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2015 (3) TMI 444 - AT - Income TaxReceipt on transfer of Goodwill - capital receipts v/s revenue receipts - assessee Company (EOPL) transferred its entire business to GNRS - As per terms of agreement assessee was to advertise, make publicity of the product. - assessee was entitled to fix resale price of the said product - A.O. opined that just because assessee has used the term goodwill, it doesn t mean that amount in question would become goodwill. Accordingly the receipt on account of goodwill was assessed under the head Profits and Gain from Business . Held that - From the combined reading of sections 55(2) and sec 28(va), it is crystal clear that if the assessee gives up right to carryon any activity in relation to business, the same would be revenue receipt. As against that if the assessee gives up the right to carryon any business the consideration received would be capital in nature. As submitted earlier that by virtue of the said agreement for transfer/ assignment of goodwill the assessee s source of earning of income has been extinguished, thus there was sterlisation of assessee s very profit making apparatus. Accordingly, the said receipt is a capital receipt in the hands of the assessee. The assessee had offered the said capital receipt under the head Capital Gains , and under no circumstances the said amount can be brought to tax under section 28(va) of the I.T. Act, 1961. - Decided in favour of assessee.
Issues Involved:
1. Treatment of the nature of receipt on transfer of goodwill: whether it should be classified as capital receipts or revenue receipts. Detailed Analysis: Treatment of the Nature of Receipt on Transfer of Goodwill: The primary issue in this case is the classification of the receipt from the transfer of goodwill as either capital receipts or revenue receipts. The assessee, M/s Elite Orgochem P. Ltd. (EOPL), was an exclusive distributor for GN ReSound (GNRS) in India. An agreement in the relevant assessment year (AY 2006-07) led to the transfer of EOPL's entire business to GNRS for Rs. 11,19,10,935, which the assessee claimed as a capital receipt, offering it under capital gains and claiming a deduction under section 54EC of the Income Tax Act. Assessing Officer's (A.O.) Findings: The A.O. observed that the assessee had shown the receipt as 'goodwill' and treated it as capital gain. However, the A.O. argued that goodwill is generally associated with business connections and reputation, and there is no presumption that every business has goodwill. The A.O. rejected the assessee's claim, treating the receipt as business income under section 28(va) of the Income Tax Act, asserting that the compensation received did not represent the price for the loss of a capital asset but was akin to advance income. CIT(A)'s Decision: The Commissioner of Income Tax (Appeals) [CIT(A)] upheld the A.O.'s decision, stating that the increase in turnover does not generate goodwill since the brand name belonged to the parent company, GNRS, and not to the assessee. The CIT(A) concluded that the compensation received was for prospective income over two years during which the business was banned by the parent company, thus taxable as business income. Tribunal's Analysis and Judgment: The Tribunal reviewed the agreements and the facts of the case. It noted that the assessee had developed a distribution network and goodwill over eight years, which was transferred to GNRS. The Tribunal emphasized that the assessee's marketing skill, selling, and distribution activities constituted a significant part of its business, and the goodwill created over the years was a capital asset. The Tribunal referenced the Supreme Court's ruling in CIT v. B. C. Srinivasan Shetty, which recognized goodwill as a capital asset. It also highlighted that the agreement clearly indicated the transfer of goodwill, with a separate consideration for the non-compete covenant. The Tribunal concluded that the compensation received for the transfer of goodwill was a capital receipt, taxable under capital gains, and not business income under section 28(va). Legal Precedents and Sections: - CIT v. B. C. Srinivasan Shetty (128 ITR 294): Goodwill is considered a capital asset, and its transfer is subject to capital gains tax. - Section 55(2)(a) of the Income Tax Act: Recognizes goodwill as a capital asset for computing capital gains. - Section 28(va) of the Income Tax Act: Differentiates between revenue receipts for giving up business activities and capital receipts for transferring business rights. Conclusion: The Tribunal allowed the appeal, ruling in favor of the assessee. It held that the receipt from the transfer of goodwill was a capital receipt, taxable under the head "Capital Gains," and not as business income under section 28(va). The judgment underscores the importance of distinguishing between the transfer of business rights and the cessation of business activities for tax purposes. Order Pronouncement: The order was pronounced in the open court on 25th February 2015.
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