The Mumbai bench of the Income Tax Appellate Tribunal (ITAT) held that the payment of Euro 20,00,000/- (INR 14,33,15,000/-) received by the Appellant from VMI in terms of SA was consideration for transfer of goodwill and the capital gains arising from the aforesaid transaction were correctly offered to tax by the appellant as capital gains.
The Appellant is an Indian private limited company engaged, at the relevant time, in the business of trading in Rubber, Chemicals, & equipment. Further, the Appellant also acted as commission agent for various parties.
For the Assessment Year 2013-14, the Appellant filed original return of income on 27/09/2013 declaring total income of INR 22,94,11,820/- which was processed under Section 143(1) of the Act. Thereafter, the Appellant filed a revised return on 26/12/2013 declaring total income of INR 23,00,31,800/-. The case of the Appellant was selected for regular scrutiny. The Assessing Officer noted that in the revised statement of income the Appellant had offered to tax Long Term Capital Gains of INR 13,83,15,000/-.
Vide order sheet noting dated 03/03/2016, the Appellant was asked to show cause why the amount of INR 14,33,15,000/- shou not be brought to tax under the head ‘Business Income’. In response, the Appellant filed reply letter, dated 14/03/2016. The Appellant took stand that Euro 20,00,000/- (INR 14,33,15,000/-) was received by the Appellant ‘for the Goodwill for handover of benefits of the business from clientele List developed since 1995’. The aforesaid payment was for loss of future business due to discontinuance of the existing agency agreement and was taxable as capital gains.
The cost of acquisition and improvement of goodwill was taken as ‘Nil’. After claiming exemption of INR 50,00,000/- under Section 54EC of the Act balance amount of INR 13,83,15,000/- was offered to tax as capital gains. Whereas, Euro 2,00,000/- (INR 1,43,98,000/-) was received by the Appellant ‘in order to settle the agreement disputes of all other claims as well as extinguish all remaining obligations’ and therefore, the aforesaid amount was offered to tax as business income.
However, the Assessing Officer was not convinced with the explanation furnished by the Appellant. According to the Assessing Officer, the Euro 20,00,000/- (INR 14,33,15,000/-) paid to the Appellant in lieu of future profits/commission which the Appellant wou have earned from the agency business. The Appellant was free to carry on its business and therefore, the source of the profits/income was intact. In any case, the source of income was business of the Appellant as a whole and each client of the Appellant could not be regarded as a separate source of income. Thus, the Assessing Officer concluded that the aforesaid amount was connected to the business carried on by the Appellant and was, therefore, taxable in the hands of the Appellant as business income.
Being aggrieved, the Appellant carried the issue in appeal before CIT(A). Being aggrieved by the order of CIT(A) the appellant appealed before the tribunal.
The tribunal noted that the Appellant was paid Euro 20,00,000/- for the Goodwill for transfer of the benefits of the business from the clientele list developed since 1995.‟ and this was clearly stated in Clause 2.1 of the SA reproduced in paragraph 6.5 above. There is nothing on record to doubt the genuineness of the SA entered between the Appellant and VMI.
The authorities below failed to appreciate that the Appellant had received a separate payment of Euro 2,00,000/- for surrendered all the claims which included claim for damages for loss of goodwill on account of termination of the agreement and all the other claims such as claim for commission due/lost and future commission. The Appellant had offered the same to tax as business income which was accepted by the Revenue. The conclusion drawn by the Assessing Officer that the payment is in lieu of loss of business earning runs contrary to express terms of ‘Financial Arrangement’ and is not supported by any material on record.
The two member bench consisting of B.R. Baskaran (Accountant member) and Rahul Chaudhary (Judicial member) held that the payment of Euro 20,00,000/- (INR 14,33,15,000/-) received by the Appellant from VMI in terms of SA was consideration for transfer of goodwill and the capital gains arising from the aforesaid transaction were correctly offered to tax by the Appellant as capital gains. The Assessing Officer was directed to accept the capital gains of INR 13,83,15,000/- offered to tax by the Appellant in the return of income after verification of the computation.
In view of the aforesaid, the other contentions/submission advanced by both the sides in relation to payment under consideration being in the nature of compensation for termination of agency or otherwise are rendered academic and therefore, not adjudicated upon. Thus the appeal was partly allowed.
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