2019 (10) TMI 116 - AT - Income Tax

Rs.1.75 crore payment not taxable under section 28 or section 45; managerial rights cost indeterminate per precedent

ITAT RAIPUR - AT held that the assessee did not manage the whole or substantially the whole affairs of the company and the Rs. 1.75 crore received was not ... Taxability of professional goodwill - whether additional payment on account of self generated goodwill, whether or not the compensation received is taxable under the head Profits and Gains from Business or Profession u/s 28, whether or not the right transferred is giving rise to capital gain in the hands of the appellant? - whether assessee was not managing the whole or substantially the whole of the affairs of the company? - HELD THAT:- We fail to see how it can be said that the affairs were fully or substantially managed by the assessee. It is a common knowledge that the affairs of a company are generally entrusted to directors and such directors generally act as per the authority given by the Board of Directors to them and it is also a common feature that the concerned director reports to the Board of Directors. In such a case, it is the Board of Directors collectively who can be said to be managing the business affairs of the company. Therefore, we conclude that the assessee was not managing the whole or substantially the whole of the affairs of the company and the impugned amount of ₹ 1.75 crore cannot be related to the three, rights referred to in the Addendum dated 20.08.2007. Second argument of the assessee that “management right” is a “capital asset” within the meaning of sec. 2(14) by virtue of retrospective amendment made by Finance Act, 2012 and so provisions relating to computation of capital gain will apply and not those relating to business income - It is true that under the scheme of taxation of capital gain, it is not the entire sale consideration of an asset which is chargeable to tax but it is the “profit or gain” arising on transfer thereof which is taxable. This observation is subject to the specific provisions of law which prescribe that in case of some category of capital assets, cost of acquisition is considered to be nil and, in those cases, full consideration accruing on transfer will become taxable. In the instant case, it is the stand of assessee that cost of acquisition of management right is indeterminate, no capital gain can be worked out and so the provisions are not workable. We observe that this plea was taken by the assessee before the AO himself, as is evident from para 4 of the assessment order and it has remained uncontroverted. Even before us, ld. DR has not made any submission on this aspect of the argument of assessee. As rightly pointed out by the assessee, sec. 55(2) does not specify that cost of acquisition of “management right” will be taken to be nil. In other words, there is no deemed cost of acquisition provided in the Statute. No case has been made out by the AO to show as to what was the cost of management right in the hands of assessee. Therefore, what has been brought to tax is the entire consideration for relinquishment of management right which runs contrary to the settled proposition of law, which was laid down by Hon'ble Supreme Court in the case of B. C. Srinivasa Setty [1981 (2) TMI 1 - SUPREME COURT] It is evident that the revenue has not established that the assessee was managing the whole or substantially the whole of the affairs of the company as no case has been made out by the Revenue that the amount of ₹ 1.75 crore received by the assessee from M/s CARE was on account of relinquishment of any managerial rights. Even if, assuming that the amount received by the assessee is relatable to relinquishment of any managerial right, in view of ratio laid down by Hon'ble Supreme Court in the case of B.C. Srinivasa Setty (supra) the cost of any such managerial right being indeterminate, provisions relating to computation of capital gain are not workable and consequently, it has to be held that the charge under sec. 45 never intended to levy a tax on such a transaction. We are of the considered opinion that the amount of ₹ 1.75 crore received by the assessee is neither chargeable under sec. 28(ii)(a) nor under the head capital gain. Accordingly, we uphold the order of ld. CIT (A) on this issue. Thus, all the grounds of Revenue are dismissed. Issues Involved:1. Whether the CIT (A) erred in appreciating full facts and legal positions brought out by the AO during assessment proceedings.2. Whether the CIT (A) erred in admitting documents as additional evidence in contravention of Rule 46A.3. Whether the CIT (A) erred in holding that the appellant did not have the right to manage the whole or substantially the whole of the affairs of the company.4. Whether the CIT (A) erred in deleting the addition of Rs. 1,75,00,000/- claimed as professional goodwill.5. Whether the CIT (A) erred in appreciating that the amount received was compensation for relinquishment of management rights.6. Whether the CIT (A) erred in holding that the cost of acquisition is indeterminate and thus, the sums received were not chargeable to tax.7. Whether the order of the CIT (A) is erroneous both in law and on facts.Detailed Analysis:Issue 1: Appreciation of Facts and Legal PositionsThe Revenue argued that the CIT (A) failed to appreciate the full facts and legal positions brought out by the AO during assessment proceedings. The AO had found that the assessee received Rs. 1,75,00,000/- from M/s Quality Care India Ltd, Hyderabad, claiming it as professional goodwill. The AO contended that the documentary evidence did not support this theory and concluded that the amount was received as compensation for relinquishing management rights, thus taxable under sec. 28(ii)(a) of the IT Act.Issue 2: Admission of Additional EvidenceThe Revenue contended that the CIT (A) admitted additional evidence in contravention of Rule 46A. The CIT (A) admitted the Original Shareholders Agreement dated 06.04.2007, which was forwarded to the AO, and the AO's remand report merely stated that the additional evidence was not acceptable.Issue 3: Right to Manage the CompanyThe CIT (A) found that the appellant merely held 22% shares in Ramkrishna Surgical Nursing Home Private Limited and did not have the right to manage the whole or substantially the whole of the affairs of the company. The CIT (A) referred to Clause 7.2 of the Shareholder Agreement, which indicated that the appellant did not have majority control over the company’s management.Issue 4: Deletion of Addition of Rs. 1,75,00,000/-The CIT (A) observed that the sum of Rs. 1.75 crore received by the appellant was not for professional goodwill but for the transfer of a capital asset. The CIT (A) relied on the amendments brought by the Finance Act, 2012, and various judicial precedents to conclude that the sums received were not taxable as business income under Section 28.Issue 5: Compensation for Relinquishment of Management RightsThe CIT (A) held that the compensation received by the appellant was not for relinquishment of management rights. The CIT (A) noted that the appellant did not have the right to manage the whole or substantially the whole of the affairs of the company, as the management was vested with various committees and not with the appellant alone.Issue 6: Indeterminate Cost of AcquisitionThe CIT (A) held that the cost of acquisition of the rights transferred was indeterminate, making the machinery provisions unworkable. The CIT (A) cited judicial precedents, including the decision in B.C. Srinivasa Setty, to support the conclusion that where the cost of acquisition cannot be determined, the gains arising from the transfer of such assets are not taxable.Issue 7: Erroneous OrderThe Revenue argued that the CIT (A)’s order was erroneous both in law and on facts. However, the CIT (A) provided a detailed analysis and justification for the conclusions reached, including the inadmissibility of the additional evidence and the nature of the compensation received.Conclusion:The Tribunal upheld the order of the CIT (A), concluding that the amount of Rs. 1.75 crore received by the assessee was neither chargeable under sec. 28(ii)(a) nor under the head capital gain. The Tribunal dismissed all grounds of the Revenue, finding that the CIT (A) had correctly appreciated the facts and legal positions, admitted additional evidence appropriately, and correctly concluded on the nature of the compensation received and the indeterminate cost of acquisition.