TMI Blog2012 (7) TMI 688X X X X Extracts X X X X X X X X Extracts X X X X ..... ew Delhi, contending that the ld. CIT(A) has erred in deleting the addition of Rs. 1,20,00,000/- received by the assessee as compensation, as business profit u/s 28(va) of the I.T. Act, since the assessee has been found to have received the said amount as compensation for not carrying on any business activity in relation to the business, which, as per the provisions of section 28(va), is chargeable as income under the head profits and gains of business'. 2. The assessee, individual, during the year, was engaged in providing consultancy in Civil Engineering under the name and proprietorship of M/s. S.D. Engineering Consultants. This concern was taken over by ICT-SD Engineering Consultants Pvt. Limited w.e.f. 31.10.2007. The assessee also received salary from M/s. ICT-SD Engineering Consultants Pvt. Ltd. in the capacity of Director, income from capital gain and other sources. 3. The AO observed that during the year, the assessee had received a compensation of Rs. 1,20,00,000/- against the discontinuance of her proprietary business. It was observed that as per the copy of Agreement dated 4.12.2007 between IST-SD Engineering Consultants Pvt. Ltd. and Mrs. Sangeeta Wij (the assesse ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rship concern. 4. The AO further observed that as per para 11 of the aforesaid Agreement, it had been stated that Mrs. Sangeeta Wij shall work exclusively as a whole-time Director of the Company for a minimum period of 5 years, starting on a salary of Rs. 2,00,000/- per month plus perks, as agreed to between the parties, that such remuneration shall be received each year, provided that in case she was relieved before the expiry of five years by the controlling group led by Shri K.K. Kapila, she would be adequately compensated, that she shall not carry out any activity or encourage, directly or indirectly in any other business directly or indirectly related to the business of ICT-SD Engineering Consultants Pvt. Ltd., and that however, she would be at liberty to do any business whatsoever after quitting or leaving ICT-SD Engineering Consultants Pvt. Ltd. From these contents of para 11 of the Agreement, the AO observed that it was evident that the compensation of Rs. 1,20,00,000/- was not a capital receipt liable for capital gains as claimed by the assessee, but a business receipt and that rather, the compensation was not for carrying out any activity in relation to the business of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . CIT(A) regarding the issue of compensation paid for discontinuance of business; that in these circumstances, where the AO has gone behind the Agreement and has made the addition taking into consideration the surrounding circumstances, the case of McDowell', 154 ITR 148(SC)gets squarely attracted; and that therefore, the order of the ld. CIT(A), being entirely unsustainable in law, be ordered to be cancelled, while reviving the addition correctly made by the AO by allowing the appeal filed by the Department. 9. The learned counsel for the assessee, on the other hand, has strongly relied on the impugned order, contending that the assessee is an M.Tech (Structures) from IIT, Delhi; that her field of specialization is in designing of structures, Public Health Engineering and Fire Protection Services; that she has designed over 500 projects all over the world; that these projects are of all kinds, i.e., Metro Corridor, Railway Coach Factory, Hospitals, Schools, Fire Stations, Police Stations and commercial and residential projects for PWD, CPWD, DLF, Ansals, Jaypee and JMD, etc.; that she has an experience of over 25 years; that she and Shri K.K. Kapila, CMD, ICT Pvt. Ltd. formed a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... correctly appreciated the factual as well as the legal position and has only thereafter deleted the addition wrongly made, which deletion of the addition has been ordered by passing a detailed reasoned order that does not require any interference whatsoever. 10. It has been contended that the present case falls squarely under Proviso (i) to Section 28 (va) of the Act, where-under, any sum received on account of transfer of the right to carry on any business is not taxable u/s 28(va), the same being taxable under the head capital gains . Reliance has been placed on the following case laws:- 1. ACIT v. B.V. Raju , 138 ITD 1 (Hyd)(SB) = 18 Taxmann.com, 188-(Hyd) - (Trib)(SB) (copy placed on record); and 2. CIT v.Media World Publications Pvt. Ltd. , 337 ITR 178(Del) (copy placed on record). 11. We have heard both the parties and have perused the material on record. The assessee is a specialist in designing of structures, public health and fire protection services, having designed over 500 projects in India and abroad, including Public Health Engineering services for the Metro Corridor, Railway Coach Factory, Hospitals, Schools, Fire Stations, Police Stations and commercial ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ifty four lakhs) by 54,000 fully paid up equity shares in the company for which share certificates will be executed and duly handed over as per procedure to the second party within fifteen days of the execution of this Agreement. 12. As per the Agreement, the sale was for a lump-sum consideration without value being assigned to individual assets. The assessee maintained that the transfer of the business was as a going concern. This is also evident from the Agreement, particularly para 6 thereof, which runs as follows:- 6. That it is expressly agreed to between the parties hereto that the party of the first part has taken over all the assets and liabilities as a going concern, as described in the Schedule attached herewith and the party of the second part shall be personally responsible for all the liabilities and other obligations in respect of the business of M/s. SD Engineering Consultants of completed contracts/works till 31.10.2007, such liabilities to include without limitation all existing or future liabilities and all statutory dues relating to the business, completed contracts/works till 31.10.2007, but shall in no case include any liabilities whatsoever arising on ac ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... profits and gains of business, u/s 28 (va) of the Act. 16. The ld. CIT(A) deleted the addition. 17. The question before us is as to whether the ld. CIT(A) is correct in having deleted the addition made by the AO. 18. The AO having invoked the provisions of section 28(va) of the I.T. Act, it would be appropriate to reproduce here-under, the said provision (relevant provision): Section 28(va): Any sum, whether received or receivable, in cash or kind, under an agreement for (a) Not carrying out any activity in relation to any business; or (b) Not sharing any know-how, patent, copyright, trade-mark, licence, franchise or any other business or commercial right of similar nature or information or technique likely to assist in manufacture or processing of goods or provision for services: Provided that sub-clause(a) shall not apply to (i) any sum, whether received or receivable, in cash or kind, on account of transfer of the right to manufacture, produce or process any article or thing or right to carry on business, which is chargeable under the head Capital gains. 19. Thus, according to the main provisions of section 28(va), as sought to be applie ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e of the other assets is to be taken. Now, as per item 6 of the aforesaid Report of the Accountant in Form 3 CEA:- 6. Net worth of the undertaking or division referred to item 2: (a) In case of depreciable assets, written down value of the Undertaking or division transferred by way of slump sale, determined in accordance with sub item (C) of item(i) of sub-clause (6) of section 43. Rs. 9,70,122/- (b) In the case of other assets, book value of Such assets. Rs. 1,80,033/- (c) Aggregate value of total assets of the undertaking or division transferred by way of slump sale [(a)+(b)] Rs. 11,50,155/- (d) Value of liabilities relatable to the undertaking or Division as appearing in the books of account. Rs. 7,12,430/- (e) Net worth of the undertaking or division [(c) -(d)] Rs. 4,73,725/- 24. As per the Schedule of Fixed Assets of S.D. Engineering Consultants for the year ended 31.10.2007 (APB 25), the WDV of the concern has been shown at Rs. 9,70,122/-. 25. Then, as per the balance sheet of M/s. S.D. Engineering Consultants, as on 31.10.2007, the aggregate value of total assets has been shown ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ty of the first part, who has taken over the same as a going concern. (emphasis ours) 30. Further, the first para at APB 31 reads as follows:- Whereas the party of the first part hereto has offered to the party of the second part hereto to take over all the assets and liabilities including goodwill etc. of the business of M/s. S.D. Engineering Consultants as a going concern, subject to clause 6 of the Agreement at an enterprise value mutually agreed between the parties. (emphasis ours) 31. The second para at APB 31 states as under:- And whereas the party of the second part has accepted the offer of the party of the first part and agreed to transfer all the assets and liabilities of the business M/s. SD Engineering Consultants as on the close of business as on 31.10.2007, subject to clause 6 of the Agreement, to the party of the first part (such assets being described in detail in Schedule attached herewith) at an agreed enterprise value of Rs. 1,20,00,000(rupees one crore and twenty lakhs only). 32. Therefore, a reading of the Agreement (supra) makes it amply clear that the business of the assessee was taken over by ICT-SD-Engg. Consultants Pvt. Ltd. as a goi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t (supra), observed that the assessee was to work exclusively as a whole time Director of ICT-SD Engineering and took this to be a circumstance going against the claim of the assessee, it was ignored that the employment of the assessee was a whole time employment entailing the normally prevalent condition that she would not engage in any other activity related to the business of the Company. Besides, para 11 of the Agreement (APB 33) also states that:- .. However, the party of the second part shall be at liberty to do any business whatsoever after quitting or leaving the party of the first part. 37. In this regard, as per the appointment letter issued to the assessee by ICT-SD-(copy at APB 37), on her appointment as Managing Director of ICT-SD Engineering, the assessee was to receive a Basic Pay of Rs. 1,20,00,000/-, House Rent Allowance of Rs. 60,000/-, Transport Allowance of Rs. 800/- and General Allowance of Rs. 19,200/-, total amounting to emoluments of Rs. 2,00,000/-. 38. It is thus evident that no material whatsoever was brought on record by the AO to the effect that the payment of Rs. 1,20,00,000/- was for the assessee not to engage in any business. Even ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t the transaction was not at an arm's length consideration, or that the transaction was a collusive one, or that the Agreement was a sham Agreement, or even that the Agreement was not actually acted upon by the parties thereto. Hence, the genuineness of the Agreement is beyond the pale of any doubt whatsoever, even as per the AO. 40. That the Agreement has to be construed in accordance with the words contained therein and the circumstances in which it is executed, has been well settled in CIT v. Delhi Flour Mills Co. Ltd. , 35 ITR 15 (SC). Also, it has been held in Narayan Prasad Vijaivargiya v. CIT , 102 ITR 748 (Cal), that a deed has to be read as a whole and that effect should be given to all parts thereof. In Belapur Company Ltd. v. Maharashtra State Farming Corporation , 1972 Bom L.R. 246 , dealing with the ambit of Proviso (6) to Section 92 of the Evidence Act, it was held that the fundamental Rule of Construction of a document is to ascertain the intention of the parties to it from the words used in the document, which are considered to be the written declaration of their minds. Meaning thereby, that the Agreement at hand could not have been tried to be rewritten, as ha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e of business as on 31.10.2007 (such assets being described in detail in the Schedule attached to this agreement).(emphasis supplied) 2. That the total enterprise value of the proprietary of M/s. S.D. Engineering Consultants Pvt. Ltd. including goodwill, empanelments, receivables, work-in-progress and all other rights and entitlements, as per Schedule attached herewith, has beendecided and determined at Rs. 1,20,00,000 (rupees hundred and twenty lakhs only.) (emphasis supplied) 13. That with effect from the close of business on 31.10.2007, S.D. Engineering Consultants Pvt. Ltd. shall be a proprietary unit of the first part, who has taken over the same as a going concern. (emphasis supplied) 43. Then, the factum of the assessee having claimed exemption u/s 54 F of the Act has nowhere been disputed by the AO. The investment by the assessee in a residential property, in order to claim exemption u/s 54F of the Act is patent on record and has nowhere been challenged. 44. Further, CBDT Circular No. 779 dated 14.9.99 explains the sale of business for a lump-sum consideration, without assigning value of individual assets and liabilities, to be a slump sale liable for capital gains ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... transferor company in accordance with section 43(6)(c)/((i)(c) and the value of other assets transferred as appearing in the books of account ignoring any revaluation. From this, the value of liabilities will be reduced to arrive at net worth (only relevant para reproduced). 45. In para 6.7 of the impugned order, it was observed by the ld. CIT(A) that the investment of Rs. 1,76,64,725/- in residential property had been made by the assessee against capital gain of Rs. 1,15,26,275/-, which far exceeded the net consideration and the assessee having fulfilled all the conditions therefor, the assessee was entitled to complete exemption u/s 54F of the Act. 46. The above entire conspectus of facts and law was duly taken into consideration by the ld. CIT(A) while deciding the matter in favour of the assessee and it was rightly held that the AO was not justified in changing the treatment of the income of the assessee from capital gain u/s 50B to income from business u/s 28(va) of the Act. Thus, correctly directing the AO to treat the amount of Rs. 1,15,26,275/- as long term capital gains of the assessee, the ld. CIT(A) rightly deleted the addition of Rs. 1,20,00,000/- wrongly made by ..... X X X X Extracts X X X X X X X X Extracts X X X X
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