TaxTMI 
TaxTMI 
2010 (12) TMI 680
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....als are pertaining to the Assessment Year 1995-96. 3.The Tribunal has allowed the appeal filed by the revenue and dismissed the appeal filed by the assessee and hence these two appeals have been filed by the assessee by raising the following substantial questions of law: 3.1.The substantial questions of law raised in T.C.(A)No.2209 of 2006 are as follows: "1.Whether the Tribunal was right in holding that a sum of Rs.1,25,00,000/- representing the value of technical know-how is liable to tax under the head Long Term Capital Gain the context of Section 45 read with Section 55 of the Income Tax Act, 1961? 2.Whether the Tribunal was right in holding that a sum of Rs.36,16,139/- lakhs representing the compensation received for pending orders was liable to Long Term Capital Gain Tax in the context of Section 45 read with Section 55 of the Income Tax Act, 1961?" 3.2.The substantial question of law raised in T.C.(A)No.2210 of 2006 is as follows: "Whether the Tribunal was right in upholding the additions made of Rs.33,00,000/- received by the appellant towards compensation for expected orders under negotiation as taxable under the ....
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....; Rs. 33,00,000/- &nb....
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....1961, an attempt is made to evade the payment of tax. The office of the assesee is continued by the new firm in the same place and the partners of the assessee are its Directors. What was done in effect is a change in the character of the firm and therefore, the transaction is taxable as a long term capital gain. Accordingly, the Assessing Officer has held a sum of Rs.97,59,426/- will have to be paid as tax. 7.Findings of the Commissioner of Income Tax (Appeals):- 7.1.The Commissioner of Income Tax (Appeals) has held that it is not in dispute that the assessee has been successfully running the business for the past 25 years. The assessee has been in possession of the technical know-how in the form of drawings of technical data. The technology is a capital asset. Since it is a capital asset, the question of treating the same as profit or income would not arise. Technology is different from a goodwill since it involves skill. In as much as the technical know-how relates to production, the same cannot be treated as a long term capital gain treating the same as a goodwill. 7.2.Similarly, in so far as the compensation of pending orders is concerned, the sam....
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....ompeting fees, in as much as there is no possibility to the assessee firm doing the very same business again. What has been done was only a transfer for better utilisation of the assets. 8.4.The Tribunal also held that the reasoning assigned by the Commissioner of Income Tax (Appeals) for rejecting the payment for future orders is concerned, the same will have to be confirmed in as much as it is only imaginary, speculative and unascertained. Accordingly, the Tribunal has allowed the appeal filed by the revenue and dismissed the appeal filed by the assessee. Challenging the said orders of the Tribunal, the assessee has come forward to file these two appeals by raising the above mentioned substantial questions of law. 9.Heard Shri.V.S.Jayakumar, learned counsel appearing for the appellant and Shri.Patty B.Jeganathan, learned counsel appearing for the respondent. 10.Contentions of the learned counsel for the assessee:- 10.1.Shri.V.S.Jayakumar, learned counsel appearing for the assessee submitted that while facts are not in dispute, the Tribunal has committed an error in not appreciating the fact that what was sold by the assessee is the value fi....
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....ee the intention involved in the transaction. Accordingly, the Tribunal has found that the transaction is a colourable one in order to evade the payment of tax and such a factual finding borne out by the records shall not be disturbed by this Court by exercising its power under Section 260(A) of the Income Tax Act, 1961. 11.2.Considering the fact that the assessee firm has been running profitably for the past 25 years, the Tribunal has correctly held that the amount of goodwill paid to the assessee was actually shown as the payment made towards the compensation and the transfer of technical know-how. Therefore, in as much as the transaction is colourable to evade the payment of tax, the appeals will have to be dismissed. 12.Difference between technical know-how and goodwill: 12.1.The word "goodwill" has been defined by the Honourable Apex Court in R.C.COOPER v. UNION OF INDIA [AIR 1970 SC 564] has held as follows: " 'Goodwill' of a business is an intangible assets, it is the whole advantage of the reputation and connections formed with the customers together with the circumstances making the connection durable. It is that component of the tot....
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....ich the assessee firm was functioning earlier. The entire assets have been taken over by the limited company. The agreement between the assessee and the limited company does not make any mention about the payment received for the goodwill. The assesee was not involved in the sale of technical know-how. 13.2.Therefore, it is clear that in as much as the assessee firm has been taken over as a going concern, it could not have been taken over without the so-called technical know-how. The assessee could not have sold the other tangible assets keeping with it the so-called technical know-how. Hence, we are of the considered view that the receipts for technical know-how and the compensation for non-competing fees are nothing but a part of composite receipt to diminish the value of the assets of the assessee firm. The assessee has termed the said amount as technical know-how in order to escape from the clutches of the provisions of Section 55(2) of the Income Tax Act, 1961 under which a goodwill amount is taxable. 13.3.There was no material on record to establish the cost of the technical know-how as observed by the Tribunal. There was also no material to quantify the a....
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....apital or revenue in nature. In the said case, the Honourable Apex Court was pleased to observe that there was no material to come to the finding that a "completely new plant" with a completely new process and a completely new technical know-how was obtained under the agreement. The Honourable Apex Court has considered the materials available on record including the provisions contained in the agreement and held that the receipt is a revenue receipt in as much as the technology was used to supplement the existing business. 14.2.Similarly, in CHEMPLANT ENGINEERS (P.) LTD. v. COMMISSIONER OF INCOME-TAX [(1998) 234 ITR 0023], the Division Bench of this Court was dealing with an issue as to whether the restrictive clause in the agreement would amount to a revenue receipt or a capital receipt. The Honourable Division Bench on the facts of the case held that in as much as the compensation received by the assessee did not affect or alter the capital structure and it was received for loss of earning the commission, the same would be revenue in nature. The Honourable Division Bench was pleased to observe that the compensation received when the loss is for capital structure then it....
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.... An obvious purpose that is served and which stares one in the face is to reduce the amount to be paid by way of bonus to workmen." 15.2.Similarly, in K.RAMASAMY v. COMMISSIONER OF INCOME-TAX [(2003) 261 ITR 358], the Honourable Division Bench of this Court has held as follows: "For the purpose of deciding the true character of the payment made by the company to the brothers, one must take note of the aforementioned facts. Having regard to the totality of the circumstances, piercing the veil of the company was a permissible exercise which the Tribunal undertook. It is well settled that the formation of a company and registration under the Companies Act does not preclude the lifting of the veil, particularly, where matters of taxation are concerned, if the circumstances of the case so warrant. The finding that the payment made by the company to these brothers is in the nature of revenue receipt in the hands of the brothers, would not negate the separate juristic existence of the company. The company continues to remain a legal entity with a right to hold property, to contract, etc. The true character of the payment made by it to these brothers who are s....