The Income Tax Appellate Tribunal ( ITAT ) Chennai bench, in a recent appeal filed before it by the revenue, held that there cannot be said to be any capital gain on the transfer of goodwill on account of the conversion of proprietary concern into a Pvt. Ltd. Co.
The aforesaid observation was made by the tribunal while dismissing an appeal filed by the Dy. Commissioner- of Income Tax, Central Circle-1(1), Chennai, against the order of the Commissioner of Income Tax (Appeals)-16, Chennai, with regard to the assessee company named M/s.Univercell Telecommunications, for the assessment year 2009-10.
The claim of the appellant department as against the assessee company is that, on account of its conversion into a Pvt. Ltd. Company under the name and style of M/s.Univercell Telecommunications India Pvt. Ltd., the same would come under the provisions of Sec.47(xiv) of the Income Tax Act, but that the assessee has violated the conditions prescribed therein by transferring the shareholding with a period of five years from the date of transfer of proprietary concern, thus invoking Sec.47A.
The department further contends that this being the state of affairs, the difference between assets and liabilities of the said company are to be considered as long-term capital gains, and that they are to be added back to the total income of the assessee.
Being aggrieved by the said assessment order of the department, the appeal filed by the assessee before the Commissioner Of Income Tax (Appeals), (CIT(A)), contenting that though the provisions of Sec.47A will come into operation due to the violations of certain conditions under Sec.47(xiv) of the Act, yet no liability to capital gains tax can be said to be there, was well accepted by the CIT(A) , the reason for the same being ignorance of the non-consideration of the difference between the assets and liabilities by the Assessing Officer while computing long term capital gains.
Considering the submissions made by either side, the tribunal while dismissing the revenue’s appeal observed:
“From the above, it is very clear that even if you invoke the provisions of Sec.47A(3) of the Act to withdraw exemption granted u/s.47(xiv)(b) of the Act, in principle, there cannot be any capital gains on transfer of goodwill because, the said goodwill is not self-generated or created on account of the conversion of proprietary concern into a Pvt. Ltd. Co., but acquired by incurring the cost. If you consider the cost incurred by the assessee for acquiring goodwill, then, capital gains on the transfer of said goodwill would come to a ‘nil’ amount.
The Ld. CIT(A) after considering the relevant facts has rightly deleted the additions made by the AO. Hence, we are inclined to uphold the findings of the Ld.CIT(A) and dismisses the appeal filed by the Revenue.”
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