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2016 (2) TMI 348 - ITAT CHENNAI

2016 (2) TMI 348 - ITAT CHENNAI - TMI - Scope of ‘transfer’ u/s 47(xiv) - whether the assessee’s transaction of converting his proprietary business into a private limited company is outside the scope of ‘transfer’ as provided under Section 47(xiv) of the Act and therefore not liable to be taxed under the head long term capital gains? - Held that:- CIT (A) has made a categorical finding in his order that the entire transaction is nothing but the conversion of assessee’s proprietorship concern as .....

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outside the ambit of Section-45 of the Act. Further, provisions of section 50B of the Act will not be applicable in the present case before us because this transaction is not slump sale as envisaged under the provisions of the Act. In these circumstances, we fully agree with the decision of the Ld. CIT (A) and accordingly, uphold his order. - Decided against revenue - I.T.A.No.1807/Mds. /2015 - Dated:- 13-1-2016 - SHRI N.R.S.GANESAN, JUDICIAL MEMBER AND SHRI A.MOHAN ALANKAMONY, ACCOUNTANT MEMBER .....

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ed by the order of the Ld. CIT (A), who had erred by holding that the assessee s transaction of converting his proprietary business into a private limited company is outside the scope of transfer as provided under Section 47(xiv) of the Act and therefore not liable to be taxed under the head long term capital gains. 3.1 The brief facts of the case are that the assessee is a Director in the company M/s.Indus Mobile Distributors P. Ltd., filed his return of income for the assessment year 2006-07 o .....

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private limited company on the conversion of the assessee s proprietary concern. While doing so, the Ld. Assessing Officer made the following observations in his order:- It was seen from the relevant balance sheets of the assessee that intangible asset-goodwill was shown as under:- As at 31/03/2005 Rs.2,06,50,000/- As on 27/09/2005 Rs.3,47,95,733/- On a perusal of the balance sheet of the assessee company, the intangible asset-goodwill amounting to ₹ 3,47,95,734/-(as at 31/03/2006) was sho .....

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₹ 6.90 crores, the value of goodwill was shown at ₹ 3.47 crore. As the liability of the proprietorship concern was ₹ 5.80 cores, the net worth of the business without goodwill is nil . In these circumstances, as the cost of acquisition of goodwill is Nil , the goodwill of ₹ 3.47 crores has not been offered to tax by the assessee. Since, the entire goodwill should be treated as long term capital gain the said gain added to the total income of the assessee. 3.2 On appeal, .....

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sessee by way of allotment of shares of ₹ 1 crore. No other consideration was received by the assessee in any form. 4.1.3 The provisions of sec.47 of the Act exclude some of the transactions from the purview of transfer for the purpose of determining the capital gains. One of such transactions is the transfer of business of a proprietary concern to a private limited company, as a going concern with all assets and liabilities. In such a case, the transaction should not be recognized as a tr .....

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set or intangible asset to the company: Provided that- (a) all the assets and liabilities of the sole proprietary concern relating to the business immediately before the succession become the assets and liabilities of the company; (b) the shareholding of the sole proprietor in the company is not less than fifty per cent of the total voting power in the company and his shareholding continues to remain as such for a period of five years from the date of the succession; and (c) the sole proprietor .....

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rred his business as a going concern with all assets and liabilities. The only consideration received by the assessee was the allotment of shares. There was no other consideration received by the assessee in any form. Further, the assessee s share in the company is at 51% of the voting power immediately after the transfer of the business. Therefore, the assessee s transaction fulfilled the requirements of the provisions of sec.47(xiv) of the Act. Consequently, the assessee s transaction will get .....

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not correct. As explained by the assessee, the goodwill is not a self-generated goodwill. The assessee had been in the process of building the brand image by incurring substantial amounts of advertisement and other expenses. Some of these expenses, which have enduring benefits, were capitalized in the books in the form of goodwill in all the years upto the date of transfer of the business to the private limited company (In fact, this can be seen from the assessee s books of accounts, i.e. as on .....

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in the form of advertisement and related expenses which have been capitalized by the assessee in his books. Therefore, since the goodwill of ₹ 3.47 crores was the actual expenses incurred and capitalized in the books and since the sale value of the goodwill (by including the sale under the slump sale at book value) was also at ₹ 3.47 crores, the capital gains will also be Rs.Nil. Hence, the Assessing Officer s action of determining the long term capital gains of ₹ 3.47 crores .....

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