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TMI Blog2012 (6) TMI 549X X X X Extracts X X X X X X X X Extracts X X X X ..... goodwill, however was attributed towards non compete fee, sale of brand name, sale of IPR - AY 2000-01 - Held that:- CIT has rightly pointed that assessee has made an attempt to suppress the true colour of the payment towards the goodwill by stating that payments were made towards non compete fee, IPR on brand/brand value, etc. Hence, factum and valuation of goodwill is confirmed. However the same cannot be treated as short-term capital gains, since assessee was in the business for more than five years. The goodwill is a self generated asset and generates along-with the commencement of the business, especially in the field of software technology. The capital gains must be treated as long-term capital gains and taxed accordingly - Decided partly in favor of assessee. Interest income earned on fixed deposit made for margin money - business income or income from other sources - deduction u/s 10B - Held that:- The interest received by the assessee on margin money deposits were not generated out of export activity. Therefore, the assessee is not entitled to treat the interest income as business income eligible for deduction u/s 10B. However, if the assessee proves that some expendit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e - IT APPEAL NOS. 1780 (MDS.) OF 2009, 1733, 1768 AND 1887 (MDS) OF 2010 - - - Dated:- 11-6-2012 - DR. O.K.NARAYANAN, V.DURGA RAO, JJ. ORDER Dr. O.K. Narayanan, Vice-President This is a bunch of four appeals. All the four appeals relate to the assessment year 2000-01. 2. The appeal in ITA No.1733(Mds)/2010, filed by the assessee, and the appeal in ITA No.1887(Mds)/2010, filed by the Revenue, are directed against the order of the Commissioner of Income-tax(Appeals)-V at Chennai, dated 13-8-2010 and arise out of the regular assessment completed under section 143(3) of the Income-tax Act, 1961. The regular assessment was completed on 31-3-2003. 3. The appeal in ITA No.1780(Mds)/2009, filed by the assessee, is directed against the revision order of the Commissioner of Income-tax, Chennai-III at Chennai, passed under section 263 of the Act through his proceedings dated 23-3-2005. In this appeal, in Form No.36, the assessee has mentioned the assessment year as 2001-02, but while hearing the case, the parties confirmed that the appeal relates to the assessment year 2000-01. 4. The appeal filed by the assessee in ITA No.1768 (Mds)/2010 is directed against the o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... M/s. Pentafour Technologies Ltd. As against the total consideration paid by it, Rs. 626,08,80,282/- was accounted under 'fixed assets' towards goodwill on acquisition of the software division. It is also stated in the notes attached to the accounts of the sister concern that the goodwill amount of Rs. 626.09 crores included non compete value of Rs. 180 crores and overseas products, intellectual rights and brand name of Rs. 364.21 crores. Ultimately, the amount proper attached to the goodwill has been stated in its accounts as Rs. 81.88 crores. 11. In its computation of income, the assessee has not offered any capital gains towards transfer of goodwill. Therefore, the assessing authority made queries to the assessee to explain the position. In reply to the queries made by the assessing authority, it was informed by the assessee that the sister concern has debited the consideration under the head 'goodwill', pending allocation of the excess consideration paid over depreciation value of the assets. But for this difference, as far as the assessee is concerned, there was no goodwill included in the transaction. The assessee explained that a sum of Rs. 66.9 crores related to deprecia ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ons of section 55(2)(a)(ii) of the Act. The assessment was accordingly completed. 15. Thereafter, the records of the case were examined by the Commissioner of Income-tax, Chennai-III at Chennai. He found that even though the Assessing Officer has treated Rs. 31,74,40,000/- as the price of the goodwill, the quantum determined by the assessing authority was not correct. The Commissioner of Income-tax found that the Assessing Officer has adopted the value of goodwill at the average of the five years' profit and no multiplier was applied to follow the accepted method of valuation of goodwill. He, therefore, held that the assessment order was erroneous and prejudicial to the interests of the Revenue, as far as this issue of valuation is concerned. 16. In the context of the goodwill, the Commissioner of Income-tax further held that the transferor company and transferee company both are having a common chairman and CEO and they are all working in a closely related manner, there is no much relevance in attributing a sizeable amount of the consideration as non compete fee. Factually speaking, there was no case of any competition between these units working under the same management ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... order and directed the Assessing Officer to examine the whole issue afresh and decide the multiplying factor by a reasonable number of years of purchase price for the valuation of goodwill. 19. Likewise, the Commissioner of Income-tax also concluded that the assessing authority has not examined the justification of the consideration for transfer of IPR. For the reasons already stated in the context of goodwill, the Commissioner of Income-tax directed the Assessing Officer to re-examine this issue as well. 20. Thirdly, the Commissioner of Income-tax examined the expenditure claimed by the assessee for issue of ESOPs. He found that the Assessing Officer has not at all considered this issue in the course of assessment. Accordingly, he set aside this matter with a direction to the Assessing Officer to re-examine the issue in the light of the materials available on record. 21. Finally, the Commissioner of Income-tax set aside the assessment order with a direction to the Assessing Officer to re-examine the above mentioned three issues and give a proper finding in accordance with law. 22. It is against the above revision order that the assessee has come in appeal before us ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ome from the business for the subsequent years, i.e. after the hive off in the hands of the transferee company were available to verify whether the method of calculation was accurate. If the subsequent years' income is also taken into account, it will be seen that the multiplier on the basis of the past years gives a very divergent figure, far from the reality of the situation. 10. The CIT failed to see that as the transfer of the undertaking was to be between sister concerns, and the management would remain with the same persons, the question of transfer of goodwill does not arise. This is the reason why no part of the consideration was earmarked towards goodwill. 11. The CIT erred in expressing a view that the assessing officer was right in taking a portion of the consideration as goodwill, when that very issue was pending for decision before the CIT(A). 12. When the CIT has directed the assessing officer to examine the issue afresh in view of the fact that the entire transaction was based on hypothetical values fixed for other purposes, he ought to have insisted on the goodwill being decided by a multiplier." 24. There is a delay of 1671 days in filing t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ne reasons and not because of any callous or negligent attitude of the assessee. Accordingly, the delay is condoned and the appeal is admitted on the rolls of the Tribunal. Therefore, the appeal has been heard and is being disposed of on merits. 27. From the detailed discussion available in the revision order passed by the Commissioner of Income-tax, it is seen that the Assessing Officer has not examined the different aspects of goodwill liable to be attributed in the consideration of transaction made between the assessee and its sister concern in respect of the technology division. Even though the Assessing Officer has treated a part of the consideration as pertaining to the goodwill, the computation was not proper. The Assessing Officer has taken only the average of the five years' profit as the value of the goodwill. The regular method accepted in accountancy is to multiply the average profit with a suitable factor of three years or so, depending upon the nature and circumstances of the business transferred. If no multiplier is adopted, it was necessary on the part of the Assessing Officer to explain the grounds as to why the multiplying factor should not be applied to the a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he assessee's file is concerned. Therefore, it goes without saying that the assessment order is erroneous and prejudicial to the interests of the Revenue. 31. In fact, at the time of hearing, the learned senior counsel has relied on the judgment of the Hon'ble Madras High Court in the case of CIT v. K.G. Denim, 180 Taxman 590(Mad.), to support her argument that where two views are possible, the Commissioner of Income-tax cannot revise an order under section 263 of the Act. The principle highlighted by the Hon'ble Madras High Court is a consistent judicial view which is religiously followed by all administrative and appellate authorities. But, as far as the present case is concerned we are afraid that the above judgment of the Hon'ble jurisdictional High Court is not applicable, as the facts in the present case are different. In the case considered by the Hon'ble Madras High Court, two views were possible. It is in the light of that possibility that the Hon'ble High Court has held that revision order is not possible when two views are possible and the assessing authority has applied one of the possible views. In the present case, there are no such views available before the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ity has adopted the average profits of the assessee for the last three years, which worked out to Rs. 4,222.33 lakhs. The Assessing Officer further applied a multiplying factor of 3 years and finally determined the value of goodwill at Rs. 12,667 lakhs. In the original assessment, the assessing authority had valued the goodwill at Rs. 31,74,40,000/-. As against the same, in the impugned assessment the assessing authority has determined the value of goodwill at Rs. 12,667 lakhs. This revised amount of Rs. 12,667 lakhs has been brought to tax as short-term capital gains on sale of goodwill. 38. This revised value of goodwill was challenged in first appeal. The Commissioner of Income-tax(Appeals) dismissed the appeal filed by the assessee with the following conclusions:- "The same issue has come up for my consideration in the appeal against the original assessment order in this case. In my appeal order of date in ITA No.156/2007-08 for the A.Y.2000-01, I have held that: ( i ) goodwill component in the price for the transfer of software division of the assessee is taxable as long-term capital gains; and ( ii ) the goodwill is to be valued at t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he goodwill was valued at Rs. 126,67,00,000/-. 41. In fact, the sister concern, who purchased the software technology division of the assessee company, M/s. Pentafour Technologies Ltd., has stated in its published accounts that out of the consideration of Rs. 894.21 crores, a sum of Rs. 629.09 crores related to goodwill. The transferee company has treated a prominent portion of the consideration towards goodwill. The argument of the assessee that the transferee company has shown the amount towards goodwill only as an interim arrangement, pending appropriation of the consideration among properly classified heads, cannot be accepted in its entirety. Some portion of that amount may be attributed to other assets and rights acquired by the sister concern. The accounts of the sister concern itself is a documentary evidence for the Revenue to come to a fair conclusion that the consideration definitely included consideration towards goodwill. 42. As rightly pointed out by the Commissioner of Income-tax in his revision order, the assessee has made an attempt to suppress the true colour of the payment towards the goodwill by stating that payments were made towards non compete fee, IP ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... TA No.1733(Mds)/2010. 49. The first issue raised is that the Commissioner of Income-tax (Appeals) has erred in treating the interest income as income from other sources and disallowing the benefit of section 10B of the Act. In the light of the decision of the Hon'ble Delhi High Court in the case of CIT v. Koshika Telecom Ltd., 287 ITR 479, it is the contention of the assessee that the interest income received should be treated as business income and the interest paid should be set off against the same. The fixed deposit is made for margin money and as such interest from the same should be treated as business income. Section 10B provides for deduction of such profits and gains as are derived by a hundred percent export oriented undertaking from the export of articles or things or computer software. The interest received by the assessee on margin money deposits were not generated out of export activity. Therefore, the assessee is not entitled to treat the interest income as business income eligible for deduction under section 10B. The principles laid down by the Hon'ble Supreme Court in the case of Pandian Chemicals Ltd. v. CIT , 262 ITR 278, support the view taken by the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ployees against which a nominal rent is recovered from them. The recovery ultimately reduces the cost in the hands of the assessee. Therefore, the recovery is in the nature of business income. This is because it reduces the business expenditure. The lower authorities are not justified in treating it as income from other sources. The above proposition has been upheld by the Hon'ble Madras High Court in the case of CIT v. M.A. Sathar (P) Ltd., 226 ITR 910. The Hon'ble court was following the earlier decision of their Lordships rendered in the case of CIT v. New India Maritime Agencies P. Ltd., 207 ITR 392. Therefore, we accept the contention of the assessee and direct the assessing authority to treat the rent recoveries as business income in the hands of the assessee-company. This issue is decided in favour of the assessee. 54. In the light of the above, the alternate ground raised by the assessee regarding deduction under section 24 does not survive. 55. The next ground is that the Commissioner of Income-tax (Appeals) has erred in denying section 10B exemption to the amounts written back, failing to see that the amounts are nothing but trade advances relating to the ..... X X X X Extracts X X X X X X X X Extracts X X X X
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