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TMI Blog2015 (3) TMI 444X X X X Extracts X X X X X X X X Extracts X X X X ..... 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. - I .T.A. No.2291/Mum/2010 - - - Dated:- 25-2-2015 - Shri R.C. Sharma And Shri Vivek Varma JJ. For the Appellant : Shri P.J. Pardiwala Ms. Vasanti Patel For the Respondent : Shri Rajesh Ranjan Prasad ORDER Per R.C. Sharma, A.M. : This is an appeal filed by the assessee is directed against the order of Ld. CIT - 22, Mumbai dated 21-01-2009 for the A.Y. 2006-07 in the matter of order passed u/s 143(3) of the Income Tax Act, 1961. 2. The only grievance of assessee relate to treatment of nature of receipt on transfer of Goodwill, whether capital receipts or revenue receipts. 3. Rival contentions have been heard and record perused. In the course of scrutiny assessment, the A.O. observed that assessee M/s Elite Orgochem P. Ltd. (EOPL) was appointed as exclusive distributor of G.N. Resound (GNRS), a Denmark based company for dis ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... zero and the entire receipts have been shown as capital gain and also invested an amount of ₹ 9.96 crores in bonds issued by REC and claimed deduction u/s 54EC. A.O. asked the assessee as to why the said goodwill should not be treated as business income. The assessee had filed its explanation dated 22-09-2008 which was reproduced by A.O. in the assessment order in para 6, page 3. A.O. noted that goodwill is generally used to denote the business arising from connection and reputation and its value is what can be got for the chance of being able to keep that connection and improve upon it but it is well established that there is no presumption that every business undertaking has goodwill. A.O. also viewed the agreement between EOPL and GNRS which took place in the previous year relevant to A.Y. 2006-07. A.O. also verified para 2 of the agreement which stated that EOPL transfers and assigns the goodwill to GNRS absolutely and forever from the date hereof and this agreement shall benefit GNRS or any successors and assigns of GNRS and shall be binding upon the successors and assigns of EOPL and agreed both the parties the payment of consideration of USD 2,570,000 (US Dollars Tw ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... by the assessee can never be transferred. The assessee cannot term any receipt as goodwill and claim it as capital receipt. 6. It was submitted before the ld. CIT(A) that the assessee had ceased its source of earning i.e. usiness operation itself is cancelled which has resulted into sterlisation of distribution revenue yielding asset. The ld. CIT(A) rejected assessee s contention and held that the compensation received was only in lieu of its prospective income for two years during which the said business was banned by the parent company, hence it has to be taxed under the head business income only. Further, the ld. CIT(A) noted that what was transferred by the assessee company is the business and not the physical assets and hence there cannot be any question of capital gains. 7. Rival contentions have been considered and record perused. We have also deliberated on the judicial pronouncements referred by lower authorities in their respective orders as well as cited by the ld. A.R. and ld. D.R. during the course of hearing before us in the context of factual matrix of the instant case. We have also carefully gone through the terms and conditions of the agreement executed by the asse ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... essee had developed a distribution network for the said product of GNRS due to the experience and skill developed by the assessee, and it had acquired the edge in the field of marketing and distribution of the said product of GNRS. These intangible assets were self-generating asset in the nature of goodwill. The said distributor agreement was terminated by agreement dated 12/08/2005 entered into between the GNRS and the assessee, pursuant to which GNRS took over the assessee's said business of distribution network etc. As per the said agreement dated 12.08.2005, the assessee was paid by GNRS consideration of ₹ 11,19,10,935/- for the assignment /transfer of the goodwill and amount of ₹ 43,85,687/- for non-compete covenant. Thus the dispute before us revolves around taxability of amount which was received on account of goodwill which was assigned/transferred to GNRS under the said agreement dated 12.8.2005. In respect of consideration received on account of non-compete covenant, the same has been offered by assessee as business income and A.O. has accepted the same. After going through various clauses of agreement and keeping in view the facts and circumstances of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... k and distribution relating to the said product of GNRS over a long period of 8 years. ClauseG In the last 8 (eight) years, the Founders have through EaPL, and at the expense of EOPL generated and maintained significant goodwill (defined below) which is crucial to EOPL's business. It is agreed by and between GNRS and the Founders that upto termination of the relationship between GNRS and EaPL, such Goodwill shall be transferred to GNRS who shall thereafter license the same to the company in accordance with the terms hereof. Definitions: Business of the company means the business of the company which consists of manufacturing, distributing and repairing GNRS hearing aids.' Business information includes without limitation, technical or financial or business information proprietary or internal information related both products or services of EOPL, Business (defined below) including information related to trade secrets, business strategies, marketing plans, procurement requirements, purchasing, manufacturing, customers, dealers, distributors, competitors, employees, business and contractual relationships, business forecasts, sales and merchandising, process/ flo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ounders are not subject to any obligation or disability that will or might hinder or prevent the full completion and performance by EOPL and/ or the Founders of the covenants and conditions stipulated herein. (c) That the Goodwill until the date hereof has not infringed and does not in any way infringe upon the copyright, trademark, patent or any other rights of any other person, (d) That the goodwill and all other rights therein have in no way been sold, made subject to a security interest, grant, arrangement or agreement that might conflict or interfere with the company's complete enjoyment of the Goodwill from the date of incorporation of the company. (e) That the use of the Goodwill by GNRS or its assigns will not in any way infringe upon any rights of any person and that EOPL and/ or the Founders have not and will not take any action which might prevent or impair the exercise of any rights assigned hereby, 10. Plain reading of the various clauses of the agreement clearly indicates that there was a transfer of goodwill for which consideration of ₹ 11,19,10,935/- was paid and separate consideration of ₹ 43,85,687/- was paid for non- compete clauses, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... The agreement dated 12.08.2005 for transfer of goodwill clearly demonstrates that GNRS has acknowledged the fact that assessee had created goodwill and accordingly agreed to pay the said consideration. The basis on which such goodwill was recognized is already demonstrated by GNRS and therefore the CIT (Appeals) was not justified in simply disbelieving the terms and conditions of the said agreement in absence of any indication that the agreement in question is make belief agreement. In this connection, decision of Calcutta High Court in the case of CIT Versus ArunDua, 180 ITR page 494 can be relied on wherein Hon'ble Calcutta High Court has held that after both the parties to the agreement have understood the agreement in certain way, and acted upon that agreement, then it is not open to the Assessing Officer to give another interpretation. Similar view has been taken by Delhi High Court in the case of D. S. Bist Sons Versus CIT, 149 ITR 276 and in the case of CIT Versus DD Industries Limited, 323 ITR 596. 14. Now coming to the decision of ld. CIT (Appeals) for upholding the addition made under the provisions of Section 28(va) of the Income Tax Act, he has relied on the d ..... X X X X Extracts X X X X X X X X Extracts X X X X
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