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TMI Blog2010 (12) TMI 680X X X X Extracts X X X X X X X X Extracts X X X X ..... evade tax it is the bounden duty of the authorities to lift the corporate veil and find out the real intention behind the same. It is the duty of the Court in every case, where ingenuity is expended to avoid taxing and welfare legislations, to get behind the smoke screen and discover the true state of affairs - The Supreme Court in the case of Juggilal Kamlapat v. CIT [1968 -TMI - 5134 - SUPREME Court] held that in cases where the same persons entered into transactions though by introducing a corporate personality into some of those transactions, the income-tax authorities are entitled to pierce the veil of the corporate personality and look at the reality of the transaction - Decided against the assessee by holding that what has been done by the assessee is to evade tax and not to avoid. X X X X Extracts X X X X X X X X Extracts X X X X ..... orders that is not to compete and indulge in transfers business Rs. 36,16,139/- C) Compensation for expected order under negotiation i.e. not to compete and indulge in transformer business Rs. 33,00,000/- Total Rs.1,94,16,139/- 4.2.The assessee filed its return of income on 06.11.1995. A show cause notice was issued on 25.02.1998 as to why the amount shown as received for non-competition fee for pending orders, future orders and for the transfer of technical know-how will not be treated as capital gains, in as much as no amount has been shown under the head "Goodwill" even though the assessee has been making good profit in the previous years. 5.Case of the assessee:- 5.1.The assessee claimed that the entire sum of Rs.1,94,16,139/- is not taxable. It was further claimed that the amount of Rs.1,25,00,000/- is received by the assessee for the transfer of technical know-how. It was the further case of the assessee that the amount of Rs.36,16,139/- and Rs.33,00,000/- respectively are for compensation for pending orders and expected orders for not competing with the limited company. The assessee has not received any money towards the goodwill from the limited company. In as muc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sual practice done in the field of business while transferring the asset for the purpose of not allowing the other party to partake in the business. However, with regard to the payment of Rs.33,00,000/- as compensation for future orders is concerned, the same was rejected by the Commissioner of Income Tax (Appeals) by holding that the said payment is speculative, imaginary and therefore cannot be granted. Accordingly, the appeal filed by the assessee in so far as the sum of Rs.1,25,00,000/- and Rs.36,16,139/- were allowed and the remaining sum claimed towards the future compensation was rejected. 8.Findings of the Tribunal:- 8.1.Both the assessee as well as the revenue filed their respective appeals before the Tribunal. The Tribunal was pleased to hold that there was no indication of the value of the technical know-how in the balance sheet. It has come into existence only at the time of signing the transfer agreement. The agreement was for the transfer of entire business of a going concern. The fact that the assessee was running its business profitably for the past 25 years is not in dispute. Admittedly, the assessee has sold a profitable concern without fixing any value for th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ot be treated as a long term capital gain. 10.2.The assessee has produced drawings, designs, technical data, specifications etc. and sold them to the limited company. They form part of the technical know-how and therefore for such a transfer, the amount has been fixed and paid to the assessee. The reasoning of the Tribunal that the technical know-how has not been shown in the balance sheet cannot be accepted, since the value will be fixed only at the time of sale and not otherwise. As per the provisions of the Income Tax Act, 1961 as it stood for the relevant assessment year, a sale of a technical know-how cannot be taxed. The Tribunal and the Assessing Officer have merely inferred that the payments were towards the goodwill when it is not the case of the assessee. 10.3.The compensation towards the non-compete fee has been paid both for present and future orders, in order to compensate the assessee. The said amount has been paid by considering the profit derived by the assessee over the years. The payment of non-compete fee is known to the business transactions. In support of his submissions, the learned counsel for the assessee has made reliance upon the following judgments: ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Tax Act, 1961 provides for the sale of goodwill after dissolution. The definition of 'goodwill' as held by the Honourable Apex Court and as seen from the provisions contained under Section 55, it is very clear that after the dissolution of a firm it shall be included in the assets. Therefore, in as much as a goodwill can be quantified by way of a sum, the assessee wanted to avoid the same by terming it as technical know-how and compensation. When a business is destroyed the goodwill goes with it. A goodwill is determined by the nature of business, character, name and reputation, its location, its impact on the contemporary market, the prevailing socio economy and the absence of competition. A goodwill can be sold along with the business or independently. "Goodwill" was brought into tax with effect from 01.04.1988. Therefore, in a commercial and trading parlance, goodwill plays a pivotal roll and that is the reason why it has been brought into the tax net. 12.3.'Technical know-how' is defined as an intangible revenue producing asset which can be put to use so as to produce revenue in two ways. The manufacturer can use it himself to make things for sale and make profit in that way ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the assessee firm over the years before the transfer. The assessee has clearly attempted to evade tax by claiming the amount received as goodwill into one of technical know-how in order to evade tax. The assessee has tried to sell the old wine in a new bottle by characterizing the receipt as technical know-how. It is not the case of the assessee that it has been selling the technical know-how to any other third party. The agreement also does not provide a clause to the effect that the assessee shall not indulge in the same business. This is for the precise reason that the assessee has merely changed from being a partnership firm into one of a private company due to business and commercial expediency. 13.4.Similarly, the question of payment to be made as compensation by way of non-competing fee also would not arise, considering the fact that the assessee firm has been taken over as a going concern in its entirety by the new company. As observed earlier, the partners of the assessee firm are the new Directors of the company. The consideration was paid to the assessee firm and not to the partners. There was no competition as alleged between the assessee firm and the new private limi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... acts of the case, in as much as in the said case, what was involved is only a transfer of technical know-how and not other assets as in the present cases on hand. Therefore, the judgments relied upon by the learned counsel for the assessee are not applicable to the facts involved in the present cases. 15.Lifting the Corporate Veil:- 15.1.Both the Tribunal and the Assessing Officer have held that what was done by the assessee firm is clearly an attempt to evade tax in order to get over the provisions contained under Section 55(2) of the Income Tax Act, 1961. It is a well settled principle of law that what is permissible is avoidance but not evasion. When an attempt is made by a company to evade tax it is the bounden duty of the authorities to lift the corporate veil and find out the real intention behind the same. It is the duty of the Court in every case, where ingenuity is expended to avoid taxing and welfare legislations, to get behind the smoke screen and discover the true state of affairs. The Court is not to be satisfied with form and leave well alone the substance of a transaction. The Honourable Apex Court in WORKMEN OF ASSOCIATED RUBBER INDUSTRY LTD. v. ASSOCIATED RUBBE ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... er that deed from liability to income-tax in the hands of the assessee. The Supreme Court in the case of Juggilal Kamlapat v. CIT [1969] 73 ITR 702] held that in cases where the same persons entered into transactions though by introducing a corporate personality into some of those transactions, the income-tax authorities are entitled to pierce the veil of the corporate personality and look at the reality of the transaction. The Court in that case observed (page 710): "It is true that from juristic point of view the company is a legal personality entirely distinct from its members and the company is capable of enjoying rights and being subjected to duties which are not the same as those enjoyed or borne by its members. But in certain exceptional cases the Court is entitled to lift the veil of the corporate entity and to pay regard to the economic realities behind the legal facade." 15.3.The Division Bench of this Court in COMMISSIONER OF INCOME-TAX v. INDIAN EXPRESS NEWSPAPERS (MADURAI) P. LTD. [(1999) 238 ITR 70] has observed as follows: "It is well settled that the corporate veil of a company can be lifted for the purpose of ascertaining the real character of a transaction ..... X X X X Extracts X X X X X X X X Extracts X X X X
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