AI Drafter 
TaxTMI 
TaxTMI 
2019 (10) TMI 116
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.... 3. Whether in law and on facts and circumstances of the case, 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 in law and on facts and circumstances of the case, the CIT (A) has erred in appreciating the fact that the amount of Rs. 1,75,00,000/- claimed to have been received by the assessee as professional goodwill is, in fact, compensation received by the assessee within the meaning of the provisions of sec. 28 (ii)( a ) of the IT. Act, 1961 and thereby erred in deleting the addition of Rs. 1,75,00,000/-? 5. Whether in law and on facts and circumstances of the case, the CIT (A) has erred in appreciating the fact that the assessee has received the said amount of Rs. 1,75,00,000/- on account of relinquishment of his rights in the management of M/s Ramkrishna Care in favour of M/s CARE and hence the amount received was clearly chargeable to tax? 6. Whether in law and on facts and circumstances of the case, the CIT (A) has erred in holding that the cost of acquisition is in determinate and it cannot be arrived and hence the machinery provisio....
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....nfirmation issued by the company is factually incorrect and the same cannot be relied upon to accept assessee's version of having received professional goodwill, The AO, therefore, observed that the amount of Rs. 1,75,00,000/- was received by the assessee on account of relinquishment of his rights in the management of M/s Ramkrishna Care in favour of M/s CARE and not on account of relinquishment of any right relating to professional expertise or acumen as surgeon. The AO concluded that the amount was received as compensation by the assessee in lieu of surrendering his rights relating to management of the company known as Ramkrishna Care. The AO, accordingly, brought the amount to tax holding that it is covered under the provision of sec. 28(ii)(a) of the IT. Act. 4. In appeal, while deleting the addition, the ld. CIT(A), inter alia, observed vide Para 7 onwards as under :- "7. I have carefully gone through the assessment order and written submissions of the appellant. The issue that is to be decided is whether or not the appellant can be said to have received additional payment on account of self generated goodwill, whether or not the compensation received is taxabl....
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.... the perusal of Clause 7.2, I find that even the Promoter Group, much less the appellant alone, did not have (he right to appoint majority of the directors in the Board, hence, I am convinced that the appellant did not have the right to manage the whole or substantially the whole of the affairs of the company at the time when the addendum was agreed upon. Furthermore, from the perusal of Shareholders Agreement, it is amply clear that the management of the company was vested with various Committees and not with the appellant alone. Therefore, the sums received by the appellant cannot be regarded as compensation taxable under Section 28. 9. As regards the issue whether the sums were received on account of professional goodwill, I find that the appellant himself in his written submission has not pressed on his initial argument before the A. O and accepted that the sums were received against transfer of a capital asset (not 'goodwill) in the light of the amendments brought by the Finance Act, 2012 with retrospective effect from 01.04.1962. Even otherwise, in Commissioner of Income Tax v. Asiatic Industrial Gases Ltd. decided on 13th February, 2012, (2012) 81 CCH 052 Kar HC....
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..... * To share equally super majority rights with CARE; and * To appoint key managerial personnel by CARE. 12. I am of the considered opinion that Quality Care India Limited, vide clause 7.2 of the Shareholders Agreement dated 6th April, 2007, was already vested with the right to appoint the majority of the directors. Hence, it can be safely deduced that the consideration was received by the appellant mainly on account of transfer of right; * To share equally super majority rights with CARE; and * To appoint key managerial personnel by CARE. 13. However, even the said two rights are also inextricably linked with the rights of management or control, hence, I am convinced that the rights transferred certainly falls within the definition of the term "property" i. e. capital asset giving rise to capital gain. 14. It is a matter of common knowledge that Capital gains are calculated on transfer of a capital asset, as sale consideration minus cost of acquisition. It is settled principle of law based on the judicial pronouncements that where the cost of acquisition in respect of transfer of an asset is not determinable under the ....
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..... B.C. Srinivasa Setty [1981] 128 ITR 294 (SC) and CIT v. Tata Services Ltd.(1979) 13 CTR (Bom) 227: (1980) 122 ITR 594 (Bom) relied on. (Para 10) Right to construct the additional floors under the DCR, 1991 was acquired without incurring any cost and therefore, assessee was not chargeable to tax in respect of such receipts. The perusal of s. 55(2)(a) reveals that cost of acquisition is to be taken at nil in those cases where the capital asset transferred is either goodwill of business or a trademark or a 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 carrier permits or loom hours. In the present case, the assessee is not carrying on any business and the right to construct additional floors is not covered, by any of the assets mentioned in the aforesaid sub-s. (2) of s. 55. Therefore, the amended provisions of s. 55(2) do not apply to the present case and the lower authorities were not justified in taking the cost of acquisition of the capital asset being right to construct the additional floors as nil. - Jethalal D. Mehta v. Dy. CIT(2005) 2 SOT 422 (Mu....
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....ee for the purpose of constructing additional floors in its own building. Therefore, such right had no inherent quality of being available on expenditure of money and therefore, cost of such asset could not be envisaged. The right acquired by the assessee did not fall within the ambit of s.45 itself. The amended provisions are also not applicable since such right is not covered by any of the assets specified in s. 55(2)(a). Receipt is capital receipt not chargeable to tax.- CIT v. Dalmia Investment Co. Ltd. (1964) 521TR 567 (SC) distinguished. (Paras 14 & 18 to 21) 15. In Commissioner of Income Tax v. Dhanraj Dugar, the Hon'ble High Court of Calcutta (1982) 137 ITR 350 (CAL): (1981) 7 TAXMAN 397 has held that "Even it be held that the amount paid to the assessee represented the values for the transfer of the assessee's interest in the premises then also the amount could not be taxed unless it could have been said that gain has resulted therefrom, in terms of s. 45. As the assessee did not pay anything to acquire the said right in buildings, compensation of capital gain could not be done in view of nil cost under s. 48. Therefore, s. 45 could not b....
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....a case where, by virtue of holding a capital asset, being a share or any other _ security, within the meaning of clause (h) of section 2 of the Securities Contracts (Regulation) Act, 1956 (42 of 1956) (hereafter in this clause referred to as the financial asset), the assessee- (A) becomes entitled to sub-scribe to any additional financial asset; or (B) is allotted any additional financial asset without any payment, ,then, subject to the provisions of sub-clauses (i) and (ii) of clause (b); (i) in relation to the original financial asset, on the basis of which the assessee becomes entitled to any additional financial asset, means the amount actually paid for acquiring the original financial asset; and (ii) in relation to any right to renounce the said entitlement to subscribe to the financial asset, when such right is renounced by the assessee in favour of any person, shall be taken to be nil in the case of such assessee; (iii) in relation to the financial asset, to which the assessee has subscribed on the basis of the said entitlement, means the amount actually paid by him for acquiring such asset; (iiia) in relation to the fina....
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....became the property of the assessee on- (a) the consolidation and division of all or any of the share capital of the company into shares of larger amount than its existing shares, (b) the conversion of any shares of the company into stock, (c) the reconversion of any stock of the company into shares, (d) the sub-division of any of the shares of the company into shares of smaller amount, or (e) the conversion of one kind of shares of the company into another kind.means the cost of acquisition of the asset calculated with reference to the cost of acquisition of the shares or stock from which such asset is derived. (3) where the cost for which the previous owner acquired the property cannot be ascertained, the cost of acquisition to the previous owner means the fair market value on the date on which the capital asset became the property of the previous owner. 17. 1 have carefully perused the provisions of Section 55(2), however, in my considered view, the property transferred by the appellant is not falling in any of the clauses of Section 55 as the right cannot be said to be arising out of the shareholding nor the right i....
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....t ld. CIT (A) erred in deleting the addition made by AO.She drew our attention to the Addendum dated 20.08.2007, the confirmatory letter dated 15.11.2011, and the shareholders agreement dated 06.04.2007. She argued that the confirmatory letter dated 15.11.2011 on which the assessee has placed reliance, has to be read with the Addendum dated 20.08.2007, as it is an explanation of the Addendum dated 20.08.2007. She took us through the contents of Addendum dated 20.08.2007 and argued that the amount of Rs. 1.75 crore was received by the assessee for relinquishing the three rights specified therein which are in the nature of managerial rights and that the plea of assessee that the amount was received as professional goodwill is an afterthought. She argued that the confirmatory letter dated 15.11,2011, does not inspire confidence as it is in contrast to what has been specifically contained in the Addendum. Since the contents of Addendum are unambiguous and clear, it is beyond doubt that the amount of Rs. 1.75 crore was received only and only for relinquishment of the three managerial rights contained in the Addendum. She then referred to provisions of sec. 28 (ii)(a) to argue that any a....
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....ce charging provision cannot be intended to cover levy of tax. 6.1 The Counsel submitted that provisions of sec. 28(ii)(a) can be applied only when it is established that the assessee had the right to manage whole or substantially the whole of the affairs of the company; that the assessee never had this right; that the AO has also not established that such right was with the assessee and since, it is the AO's allegation that the assessee had the alleged right and therefore, the burden was on the AO to prove that provisions of sec. 28(ii)(a) were applicable. He argued that a reading of the entire assessment order shows that the AO has nowhere established that the assessee had the right to manage whole or substantially the whole of affairs of the company and thus, provisions of sec. 28(ii)(a) could not have been invoked. He further argued that till the date of execution of shareholders agreement on 06.04.2007, the assessee had only 22% shares which did not constitute majority shareholding and in view of this, such an alleged right is unthinkable. He referred to clause number 7.2.2 of the shareholders agreement dated 06.04.2007, to demonstrate that M/s CARE Hyderabad had right ....
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....ares and therefore, it cannot be % perceived that on the date of execution of Addendum, the assessee had alleged rights and in absence of such rights with assessee, the amount of Rs. 1.75 crore cannot be related to the management rights. 6.2 Continuing his arguments on the second aspect of "management right" being a "capital asset", he argued that by virtue of retrospective amendment made by Finance Act, 2012 in sec. 2(14) in the definition of "property", "management right" was included in the definition of "property" and therefore, even if the assessee had right to manage whole or substantially the whole of affairs of the company, what was transferred by the assessee was a "capital asset". He argued that provisions of sec. 45 can be applied only if there is "profit or gain" and for computing any such profit or gain, it is necessary to deduct cost from the sale consideration and that the section does not envisage that entire sale proceeds can be brought to tax. He took us through the decision of Hon'ble Supreme Court in the case of B.C. Srinivasa Setty (supra) in support of above argument. He argued that since the cost of acquisition of "management right" is nil, capital gai....
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....e where any compensation or other payment is due to received by any person managing the whole or substantially the whole of the affairs of an Indian company, at or in connection with the termination of his management or the modification of the terms and conditions relating thereto. We observe that the words used in the sec. are "managing the whole or substantially the whole of the affairs ......"Therefore, it has to be established whether the amount due or received is against termination of any right which an assessee was enjoying by managing the whole or substantially the whole of the affairs of an Indian company. As rightly pointed out by the ld. AR of the assessee, we observe that no case has been made out by the AO to establish this particular condition of the sec. 28(ii)(a). The AO has only relied upon the contents of Addendum and thereafter he invoked sec. 28(ii)(a). What the AO should have done is, he should also have established that the assessee was the person who was managing the whole or substantially the whole of the affairs of the company. This vital finding is missing and therefore, at the threshold only, invocation of sec. 28(ii)(a) fails. Before us, ld. DR has tried....
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....unsubstantiated and nothing in support of such an assertion has been brought on record. Therefore, it is crystal clear that so far as appointment of majority directors is concerned, the assessee individually never had any such right. We have also gone through clause number 7.7.1 of agreement dated 06.04.2007 and observe that whatever powers and authority the assessee had, he derived his powers and authority from the Board of Directors and he was responsible for reporting to the Board. Therefore, this gives an indication that it is the Board of Directors which is managing the affairs of the company, of course through the assessee and others. One of the three rights mentioned in the Addendum dated 20.08.2007 speaks about appointing key managerial personnel. A perusal of clause number 7.8.1 of the shareholders agreement dated 06.04.2007 shows that M/s CARE had the right to appoint hospital administrator, CFO and chief accountant, who have been named in the agreement to be key officials. Therefore, we find that the Addendum refers to some rights which were not available with the assessee and therefore, the amount of Rs. 1.75 crore is not established to be linked to the three rights men....
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....able. We have carefully considered this argument of the assessee. 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. N....