2014 (1) TMI 1351 - AT - Income Tax

Whether transfer of goodwill amounts to long term capital gain - Held that - Following G.K.Choksi & Co 2007 (11) TMI 7 - Supreme Court of India - The word business occurring in cl.(iv) of s.32(1) by no stretch of imagination, can be said to include profession as well - If the expression business is interpreted as including within its scope profession it would not mean that the lacuna has been made good by giving a wider interpretation to the word business - There is nothing in s.32(1)(iv) which envisages the scope of word business to include in it profession as well - If the expression business is interpreted to include within its scope profession as well, it would be doing violence to the provisions of the Act. Such interpretation would amount to first creating an imaginative lacuna and then filling it up, which is not permissible in law. It can be safely construed that business and profession are two different streams and treatment has to be given differently in case the statue provides for taxing any income under the head business only - The income arising out of sale of goodwill in case of profession relates to the personal competence of the professional - In profession, goodwill is gained by an individual from his personal skill and experience which he gains over the period of time - The sale of goodwill in the present case results in generation of capital receipts in the hands of the assessee out of his profession and as such do not come within the ambit of the provisions of section 55(2)(a) - Decided in favour of assessee.

Summary

Issues:
Assessment of lump sum receipts as capital receipts or non-compete fee under section 28(va) - Distinction between business and profession for tax treatment - Interpretation of goodwill in the context of profession.

Analysis:
1. The appeal before the ITAT Chennai challenged the CIT(Appeals) order regarding the nature of lump sum receipts received by the assessee, an ophthalmologist, under a Professional Collaboration Agreement (PCA) with a hospital. The dispute centered on whether the amount received was for the sale of goodwill or as a non-compete fee under section 28(va) of the Income Tax Act, 1961.

2. The assessee contended that the receipts were capital in nature, related to the transfer of goodwill of his profession, and hence exempt from tax. The Assessing Officer treated the receipts as capital gains, but the CIT(Appeals) categorized them as receipts under section 28(va), not related to goodwill but to the extinguishment of rights to practice under a specific name.

3. The ITAT analyzed the PCA terms and found no indication that the amount paid was for non-compete obligations. The agreement focused on transferring reputation and goodwill, not restricting the assessee from practicing individually or competing with the new entity, thereby rejecting the non-compete fee argument.

4. The ITAT delved into the distinction between business and profession, citing the Supreme Court's judgment in G.K.Choksi & Co case, emphasizing that business and profession are distinct for tax purposes. The Court's interpretation highlighted that goodwill in a profession stems from personal competence, not akin to business goodwill, leading to different tax treatments.

5. Referring to section 55(2)(a) of the Act, which specifies 'business' in relation to goodwill, the ITAT concluded that the sale of goodwill in a profession generates capital receipts exempt from section 55(2)(a) provisions. Therefore, the ITAT allowed the appeal, directing the deletion of the addition made on account of Long Term Capital Gains from goodwill in the assessment.

6. The judgment clarified the tax treatment of receipts in professions involving goodwill transfers, emphasizing the need to differentiate between business and profession for accurate tax assessments. The decision provided clarity on the capital nature of receipts from goodwill sales in professional contexts, aligning with the Supreme Court's interpretation and statutory provisions.

Judgment:
The ITAT Chennai allowed the appeal, setting aside the CIT(Appeals) order and directing the deletion of the addition on Long Term Capital Gains from goodwill in the assessment for the AY 2008-09.