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2015 (4) TMI 946 - DELHI HIGH COURT

2015 (4) TMI 946 - DELHI HIGH COURT - TMI - Taxability of goodwill - whether sum received by the company from its collaborators on account of goodwill not exigible to tax as held by Tribunal - Held that:- Basis for valuation of goodwill in this case was three fold: (a) the assessee, though established in 1984 in a sense was continually engaged in business since 1975, when Sehgal Cables started functioning (that concernís business was assimilated by the assessee); (b) the assessee had unexecuted .....

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, and to what extent it has competition in respect of the business activities it undertakes, the market acceptability and demand for the product or services in question, capital employed, unique expertise developed, etc. too are all relevant. The ITATís view therefore has some basis in law. It is worthwhile to recollect that the Supreme Court, in Commissioiner of Income Tax v. Srinivasa Setty [1981 (2) TMI 1 - SUPREME Court] held that since goodwill is a self-generating asset, its transfer would .....

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. This Court also notices that the AO and CIT (A) did not advert to the report of M/s R. K. Khanna nor cared to call that firm. In the circumstances, it cannot be held that the valuation of goodwill made by the assessee was unreasonable or untenable in law. - Decided in favour of assessee. - ITA 178/2001 - Dated:- 13-4-2015 - S. Ravindra Bhat And R.K. Gauba JJ For the Appellant : Sh. Arjun Harkauli with Sh. Satyawan Shekhawat, Advocates. MR. Justice S. Ravindra Bhat (OPEN COURT) 1. The revenue i .....

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llaboration agreement dated 03-12-1986. The new company was promoted by the assessee and two Japanese companies. Clause 7 (1) of the Collaboration Agreement provided that the consideration of the unit as a going concern could be adjusted against the goodwill of the assessee. The valuation of the goodwill was to be based on assumptions and projections approved by the investing/purchasing Japanese Companies, and evaluated by a chartered accountant nominated with the concurrence of the Japanese com .....

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se of such order as to claim to possess such goodwill. It was also concluded that the assessee had incurred loss during the previous year and further the goodwill claimed was founded on the expertise drawn from the collaborating company/investors, after which M/s Maruti Udyog Ltd. had recognized the assessee. These findings were approved by the Commissioner (Appeals) who rejected the assessee s claims and confirmed the AO s corresponding addition. 4. The ITAT, in its impugned order noticed that .....

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d taken place and that it had a manufacturing monopoly over the product, i.e wireless harness. Consequently, the ITAT allowed the assessee s appeal. 5. Mr. Harkauli, learned counsel for the revenue argued that the ITAT fell into error in setting aside the findings of the AO and the CIT (A). Both those authorities had furnished good and valid reasons for rejecting the valuation of goodwill put forth by the assessee. The revenue contended that to say that the goodwill could be valued at such high .....

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ere it was held that: "Hence to determine the nature of the goodwill in any case, it is necessary to consider the type of business and the type of customer which such a business is inherently likely to attract as well as the surrounding circumstances...... The goodwill of a business is a composite being referable in part to its locality, in part to the way in which it is conducted and the personality of those who conduct it, and in part to the likelihood of competition, many customers, bein .....

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l thus be seen that the goodwill of a business depends upon a variety of circumstances or a combination of them. The location, the service, the standing of the business, the honesty of those who run it, and the lack of competition and many other factors go individually or together to make up the goodwill, though locality always plays a considerable part. Shift the locality, and the goodwill may be lost. At the same time, locality is not everything. The power to attract custom depends on one or m .....

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that the basis for valuation of goodwill in this case was three fold: (a) the assessee, though established in 1984 in a sense was continually engaged in business since 1975, when Sehgal Cables started functioning (that concern s business was assimilated by the assessee); (b) the assessee had unexecuted orders worth ₹ 4.87 crores in hand, when the collaboration agreement was signed; its profit for one year offset the loss for the previous year; (c) the assessee held a manufacturing monopoly .....

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xpertise developed, etc. too are all relevant. The ITAT s view therefore has some basis in law. It is worthwhile to recollect that the Supreme Court, in Commissioiner of Income Tax v. Srinivasa Setty [1981] 128 ITR 294, held that since goodwill is a self-generating asset, its transfer would not give rise to a capital gain. The court observed that: "Goodwill denotes the benefit arising from connection and reputation. The original definition by Lord Eldon in Cruttwell v. Lye [1810] 17 Ves 335 .....

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