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TMI Blog2019 (4) TMI 668X X X X Extracts X X X X X X X X Extracts X X X X ..... pital asset. Now the 2nd question arises about the cost of acquisition of these assets. The assessee has not purchased the reassessment are self-acquired therefore according to the provisions of section 55 (2) (a) (ii) the cost of the acquisition of these essential be taken to be nil. Therefore INR 2,900,000 on by the assess is chargeable to tax under the head capital gain and the cost of acquisition being nil. Therefore, INR 2,900,000 cannot be taxed as non-compete fees and also cannot be considered as capital receipt but is chargeable to tax under the head capital gains. As the assessee has made an investment in the specified bonds and capital gain has arisen to the assessee from transfer of a long-term capital asset, assessee is also eligible for exemption under that section. Disallowance as bonus paid to the partners - HELD THAT:- The remuneration payable was to be mutually agreed between the partners from time to time further in para number 10 on interpretation of clause 2 of the supplementary deed the honourable high courts held that conjoint reading of clause 7 of the partnership deed dated 01/05/1976 and clause 1 and 2 of the supplementary partnership deed dated 01/04/19 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Bonus of ₹ 67,87,318 which has been paid to partners of the Firm in accordance with the agreements of partnership and as per section 40(b) of the Act. 2. The appellant assessee is a partnership firm carrying on the profession of chartered accountancy. It filed its return of income on 29/9/2011 declaring total income of INR 34011290/ wherein the long-term capital gain of INR 29 Lacs was claimed exempt u/s 54EC of The Income Tax Act [the Act]. The learned assessing officer passed an order u/s 143 (3) of the Act on 28/2/2014 determining total income of the assessee at INR 38986560 wherein he made the two additions/ disallowances to the returned income. Firstly the assessee has shown capital gain of INR 2,900,000 which was claimed as exempt u/s 54EC of the income tax act was made taxable and secondly disallowed bonus paid to the partners of ₹ 4972773/ . Both the issues were agitated before the learned CIT A, where in appeal of assessee was dismissed, therefore, assessee is in appeal. 3. The first issue is with respect to chargeability of sum of INR 29 Lacs. The brief facts shows that assessee has claimed to have sold a long-term capital asset being client rela ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the 1st part of sale price. One of the partners of the assessee firm along with some of his working team was also to be employed by Protivity. Therefore, the claim of the assessee was that consideration received by it of ₹ 29 lakhs is a capital receipt.‟ Alternatively it also claimed that , if it is held to be transfer of a capital assets‟ then exemption u/s 54EC is allowable as assessee has made requisite investments in the bonds. Assessee submitted that above sum is chargeable to tax under the head capital gain and cost of acquisition of the same u/s 55 (2) (a) of the act is nil and Total sum is a Long term capital again against which assessee is eligible for exemption u/s 54 EC of the act. The main reason for claiming that it is a capital receipt not chargeable to tax at all was that when the source of the income was terminated it becomes a capital receipt. The assessee states that when it is sources of income that is its internal audit practice, is terminated to another party and it enters into a non compete agreement to not to do the similar business for a certain number of years, the resultant consideration received for the same so far as it relates to o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on u/s 54EC of the Act. 4. On appeal before the learned CIT A, assessee reiterated the same facts and arguments. He held that the claim of the assessee that the goodwill has been sold is not apparent from the facts. He held that the invoices and bills do not show the name of the assessee appearing and thus the fact did not show that the brand name of the appellant was being used. He further stated that there is no evidence to show that the internal audit practice of the appellant has been transferred in entirety to the buyer. However, he stated that, the goodwill exist with client relationship or the name of the appellant as reputation in connection of the business. He also noted that the appellant has no doubt stopped the practice in the respect of internal audit after entering into impugned agreement with the buyer, however, the above fact do not show that any of the asset i.e. goodwill has been transferred. Thus he held that the sum received of INR 29 ,00,000 by the assessee is a noncompete fee which is taxable u/s 28 (va) of the act. He further relied on the series of decisions and rejected the several decisions relied upon by the assessee. He therefore rejected the claim ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of ld AO that that all the clients of the assessee were not served by the buyer and not all the clients of the assessee prior to the acquisition by the buyer remained with the buyer, he submitted that at the time of acquisition assessee transferred all client relationship and therefore later on it is for the clients and the new buyer to continue that relationship. He submitted that assessee did not carry on internal audit practice with those clients and it is purely a business call for both the sides on which assessee does not have any control. On the finding of ld AO about transfer of the employees, he submitted that learned CIT appeal has noted that the internal audit vertical employees of the assessee joined the buyer, hence finding of ld AO was held to be erroneous by ld CIT (A) therefore this argument of the AO does not survive. He further stated that for not competing with the similar business of the buyer, assessee was further paid a sum of INR 1,600,000, which was offered as a non compete fees, and there is no dispute on the same. Therefore there is evidence based on which lower authorities held that this sum of ₹ 29 Lakhs is also a non compete fees. Therefore, he sta ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... urchased asset‟ agrees to sale, transfer aside and convey to the purchaser all the purchased assets. The purchased assets have also been defined in article 1 of the agreement, which means collectively client relationships and goodwill. The client relationships‟ are also defined in the article 1 meaning the relationships, trade connections, referrals and future opportunities cultivated over the years in relation to the IARC practice including client contacts and/or contracts entered into with any other person in relation to the IARC practice and includes all rights, title and interest in the same together with the right to represent to 3rd parties that the purchaser is the owner of the aforesaid. The client contracts‟ have also been defined in the article 1 meaning that the contracts or agreements or engagement letters of confirmation executive or issued novated by the clients which as on the completion date shall already reflect the engagement of the identified person of the purchaser by such clients to the satisfaction of the purchaser for availing of services by clients in relation to IARC practice and shall include any prior/ in future relationships with su ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed by them as a noncompete fees as business income. Further, as the above client list and contract relationship is been built by the assessee over past 30 years it can also not be held to be a short-term capital asset but they are a long-term capital asset. Now the 2nd question arises about the cost of acquisition of these assets. The assessee has not purchased the reassessment are self-acquired therefore according to the provisions of section 55 (2) (a) (ii) the cost of the acquisition of these essential be taken to be nil. Therefore INR 2,900,000 on by the assess is chargeable to tax under the head capital gain and the cost of acquisition being nil. Therefore, INR 2,900,000 cannot be taxed as noncompete fees and also cannot be considered as capital receipt but is chargeable to tax under the head capital gains. As the assessee has made an investment in the specified bonds and capital gain has arisen to the assessee from transfer of a long-term capital asset, assessee is also eligible for exemption under that section. In view of this ground number 1 of the appeal of the assessee is partly allowed. 8. The second issue in the appeal is with respect to the disallowance of ₹ 4 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... held that no bonus paid to the partners during the relevant previous year could be allowed based on the partnership deed dated 29/9/2006. Thereafter, he referred to the provisions of section 40 (b) of the income tax act and noted that the partnership deed can only sanction payment of bonus with prospectively and not retrospectively, the payment can only be to a partner and not to someone who has retired as a partner, the supplementary partnership deeds can only sanction payment of bonus subsequent to that. He further held that the payment made in accordance with the supplementary partnership deed executive on the last day of the financial year cannot be allowed for the financial year as it would amount to sanctioning the bonus with retrospective effect. He further held that Shri Akshay Bhalla retired from the firm with effect from 18/11/2010 and bonus sanctioned to him by partnership deed dated 18/11/2010 cannot be allowed under the income tax act. Therefore out of the total bonus paid of INR 6 787318/ for the full year he computed the allowable bonus for 4 months and 12 days out of 12 months and stated that only INR 1814544/ is allowable to the assessee. Consequently, he disall ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... fication of bonus cannot be made in the partnership deed itself but authority to pay bonus arises from the partnership deed. He further stated that provisions of section 40 (b) only prescribes that the payment has to be made in accordance with and authorised by the partnership deed. He further stated that the decision relied upon by the learned CIT A of the honourable Delhi High Court clearly shows that there was no mention of any amount in the partnership deed or in the supplementary deed. He referred to the paragraph number 14 of that decision and therefore he stated that the above decision is distinguishable on the fact and therefore does not apply. He further referred to the several judicial precedent and notable amongst them was CIT vs Vaish Associates 63 taxmann.com 90 (2015) and stated that the issue is fully covered in favour of the assessee. Accordingly, he submitted that the disallowance made by the lower authorities is not in accordance with the provision of the law. 11. The learned departmental representative vehemently supported the order of the learned lower authorities and submitted that issue is squarely covered against the assessee by the decision of the honou ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the each partner. The bonus will also paid in terms of the clause of the partnership deed. Therefore, according to us, the amount of partners‟ remuneration, which includes the above bonus, is in accordance with and authorised by the partnership deeds of the assessee. Further, now the only issue that remains is whether the supplementary partnership deed entered on 31st day of March 2011 and 18th day of November 2010, the partners can be allowed the bonus prior to those dates or not, because in the original partnership deed dated 29th day of September 2006 though there was provision of payment of bonus however there was no quantification of the manner of computation of the bonus payable to the partners was mentioned. However, in the supplementary deed, the exact amount of bonus payable to the each of the partner is mentioned. On reading of the supplementary deed provided for the payment of bonus on 18th day of November 2010. Therefore, on that particular date only the bonus accrued to the partners. Similarly wide supplementary deed dated 31st day of March 2011 it was decided to pay the bonus and therefore it accrued to the partners on the same date. In both the partnership d ..... X X X X Extracts X X X X X X X X Extracts X X X X
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