By TIOL News Service

ERNAKULAM, AUG 30, 2017: THE ISSUE BEFORE THE COURT IS - Whether the value of goodwill of a proprietorship concern transferred along with its assets upon acquisition by a limited company, is required to be taxed u/s 45, and the proprietor can take shield of Section 47(xiv)(c), only if he has not received any consideration in any form, other than by way of allotment of shares in the Company. YES is the verdict.

Facts of the case:

The Assessee was running a proprietorship concern under the name and style as KAP (India) Constructions, Thrissur. The said establishment, which was pursuing business in civil construction on contract basis, was having the head office at Bangalore and site offices at different places, including in Kerala. The proprietorship concern after Sep 30, 2000, was taken over by a limited Company by name KAP (India) Projects and Constructions (P) Limited, with all the assets and liabilities of the former. The Assessee thereafter, filed return for A.Y 2001-02, declaring a total income of Rs. 47,83,440/-; of course revealing the income received from the proprietorship concern up to Sep 30, 2000 and income from other sources as well. Pursuant to scrutiny, the assessment was finalized treating the assessed income as Rs.50,49,130/- and fixing tax liability accordingly. On further scrutiny, the CIT observed that the credit balance in the capital & current account of assessee in the balance sheet of proprietorship concern amounted to Rs.5,17,03,897.63 and an amount of Rs.1,52,94,900/-, was shown as "unsecured loans" due to assessee. As per him, since the assesee had transferred assets along with goodwill to the Company, the transfer of goodwill would attract capital gain tax, and since the goodwill valued at Rs.2,45,00,0000/- remained untaxed, the assessment finalized by AO was noted as erroneous and prejudicial to the interest of Revenue. The CIT noted that the assessee had received consideration in some form other than by way of allotment of shares. Accordingly, the order passed by AO was set aside, directing to recompute the assessee's total income and to fix the liability accordingly.

On appeal, the ITAT held that invocation of the power by CIT u/s 263 was wrong and there was no violation of Section 47 (xiv) at the hands of assesee, as the deficit figure was to be treated as genuine liability of the sole proprietorship concern, to the proprietor. It was also observed that, no consideration was received by the assessee in respect of transfer of assets and liabilities, except to the extent as mentioned by the assessee and further, even if the disputed amount shown in the 'current account' of the proprietorship concern as due to the proprietor, no such amount was received by assessee in the particular year, to be reckoned for the purpose of computation.

High Court held,

++ with regard to the observation made by Tribunal, finding fault with the course pursued by the Commissioner for invoking power u/s 263, it is to be noted that Section 263 confers adequate power upon the Commissioner to call for and examine any proceedings under the Act, if he considers that the order passed by AO is erroneous, in so far as it is 'prejudicial to the interest of the revenue'. There is no dispute as to the factual position that the worth of the assets of proprietorship concern transferred to the Company by the assessee amounted to Rs.9,64,39,231.19 and the liabilities were to the tune of Rs.4,47,35,333.56. The value of the assets transferred includes the 'goodwill' as well, which was valued at Rs.2,45,00,000/-. By virtue of the mandate u/s 55(1)(b) and 55(2)(a) of Income Tax Act, it was noted that the cost of acquisition and cost of improvement of the 'goodwill' shall be taken as 'nil' and it was accordingly, that the differential portion was worked out and shown as the amount actually due to the assessee. Out of this amount, since the value of the total shares amounted to only Rs.1,52,94,9000/-, it was observed that Section 47 (xiv) (c) was not satisfied completely and the 'goodwill' portion to an extent of Rs.2,45,00,000/- was also liable to be taxed. This is not an attempt on the part of the Commissioner 'to generate some more revenue' by refixing the assessment, if two views were possible. It is not a question of two alternate views, but a case of only 'one view', which came to be wrongly decided by the Tribunal. Non-satisfaction of the ingredient u/s 47(xiv)(c) in toto is a major defect and as such, value of the 'goodwill' i.e. Rs.2,45,00,000/- admittedly forming part of the assets transferred, required to be taxed under such circumstances. This Court is of the firm view that the power exercised by Commissioner u/s 263 is correct;

++ coming to the reasoning given by the Tribunal, the 'deficit' has to be treated as 'loan' given by the proprietorship concern, to the proprietor. It is to be noted that, under no circumstances can a person borrow from himself and transpose as 'creditor' and 'borrower' at the same time. To this extent, 'proprietor' and 'proprietorship concern' are not two different entities. Whatever is pumped in by the 'proprietor' to his proprietorship, is nothing other than investment and it forms part of the asset, which, when taken over by the Company, will have to be compensated, after deducting the liabilities. If at all any exemption is to be claimed to come outside the purview of 'transfer' envisaged u/s 45 of the Act, various requirements mentioned u/s 47(xiv) have to be satisfied. There may not be any dispute to the fact that all the assets and liabilities of the proprietorship concern have been taken over, but if there is wrong description of part of the assets concerned as a 'liability', such wrong procedure/accounting cannot be glibly swallowed, disregarding the mandate of the provisions of law in relation to the exigibility to tax. The proprietorship concern could have borrowed any amount to have categorized as a 'loan', only if it was procured from some other source, than himself/the proprietor;

++ with regard to the further observation made by the Tribunal, that even if the amount in dispute is treated as part of consideration, no such consideration was ever received by the assesee in the year '2001-02' and hence Section 47(xiv)(c) was not attracted; it is to be noted that the 'transfer' was effected the date, on which the disputed amount described as the liability of the 'proprietorship concern', to the proprietor, was stated as taken over by the Company as 'unsecured loan' to be discharged to the proprietor on demand. This by itself shows that the Company could not have borrowed any amount from the proprietor/assessee, unless the amount was credited to the latter's account. Though the amount actually did not come to the hands of the assessee/proprietor, the moment it is shown as 'loan' repayable to the proprietor, there results an indirect admission that the said amount had already come to the credit of the proprietor/assessee; from whom the Company had taken over the 'loan'. By virtue of the legal fiction in this regard, it can be easily said that, part of the consideration was paid by the Company to the 'proprietor' pursuant to taking over the proprietorship concern with all the assets and liabilities; which included the cost of the 'goodwill' as well, to an extent of Rs.2,45,00,000/-. In so far as there is no dispute that the total number of shares transferred was only 1,52,949 with a total worth of Rs.1,52,94,900/-, there was clear deficit, which was never paid or satisfied in the form of shares as envisaged u/s 47(xiv)(c) of the Act. In other words, the terminology used u/s 47(xiv)(c) is quite categoric, that the proprietor shall not receive any consideration or benefit directly or directly, in any form or manner, other than by way of allotment of shares in the Company.

(See 2017-TIOL-1701-HC-KERALA-IT)