Transfer of goodwill is not considered company income but rather a capital gain
Fact and issue of the case
By way of the present appeal the Appellant has challenged the order, dated 20/11/2017, passed by the Ld. Commissioner of Income Tax (Appeals)-14, [hereinafter referred to as ‘the CIT(A)’] for the Assessment Year 2013-14, whereby the Ld. CIT(A) had partly allowed the appeal of the Assessee against the Assessment Order, dated 26/03/2016, passed under Section 143(3) of the Income Tax Act, 1961 (hereinafter referred to as ‘the Act’).
The Appellant has raised following grounds of appeal: “1 The Ld. CIT(A) erred in holding that compensation received by appellant on termination of its agreement with M/s. VMI EPE, Holland (VMI) is a revenue receipt as against capital receipt taxable u/s.45 of the Income Tax Act without properly appreciating the facts of the case and law applicable thereto.
The Ld. CIT(A) erred in holding that receipt of compensation is taxable as business income u/s.28(ii)(c) of the Income Tax Act without appreciating the fact that appellant is not an agent of VMI as assessee is restrained to conclude any agreement for and on behalf of VMI.
The Ld. CIT(A) erred in not properly interpreting terms of settlement agreement which provided payment of compensation on termination to the appellant being payment for the Goodwill for transfer of the benefits of the business from the clientele list developed since 1995 and not a payment for future profit or for creating any goodwill for VMI. The Id CIT(A) thus erred in rewriting the agreement entered between two independent parties.
The Ld. CIT(A) erred in holding that compensation received by appellant from VMI is for services rendered by appellant in creating goodwill for VMI as products of VMI were marketed in the name of VMI without appreciating the fact that compensation was awarded under the terms of the agreement, for damage caused to appellant’s business apparatus and not for creating any goodwill for VMI.
The Ld. CIT(A) further erred in holding that compensation received from VMI, in part, was to compensate towards future profit which could have been earned by appellant from clientele list developed since 1995 without appreciating the fact that appellant developed business apparatus for VMI products of tyre making plant and equipments in Indian market, a profit making apparatus, damages received for destruction of such profit making apparatus is capital receipt.
Appellant pray that compensation received under settlement agreement from VMI, being compensation for damage, injury and deterioration of its profit making apparatus be assessed u/s 45 of the IT ACT.
The Appellant has also raised the additional grounds of appeal vide letter dated 13/05/2021:
“The Ld. CIT(A) ought to have held that compensation received by appellant on termination of its agreement with M/s VMI EPE, Holland (VMI) is a capital receipt, not chargeable to tax under Income Tax Act.”
The relevant facts in brief are that 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 Thereafter, the Appellant filed a revised return on 26/12/2013 declaring total income of INR 23,00,31,800/-
Observation of the court
We note 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. In our view, 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. In view of the aforesaid, we hold 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 is 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.
In view of the above, (a) Ground No. 1, & 3 raised by the Appellant are allowed; (b) Ground No. 2 raised by the Appellant is dismissed as being infructuous; and (c) Ground No. 4, 5, 6 and the additional ground raised by the Appellant are dismissed. In result, the present appeal preferred by the Assessee is partly allowed.
Order pronounced on 15.09.2023.
In the result, appeal of the assessee is allowed and ruled in favour of the assessee
Read the full order from hereSBM-Chemicals-Instruments-Pvt.-Ltd.-Vs-ACIT-ITAT-Mumbai2