TMI Blog2010 (12) TMI 680X X X X Extracts X X X X X X X X Extracts X X X X ..... on behind the same. It is the duty of the Court in every case, where ingenuity is expended to avoid taxing and welfare legislations, to get behind the smoke screen and discover the true state of affairs - The Supreme Court in the case of Juggilal Kamlapat v. CIT [1968 -TMI - 5134 - SUPREME Court] held that in cases where the same persons entered into transactions though by introducing a corporate personality into some of those transactions, the income-tax authorities are entitled to pierce the veil of the corporate personality and look at the reality of the transaction - Decided against the assessee by holding that what has been done by the assessee is to evade tax and not to avoid. - 2209 AND 2210 OF 2006 - - - Dated:- 16-12-2010 - MR. JUSTICE F.M.IBRAHIM KALIFULLA, MR. JUSTICE M.M.SUNDRESH, JJ. For Appellant in both cases : Shri.V.S.Jayakumar For Respondent in both cases : Shri.Patty B.Jeganathan C O M M O N J U D G M E N T M.M.SUNDRESH, J In view of the fact that both the appeals have arisen from the same Assessment Year and order, coupled with the further fact that the parties are one and the same, they have been taken up together and a common ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Rs.1,25,00,000/- B) Compensation for pending orders that is not to compete and indulge in transfers business Rs. 36,16,139/- C) Compensation for expected order under negotiation i.e. not to compete and indulge in transformer business Rs. 33,00,000/- Total Rs.1,94,16,139/- 4.2.The assessee filed its return of income on 06.11.1995. A show cause notice was issued on 25.02.1998 as to why the amount shown as received for non-competition fee for pending orders, future orders and for the transfer of technical know-how will not be treated as capital gains, in as much as no amount has been shown under the head "Goodwill" even though the assessee has been making good profit in the previous years. 5.Case of the assessee:- 5.1.The assessee claimed that the entire sum of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ogy is a capital asset. Since it is a capital asset, the question of treating the same as profit or income would not arise. Technology is different from a goodwill since it involves skill. In as much as the technical know-how relates to production, the same cannot be treated as a long term capital gain treating the same as a goodwill. 7.2.Similarly, in so far as the compensation of pending orders is concerned, the same was also allowed on the ground that the same is a usual practice done in the field of business while transferring the asset for the purpose of not allowing the other party to partake in the business. However, with regard to the payment of Rs.33,00,000/- as compensation for future orders is concerned, the same was rejected by the Commissioner of Income Tax (Appeals) by holding that the said payment is speculative, imaginary and therefore cannot be granted. Accordingly, the appeal filed by the assessee in so far as the sum of Rs.1,25,00,000/- and Rs.36,16,139/- were allowed and the remaining sum claimed towards the future compensation was rejected. 8.Findings of the Tribunal:- 8.1.Both the assessee as well as the revenue filed their respective appeals befor ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ellant and Shri.Patty B.Jeganathan, learned counsel appearing for the respondent. 10.Contentions of the learned counsel for the assessee:- 10.1.Shri.V.S.Jayakumar, learned counsel appearing for the assessee submitted that while facts are not in dispute, the Tribunal has committed an error in not appreciating the fact that what was sold by the assessee is the value fixed for the technical know-how produced by it. The technical know-how is a capital asset and therefore, the same cannot be treated as a long term capital gain. 10.2.The assessee has produced drawings, designs, technical data, specifications etc. and sold them to the limited company. They form part of the technical know-how and therefore for such a transfer, the amount has been fixed and paid to the assessee. The reasoning of the Tribunal that the technical know-how has not been shown in the balance sheet cannot be accepted, since the value will be fixed only at the time of sale and not otherwise. As per the provisions of the Income Tax Act, 1961 as it stood for the relevant assessment year, a sale of a technical know-how cannot be taxed. The Tribunal and the Assessing Officer have merely inferred that the pa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ON OF INDIA [AIR 1970 SC 564] has held as follows: " 'Goodwill' of a business is an intangible assets, it is the whole advantage of the reputation and connections formed with the customers together with the circumstances making the connection durable. It is that component of the total value of the undertaking which is attributable to the ability of the concern to earn profits over a course of years or in excess of normal amounts because of its reputation, location and other feature." 12.2.Section 55 of the Income Tax Act, 1961 provides for the sale of goodwill after dissolution. The definition of 'goodwill' as held by the Honourable Apex Court and as seen from the provisions contained under Section 55, it is very clear that after the dissolution of a firm it shall be included in the assets. Therefore, in as much as a goodwill can be quantified by way of a sum, the assessee wanted to avoid the same by terming it as technical know-how and compensation. When a business is destroyed the goodwill goes with it. A goodwill is determined by the nature of business, character, name and reputation, its location, its impact on the contemporary market, the prevailing socio economy and t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s of Section 55(2) of the Income Tax Act, 1961 under which a goodwill amount is taxable. 13.3.There was no material on record to establish the cost of the technical know-how as observed by the Tribunal. There was also no material to quantify the amount shown as paid to the assessee for the transfer of the alleged technical know-how. As observed by the Tribunal and the Assessing Officer, there is no explanation as to why no amount has been received towards the goodwill considering the undisputed fact of the good performance of the assessee firm over the years before the transfer. The assessee has clearly attempted to evade tax by claiming the amount received as goodwill into one of technical know-how in order to evade tax. The assessee has tried to sell the old wine in a new bottle by characterizing the receipt as technical know-how. It is not the case of the assessee that it has been selling the technical know-how to any other third party. The agreement also does not provide a clause to the effect that the assessee shall not indulge in the same business. This is for the precise reason that the assessee has merely changed from being a partnership firm into one of a private compa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ure and it was received for loss of earning the commission, the same would be revenue in nature. The Honourable Division Bench was pleased to observe that the compensation received when the loss is for capital structure then it would become a capital receipt. As observed earlier, the facts involved in the case is totally different to the cases on hand. 14.3.The judgment relied upon by the learned counsel for the assessee in JONAS WOODHEAD AND SONS (INDIA) LTD. v. COMMISSIONER OF INCOME-TAX [(1997) 224 ITR 342] is not applicable to the facts of the case, in as much as in the said case, what was involved is only a transfer of technical know-how and not other assets as in the present cases on hand. Therefore, the judgments relied upon by the learned counsel for the assessee are not applicable to the facts involved in the present cases. 15.Lifting the Corporate Veil:- 15.1.Both the Tribunal and the Assessing Officer have held that what was done by the assessee firm is clearly an attempt to evade tax in order to get over the provisions contained under Section 55(2) of the Income Tax Act, 1961. It is a well settled principle of law that what is permissible is avoidance but no ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e company. The company continues to remain a legal entity with a right to hold property, to contract, etc. The true character of the payment made by it to these brothers who are shareholders and directors and who as partners of the firm own the buildings and the equipment used by the company for running the hotel, has to be judged by looking at the reality after removing or piercing the veil of the company, as the circumstances of the case justify such an exercise. The purpose of the deed of compensation in reality was only to screen the payment made under that deed from liability to income-tax in the hands of the assessee. The Supreme Court in the case of Juggilal Kamlapat v. CIT [1969] 73 ITR 702] held that in cases where the same persons entered into transactions though by introducing a corporate personality into some of those transactions, the income-tax authorities are entitled to pierce the veil of the corporate personality and look at the reality of the transaction. The Court in that case observed (page 710): "It is true that from juristic point of view the company is a legal personality entirely distinct from its members and the company is capable of enjoying rights ..... X X X X Extracts X X X X X X X X Extracts X X X X
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