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TMI Blog2019 (4) TMI 668X X X X Extracts X X X X X X X X Extracts X X X X ..... relationship and 'Goodwill' in respect of Internal Audit and Risk Consultancy practice and the amount received against that was a capital gain entitled to deduction u/s 54EC of the Act. 2) That on the facts and in the circumstances of the appellant firm the learned CIT(Appeals) has erred both on facts and in law in confirming the action of the learned assessing officer in disallowing Rs. 49,72,773 out of Bonus of Rs. 67,87,318 which has been paid to partners of the Firm in accordance with the agreements of partnership and as per section 40(b) of the Act." 2. The appellant assessee is a partnership firm carrying on the profession of chartered accountancy. It filed its return of income on 29/9/2011 declaring total income of INR 34011290/- wherein the long-term capital gain of INR 29 Lacs was claimed exempt u/s 54EC of The Income Tax Act [the Act]. The learned assessing officer passed an order u/s 143 (3) of the Act on 28/2/2014 determining total income of the assessee at INR 38986560 wherein he made the two additions/ disallowances to the returned income. Firstly the assessee has shown capital gain of INR 2,900,000 which was claimed as exempt u/s 54EC of the income tax ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... its rights and interest in the specified practice. The assessee was carrying on this internal audit practice over a period of more than 30 years and the overall firms‟s practice and reputation was for more than 60 years. The bundle of rights in the above practice was defined as the purchase assets, which is client relationship and goodwill. Assessee sold it for payment of INR 2,900,000 as the 1st part of sale price. One of the partners of the assessee firm along with some of his working team was also to be employed by Protivity. Therefore, the claim of the assessee was that consideration received by it of Rs. 29 lakhs is a „ capital receipt.‟ Alternatively it also claimed that , if it is held to be transfer of a „ capital assets‟ then exemption u/s 54EC is allowable as assessee has made requisite investments in the bonds. Assessee submitted that above sum is chargeable to tax under the head capital gain and cost of acquisition of the same u/s 55 (2) (a) of the act is nil and Total sum is a Long term capital again against which assessee is eligible for exemption u/s 54 EC of the act. The main reason for claiming that it is a capital receipt not chargea ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in stating that it is distinguishable on facts. Therefore he held that the claim of the assessee of the sale of the client relationship and goodwill of the internal audit practice is a noncompete fee received for not to carry out a specific business activity and is chargeable to tax under section 28 (va) of the act. As he has taxed above sum as business income, there was no question of granting deduction u/s 54EC of the Act. 4. On appeal before the learned CIT - A, assessee reiterated the same facts and arguments. He held that the claim of the assessee that the goodwill has been sold is not apparent from the facts. He held that the invoices and bills do not show the name of the assessee appearing and thus the fact did not show that the brand name of the appellant was being used. He further stated that there is no evidence to show that the internal audit practice of the appellant has been transferred in entirety to the buyer. However, he stated that, the goodwill exist with client relationship or the name of the appellant as reputation in connection of the business. He also noted that the appellant has no doubt stopped the practice in the respect of internal audit after entering in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ses, which shows that what is „purchased assets‟ defined in agreement as client relationship and goodwill only. With respect to the transfer of the client relationship, he stated that as per the letter dated 29/1/2014, assessee submitted before the AO details of the clients, which were acquired by the buyer, and confirmation of the buyer with respect to those clients. However, on observation of ld AO that that all the clients of the assessee were not served by the buyer and not all the clients of the assessee prior to the acquisition by the buyer remained with the buyer, he submitted that at the time of acquisition assessee transferred all client relationship and therefore later on it is for the clients and the new buyer to continue that relationship. He submitted that assessee did not carry on internal audit practice with those clients and it is purely a business call for both the sides on which assessee does not have any control. On the finding of ld AO about transfer of the employees, he submitted that learned CIT appeal has noted that the internal audit vertical employees of the assessee joined the buyer, hence finding of ld AO was held to be erroneous by ld CIT (A) ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... at the assessee is engaged in the business of providing services related to internal audit and risk consulting practice. The buyer agreed to purchase the specified assets in terms of the above agreement and the assessee firm has agreed to transfer all rights/ interest entitled in the specified assets. As per article 2 of the agreement it is further stated that the assessee firm is owner of the „purchased asset‟ agrees to sale, transfer aside and convey to the purchaser all the purchased assets. The purchased assets have also been defined in article 1 of the agreement, which means collectively "client relationships and goodwill." The „client relationships‟ are also defined in the article 1 meaning the relationships, trade connections, referrals and future opportunities cultivated over the years in relation to the IARC practice including client contacts and/or contracts entered into with any other person in relation to the IARC practice and includes all rights, title and interest in the same together with the right to represent to 3rd parties that the purchaser is the owner of the aforesaid. The „client contracts‟ have also been defined in the arti ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ee has transferred capital asset, therefore, it is chargeable to tax under the head capital gain. It can also not be considered as a noncompete fees because in the agreement through which the assessee has received INR 29 Lacs does not talk about the noncompete conditions. For the same the assessee has entered into another agreement for which INR 1,600,000 have been paid by the buyer to the assessee, which has been offered by them as a noncompete fees as business income. Further, as the above client list and contract relationship is been built by the assessee over past 30 years it can also not be held to be a short-term capital asset but they are a long-term capital asset. Now the 2nd question arises about the cost of acquisition of these assets. The assessee has not purchased the reassessment are self-acquired therefore according to the provisions of section 55 (2) (a) (ii) the cost of the acquisition of these essential be taken to be nil. Therefore INR 2,900,000 on by the assess is chargeable to tax under the head capital gain and the cost of acquisition being nil. Therefore, INR 2,900,000 cannot be taxed as noncompete fees and also cannot be considered as capital receipt but is c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eed dated 29/9/2006 did not specify the amount of bonus payable not prescribe any manner of computation for the same, hence, according to him the above bonus is not allowable to the assessee. He further stated that though the assessee firm appears to agree with this proposition and it executed two more supplementary partnership deed dated 18/11/2010 and 31/3/2011, which quantified the said bonus. Therefore, he held that no bonus paid to the partners during the relevant previous year could be allowed based on the partnership deed dated 29/9/2006. Thereafter, he referred to the provisions of section 40 (b) of the income tax act and noted that the partnership deed can only sanction payment of bonus with prospectively and not retrospectively, the payment can only be to a partner and not to someone who has retired as a partner, the supplementary partnership deeds can only sanction payment of bonus subsequent to that. He further held that the payment made in accordance with the supplementary partnership deed executive on the last day of the financial year cannot be allowed for the financial year as it would amount to sanctioning the bonus with retrospective effect. He further held that S ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... fic financial year and authorised by the supplementary deed. Supplementary partnership deed is part of the original partnership deed. He further stated that it is an accepted law that the profits are determined at the end of the financial year and not on daily bases. Therefore, it cannot be held that the profit accrued to the assessee prior to the close of the accounting year. He further stated that quantification of bonus cannot be made in the partnership deed itself but authority to pay bonus arises from the partnership deed. He further stated that provisions of section 40 (b) only prescribes that the payment has to be made in accordance with and authorised by the partnership deed. He further stated that the decision relied upon by the learned CIT - A of the honourable Delhi High Court clearly shows that there was no mention of any amount in the partnership deed or in the supplementary deed. He referred to the paragraph number 14 of that decision and therefore he stated that the above decision is distinguishable on the fact and therefore does not apply. He further referred to the several judicial precedent and notable amongst them was CIT vs Vaish Associates 63 taxmann.com 90 (20 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... etired from the firm. Further on 31st May of March 2011 the said clause 13 C of the partnership deed dated 19/11/2010 was amended further provide bonus to the partners at the fixed sum which is mentioned against the each of the partners. The supplementary deed stated that it is applicable for the financial year 2010 - 11 only. Therefore, it is apparent that the fixed sum of bonus is mentioned against the name of the each partner. The bonus will also paid in terms of the clause of the partnership deed. Therefore, according to us, the amount of partners‟ remuneration, which includes the above bonus, is in accordance with and authorised by the partnership deeds of the assessee. Further, now the only issue that remains is whether the supplementary partnership deed entered on 31st day of March 2011 and 18th day of November 2010, the partners can be allowed the bonus prior to those dates or not, because in the original partnership deed dated 29th day of September 2006 though there was provision of payment of bonus however there was no quantification of the manner of computation of the bonus payable to the partners was mentioned. However, in the supplementary deed, the exact amount ..... 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