeals) erred in deleting the addition of Rs. 36,16,139 received as compensation for pending orders for not competing. The Tribunal observed that the partners of the transferor-firm were the promoters/directors of the transferee-company, and the firm ceased to exist upon transferring the business. Therefore, there was no potential threat of competition. The Tribunal held that the non-competing fee was part and parcel of goodwill and not a separate non-competing fee. It concluded that the payment for non-competition to a non-existing entity was beyond imagination, and thus, the Assessing Officer was justified in treating it as goodwill. The order of the CIT (Appeals) on this issue was reversed.

3. Confirmation of Disallowance of Rs. 33 Lakhs as Compensation for Expected Orders Under Negotiation:
The assessee was aggrieved by the confirmation of disallowance of Rs. 33 lakhs received as compensation for expected orders under negotiation. The Tribunal reiterated that since the assessee-firm ceased to exist, there was no question of competition. Consequently, the payment of Rs. 33 lakhs towards non-competition for future orders was unwarranted. The Tribunal upheld the CIT (Appeals) order on this issue, rejecting the assessee's appeal.

Conclusion:
The Tribunal allowed the revenue's appeal and dismissed the assessee's appeal. The Rs. 1.25 crores termed as technical know-how was treated as goodwill and taxable. The Rs. 36,16,139 and Rs. 33 lakhs received as non-competing fees were also treated as goodwill and taxable.