Addition of Long Term Capital Gains not valid if Capital Gains on Transfer of Goodwill is Nil after Consideration of Costs Incurred for Transfer: ITAT grants relief to Univercell [Read Order]

The Chennai Bench of the Income Tax Appellate Tribunal (ITAT) has held that addition of long term capital gains are not valid if capital gains on transfer of goodwill is zero after consideration of costs incurred for transfer.

The Tribunal bench comprising V Durga Rao and G Manjunatha upheld the findings of the Commissioner of Income Tax (Appeals) and ruled in favor of the assessee, dismissing the appeal of the Deputy Commissioner of Income Tax, Chennai.

M/s.Univercell Telecommunications, a proprietary concern of Mr.Sathish Babu, had been converted into a Pvt. Ltd. Co., under the name and style of M/s.Univercell Telecommunications India Pvt. Ltd., on 28.09.2005. Pursuant to conversion, the proprietary concern becomes a Pvt. Ltd. Co., and transfer of assets and liabilities of proprietary concern, had been treated as exempt as per provisions of Sec.47(xiv) of the Income Tax Act, 1961.

The Assessing Officer(AO) had observed the transfer of shares of Mr. S.Satish Babu, within a period of five years from the date of transfer of proprietary concern and thus, invoked Sec.47A of the Income Tax Act and assessed difference between assets and liabilities of company as long term capital gains and added back to the total income of the assessee. Assessee, aggrieved by the action of the AO, seeked for redressal of grievance before the CIT(A).

The CIT (A), by taking note of the order of ITAT in the case of Mr.D.Satish Babu, Proprietor of erstwhile proprietorship concern observed that there was no capital gains on transfer of goodwill at book value, because, if you consider the cost incurred by the assessee for creation of goodwill, then, the capital gains on transfer of said goodwill become ‘nil’ and thus, deleted the additions made by the AO.

In aggrievance, the Deputy Commissioner appealed before the ITAT that the Section 47(xiv)(b) was clearly violated by the Assessee. The ITAT, in perusal of the impugned order of the CIT(A), paper books and other evidence on record, has held that, the actions of the AO upto the consideration of the violation of Section 47(xiv)(b) are correct, but it was to be noted that the Goodwill of Rs. 3.47 Crores was not self generated, but created by the proprietary concern before the assets and liabilities have been transferred to the Pvt. Ltd. Company. The expenditures incurred for the generation/creation of goodwill is also reflected by the assessee in the books of account of the proprietary concern. The findings of CIT(A) in this regard was also noted by the ITAT.

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