Case Law Details
DCIT Vs Univercell Telecommunications India-Pvt. Ltd. (ITAT Chennai)
M/s. Univercell Telecommunications, proprietary concern of Mr. Sathish Babu. D, was taken over by the assessee company on 28.09.2005 in terms of Sec. 47(xiv)(b) of the Act. It is an undisputed fact that when proprietary concern was converted into a Pvt. Ltd. Co., conditions of Sec.47(xiv)(b) of the Act, has been satisfied. However, at later date, Mr. Satish Babu. D has transferred 16.67% of his shareholding to Mr. Shankar S. Nathan on 10.10.2018 i.e. within five years from the date of transfer of proprietary concern into the assessee company and thus, breached the conditions prescribed u/s. 47(xiv)(b) of the Act, i.e. retaining not less than 50% of the shares of successor company for a period of five years from the date of transfer of proprietary concern. Therefore, we are of the considered view that the assessee is hit by provisions of Sec.47A(3) of the Act, and as per the said provision, if certain conditions are violated, then, exemption granted u/s. 47(xiv)(b) of the Act, needs to be withdrawn for the impugned assessment year. To this extent, we cannot find fault with the findings of the AO. But, fact of the matter is that even after invoking the provisions of Sec.47A(3) of the Act, there cannot be any liability of capital gains on conversion of proprietary business into Pvt. Ltd. Co., because, the assessee has transferred all assets and liabilities of erstwhile proprietary ship into Pvt. Ltd. Co., on book value including so called goodwill of Rs.3.47 Crs. considered by the AO for taxation. As per the details filed by the assessee, goodwill considered by the AO is not self-generated but created by the erstwhile proprietary concern before assets and liabilities have been transferred to Pvt. Ltd. Co., which is evident from the fact that the assessee has filed necessary details of expenditure incurred for generation/creation of goodwill in the books of accounts of proprietary concern. Further, this fact is strengthened by the findings of the order of the Ld.CIT(A) in the case of Mr. D. Sathish Babu for the AY 2006-07, where the Ld.CIT(A) had categorically find that the assessee has spent a sum of Rs.3.47 Crs. towards goodwill and on account of transfer of proprietary concern to a Pvt. Ltd. Co., there will not be any capital gains. The ITAT Chennai in ITA No.1807/Mds/2015 order dated 31.01.2016 had upheld the findings of the Ld.CIT(A) in the case of Mr. Satish Babu and held that since the assessee has generated goodwill by paying consideration, on transfer of said goodwill, capital gains become ‘nil’. 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, but, in principle there cannot be any capital gains on transfer of goodwill, because, said goodwill is not self-generated or created on account of conversion of proprietary concern into a Pvt. Ltd. Co., but acquired by incurring cost. If you consider cost incurred by the assessee for acquiring goodwill, then, capital gains on transfer of said goodwill would come to ‘nil’ amount. The Ld.CIT(A) after considering the relevant facts has rightly deleted the additions made by the AO.
FULL TEXT OF THE ORDER OF ITAT CHENNAI
This appeal filed by the Revenue is directed against the order of the Commissioner of Income Tax (Appeals)-16, Chennai, dated 30.09.2021 and pertains to assessment year 2009-10.
2. The Revenue has raised the following grounds of appeal:
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