TaxTMI 
TaxTMI 
2015 (3) TMI 444
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....PL operated the business of distributing and repairing hearing aid products of GNRS at various locations in India. An agreement between EOPL and GNRS took place in the previous year relevant to AY 2006- 07, whereby the assessee Company (EOPL) transferred its entire business to GNRS for consideration of Rs. 11,19,10,935. The assessee Company in its return of income claimed the amount as capital receipt and accordingly offered capital gain on this amount. The assessee further has invested this amount in the bonds issued by REC and has claimed the deduction u/s 54EC of the Income Tax Act. 3. During the scrutiny proceedings the issue of 'goodwill' was under discussion. The assessee was asked to submit as to why the amount so received on account of transfer of 'Goddwill' should not be considered as 'income from Business'. The assessee has made submission on this issue vide letter dated 22.9.2008. It was submitted that assessee had entered into agreement with GNRS initially on 16-7-1997 which was further extended by agreement dated 1-8-2003 for distribution of products of GNRS on pribncipal to principal basis. As per agreement assessee was entitled to fix resale pr....
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....the clauses are general in nature and no connection with the actual value of goodwill determined. A.O. rejected claim of assessee regarding capital receipt relying on the decision in the case of Rustom Cavasjee Cooper vs. UOI (1970) 40 Comp. Cas 325 and Guzdar Kajora Coal Mines Ltd. vs.CIT (1972) 85 TR 599. The A.O. further noted that assessee has not been able to ascertain with the evidence the contention about the Goodwill and accordingly treated this receipt as compensation which is taxable u/s 28(va) of the I.T. Act. The A.O. noted that it merely deprived the assessee of a trading revenue for the period of 2 years, leaving it free to devote its energies after the end of period of 2 years to carry on the rest of the business. A.O. therefore held that compensation received did not represent the price received for loss of capital asset, but at the most can be said as an advance received by the assessee with regard to the income that he could have earned. It was further stated by A.O. that just because assessee has used the term goodwill, it doesn't mean that amount in question would become goodwill. Accordingly the receipt on account of goodwill was assessed under the head 'Profit....
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....e have also carefully gone through the agreement executed on 12-8-2005 entered by the assessee with GNRS pursuant to which GNRS took over the assessee's said business of distribution network etc., different clauses of which provide for assignment/transfer of goodwill by assessee to GNRS for which the assessee was to receive Rs. 11,19,10,935/- as a consideration for such transfer of Goodwill. Through this agreement, the assessee was also in receipt of Rs. 43,85,687./- for non-compete covenant. The amount received on account of assignment/transfer of goodwill was offered by assessee as capital receipt liable to tax under the head 'capital gains'. The amount received for noncompete covenant was offered by assessee as business income and same was accepted by A.O. The controversy in this appeal revolves around the amount received on transfer of goodwill, whether amounts to capital receipt liable to tax under the head "capital gains" or "income from business or profession". 8. From the record we found that the assessee, EOPL had been appointed as exclusive distributor of GN ReSound, a Denmark based company (GNRS) for distribution of products namely Hearing instruments, assistive liste....
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....ed out by the assessee was confined to distribution of said product of GNRS. There is no dispute to the fact that assessee's marketing skill, selling and distribution activities constituted very important function of the business of assessee. Over the period of 8 years, the assessee had captured huge market and increased substantial turnover. As per the terms of agreement entered on 16-7-1997 & 1-8-2003, the assessee was also required to provide after-sales services including repairing of the instruments, and for that purpose the assessee had engaged qualified and skilled technicians. As per materials placed on record, we found that over a period of last 8 years, assessee had appointed various sub-distributors all over India for the said products of GNRS. In view of the above facts, goodwill had been created over the period of eight years. Thereafter the amount received on transfer of this goodwill was capital in nature liable to capital gains tax. 8. It is an undisputed fact that the assessee had been a distributor of GNRS's said product for last 8 years and the assessee had specialized knowledge, business skill, experience for marketing of the said product and reputati....
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....EOPL Business" means the erstwhile business of ECPL consisting of manufacturing, distributing and repairing GNRS bearing aids in India." ""Goodwill" includes without limitation the reputation, patronage, Intellectual Property Rights (defined below) and Business Information created, acquired, developed and maintained by the Founders and EOPL and associated, whether directly or indirectly, with the EOPL business." ""Intellectual Property Rights" includes other than trademarks, patents, copyrights, registered designs, all other ideas, designs, concepts, techniques, practices discoveries, inventions, procedures, specifications, data, memoranda, documentation and other materials, that are first concerned, acquired, created or reduced to practice by EOPL, and/ or the Founders in connection with carrying on EOPL, Business and/ or embodied, underlying or reduced to practice in the EOPL Business and further includes all moral rights and any derivative work, improvement, extension, revision, modification, translation, abridgement, condensation, expansion, collection, compilation, error correction, of the aforesaid." Clause-2.2of Transfer of goodwill and license thereof to the Compan....
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.... impairment of the capital structure or profit making apparatus, to the extent of business specified in the said agreement. It is well settled by Supreme Court in the case of Oberoi Hotel (P) Ltd. V. CIT 236 ITR 903that when there is a loss of source of income, to the assessee, and that right is determined for a consideration the same is a capital receipt. The Hon'ble Supreme Court held that it was not for settlement of rights under a trading contract, but the injury was inflicted on the capital asset of the assessee and giving up the contractual right on the basis of the principle agreement had resulted in the loss of service of the assessee's income. The receipt was held to be a capital receipt. 11. Similar view was also taken by the Hon'ble Supreme Court in CIT v. Bombay Burmah Trading Corpn. Ltd. (1986) 161 ITR 386 by holding that the compensation received for immobilization, sterilization, destruction or loss, total or partial, of a capital asset would be a capital receipt. If a sum represented profit in a new form, then that would be income but where the agreement related to the structure of the assessee's profit making apparatus and affect the conduct of the busin....
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....assessee. The Bombay Court on the facts of the said case held that the assessee in the said case was a trespasser who was not the owner of any asset and there was no transfer of capital asset during the previous year. All that has been agreed by the assessee was that he will abstain himself from carrying out any activity relating to fish farming in the ponds located in the said land and therefore receipt of Rs. 25,00,000/- which was received by the assessee under the agreement cannot be said to be profit arising from transfer of capital assets and accordingly was taxable under the provisions of Section 28(va) of the I. T. Act. 15. For taxing the amount received on transfer/assignment of Goodwill under the head capital gains, the relevant provisions of sub section (2) of Section 55 are as under: "For the purpose of sections 48 and 49 (cost of acquisition) (a) In relation to a capital asset being goodwill of a business or a trade mark or brand name associated with business or a right to manufacture produce or process any article or thing or right to carry on any business, tenancy rights, stage carriage permits or loom hours. (b) Provision of Cl. (va) of Section 28 for taking....