2018 (12) TMI 209 - AT - Income Tax

Amortization of License Fees Allowed, Sale Consideration as Capital Gains

The Tribunal allowed the assessee's appeal, permitting the amortization of license fees over the relevant years. It upheld the CIT(A)'s decision to ... Treating the sum of License Fees as business income - Held that:- We find merit in the arguments of the Ld. A.R. as is clear from the various agreements that the assessee has allowed M/s. Kuoni Travels India Ltd. to use its business model including brand and logo with the option to buy ultimately if the said it was fully satisfied with the model of the business of the assessee. As per the assessee ₹ 1,00,00,000/- was received as non refundable fee in lieu of assets to be used by the M/s. Kuoni Travels India Ltd. We find reason in the contentions of the assessee that so long as there was no confirmation of purchase of business by the said transferee, the same can not be treated as capital gain. The assessee offered the income on pro-rata basis as business income and once the transferee exercises the option to purchase the business, income falling thereafter was offered as capital gain. In our view, the assessee has rightly offered the income in A.Y. 2002-03, 2003-04 & 2004-05 to the tune of ₹ 13,63,636/-, ₹ 18,18,132/- and ₹ 13,63,636/- respectively as business income which were duly assessed and to this extent we are not in agreement with the CIT(A) that the same should be assessed in one year i.e. 2002-03. So far as the license fee shown as capital gain A.Y. 2004-05 to the tune of ₹ 54,54,546/- is concerned we are in agreement with the CIT(A) that the same should be treated as revenue receipt following the same practice as followed in the earlier years. Accordingly, we modify the order of CIT(A) to this extent that income has to be amortized and therefore this appeal of the assessee is allowed on this issue. Receipt from sale of running business - Capital gains OR business income - allow deduction under section 54E towards investment in bonds of Rural Electrification Corporation Ltd. - Held that:- We find that CIT(A) has passed a very detailed and reasoned order and thus came to conclusion that ₹ 12,79,60,000/- has to be assessed as capital gain in A.Y. 2004-05 which in our opinion is correct. We are, therefore, fully satisfied with the reasoning of the CIT(A) on this issue and in view of the same the appeal of the Revenue is dismissed. Issues Involved:1. Treatment of License Fees as Business Income or Amortized Income.2. Classification of Income from Sale of Business as Capital Gains or Business Income.3. Year of Chargeability for Capital Gains on Sale of Business.Issue-wise Detailed Analysis:1. Treatment of License Fees as Business Income or Amortized Income:The assessee contested the CIT(A)'s decision to treat the license fee of Rs. 1,00,00,000 as business income for AY 2002-03, arguing it should be amortized over three years. The AO had observed that the assessee sold its tour and travel business to M/s. Kuoni Travels India Ltd. in AY 2004-05, treating the entire consideration as business income. The CIT(A) partly allowed the appeal, stating that the revenue had accrued to the assessee as the amount was non-refundable. However, the Tribunal found merit in the assessee's argument that the income should be amortized over the period until the business was fully transferred in AY 2004-05. The Tribunal modified the CIT(A)'s order, allowing the income to be amortized over the relevant years.2. Classification of Income from Sale of Business as Capital Gains or Business Income:The Revenue challenged the CIT(A)'s decision to treat the amount of Rs. 12,79,60,000 as capital gains instead of business income. The AO had treated the receipt from the sale of the running business as business income under section 28 of the Act. The CIT(A) directed the AO to treat the amount as capital gains, noting that the sale of the business constituted a transfer of capital assets. The Tribunal upheld the CIT(A)'s decision, agreeing that the gains from the transfer of the business should be treated as capital gains and not business income. The Tribunal found the CIT(A)'s detailed reasoning to be correct and dismissed the Revenue's appeal.3. Year of Chargeability for Capital Gains on Sale of Business:The CIT(A) determined that the transfer of the business took place in AY 2004-05, and the capital gains should be assessed in that year. The AO had incorrectly taxed the amount in AY 2002-03. The CIT(A) noted that the consideration for the transfer was contingent on future profits and could not be determined with certainty in AY 2002-03. The Tribunal agreed with the CIT(A) that the capital gains should be taxed in AY 2004-05, as the transfer was completed in that year upon fulfillment of the conditions of the agreement. The Tribunal upheld the CIT(A)'s direction to allow the deduction under section 54E for the investment in bonds.Conclusion:The Tribunal allowed the assessee's appeal regarding the amortization of license fees and dismissed the Revenue's appeal, upholding the CIT(A)'s decision to treat the sale consideration as capital gains and assess it in AY 2004-05. The Tribunal also dismissed the assessee's cross-objection as not pressed. The order was pronounced in the open court on 30.11.2018.