TaxTMI 
TaxTMI 
2012 (1) TMI 433
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....ces of the case the amount of Rs. 3,69,10,000/- is a capital receipts not liable to tax in view of the following decision of Supreme Court 1. C.I.T. Gujarat v/s Mohanbhai Pamabhai 165 ITR 166 (S.C) 2. Sunil Siddarthbhai v/s CIT 156 ITR 509 (SC) and so the same can not be taxed as capital gain u/s 45 of the Income-tax Act as has been done by the ld. ACIT Cir-2, Baroda and confirmed by the ICT Appeals. 2. Ld. CIT (A) has erred in law and on facts in confirming the addition of Rs. 27450000/- received by the appellant as non-competition fees. Under the facts and circumstances of the case the amount of Rs. 27450000/- is a capital receipts not liable to tax on the basis of the following decisions. A. CIT V/s. Kamal Behari Lal Singha 82 ITR 460 B. Gillandars Arbuthnot & Co. v/s CIT 53 ITR 283 C. Best & Co. Pvt. Ltd. 60 ITR 11 D. R.N. Agarwala v/s CIT 38 ITR 67 E. Oberoi Hotels Pvt. Ltd. V/s CIT 236 ITR 403 The appellant has received this amount for the negative convenient mentioned in the non-competition agreement executed in this behalf in view of the legal decisions the same is not l....
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....n agreement executed in this behalf in view of the legal decisions the same is not liable to tax. Moreover the Financial Bill 2002 also support the case of the assessee by making the non competition fees as taxable only from A.Y. 2003-2004 on words and not before. (3) ld. CIT (A) as well as the ld. AO has erred in not considering various facts submissions, explanations and clarifications as given by the appellant. Both the lower authorities have further erred in not appreciating the facts and law in their proper perspective." The Revenue in the cross appeal in the case of Mayur S Sheth in ITA No. 3091/Ahd/2002 has raised the following grounds of appeal: "1. On the facts and in the circumstances of the case and in law, the ld. CIT (A) erred in holding that the entire capital gain be treated as long term capital gain. 2. On the facts and in the circumstances of the case and in law the ld. CIT (A) ought to have upheld the order of the Assessing Officer. 3. It is, therefore prayed that the order of the CIT (A) be set aside and that of the Assessing Officer be restored. Now we take up the appeal of the assessee and the revenue in the case o....
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....m 1.7.1998. A supplementary deed of partnership was signed by Shri Samir Sheth, Shri Mayur Sheth and Ciba and the deed of Partnership dated 28.02.1998 became the main deed to this supplementary deed. iv. As per Annexure-I to the partnership deed, the profit sharing ratio amongst the partners from 1.7.1998 was as under:- a. Shri Samir Sheth 27% b. Shri Mayur Sheth 22% c. Ciba India Pvt. Ltd. 51% v. As per this partnership deed, Sheth Brothers were having authority to admit other members of Sheth family as partners by sharing their profit sharing ratio of 49%. Subsequently on 18.12.1998, a fresh deed of partnership was entered into and the members of Sheth Family were admitted and the profit sharing ratio with effect from 18.12.1998 is as under: a) Samir Sheth 19% b) Mayur Sheth 17% c) Ketki S Sheth 3% d) Nayana M Sheth 3% e) Suryakant G Sheth 3% f) Devang S Sheth 3% g) C.B. Thakkar 3% h) Ciba India Pvt. Ltd. 51% vi. Capital in the firm as on 1.4.1998 of Shri Samir Sheth and Shri Mayur Sheth was as under:- Shri Samir Sheth Rs. 9,28,27,002 Shri Mayur S....
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....; 3,01,90,000 Noncompetition agreement 2,74,50,000 = 1.22 2,25,00,000 6. ISSUE INVOLVED Whether the amount received by the old partners from the newly admitted partners is chargeable to tax. Assessee's contention In the notes forming part of the return of income the assessee relied on the decision of the Supreme Court in the following cases:- i. Mohanbhai Pamabhai (165 ITR 166) ii. Tribhovandas G Patel (1998) (8 SSC 509) iii. Sunil Siddarthbhai (156 ITR 509) 7. During the course of assessment proceedings, the assessee argued that on retirement of a partner, amount received by him from the continuing partners is nothing, but the amount which belonged to him as a partner and there is no element of transfer on the retirement by the partner from the firm and when a partner retires from the firm, the amount received is not chargeable to capital gains tax. It was further argued that the present case involved partial retirement of the assessee from the firm wherein his share in the profit of the firm was reduced. Therefore, legally it is at par with the total retirement of the partner. It was,....
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....IPT A business builds up some reputation after it is continued for sometime. It is a valuable asset and the value of it depends on personal reputation of the owners/management/the peculiar advantage of the site/with regard to sale of material and the pattern, copy right, trade marks owned by the firm. According to Courts, variety of elements go into making of goodwill and its composition varies in different trades and in different business. In the case of Lord Macnaghten IRC v/s. Muller & Co. Margarine Ltd. (1901) (AC 217) (HL) has held that value of goodwill fluctuates depending on the changes in the reputation of the business. It is effected by the prevailing socio-economic ecology effective to old customers and absence of competition. 12. In the present case, Shri Samir Sheth and Shri Mayur Sheth were closely related to the business of marketing, development, manufacture of master batches and pigment preparation. Both the Sheth Brothers had specialized technical knowledge and know-how, information and process related to the marketing of products. Both Shri Samir Sheth and Shri Mayur Sheth had possessed information and experience in the chemical industry and due....
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....p;3.09 crore for relinquishing 23% share. 15. CONCLUSION At the time of admission of new partner, the capital accounts of old partners were adjusted and the amount of various reserves of the firm were transferred to the credit of old partners. This has taken care of the fair market value of all tangible assets and liabilities existing as on 30.06.1998. The assessee had adjusted his capital in the firm to match new profit sharing ratio and the new incoming partner Ciba had contributed its share of capital to the firm. Therefore, in these circumstances, the amount paid separately by the new incoming partner to the old partners without involving the firm is nothing, but consideration for intangible asset i.e. the loss of share of partner in the goodwill of the firm. Accordingly, this amount is to be charged to tax under the head capital gains. 16. AMOUNT PAID FOR NONCOMPETITION AGREEMENT As discussed in the preceding para, apart from making payment for loss of share in the profit of the firm, on 28.2.1998 itself separate agreements were entered by the new incoming partner Ciba with both the old partners of the firm separately wherein new partner had....
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....appeared that some other agreement related to some company had been hurriedly copies and applied in this case which has different set of facts. It was further stressed that in case of noncompetition, both Shri Samir Sheth and Shri Mayur Sheth who were equally competent technical persons, the amount paid to them ought to have been equal and not in the ratio of their right relinquished by them. Therefore, it would be easily concluded that the further amount paid by the new partner directly to the old partner in the name of noncompetition agreement was nothing, but towards loss of share of goodwill in the firm. 19. In reply to the show cause letter, the assessee reiterated his stand and stated that the amount was paid for restrictive covenant and, therefore, the same cannot be treated as goodwill and the amount would be taxable as business receives from assessment year 20032004 only. 20. CONCLUSION As discussed in the preceding paras, both the Sheth Brothers were competent technical persons having expertise in the field of manufacturing and marketing of various grades of master batches and pigment preparations. The reputation of the firm soared due to the kn....
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.......The taxing authority is entitled and is indeed bound to determine the true legal relation resulting from a transaction. If the parties have chosen to conceal by a device the legal relation, it is open to the taxing authorities to unravel the device and to determine the true character of the relationship. But the legal effect of a transaction cannot be displaced by probing into the 'substance or transaction'........". ".......It is neither fair nor desirable to expect the legislature to intervene a take care of every devices and scheme to avoid taxation. It is upto the Court to take stock to determine the nature of the new and sophisticated legal devices to avoid tax and consider whether the situation created by the device could be related to the existing legislation with the aid of emerging techniques of interpretation to expose the devices for what they really are and to refuse to give judicial benediction......." 23. FOR VALUATION OF GOODWILL The working of goodwill supplied by the assessee is based on accounting principles. It has not taken into consideration the immediate effect of joining of hands by a multinational company Ciba with the professio....
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....competition agreement. vii. In view of the fact that the assessee continued to be partner in the firm and express clause in the partnership deed, which prohibited competition by the continuing partners, there was no occasion to make payment separately for noncompetition. viii. The amount paid in name of noncompetition to both the partners were in ratio of their loss in the profit share of the firm, which clearly suggests that it is nothing, but the amount paid for loss of their share in the partnership firm. ix. Once the capital accounts were settled prior to reconstitution of firm every tangible asset was taken care of and in consideration for tangible asset, the then existing partners withdrawn the capital and new partner introduced the capital in the books of the firm. x. Over and above new incoming partner had paid total sum of Rs. 11,70,50,000/- to the above existing partners privately and directly. There is no doubt that this amount represents the loss of share of the then partners in the goodwill of the firm. xi. The agreement of non-competition agreement is nothing, but a colourable device to avoid payment of taxes. Therefor....
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....of capital receipt where source of income is lost for indefinite period are to be taxed as business income. In the cases like that of assessee. Where the restraint of source of income is for a very short period, the amount is otherwise chargeable to tax as revenue receipt of business/profession. Therefore, if the noncompetition agreement is held to be a genuine one, the amount of Rs. 2,74,50,000/- should be taxed as business receipt. 28. Subject to above remarks, total income of the assessee is competed as under:- Income from business as per return Rs. 34,99,230 Income from other sources as per return Rs. 1,30,89,747 Income under the head capital gain i) Short Term Rs. 3,44,78,571 ii) Long term Rs. 2,98,81,429 Gross Total Income Rs .8,09,48,977 LESS: Deduction under Chapter VIA As per return Rs. 19,617 Total Income Rs. 8,09,29,360" 3. The ld. CIT (A) vide para 3.5 to 3.8 with respect to taxability of goodwill observed that it is not in dispute that the receipt is capital in nature and therefore to that extent the observations in the case of Rajindra Prasad Modi's case were accepted. Aft....
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...., as already argued hereinabove. On the facts such a payment is justified. Such a payment has been held to be a capital receipt. He relied upon the decisions of various courts of law as under: 1) Guffic Champ Ltd. v. CIT (2011) 332 ITR 602 (SC) 2) 305 ITR 18 (MP) 3) Rohitasavachand v. CIT (2008) 306 ITR 242 (Del.) 4) 246 CTR 190 (Bom.) 5) CIT v. Sarajkumar Poddar (2005) 279 ITR 573 (Cal.) 8. The ld. CIT(DR) on the other hand argued that the department is also of the view that it is a capital receipt. It is a case of transfer of a capital asset and therefore it is taxable as a capital gain. He further argued that section 14 Partnership Act itself includes goodwill. The present case is the case of transfer of share in the partnership. The ld. Counsel for the assessee has cited the decisions of various courts of law with regard to retirement of partnership and none of the case has been cited by the ld. Counsel for the assessee with regard to partners continuing. Therefore, none of the cases cited by the ld. Counsel for the assessee are applicable in the present facts and circumstances of the case. As regards the non-compete fee the cases....
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....Ld. CIT (A) with regard to the valuation of goodwill. 10. As regards non-compete fees the judgments of various courts of law relied upon by the Learned Counsel for the assessee cannot help the assessee. Since in the present facts and circumstances of the case the payment in the present case has been made only for compensating for the loss due to the reduction in the share of goodwill of the firm. We are convinced with the arguments made by Ld. CIT-DR that Section 16 of Partnership Act provides that the partner cannot indulge in the competition and therefore there is no question of compete fee in the present case and the amount received is a compensation received for reduction of share in the partnership firm which is shown as compete fee is required to be taxed in the same way as the amount of goodwill is taxed.. Therefore, we do not find any error in the order of Ld. CIT (A) in this respect, who has rightly confirmed the action of Assessing Officer. 11. As regards taxability of the capital gains in para-5.5 in the order of Ld. CIT(A), he has rightly treated the entire capital gains as Long Term Capital Gains. We find no infirmity in the order of Ld. CIT(A). Thus, all the gro....