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Asstt. Commissioner of Income Tax – 12 (3) , Mumbai Versus M/s Lemuir Air Express and Vica-Versa

2015 (11) TMI 1299 - ITAT MUMBAI

Amount received on account of non-compete fees - whether chargeable as business income or capital gains? - Held that:- Only on the basis of clause No.3.4 of the agreement dated 29-5-2003, the AO inferred that entire amount was received by assessee on account of non-compete clause. We found that this clause is merely consequent to the transfer of the business. Obviously, the vendor cannot carry on the business because it has already been transferred major part of its business. The assessee group .....

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d very rationally attributed ₹ 4.5 crores as non-competitive fees falling under Section 28(va) of the Act. The balance amount was for transfer of intangible assets and goodwill, therefore, treated by CIT(A) as capital receipt liable to tax under the head capital gains amounting to ₹ 50.23 crores, we do not find any infirmity in the decision arrived at by CIT(A), which is based on material on record, therefore, do not require any interference on our part. - I.T.A. Nos. 3245/Mum/2008 - .....

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th assessee and Revenue pertains to treatment of amount received on account of non-compete fees whether chargeable as business income or capital gains. 4. Rival contentions have been heard and record perused. Facts of the case in brief are that the assessee company is a registered partnership firm engaged in the business of custom house agent as well as air cargo agent which consists of air freight and forwarding for export, domestic air freight as well as import consolidation and break bulk. Du .....

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d exemption under Section 54EC, by depositing the sale proceeds in 'NABARD Bonds and NHB Bonds'. The AO, observed that the assessee had no rights which were capable of being transferred, which could amount to "property" as is understood in law. The AO further observed that the assessee was in the business of clearing, forwarding. international transportation etc. which are basically agency business, which in commercial terms cannot be transferred, and therefore, the considerati .....

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ry on such a business, and therefore the amount is received against the agreement for non-compete which is covered by Section 28(va) of the Act and taxable under the head 'Profits and Gains of Business & Profession'. 5. By the impugned order, the ld. CIT(A) held that out of total consideration of ₹ 54.73 crores, an amount of ₹ 4.50 crores was on account of con-compete fees chargeable as business income and the balance amount was treated by him as capital receipt liable to .....

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intangible. 19. It is important to mention here that the Agreement to Sell dated May 24, 2003, vide Clause 8.1.1 clearly mandates that the name of the Appellant, which constitutes one of the component of goodwill of the Appellant, shall remain with the Appellant. However, the JV Company has been named as 'DHL Danzas Lemuir Pvt. Ltd.', which includes the name 'Lemuir', being the name of the Appellant. Further, in my view, the Appellant being in the service industry, the key compo .....

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of goodwill but subject to further discussion below. 20. The contention of the Appellant for consideration to be treated as for transfer of right to carry on business does not hold merit as there is no alienation of the right of the Appellant. Also, the term 'Right to carry on business' has not been defined under the Act. 21. Accordingly, the consideration received by the Appellant, cannot be considered as received towards 'right to carry on business' but must be said to be for .....

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toppage of business (Clause 3.4 of Deed of Transfer of Business dated May 29, 2003) which states as under: 3.4 On and after the date hereof the vendor will not carryon the Business." Hence, in my considered opinion the receipt amount was: (i) For Goodwill; and (ii) For stoppage of business Now the question to be considered is whether the entire amount is for transfer of goodwill or if the appellant is to be believed "right to business". The answer in my opinion is No. As the answe .....

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ame / goodwill, as well as right to manufacture ice-cream under the name 'Kwality' in specified areas. In this case, the assessee offered ₹ 10 lakhs as Long Term Capital Gains and treated the balance 45 lakhs as capital receipt towards termination of business under that trademark, whereas, the AO considered the entire receipts towards transfer of capital asset and therefore chargeable to capital gains. However, on appeal, the Hon'ble Tribunal confirmed the order of the CIT(A), .....

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of right to manufacture. Therefore, drawing an analogy for the decision of Chandigardh Tribunal supra, and considering the fact that the appellant is a service industry where customer go by quality of services rendered. I am of the view that it would be logical for the transferee to enter into an non-compete for a period of one year, by which it would have established itself in the market and the threat of competition from the appellant would have ceased. Accordingly, I am of the considered opin .....

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ed above. The ground partly succeeds. 6. It was argued by the ld. CIT - D.R., Shri A.K. Srivastava that no asset was transferred by the assessee and it was only non-compete rights for which the assessee was in receipt of ₹ 54.73 crores and the same was liable to tax as business income u/s 28(va) of the Act. As per the ld. CIT - DR, the assessee has not transferred its staff, only staff was given option to join new company. No premises were transferred, no fixed assets were transferred. As .....

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ng out any activity in relation to business is chargeable to Income Tax under the head profits and gains of business or profession. Reliance was placed by the ld. DR on the decision of Hon‟ble Punjab & Haryana High Court in the case of Sumeet Taneja vs. CIT 38 taxmann.com 149 (Punjab & Haryana) [2013]. Reliance was also placed on the decision of Mumbai ITAT in the case of Anurag Toshniwal vs. DCIT, 30 taxmann.com 383 (Mumbai - Trib) [2013] wherein it was held that non-compete fee i .....

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, Shri Hiro Rai, Ld. AR appearing on behalf of the assessee has contended that the assessee was engaged in the service industry in the form of custom house agent as well as air cargo agent. During the year the assessee has transferred air cargo business to a company wherein 51% stake was held by the partners of the assessee firm. The business was transferred for a sale consideration of ₹ 54.75 crores. The amount of consideration was received in for transfer of capital asset which means pro .....

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ent to sale and the gain on such transfer of business /right to carry on business was gain on transfer of capital asset‟. In the sale consideration there was no component of non-compete amount having been received by the assessee, therefore, the CIT(A) was not justified in treating ₹ 4.5 crores out of sale consideration as amount received for not-competing. The ld. Counsel further contended that the A.O. has completely ignored the proviso to section 28(va) while treating the non-comp .....

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not a consideration arising out of business receipts u/s 28(va) of the Act. Further reliance was placed on the decision of ITAT Delhi Bench in the case of ACIT vs. Smt. Sangeeta Wij, [2012] 17 ITR (Trib) 162 (Delhi) wherein it was held that the proprietary concern of assessee taken over by company as going concern, consideration for transfer is taxable as long term capital gains and not as business income. Further reliance was placed on the decision of ITAT Special Bench in the case of ACIT vs. .....

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l pronouncements referred by lower authorities in their respective orders and also cited by ld. AR and ld. DR during the course of hearing before us. From the record we found that the assessee is a partnership firm engaged in the business of custom house agents as well as air cargo agents which consists of air freight and forwarding for export, domestic air freight as well as import consolidation and break bulk. For these activities, commission was received from air lines. During the year under .....

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business together with all contracts pertaining to the business at the price of ₹ 54.73 crores. As per the A.O., the amount of ₹ 54.75 crores was received by the assessee firm as a compensation for non-compete and the closure of the business. The A.O. observed that as per the Transfer of Property Act what can be transferred is something concrete or rights thereof. The A.O. further observed that the assessee has not transferred its staff, however, the staff was just given offer to jo .....

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or premises or any other fixed assets, not even written contracts have been transferred. The only thing which has been transferred is unwritten business contract . As per the A.O. , the unwritten business contract does not amounts to capital asset. By referring to the Deed of Transfer of Business, clause 3.4 of the agreement dated 29-5-2003, according to which on and after the date thereof, the vendor will not carry on the business , the A.O. inferred that there was a clear cut understanding bet .....

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nless he agrees not to compete with this assessee in this line of business, he could once again build up a customer base and start this business as he already knows the litigity of this business and he has been operating this business over last 50 years. No company would have agreed to take over the business for such a vast sum without a non-compete clause. During appellate proceedings, the ld. CIT(A) observed that the assessee company has not transferred any tangible asset. However, he observed .....

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