2018 (5) TMI 1175 - HC - Income Tax

Valuation of goodwill - transfer of trademark and technical knowhow - whether goodwill would be reduced to nil - Department contended that the assessee had deliberately under-valued the goodwill since the gain arising out of transfer of such asset was exigible to capital gain tax as compared to trademark where no tax was leviable - Held that - The reflected sale consideration in an agreement between the transferor and transferee in such a situation cannot be lightly tampered with. The Assessing Officer in addition to having discarded such valuation, adopted a rather simplistic method of substitution of book mean of the transferred value of trademark and the goodwill and projected the resulting figure as a consideration for transfer of goodwill. If the assessee s adoption of the sum of ₹ 15.67 lakhs as valuation for goodwill was not backed by any material or data on the record, the substitution adopted by the Assessing Officer suffered from greater vice. There was no basis for him to believe that the trademark and goodwill must value at the same level. This Court in case of Parle International Limited 2016 (8) TMI 658 - GUJARAT HIGH COURT has frowned upon the Assessing Officer discarding the disclosed consideration in an agreement by doubting its genuineness without there being any supporting material on record.

Summary

Issues:
Assessment of capital gain tax on the transfer of goodwill, valuation of goodwill in comparison to trademark, validity of Assessing Officer's substitution of declared consideration, interpretation of agreements for transfer of assets.

Analysis:
The judgment pertains to the assessment of a company for the year 1994-1995 concerning the transfer of trademark, goodwill, technical knowhow, and franchise rights to another company. The primary issue was the valuation of goodwill in comparison to the trademark for the purpose of capital gain tax. The Assessing Officer questioned the lower valuation of goodwill by the assessee, leading to a dispute. The assessee contended that the goodwill had no value of acquisition and cited a Supreme Court judgment to support their position. They also argued that the declared consideration of &8377; 15.67 lakhs for the goodwill transfer should not be substituted by the Assessing Officer. However, the Assessing Officer rejected these contentions and substituted the goodwill value with a higher amount based on the mean of the total consideration received for trademark and goodwill transfers.

The Commissioner of Income Tax [Appeals] reversed the Assessing Officer's decision, emphasizing that the transfer of trademark inherently included goodwill, and the separate agreement for goodwill transfer did not alter this fact. The Tribunal upheld this view, leading to an appeal by the Revenue. The substantial question of law framed by the Court focused on the correctness of the valuation of goodwill.

The Court considered arguments from both sides, with the Department contending that the assessee undervalued goodwill intentionally to avoid capital gain tax. On the other hand, the assessee argued that the valuation was justified, and the Assessing Officer had no basis to substitute the declared consideration. The Court highlighted that the issue was not about the taxability of capital gain but the valuation of goodwill. It noted the lack of scientific basis for the assessee's valuation but decided not to disturb the Tribunal's view due to detailed reasoning provided by the Commissioner of Income Tax [Appeals].

The Court emphasized that the Assessing Officer's simplistic method of substitution lacked justification and referenced a previous case to caution against doubting declared consideration without supporting evidence. Ultimately, the Court ruled in favor of the assessee, dismissing the Tax Appeal and upholding the Tribunal's decision.