1996 (7) TMI 567 - AT - Income Tax

Tribunal rules in favor of assessee in tax case involving business sale and restrictive covenant payment.

M.R. MUCHHALA Versus FOURTH INCOME-TAX OFFICER

The Tribunal ruled in favor of the assessee in a tax case involving the sale of a proprietary business and a restrictive covenant payment. The Tribunal ... - Issues Involved1. Taxability of the sale consideration received on the sale of the proprietary business.2. Taxability of the amount received for restrictive covenant.3. Charge of interest u/s 139(8) and 217 of the Income-tax Act.4. Treatment of sums attributable to furniture and fixtures and office equipment.Issue-wise Summary1. Taxability of the Sale Consideration Received on the Sale of the Proprietary Business:The first issue pertains to the addition of Rs. 18,09,893 sustained by the Commissioner (Appeals) out of the consideration received on the sale of the proprietary concern of the assessee. The assessee argued that the entire business was sold as a going concern for a slump price, and thus, the sale consideration was a capital receipt, not taxable. The Assessing Officer disagreed, noting that the assets were valued individually, and the sale consideration should be apportioned to various assets. The Commissioner (Appeals) upheld this view, citing Supreme Court decisions and a valuation report by Chartered Accountants, M. Mody & Co., which apportioned the sale price into various assets. However, the Tribunal concluded that the sale was indeed of a going concern for a slump price and that the sale consideration could not be treated as business income. The Tribunal deleted the addition sustained by the Commissioner (Appeals).2. Taxability of the Amount Received for Restrictive Covenant:The second issue involves the addition of Rs. 10,000 received by the assessee for agreeing not to carry on any competing business for three years. The assessee contended that this payment was compensation for a restrictive covenant and thus not taxable. The Tribunal agreed with the assessee, citing Supreme Court decisions that amounts received for restrictive covenants are capital receipts and hence not taxable. The addition of Rs. 10,000 was deleted.3. Charge of Interest u/s 139(8) and 217 of the Income-tax Act:The third issue relates to the charge of interest u/s 139(8) and 217. The assessee's counsel stated that these grounds are consequential. The Tribunal directed the Assessing Officer to grant consequential relief in accordance with the law.4. Treatment of Sums Attributable to Furniture and Fixtures and Office Equipment:The fourth issue pertains to the sums of Rs. 32,759 and Rs. 7,349 representing the price attributable to furniture and fixtures and office equipment. The Commissioner (Appeals) directed the Assessing Officer to work out profit u/s 41(2) and/or capital gains with reference to the actual cost/written down value as per the assessment records. The Tribunal found no infirmity in this direction and upheld the decision of the Commissioner (Appeals).ConclusionThe appeal of the assessee was allowed, and the appeal of the Revenue was dismissed.