TaxTMI 
TaxTMI 
2012 (7) TMI 688
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....ring Consultants Pvt. Limited w.e.f. 31.10.2007. The assessee also received salary from M/s. ICT-SD Engineering Consultants Pvt. Ltd. in the capacity of Director, income from capital gain and other sources. 3. The AO observed that during the year, the assessee had received a compensation of Rs. 1,20,00,000/- against the discontinuance of her proprietary business. It was observed that as per the copy of Agreement dated 4.12.2007 between IST-SD Engineering Consultants Pvt. Ltd. and Mrs. Sangeeta Wij (the assessee), proprietor of M/s. S.D. Engineering Consultants, the total enterprise value of the proprietary business of M/s. S.D. Engineering Consultants Pvt. Ltd. including good-will, empanelments, receivables, work in progress and all other rights and entitlements, as per the schedule attached, had been decided and determined at Rs. 1,20,00,000/-, as follows:- Computation of Goodwill Agreed consideration A 1,20,00,000 Amount of Sundry Debtors taken over 68,62,759.00 Cost of Fixed Assets taken over 8,06,256.00 Amount of opening balance of banks 91,890.00 77,60,905.00 Less: Loan against car &nbs....
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....ensation of Rs. 1,20,00,000/- was not a capital receipt liable for capital gains as claimed by the assessee, but a business receipt and that rather, the compensation was not for carrying out any activity in relation to the business of the Company; that as per section 28(va)(a) of the Act, any sum, whether received or receivable in cash or kind, under an agreement for not carrying out any activity in relation to any business shall be chargeable to Income Tax under the head 'profits and gains of business or profession'. 5. It was in this manner that the AO held the compensation of Rs. 1,20,00,000/- received by the assessee to be her business income and added it to the total income of the assessee under the head 'business income'. 6. By virtue of the impugned order, the ld. CIT(A) deleted the aforesaid addition. 7. Aggrieved, the Department is in appeal before us. 8. Challenging the impugned order, the ld. DR has contended that while wrongly deleting the addition correctly made, the ld. CIT(A) has failed to take into consideration the settled position that as per section 28(va)(a) of the Act, any sum received under an agreement for not carrying out any activity in relati....
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....itals, Schools, Fire Stations, Police Stations and commercial and residential projects for PWD, CPWD, DLF, Ansals, Jaypee and JMD, etc.; that she has an experience of over 25 years; that she and Shri K.K. Kapila, CMD, ICT Pvt. Ltd. formed a Company by the name of ICT-SD Engineering Consultants Pvt. Ltd., in the Agreement pertaining to which newly formed Company, it was agreed that the newly formed Company had taken over the assets and liabilities of SD Engineering Consultants as a going concern on the close of business as on 31.10.2007 for a total consideration of Rs. 1,20,00,000/-, inclusive of good-will, vide Memorandum of Understanding dated 30.10.2007, which was followed by the said Agreement dated 4.12.2007; that it was, in fact, a slump sale and it was in compliance with the provisions of section 50 B(2)/(3) of the Act, that the assessee furnished a Report of the Chartered Accountant in Form 3 CEA, determining the net worth at Rs. 4,73,725/-; that as such, there was a long term capital gain of Rs. 1,15,26,275/-, exemption whereon was availed u/s 54 F of the Act; that while making the addition, the AO completely disregarded the provision in the aforesaid Agreement dated 4.12.0....
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....and fire protection services, having designed over 500 projects in India and abroad, including Public Health Engineering services for the Metro Corridor, Railway Coach Factory, Hospitals, Schools, Fire Stations, Police Stations and commercial and residential projects for PWD, CPWD, DLF, Ansals, Jaypee and JMD, etc., was the proprietor of SD-Engg.Consultants. She formed a Company with one Sh.K.K. Kapila, who was engaged in Project Management Consultancy for various projects in India and abroad. The Company is known as ICT-SD Engineering Consultants Pvt. Ltd. Vide a Memorandum of Understanding dated 30.10.2007, (copy placed at pages 35-36 of the APB), followed by an Agreement dated 4.12.2007 (copy at pages 30 to 34 of the APB), it was agreed that the newly formed Company had taken over the assets and liabilities of the business of S.D. Engg. Consultants as a going concern on the close of business as on 31.10.2007, for a total consideration of Rs. 1,20,00,000/-, inclusive of good-will, empanelments, receivables, work in progress and all other rights and entitlements. Out of the said consideration of Rs. 1,20,00,000/-, a sum of Rs.54,00,000/- was to be paid by Rs. 54,000/- fully paid u....
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.....2007, such liabilities to include without limitation all existing or future liabilities and all statutory dues relating to the business, completed contracts/works till 31.10.2007, but shall in no case include any liabilities whatsoever arising on account of unfinished/incomplete business carried on hitherto by the second party and taken over by the first party and executed/completed subsequent to 31.10.2007. It has been made clear that such liability is limited to only completed and finished contracts/works till 31.10.2007. Any liability in respect of unfinished/running/unexecuted works/contracts shall be the responsibility of the party of the first part who has taken over these contracts/works as a going concern with effect from 01.11.2007 (after the close of the business of 31.10.2007) as any receipts recovered subsequent to the date of take over shall be on account of party of the first part, though in the name of party of the second part." (emphasis supplied). 13. As per section 2(42C) of the I.T. Act: "Slump sale" means the transfer of one or more undertakings as a result of the sale for a lump sum consideration without values being assigned to the individual assets ....
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....f transfer of the right to manufacture, produce or process any article or thing or right to carry on business, which is chargeable under the head "Capital gains." 19. Thus, according to the main provisions of section 28(va), as sought to be applied by the assessee to the present case, any sum received under an agreement for not carrying out any activity in relation to any business, is chargeable to income as "profits and gains of business". 20. It is, however, seen that herein, the sum received was not for carrying out any activity in relation to any business. Rather, it is patent on record, that the business itself was transferred by the assessee, for a lump-sum consideration, with effect from 31.10.2007, when the firm of the assessee ceased to operate consequent upon the slump sale of the business as a going concern. The intention of the assessee is eloquently clear from the Disclosure of the Accounting Policies (APB 27), filed before the AO. As per clause 1B thereof:- "The firms ceases its operations w.e.f. 31.10.2007 consequent to the slump sale of the business." 21. Further, as per clause 1C of the aforesaid Disclosure of Accounting Policies :- "The Written Down....
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.... Rs. 9,70,122/-. 25. Then, as per the balance sheet of M/s. S.D. Engineering Consultants, as on 31.10.2007, the aggregate value of total assets has been shown at Rs. 11,50,154.97. 26. The above facts were all placed before the AO by the assessee and the AO never raised any dispute with regard to the veracity thereof. 27. The balance sheet of ICT-SD -Engineering Consultants Pvt. Ltd. as on 31.3.08, including all its annexures (copy at APB 38 to 46) was also placed before the AO beside the copy of sale deed of house property purchased by the assessee (APB 47 to 52), the ledger account of S.D. Engineering Consultants for the period from 1.4.07 to 31.10.07 (copy at APB 55 to 57), showing, inter alia, including loans and TDS payable (professional), copy of bank statement of Union Bank of India for the period from 1.4.07 to 31.10.07 (APB 58), bank statement of Union Bank of India for the period from 31.5.07 to 31.3.08 (APB 59 to 60), and copy of bank statement of Punjab National Bank for the period from 1.8.07 to 12.9.07 (copy at APB 61-62). All these documents were considered by the AO and no fault therewith was found. It is only that the AO took the consideration received by t....
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....herefore, a reading of the Agreement (supra) makes it amply clear that the business of the assessee was taken over by ICT-SD-Engg. Consultants Pvt. Ltd. as a going concern, for a lump-sum consideration, and not "compensation", of Rs. 1,20,00,000/- 33. Then, in the third para on the second page of the assessment order, the AO has observed as follows:- "As per the copy of Agreement executed on the 4th day of December, 2007 between IST-SD Engineering Consultants Pvt. Ltd. and Mrs. Sangeeta Wij, proprietor of M/s. S.D. Engineering Consultants, the total enterprise value of the proprietary business of M/s. S.D. Engineering Consultants Pvt. Ltd. including good-will, empanelments, receivables, work in progress and all other rights and entitlements as per Schedule attached had been decided and determined at Rs. 1,20,00,000/- (rupees one hundred and twenty lakhs only)." 34. Thus, the AO was in the know of the fact, and accepted it as such, that the consideration of Rs. 1,20,00,000/- was an enterprise value of the business of M/s. SD Engg. Consultants, inclusive of good-will, empanelments, receivables, work in progress and all other rights and entitlements. So much so, even the brea....
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....hus evident that no material whatsoever was brought on record by the AO to the effect that the payment of Rs. 1,20,00,000/- was for the assessee not to engage in any business. Even so, the AO opined that the "compensation" of Rs.1,20,00,000/- was not a capital receipt liable to capital gains, but was a business receipt falling under "business income" and that rather, the "compensation" was for not carrying out any activity in relation to the business of the Company, which was taxable u/s 28(va) of the Act. This, despite the fact that the recitals in the Agreement (supra) are specific, clear and unambiguous and even the AO himself did not record a finding holding the Agreement either to be sham, or not acted upon the parties thereto. The contention of the ld. DR that the AO has "lifted the veil" over the Agreement, carries no weight inasmuch as, in fact, despite the lucid contents of the Agreement, this Agreement was tried to be re-written by the AO, which is wholly impermissible in law. That the amount of Rs.,1,20,00,000/- was indeed the consideration and not the compensation, is amply clearly borne out from the stand taken by the parties to the Agreement, their respective audited ....
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....s used in the document, which are considered to be the written declaration of their minds. Meaning thereby, that the Agreement at hand could not have been tried to be rewritten, as has been done by the AO, nor could a new Agreement be sought to be made out for the parties. The intention of the parties to the Agreement is to be gathered from the form of the document and from its contents, taken in their entirety. In fact, in "CIT v. Motor & General Store Pvt. Ltd.", 66 ITR 692 (SC), it has been, inter alia, held that when the transaction is embodied in a document, the liability to tax depends upon the meaning and the context of the language used in the document, in accordance with the ordinary rules of construction. The Agreement could have either been rejected in totality or accepted in its entirety. There was no mid-way available to the AO. Herein, though, the AO, while not bringing anything on record to refute the veracity of the Agreement, has sought to interpret it in a manner un-envisageable in law under the garb of lifting the veil over the Agreement. This, in fact, amounts to a conduct of approbation and reprobation, which cannot be resorted to by an AO in his dual capacity ....
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....o. 779 dated 14.9.99 explains the sale of business for a lump-sum consideration, without assigning value of individual assets and liabilities, to be a slump sale liable for capital gains u/s 50B. The relevant portion thereof reads as follows:- "56/4 (xx) A new section 50B has been inserted in the Income Tax Act containing special provision for computation of capital gains in the case of slump sale. It provides that the profits and gains arising from slump sale shall be chargeable to income tax as capital gains arising from transfer of long term capital assets in the previous year in which the transfer takes place. However, the profits and gains arising from such transfer of one or more undertakings held for less than 36 months shall be deemed to be short term capital gains. It is further provided that the net worth of the undertaking or the division shall be deemed to be the cost of acquisition and cost of improvement for the purpose of sections 48 and 49 and the provisions contained in the second proviso to section 48 relating to adjustment for cost inflation index shall be ignored. The "net worth" of the undertaking shall be determined with reference to the net worth of the co....
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....rrectly directing the AO to treat the amount of Rs. 1,15,26,275/- as long term capital gains of the assessee, the ld. CIT(A) rightly deleted the addition of Rs. 1,20,00,000/- wrongly made by the AO. 47. The assessee, in fact, is correct in contending that the case is covered by the Proviso (i) to section 28(va). The said Proviso stands reproduced hereinabove. This Proviso, it is seen, as applicable to the facts of the present case, provides that section 28(va)(a) shall not apply to any sum received on account of transfer of a right to carry on business, which is chargeable as capital gains. Herein, as discussed in the preceding paras, what was transferred was a right to carry on business and that being so, application of the main section 28(va)(a) is foreclosed and forbidden, by the use of the words "shall not" in the Proviso. 48. In " ACIT v. B.V. Raju " (supra), it has been held that:- "If a payment is in the nature of non-compete fee received by the transferor when he sells his business and agrees not to carry on the business which he transfers, then that would fall for consideration under (category (b) referred to earlier) section 55(a) "right to carry on business". If....