TMI Blog2015 (8) TMI 331X X X X Extracts X X X X X X X X Extracts X X X X ..... the AO, the contentions were made without prejudice and therefore the observations of the AO in this regard are not correct. "Technical Know How " is a self-generated asset and the Assessee incurred no cost but developed in the course of conducting its business. Even if "Technical Know-how" is to be regarded as "right to manufacture an article or thing or a right to carry on business", the amendment to Sec.55(2)(a) of the Act deeming "Cost of Acquisition" of these assets as "nil" was effective only from 1.4.2003 and prior to that the capital gain on transfer of these assets was incapable of being determined and therefore the charging provisions of Sec.45 read with Sec.48 of the Act were not capable of being applied and the charge to tax would fail on the principle laid down by the Hon’ble Supreme Court in the case of B.C.Srinivasa Setty (supra). We therefore hold that profit on sale of "Technical Know-how" cannot be brought to tax as "Capital gain" u/s.45 of the Act. With regard to the argument of the learned DR praying for a remand of the issue to the AO for a fresh consideration, we are of the view that the AO in the remand proceedings has consciously taken a decision that ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ight and the mere fact that the receipt is not attributable to non-compete covenant it cannot be automatically concluded that the receipt was either from business or income of a casual or recurring nature. In the decision rendered in the case of Madras Carbon Brushes Pvt.Ltd., (2007 (5) TMI 596 - ITAT CHENNAI), the finding of the tribunal was non-compete fee was in fact consideration for transfer of goodwill. In the present case the Tribunal has already held that the payment of ₹ 30 crores is not towards goodwill. Therefore reliance placed by the learned CIT(A) on the aforesaid decision cannot in any way improve the case of the revenue. We therefore hold that the sum of ₹ 30 crores cannot be brought to tax and delete the addition made in this regard and allow the relevant grounds of appeal of the Assessee as indicated above. - Decided in favour of assessee. Manner of treating the Interest under section 244A of the Act granted earlier, while computing the interest under section 220(2) - Held that:- As in the case on hand, the question of undue delay in the case of Revenue does not arise. The interest under section 244A of the Act is granted by the department to the a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... test, quality assurances and servicing for all railway equipment and parts/components thereof as existing with the Assessee, all liabilities relating to pertaining to the operations and activities of the Assessee s transportation business. 3. Under another agreement dated 24.6.1996, the Assessee agreed with ABB Bahnbeteiligungen GmbH, hereinafter referred to as 'DEBAB , which effectively held all the shares of ABB Daimler Benz Transportation (India) Ltd., to whom the transportation business undertaking of the Assessee was sold, that neither the Assessee or its affiliates shall engage in any way directly or indirectly, in any industrial activity which competes in India with the activities of the business that is transferred. In respect of this covenant not to compete, the Assessee was paid a sum of ₹ 30,00,00,00 by DEBAB. 4. Both the aforesaid receipts were claimed as not taxable in the return of income filed by the Assessee for AY 97-98. The note given by the Assessee along with the return of income reads thus: Notes: 1. During the year vide an Agreement dated 28th June, 1996 the company had sold and transferred its entire undertaking relating to the transpo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ing the gains therefrom. Gain from slump sale has been held by judicial decisions to be not taxable neither as business income u/s. 41 (2) nor as Capital gains u/s. 45 of the Act. To attract section 41 (2), the subject matter should be depreciable assets and the consideration received should be capable of allocation between various assets. In case of a slump sale, an undertaking is transferred including depreciable and non-depreciable assets and it is not possible to allocate slump price to depreciable assets and therefore, the same cannot be taxed u/s. 41 (2). Taxing gain on slump sale as capital gain is also not possible because the Apex Court following the decision in CIT V. B. C. Srinivasa Setty (128 ITR 294) held that the charging section and the computation sections are integrated code and if one fails other fails. If the computation sections fail then even the charging section fails. In case of slump sale, there are bundle of assets (including intangible assets like goodwill) that are transferred and in absence of any specific provision like Section 50B, it is not possible to determine the cost of the said assets and thus, the computation mechanism fails and so does the char ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as determined by the Assessing Officer at ₹ 6.79 crores, was chargeable to tax as short-term capital gain in terms of section 50 and not as long-term capital gain as held by the Assessing Officer. As regards the taxability of ₹ 33.21 crores being the amount received for furnishing restrictive covenant, the ld. CIT(A) has taken the view that the said amount represented consideration for the transfer of goodwill and hence he directed the Assessing Officer to charge the same as long term capital gain. He has further held that the interest that was payable to the assessee owing to the delay in receipt of the sale consideration was liable to be apportioned in two parts and accordingly the interest for the from 1.1.1996 to 31.3.1996 was chargeable in the assessment year 1996-97 while the balance of the interest received for the period commencing on 1.4.1996 was chargeable to tax in AY l997-98. 12. The Tribunal modified the above directions of the CIT(A) as follows:- 96. We have heard both the parties. There are three distinct categories of assets which have been transferred under the Agreement and to which values have been assigned by the purchaser, namely, (i) value a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... penses towards acquisition/improvement/development already stood claimed as revenue expenses in the accounts, made by the learned CIT-DR, in its submissions including the written submissions. We find that this aspect has not been looked into by the learned CIT(A) but adjudication on this issue of taxability of profits or gains arising on transfer of non-depreciable assets is a necessary consequence of our directions to the AO to split the sale consideration into three parts. 100. We find that the purchaser has allocated ₹ 43.17 crores out of total sale consideration to technical know-how. The assessee has not purchased the technical know-how. It has developed the technical know-how in-house. It is unbelievable that the assessee could have developed the technical know how in-house without incurring any expenditure or cost. There is nothing before us to indicate that the assessee has capitalised the expenses towards acquisition/improvement/development of technical know-how in its accounts or claimed depreciation thereon. The only inference that can be drawn is that the expenses incurred towards acquisition/improvement/development of technical know-how have been claimed as re ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... non-taxable. 130. Ld. CIT(A) has noted in Para 21.3 (page 26) of his order the decision of the Assessing Officer that the impugned receipts are taxable either u/s. 28 or u/s. 10(3) or, in the alternative, as attributable to transfer of goodwill. In other words, the Id. CIT(A) was well-aware of the fact that the Assessing Officer has taxed it firstly as revenue receipts u/s. 28 and then as income of casual and non-recurring nature under section 10(3)/56 of the l-T Act and it was only in the alternative that he recorded the finding that the impugned receipt is also liable to tax on account of transfer of goodwill. At Para 21.7 (page 28) of his order the ld. CIT(A) has held that the receipt does not have the character of income and hence cannot be taxed as such and thereafter proceeded to decide that the impugned receipt was taxable as long term capital gain on the ground that the impugned amount represented receipt on account of transfer of goodwill to the purchaser. The order of the ld. CIT(A) is quite cryptic in as much as he has not given a wellreasoned consideration to the relevant aspects of the issue. He has not recorded any finding as to how the impugned receipt failed to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... trademark, trade name etc., are indistinguishable, inseparable and part of goodwill. He held that the cost of acquisition was nil and therefore brought the entire sum earmarked for technical how by the purchaser of the transportation business/undertaking in his books as long term capital gain. 17. Before CIT(A) the Assessee contended that the revenue in coming to the conclusion that sale of the Transportation business/undertaking by the Assessee was not a slump sale had placed strong reliance on the classification and allocation of consideration as recorded in its books of accounts by the purchaser. However when it comes to taxing the consideration allocated by the purchaser towards Technical Know-how , the revenue claims that it was towards goodwill. It was further argued that the revenue has not accepted the correctness of the decision of the Hon ble Karnataka High Court in the case of Mangalore Ganesh Beedi Works (supra) equating trademark, trade name etc., as indistinguishable, inseparable and part of goodwill, in as much as Cost of Acquisition in the case of self-generated assets like goodwill was amended by the Finance Act, 1987 w.e.f. 1.4.1989 by laying down that cost ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... order details of technical knowhow transferred along with documentary evidence relating to its accounting treatment, entries passed in its books of accounts relating to the transaction, copies of relevant ledger/extract/accounts etc., but the Assessee had not produced any evidence in this regard before the AO. The CIT(A) thereafter referred to a decision of the ITAT Chennai Bench in the case of Indo Tech Electric Co. Vs. DCIT (2006) 282 ITR (A.T.) 197 (Chennai) wherein it was held, at the time of transferring the firm as a going concern for a consideration, what was sold under the guise of technical now-how was nothing but goodwill with the sole intention of evading tax. In the absence of any evidence of what was the technical know-how transferred, the CIT(A) was of the view that what was transferred was in fact Goodwill . The CIT(A) also held that just because the department has accepted the allocation of consideration for transfer of business by the purchaser while coming to the conclusion that the transfer of the business was not a Slump Sale , it cannot be said that the department cannot dispute the consideration allocated by the purchaser as towards Technical know-how whe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... It was also pointed out by him that the decision of the Hon ble Karnataka High Court in the case of Mangalore Ganesh Beedi Works (supra) has since been set aside and remanded to the Hon ble High Court for fresh consideration by the Hon ble Supreme Court as reported in 273 ITR 15 and 56 (SC). It was his submission that allocation of the consideration for transfer of business by the transferee/purchaser of the business cannot be disregarded and it has to be held that the consideration of ₹ 43,16,62,000/- is towards transfer of Technical Know-How . He reiterated the argument that Technical know-how does not have a cost of acquisition and therefore computation of capital gain on such transfer is not possible prior to 1.4.2003 and therefore the charging provisions fail. 20. He placed reliance on the decision of the Hon ble Bombay High Court in the case of CIT Vs. Fernhill Laboratories and Industrial Establishment 348 ITR 1 (Bom.). The Assessee in that case sold trademark and designs for the considerations of ₹ 15 crores and ₹ 20 lakhs, but did not offer the same to tax in his return. The AO held that consideration received by assessee was chargeable to capital g ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Technical Know-how is ascertainable and therefore it was not possible to argue that there is no cost of acquisition of Technical Know-how . 22. In his rejoinder the learned counsel for the Assessee submitted that the Tribunal cannot remand the matter now and doing so will be allowing a 3rd opportunity to the revenue. He relied on the decision of the Third Member Delhi in the case of ZUARI LEASING FINANCE LTD. vs. INCOME TAX OFFICER 112 ITD 205 TM (Delhi) wherein it was held Primary power, rather obligation of the Tribunal, is to dispose of the appeal on merits. The incidental power to remand, is only an exception and should be sparingly used when it is not possible to dispose of the appeal for want of relevant evidence, lack of finding or investigation warranted by the circumstances of the case. Remand in a casual manner and for the sake of remand only or as a short cut, is totally prohibited. It has to be borne in mind that litigants have to wait for long to have fruit of legal action and expect the Tribunal to decide on merit. It is, therefore, all the more necessary that matter should be decided on merit without allowing one of the parties before the Tribunal to have anot ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ced strong reliance on the classification and allocation of consideration as recorded in its books of accounts by the purchaser. However when it comes to taxing the consideration allocated by the purchaser towards Technical Know-how , the revenue claims that it was towards goodwill. As already stated at no point of time in the original proceedings did the authorities take a stand that the consideration allocated towards Technical know-how was in fact not for transfer of Technical know-how but towards Goodwill . The CIT(A) in the proceedings after the order of the Tribunal sustained the order of the AO on the basis that the Assessee failed to produce any details/information called for to substantiate the expenses incurred towards acquisition/improvement/development of Technical knowhow or the fact of its existence. This cannot be the basis to conclude that what the parties agreed to as Transfer of Technical know-how was in fact transfer of Goodwill . The Agreement dated 28.6.1996 in clause 1 (a)(vi) gives an indication of what was transferred as Technical know-how and it reads thus:- 1. In this Agreement, the following expressions shall, unless the context otherwise ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n 45, in which the expression capital asset is used, excludes goodwill. The Hon'ble Court after referring to Sec.48 which provides the mode of computation of capital gain viz., deducting from the full value of the consideration received or accruing as a result of the transfer of the capital asset the cost of acquisition of the capital asset , held that the asset contemplated in sec.45 of the Act is an asset which possesses the inherent quality of being available on the expenditure of money to a person seeking to acquire it. The Hon'ble Court held that goodwill is something built up by the carrying on of a business or profession and cannot be acquired by just paying money. Therefore there can be no cost of acquisition for goodwill which is a self - generated. The Court held that Sec.45 which is the charging section and Sec.48 which is the computation provision together constitutes an integrated code. When there is a case to which the computation provisions cannot apply at all, such a case was not intended to fall within the charging section. In such a case, when the asset is sold and the consideration is brought to tax, what is charged is the capital value of the asset a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o be nil. 30.2 Instances have come to light where rights to manufacture, produce or process any article or thing have been extinguished for a consideration and claimed to be not taxable. 30.3 The Act has, therefore, amended sections 55(1) and 55(2) of the Income-tax Act in order to bring extinguishment of such a right to manufacture, etc., within the ambit of capital gains tax. Capital gains tax would be leviable only where such an extinguishment of right to manufacture, etc., is for any consideration. Such receipts will be subjected to capital gains tax on the same basis as already adopted for taxing transfer of goodwill and tenancy rights. The cost of acquisition and cost of improvement will be determined in the same manner as for goodwill. 28. CBDT Circular No.14 of 2001 dated 12.12.2001 252 ITR (St.) 65 which also clarifies that Goodwill of a business is an asset separate and distinct from a Trade mark that is used in the business . 29. By the Finance Act, 2002, w.e.f. 1-4-2003, the provisions of Sec.55(2)(a) was amended as follows:- (2) For the purposes of sections 48 and 49, cost of acquisition ,- (a) in relation to a capital asset, being goodwill of a b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... urt in the case of Mangalore Ganesh Beedi Works (supra) has since been set aside and remanded to the Hon ble High Court by the Hon ble Supreme Court. As rightly contended by the learned counsel for the Assessee, technical knowhow has to be regarded as an asset separate and distinct from goodwill. In the absence of any cost of acquisition being incurred for acquiring such Technical Knowhow, which fact is not disputed by the AO/CIT(A), the entire consideration could not be brought to tax having regard to the principle enunciated by the Hon ble Supreme Court in CIT Vs. B.C.Srinivasa Setty 128 ITR 294 (SC). Technical Know How is a self-generated asset and the Assessee incurred no cost but developed in the course of conducting its business. Even if Technical Know-how is to be regarded as right to manufacture an article or thing or a right to carry on business , the amendment to Sec.55(2)(a) of the Act deeming Cost of Acquisition of these assets as nil was effective only from 1.4.2003 and prior to that the capital gain on transfer of these assets was incapable of being determined and therefore the charging provisions of Sec.45 read with Sec.48 of the Act were not capable of bei ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ansfer of goodwill. The tribunal held that the payment cannot be on account of transfer of goodwill. The issue was therefore set aside to the AO for a fresh consideration to decide whether the receipt would be chargeable to tax either u/s.28 or u/s.10(3) read with Sec.56 of the Act. 35. In the proceedings after the order remand by the Tribunal, the AO held that the receipt was business profits. No reasons have been assigned by the AO for coming to this conclusion. 36. Before CIT(A) the Assessee contended that the question whether the receipt of ₹ 30 crores constituted business receipts u./s.28 of the Act or income of a casual and non-recurring nature u/s.10(3) of the Act read with Sec.56 of the Act was not concluded by the ITAT in its order and the same was left open for determination by the AO. It was pointed out had the decision of the Tribunal been to hold that the receipt in question was business receipt, there was no necessity to have remanded the issue to the AO for fresh determination. It was argued by the Assessee that in the set aside proceedings, the AO brought no material on record to justify bringing to tax receipt of ₹ 30 crores either under the head ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... inted out that the receipt in the case of the Assessee is not attributable to transfer of any asset or right and the mere fact that the receipt is not attributable to non-compete covenant it cannot be automatically concluded that the receipt was either from business or income of a casual or recurring nature. In the decision rendered in the case of Madras Carbon Brushes Pvt.Ltd., (supra), the finding of the Tribunal was non-compete fee was in fact consideration for transfer of goodwill. He pointed out that in the present case the Tribunal has already held that the payment of ₹ 30 crores is not towards goodwill. Therefore reliance placed by the learned CIT(A) on the aforesaid decision cannot in any way improve the case of the revenue. He reiterated that the revenue has failed to establish that the receipt in question is on revenue account and chargeable to tax either as business receipts or income of a casual or non-recurring nature. He drew our attention to the decision of the Hon ble Supreme Court in the case of Partimisetti Seetharamamma (supra) and explained the ratio laid down therein. Further reliance was placed by him on the decision of the Hon ble Bombay High Court in t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mere quantum. On both the counts, therefore, the answer to the question whether these receipts constitute income of the assessee must be in the negative and in favour of the assessee, viz., that they did not constitute income. 39. According to him if the receipt is not towards non-compete fee than it cannot be regarded as trading receipt as the Assessee never had the expectation that he would receive ₹ 30 crores at the time of transfer of Transportation business/undertaking . It must therefore be held that it was not in the nature of income at all. 40. Further reliance was placed by him on the decision of the Hon ble Bombay High Court in the case of CADELL WEAVING MILL CO. (P) LTD. vs. COMMISSIONER OF INCOME TAX 249 ITR 265 (Bom) wherein it was held that a capital receipt which is not chargeable to tax u/s.45 of the Act cannot be regarded as income of a casual or non-recurring nature and brought to tax. Further reference was also made to the decision of the Hon ble Supreme Court in the case of COMMISSIONER OF INCOME TAX vs. D.P. SANDU BROS. CHEMBUR (P) LTD. 273 ITR 1 (SC) wherein the Hon ble Supreme Court confirmed the view taken by the Hon ble Bombay High Court in th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s not a revenue receipt as so far as the ingots did not reach Bombay and got converted into strips, the connection it bore with assessee's business was remote. Ingots were not stock-in-trade of assessee and even if assumed to be so, they got blocked and sterlised and ceased to be so. It was held that any surplus received due to fluctuation in exchange rate was capital receipt only and not chargeable to tax. And that the excess arose due to fortuitous circumstances of devaluation of currency but not due to business activity, therefore, not taxable 43. We have given a very careful consideration to the rival submissions. The facts go to show that the Assessee claimed to have received ₹ 30 crores under an agreement that it will not carry on any business competing with the business that it sold viz., Transportation business/undertaking . The tribunal has already held that there was no threat of any competition by the Assessee and therefore the receipt of ₹ 30 crores cannot be said to be for agreeing to a covenant not to carry on a competing business. According to the Tribunal the order of CIT(A) was cryptic and had not analysed as to whether the receipt in question c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f nature love and affection and not for services rendered by the Assessee. On further appeal the Hon ble Supreme Court held:- In so observing, the High Court in our judgment has committed an error of law. By ss. 3 and 4 the act imposes a general liability to tax upon all income. But the Act does not provide that whatever is received by a person must be regarded as income liable to tax. In all cases in which a receipt is sought to be taxed as income, the burden lies upon the Department to prove that it is within the taxing provision. Where however a receipt is of the nature of the income, the burden of providing that it is not taxable because it falls within an exemption provided by the Act lies upon the assessee. The appellant admitted that she had received jewellery and diverse sums of money from Sita Devi and she claimed that these were gifts made out of love and affection. The case of the appellant was that the receipts did not fall within the taxing provision : it was not her case that being income the receipts were exempt from taxation because of a statutory provision. It was therefore for the Department to establish that these receipts were chargeable to tax. (emphasi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the receipt was either from business or income of a casual or recurring nature. In the decision rendered in the case of Madras Carbon Brushes Pvt.Ltd., (supra), the finding of the tribunal was non-compete fee was in fact consideration for transfer of goodwill. In the present case the Tribunal has already held that the payment of ₹ 30 crores is not towards goodwill. Therefore reliance placed by the learned CIT(A) on the aforesaid decision cannot in any way improve the case of the revenue. 46. We therefore hold that the sum of ₹ 30 crores cannot be brought to tax and delete the addition made in this regard and allow the relevant grounds of appeal of the Assessee as indicated above. 47. The Assessee has also raised an issue with regard to the manner in which the AO has computed interest u/s.220(2) of the Act while giving effect to the order of the ITAT. The AO passed the order giving effect to the directions of the Tribunal on 10.12.2009. In the said order after giving effect to the directions of the Tribunal, the tax payable was arrived at by him at ₹ 1,70,94,171. To the aforesaid sum the AO added a sum of ₹ 34,49,92,215 to arrive at the tax payable on ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sing a subsequent order for charging interest under section 220(2) of the Act or granting interest under section 244A of the Act. Otherwise, it would amount to tax on an amount which was earlier treated as interest subsequently being treated as tax by revenue. It is submitted that the interest amount granted under section 244A of the Act has been offered to tax by the assessee under the head income from other sources in the year of receipt and treating it as tax now would amount to double taxation. In view of this, the learned Authorised Representative assailed the principle upheld by the learned CIT (Appeals) that just as interest on interest under section 244A of the Act can be charged, on parity, of reasoning or reverse analogy interest on interest can be charged under section 220(2) of the Act. In support of the assessee s stand and the arguments put forth, the learned Authorised Representative placed reliance on the following judicial decisions: i) Girnar Investments Ltd. V CIT (2012) 340 ITR 529 (Del) ii) CIT v. Fluoro Chemicals SLP (C) No.11406 of 2008 dt.18.9.2013. ITA Nos.437 439/Bang/12 4.2 Per contra, the learned Departmental Representative supported the or ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r section 244A of the Act is granted by the department to the assessee for the delay in giving refund due to the assessee. On a subsequent date, if due to orders of assessment or appellate orders passed, the interest granted to the assessee under section 244A of the Act is to be withdrawn, the assessee cannot be held responsible for any undue delay, thereby requiring any compensation. Hence, the principle of compensatory interest for undue delay in grant of refund can be applicable to the assessee but not to the Department. 4.3.4 In view of the above discussion at para 4.3.1 to 4.3.3 (supra), we direct the Assessing Officer to recompute the interest chargeable under section 220(2) of the Act accordingly, by reducing only the principal amount of tax from the refund granted earlier and not to charge interest on the interest granted earlier under section 244A of the Act. It is ordered accordingly. Consequently, the assessees appeals for Assessment Years 199697 and 2003-04 on this issue are allowed. 50. Respectfully following the order of the Tribunal, we direct the AO to compute interest u/s.220(2) of the Act as has been claimed by the Assessee. The relevant ground of appeal of ..... X X X X Extracts X X X X X X X X Extracts X X X X
|
