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2019 (10) TMI 116 - AT - Income TaxTaxability of professional goodwill - whether additional payment on account of self generated goodwill, whether or not the compensation received is taxable under the head Profits and Gains from Business or Profession u/s 28, whether or not the right transferred is giving rise to capital gain in the hands of the appellant? - whether assessee was not managing the whole or substantially the whole of the affairs of the company? - HELD THAT:- We fail to see how it can be said that the affairs were fully or substantially managed by the assessee. It is a common knowledge that the affairs of a company are generally entrusted to directors and such directors generally act as per the authority given by the Board of Directors to them and it is also a common feature that the concerned director reports to the Board of Directors. In such a case, it is the Board of Directors collectively who can be said to be managing the business affairs of the company. Therefore, we conclude that the assessee was not managing the whole or substantially the whole of the affairs of the company and the impugned amount of ₹ 1.75 crore cannot be related to the three, rights referred to in the Addendum dated 20.08.2007. Second argument of the assessee that “management right” is a “capital asset” within the meaning of sec. 2(14) by virtue of retrospective amendment made by Finance Act, 2012 and so provisions relating to computation of capital gain will apply and not those relating to business income - 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. No case has been made out by the AO to show as to what was the cost of management right in the hands of assessee. Therefore, what has been brought to tax is the entire consideration for relinquishment of management right which runs contrary to the settled proposition of law, which was laid down by Hon'ble Supreme Court in the case of B. C. Srinivasa Setty [1981 (2) TMI 1 - SUPREME COURT] It is evident that the revenue has not established that the assessee was managing the whole or substantially the whole of the affairs of the company as no case has been made out by the Revenue that the amount of ₹ 1.75 crore received by the assessee from M/s CARE was on account of relinquishment of any managerial rights. Even if, assuming that the amount received by the assessee is relatable to relinquishment of any managerial right, in view of ratio laid down by Hon'ble Supreme Court in the case of B.C. Srinivasa Setty (supra) the cost of any such managerial right being indeterminate, provisions relating to computation of capital gain are not workable and consequently, it has to be held that the charge under sec. 45 never intended to levy a tax on such a transaction. We are of the considered opinion that the amount of ₹ 1.75 crore received by the assessee is neither chargeable under sec. 28(ii)(a) nor under the head capital gain. Accordingly, we uphold the order of ld. CIT (A) on this issue. Thus, all the grounds of Revenue are dismissed.
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