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TMI Blog2012 (6) TMI 549X X X X Extracts X X X X X X X X Extracts X X X X ..... arties confirmed that the appeal relates to the assessment year 2000-01. 4. The appeal filed by the assessee in ITA No.1768 (Mds)/2010 is directed against the order of the Commissioner of Income-tax(Appeals)-V at Chennai, dated 13-8-2010 and arises out of the assessment completed under section 143(3), consequent to the revision order passed under section 263 of the Act. 5. We heard Smt.Pushya Sitharaman, the learned senior counsel, alongwith Ms. Vardini and Ms. Sree Vidya, advocates, appearing for the assessee. 6. Dr.Sibendu Moharana, the learned Commissioner of Income-tax, appeared for the Revenue and argued the case. 7. First we will consider the revision appeal filed by the assessee against the order of the Commissioner of Income-tax passed under section 263 of the Act. 8. The assessee is engaged in the business of multimedia computer graphics and animation. The assessee also had been running a software and training division. This software and training division was hived off to its sister concern M/s. Pentafour Communications Ltd. (later on renamed as Pentafour Technologies Ltd.). The transfer was made through an agreement dated 23-2-2000. The consideration for the transact ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ee is concerned, there was no goodwill included in the transaction. The assessee explained that a sum of Rs. 66.9 crores related to depreciation reserve received on transfer and the balance amount related to additional consideration paid against purchase of the assets. The assessee accordingly submitted before the assessing authority that no consideration was exchanged for transfer of goodwill as such. 12. The above explanation offered by the assessee was not acceptable to the assessing authority. He held that the consideration also included a portion attributable to the transfer of goodwill of the software division of the assessee company. Relying on the judgment of the Hon'ble Bombay High Court in the case of Evans Fraser & Co. Ltd. v. CIT, 137 ITR 493, the assessing authority held that even if it is impossible to ascertain in terms of money value of goodwill in view of its nebulous character and its uncertain nature, it is possible to value the goodwill by applying accounting standards at a certain multiple of the average profits of the past in the belief that if the business is continued in the same name and style, the same amount of profits would be earned in future as well. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... fee. Factually speaking, there was no case of any competition between these units working under the same management with a common chairman and CEO. Therefore, the Commissioner observed that the amount attributed to non compete fee is nothing but a colourful arrangement of the accounts to shadow over the reality of the transfer of goodwill. The Commissioner of Income-tax observed that many of the components of the consideration have been termed by the assessee as non compete fee, IPR value, brand value, etc. to evade payment of capital gains tax on the transfer of the software division for the reason that goodwill alone was taxable for the assessment year 2000-01, compared to the transfer of other intangible assets like non compete fee, brand value, etc. 17. The Commissioner of Income-tax further examined the treatment given by M/s. Pentafour Technologies Ltd. in its accounts, wherein a sizeable portion of the consideration has been accounted as 'goodwill'. After examining every aspect of the case in a very detailed manner, the learned Commissioner of Income-tax came to the conclusion that the alleged payment towards non compete fee, IPR on brand/brand value, etc. was a figment of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ith law. 22. It is against the above revision order that the assessee has come in appeal before us. 23. The detailed grounds raised by the assessee in the appeal are extracted below:- "2. The CIT erred in passing an order of revision u/s 263 of the Act in respect of the assessment of goodwill which was subject matter of an appeal pending before the CIT(A), pre-empting the decision of the Commissioner(Appeals) and rendering the appeal infructuous. 3. The CIT erred in exercising jurisdiction u/s 263 to direct the assessing officer to adopt a multiplier with regard to valuation of goodwill, when the question whether there was a transfer of goodwill at all was pending in appeal. 4. The CIT failed to see that where there can be more than one opinion regarding adopting the number of years purchase in the matter of determination of value of goodwill, it cannot be said that the order is erroneous and prejudicial to the revenue to give rise to reversionary powers u/s 263 of the Act. 5. The CIT failed to see that goodwill can be brought to tax only if it is transferred and consideration ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hen the CIT has directed the assessing officer to examine the issue afresh in view of the fact that the entire transaction was based on hypothetical values fixed for other purposes, he ought to have insisted on the goodwill being decided by a multiplier." 24. There is a delay of 1671 days in filing this appeal before the Tribunal. The assessee has filed a petition praying for condonation of the delay. It is the case of the assessee that when the Commissioner of Income-tax has passed the revision order under section 263, the appeal of the assessee against the original assessment was pending before the Commissioner of Income-tax(Appeals). The advice given to the assessee was that as the entire assessment order was set aside, no prejudice is caused to the assessee and the issues can be agitated in the consequential assessment especially in the light of the outcome of the appeal which is pending before the Commissioner of Income-tax(Appeals). By the time, the Assessing Officer passed a fresh assessment order on 31-3-2006 taking the value of the goodwill at Rs. 126 crores liable to tax as short-term capital gains. When this order was taken in appeal before the Commissioner of Income-ta ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rofit 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 Assessing Officer to explain the grounds as to why the multiplying factor should not be applied to the average profit of five years. Therefore, on this ground itself, the Commissioner of Income-tax is justified in holding that the order of the Assessing Officer is erroneous and prejudicial to the interests of the Revenue as far as the issue of valuation of goodwill is concerned. 28. As rightly pointed out by the Commissioner of Income-tax, the Assessing Officer has not analysed the circumstances leading to the payment of non compete fee by the sister concern to the assessee-company. The locus standi of the parties to the transaction to fix an amount of non compete fee is to be appreciated in the light of the fact that the assessee and sister concern are under the common management of a common chairman and a common CEO. The assessee-company and its sister concern are working in close relation with a lot of interlacing of activities and interlocking of finance. In these circumstances, as rightly p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... le. It is in the light of that possibility that the Hon'ble High Court has held that revision order is not possible when two views are possible and the assessing authority has applied one of the possible views. In the present case, there are no such views available before the Assessing Officer to choose among them as a possible view. While doing the valuation of the goodwill, the Assessing Officer has adopted only the average profit for five years without any multiplier. The standard rule of valuation of goodwill is to apply a factor of multiplier. There are no two views on this point. If a multiplier is not necessary, it is the duty of the Assessing Officer to state in his order as to why the situation of the present case is different and a different rule should be applied. Therefore, there is no question of the Assessing Officer choosing one of the possible views while making the valuation of the goodwill. 32. For the same reasons stated above, the decision of the Income-tax Appellate Tribunal, Bangalore B-Bench, rendered in the case of International Society for Krishna Consciousness v. Deputy Director of Income-tax(Exemptions), 15 DTR (Bang)(Trib) 633., which is relied on by th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... te in ITA No.156/2007-08 for the A.Y.2000-01, I have held that: (i) goodwill component in the price for the transfer of software division of the assessee is taxable as long-term capital gains; and (ii) the goodwill is to be valued at three years' purchase price of the average profits of five years, based on the profits for years 1995 to 1999. I, therefore, hold that the assessment of goodwill by the A.O is in accordance with law and the goodwill value of Rs. 67.50 crores as computed in the appeal order of date in ITA No.156/2007-08 is to be assessed as capital gains (long-term) instead of Rs. 1,26,67,00,000 adopted by the A.O in the impugned assessment order. The appeal is dismissed. However, the addition on account of Goodwill has been given effect to in ITA 156/2007- 08 for the same assessment year." 39. It is against the above that the assessee has come in second appeal before us. The grounds raised by the assessee read as below:- "1. The CIT(A) has failed to see that when a division was ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... acquired by the sister concern. The accounts of the sister concern itself is a documentary evidence for the Revenue to come to a fair conclusion that the consideration definitely included consideration towards goodwill. 42. As rightly pointed out by the Commissioner of Income-tax in his revision order, the 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. In fact the assessee as well as its sister concern M/s. Pentafour Technologies Limited do have a common CEO and the companies are working under a common management. There is interlacing of activities and interlocking of funds. These group concerns are not working at loggerheads. In such circumstances, as rightly pointed out by the Commissioner of Income-tax, there is no de facto situation which demands payment of non compete fee by the assessee's sister concern to the assessee company. This is the same case with IPR on brand/brand value, etc. These are all, as rightly held by the Commissioner of Income-tax, a figment of a creative accounting, with no relevance to real state of affairs. It is to be ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the export of articles or things or computer software. 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 under section 10B. The principles laid down by the Hon'ble Supreme Court in the case of Pandian Chemicals Ltd. v. CIT, 262 ITR 278, support the view taken by the lower authorities. This issue is accordingly decided against the assessee. 50. The connected argument raised by the assessee is that the expenditure incurred for earning that interest income should be allowed as a deduction while computing the income from other sources. There is no objection to this. 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. The Assessing Officer is directed to look into it. 51. The next ground raised by the assessee is that the Commissioner of Income-tax (Appeals) has erred in treating the amount received on renting out of computers, insurance claims on damage to computers, sale of scrap and reimbursement of ex ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ompany. This issue is decided in favour of the assessee. 54. In the light of the above, the alternate ground raised by the assessee regarding deduction under section 24 does not survive. 55. The next ground is that the Commissioner of Income-tax (Appeals) has erred in denying section 10B exemption to the amounts written back, failing to see that the amounts are nothing but trade advances relating to the eligible business and as remission of trading liability is to be treated as income under section 41(1)(a), the same should be considered for deduction under section 10B. The Assessing Officer 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 under section 10B on this amount also. The Assessing Officer is directed to verify the issue. 56. The next ground raised by the assessee is that the Commissioner of Income-tax (Appeals) has failed to see that when a division was transferred to its sister concern, there was no transfer of goodwill and no part of the consideration was earmarked for goodwill and as such the question of computation o ..... X X X X Extracts X X X X X X X X Extracts X X X X
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