2014 (6) TMI 772 - AT - Income Tax

Goodwill treated as short-term gains; deductions allowed for property purchase within prescribed period

Kantilal Gopalji Kotecha Versus ITO-8 (2) (4), Mumbai

The Tribunal partly allowed the appeal, upholding the Assessing Officer's decision on the treatment of goodwill as short term capital gains due to lack of ... Goodwill treated as STCG without appreciating section 47(xiv) of the Act – Self generated goodwill from conversion of proprietary concern – Held that:- The general wordings contained in the recitals of the agreement covers ‘good will’ for the transfer of which negotiation has taken place between the assignor and assignee, the assignment deed does not evidence that a good will is transferred to the assignee - the good will has never been created in the books of the propriety concern of the assessee - the allotment of shares worth exceeding is in the form of excess assets over the assets and liabilities of the assignor - the assessee’s capital account in the OPM had the credit balance only and the assessee has been allotted fully paid up share capital - the assessee has got the additional share capital allotment without bringing anything to the assignee - the pre-requisite laid down in section 47(xiv) has not been complied with - a proper valuation of good will has been done prior to the transfer of assets – thus, there was no justifiable reason to interfere with the order of the CIT(A) confirming the addition/disallowance – Decided against Assessee. Date of investment in new property - Whether the date of agreement i.e., 26.05.2006 or the date of payments has to be taken into account for the purpose of calculating the time frame prescribed u/s 54 of the Act – Held that:- The flat in Presidency Co-operative Housing Society, JVPD, Mumbai has been sold by the assessee on 11.09.2008 - the subsequent payments made in the year 2008 is to be considered for the purposes of section 54 – Following ITO, Ward-II, Gurgaon Versus Dr. Smita Swarup, D/o Shri Shanti Swarup [2014 (6) TMI 559 - ITAT DELHI] - the assessee is eligible to claim the deduction u/s 54 of the Act for the payments made towards the purchase of the property within the permissible time period of limitation though on the date of agreement of purchase, the assessee is not eligible to claim the deduction by virtue of the time limitation provided under the section - thus, the claim of deduction in respect of the payments made within the period of limitation prescribed u/s 54, irrespective of the date of agreement, is to be allowed – Decided partly in favour of Assessee. Claim of interest on housing loan claimed u/s 24(b) of the Act – Held that:- The word used in section 24(b) is ‘acquired or constructed’ and nowhere in the section, the word ‘possession’ is used by the legislature - the authorities are not justified in not allowing the claim of deduction on the ground that the assessee has taken possession of the property only during the FY 2008-09 - the AO is directed to ascertain the date of completion of construction for the purposes of the said provisions and accordingly allow the claim of the assessee – Decided in favour of Assessee. Issues:1. Treatment of Goodwill as Short Term Capital Gains under Sec.47(xiv) of the I.T. Act, 1961.2. Claim of deduction u/s 54 of the I.T. Act, 1961.3. Claim of interest on housing loan u/s 24(b) of the I.T. Act, 1961.Issue 1: Treatment of Goodwill as Short Term Capital Gains under Sec.47(xiv) of the I.T. Act, 1961:The appellant, a proprietor of a concern, converted it into a private limited company. The Assessing Officer (AO) created goodwill due to differences in capital accounts, leading to short term capital gains. The appellant argued that the goodwill transfer was exempt under Sec.47(xiv) as it was fictitious. The Tribunal found no evidence of goodwill valuation in the transfer deed, concluding the appellant received excess share capital without transferring goodwill. The AO's decision was upheld as goodwill wasn't part of the original concern's assets. Previous case laws cited were deemed inapplicable due to valuation differences.Issue 2: Claim of deduction u/s 54 of the I.T. Act, 1961:The appellant sold a property and claimed deduction u/s 54 for a new property purchase. Disputes arose over the new property's joint ownership and purchase date vis-a-vis the sale. The AO disallowed deductions due to timing discrepancies, restricting it to 50% based on ownership shares. The Tribunal referenced a similar case where deductions were allowed for payments made within the time frame, irrespective of the agreement date. Consequently, deductions for payments within the prescribed period were allowed, partially overturning the AO's decision.Issue 3: Claim of interest on housing loan u/s 24(b) of the I.T. Act, 1961:The appellant claimed interest on a housing loan for a self-occupied property. Disallowance by the AO and CIT(A) was based on possession timing, not construction or acquisition. The Tribunal clarified that the law focuses on acquisition or construction, not possession. The AO was directed to verify the construction completion date to allow the claim. The disallowance was overturned, emphasizing the relevance of construction/acquisition dates for interest deduction eligibility.In conclusion, the Tribunal partly allowed the appeal, addressing issues related to goodwill treatment, deduction u/s 54, and interest claim on a housing loan. The judgments provided clarity on legal interpretations and applicability of relevant sections, ensuring fair treatment based on the specific circumstances of each issue.