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2012 (6) TMI 549 - AT - Income TaxValidity of Revisionary order u/s 263 - dispute regarding valuation of goodwill - Held that:- AO has taken only the average of the five years' profit as the value of the goodwill. The regular method accepted is to multiply the average profit with a suitable factor of three years or so, depending upon the nature and circumstances of the business transferred. If no multiplier is adopted, it was necessary on the part of the AO to explain the grounds of not applying the same. Further, assessing authority has not examined important aspects such as justification for the sister concern for paying any non compete fee to the assessee company - consideration paid for the transfer of intellectual property rights - deduction claimed by the assessee in respect of ESOP scheme. Therefore, CIT is justified in holding that the order of the AO is erroneous and prejudicial to the interests of the Revenue - Decided against the assessee. Validity of Revisionary order u/s 263 - transfer of software technology division to sister concern - No amount attributed towards goodwill, however was attributed towards non compete fee, sale of brand name, sale of IPR - AY 2000-01 - Held that:- CIT has rightly pointed that assessee has made an attempt to suppress the true colour of the payment towards the goodwill by stating that payments were made towards non compete fee, IPR on brand/brand value, etc. Hence, factum and valuation of goodwill is confirmed. However the same cannot be treated as short-term capital gains, since assessee was in the business for more than five years. The goodwill is a self generated asset and generates along-with the commencement of the business, especially in the field of software technology. The capital gains must be treated as long-term capital gains and taxed accordingly - Decided partly in favor of assessee. Interest income earned on fixed deposit made for margin money - business income or income from other sources - deduction u/s 10B - Held that:- The interest received by the assessee on margin money deposits were not generated out of export activity. Therefore, the assessee is not entitled to treat the interest income as business income eligible for deduction u/s 10B. However, if the assessee proves that some expenditure is incurred for earning that bank interest, that expenditure may be deducted while computing the income from other sources - Decided partly in favor of assessee Amount received on renting out of computers, insurance claims on damage to computers, sale of scrap and reimbursement of expenses incurred for agents abroad - business income or income from other sources - Held that:- Incidental income arising from use of computers, insurance claims on damage to computers, etc. needs to be treated as operational income in the nature of business income since the same are installed for the purpose of carrying on business. This is the case with the sale of scrap as well. Also, reimbursement of expenses reduces the cost and results in overall increase in business income. Hence, aforesaid to be treated as business income - Decided in favor of assessee Rent received from employees occupying quarters of the assessee - recovery is reduced from staff welfare expenses - Held that:- Since it reduces the business expenditure, hence rent recoveries are to be treated as business income - Decided in favor of assessee Exemption u/s 10B - denial in respect of trade advances written off - Held that:- AO may verify the nature of advances made by the assessee and if they were trade advances, the same shall form part of the business income on writing back. If so, the assessee is entitled for deduction u/s 10B. Exemption u/s 10B - denial in respect of gain arising out of transfer of division to sister concern - assessee contended that upto the AY 2000-01, entire income earned by the STP undertaking is exempt u/s 10B as a tax holiday - Held that:- The tax holiday benefit applies only to the income earned out of export of articles or things or computer software. Income arising out of sale of a business division and other items, etc. does not qualify for deduction u/s 10B - Decided in favor of Revenue On contention of Revenue of application of section 50 and capital gains to be treated as short-term capital gains it is held that Section 50 does not automatically apply to an asset only because of the reason that the asset is a depreciable asset. In the present case, there was no occasion to give any allowance of depreciation on the goodwill computed in the hands of the assessee. The assessee has been in business for a period of more than three years - Decided against Revenue
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