Transfer of goodwill taxable under Capital Gain and not business income

SBM Chemicals & Instruments Pvt. Ltd. Vs ACIT (ITAT Mumbai)

ITAT Mumbai held that amount received by the appellant from VMI in terms of the Settlement Agreement was consideration for transfer of goodwill and the same is taxable under Capital Gains and cannot be treated as business income.

Facts- The Appellant is an Indian private limited company engaged 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 case of the Appellant was selected for regular scrutiny. AO 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, the Appellant was asked to show cause why the amount of INR 14,33,15,000/- should not be brought to tax under the head ‘Business Income’. AO 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 would 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, AO 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.

Conclusion- 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. 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.

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 transaction were correctly offered to tax by the Appellant as capital gains.

FULL TEXT OF THE ORDER OF ITAT MUMBAI

1. 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’).

2. 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.

2. 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.

3. 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.

4. 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.

5. 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.

6. 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.

2.1. 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.”

3. 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.

4. 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/-.

4.1. 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/- computed as under:

4.2. Vide order sheet noting dated 03/03/2016, the Appellant was asked to show cause why the amount of INR 14,33,15,000/- should not be brought to tax under the head ‘Business Income’.

4.3. 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.

4.4. 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 would 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.

5. Being aggrieved, the Appellant carried the issue in appeal before CIT(A) and raised the following ground of appeal:

“Ground No. 1: capital Gains or Business Income

1.1. The learned AO erred in treating the income of Rs. 14,33,15,000/- under the head Profits/Gains of Business or Profession’ instead of ‘Capital Gains’ has been claimed in the Return of income), in respect to the transfer of Goodwill, which is arising from the Settlement Agreement, between the Appellant and VMI Epe Holland.”

5.1. Before the CIT(A), the Appellant filed submissions in support of the contention that INR 14,33,15,000/- had been correctly offered to tax by the Appellant under the head ‘Capital Gains’ as the same has been received in respect to the transfer of Goodwill. However, the CIT(A) did not find any merit in the submissions advanced by the Appellant and confirmed the order passed by the Assessing Officer on this issue. The CIT(A) concluded that (a) payment of Euro 20,00,000/- (INR 14,33,15,000/-) received by the Appellant was revenue in nature, and (b) there was no doubt that the aforesaid compensation was received by the Appellant on termination of agency and therefore, the receipt, whether revenue or capital in nature, was taxable as business income in the hands of the Appellant in view of the provisions of Section 28(ii)(c) of the Act. While concluding as aforesaid, the CIT(A) observed that the judicial precedents cited on behalf of the Appellant were either distinguishable on facts or were rendered in the context of the statutory provisions which were applicable for prior periods. The CIT(A) dismissed Ground No. 1 raised by the Appellant in appeal before CIT(A) vide order, dated 20/11/2017.

6. Being aggrieved, the Appellant is now in appeal before us on this issue. The Appellant had initially raised Grounds Nos. 1 to 5 reproduced in paragraph 2.1 above in appeal before the Tribunal. Thereafter, additional ground reproduced in paragraph 2.2 above was raised by the Appellant vide letter, dated 13/05/2021. It was submitted that the additional ground raised was a pure question of law necessary to clarify grounds of appeal already raised. In view of the aforesaid submissions the additional ground raised by the Appellant is admitted as per the judgment of the Hon’ble Supreme Court in the case of National Thermal Power Co. Ltd. vs. CIT: 229 ITR 383. Since all the grounds raised by the Appellant are connected the same are taken up together hereinafter.

6.1. We have heard the Learned Senior Counsel appearing for the Appellant and the Learned Departmental Representative. We have considered the rival submissions, and perused the material on record.

6.2. On perusal of record it emerges that the Appellant had entered into Sales Agency Agreement on 13/11/1994 with VMI EPE Holland BV, a Dutch corporation engaged in the business of manufacture and sale of tyre manufacturing machinery and equipment. As per the aforesaid agreement, the Appellant was appointed as exclusive sales agent of VMI EPE Holland BV (for short ‘VMI’) with effect from 01/01/1995. Subsequently, the Appellant entered into another Sales Agency Agreement, dated 07/04/2004, with VMI whereby the Appellant was appointed as exclusive sales agent of VMI for India on exclusive basis in respect of machinery manufactured and supplied by VMI. As per Article 5 of this agreement, the agreement was to be renewed automatically unless a termination notice was sent by either of the parties by 30^th of September of the calendar year. As per Article 5.2, the aforesaid agreement could also be terminated by VMI on account of weighty reasons such as modification in the legal form of the Appellant having adverse influence on the results of VMI. Further, as per Article 5.3 either party had the right to terminate the aforesaid agreement on account of breach of terms of the agreement. As per Article 5.6 the aforesaid agreement could also be terminated with immediate effect in case the parties did not agree in respect of sales target to be met by the Appellant. It is admitted position that VMI terminated the aforesaid agreement on 04/06/2010 which led to a dispute between the Appellant and VMI.

6.3. The Appellant invoked Article 6.1 of the Sales Agency Agreement, dated 07/04/2004 and vide letter, dated 01/06/2011 made a request for arbitration in terms of Article 4(1) of the Rules of International Chamber of Commerce (ICC) International Court of Arbitration for appointment of Arbitral Tribunal. In the aforesaid request for arbitration, the Appellant sought following reliefs:

“Relief Sought

21. Relief sought by the Claimant includes:

Declaratory relief that the Respondent’s immediate and irregular termination of the contract per June 4, 2010 is null and void or invalid (as the case may be) and that the aforementioned notice of termination is regarded valid and effective as of January 1, 2011;

A claim for correct commissions due, in an amount to be determined by the Arbitral Tribunal, upon verification of documents to be produced by the Respondent to enable the Claimant to calculate the proper amounts due on the basis of the contractual provisions, plus interest and compensation for exchange rate losses under Article 6:125 of the Dutch Civil Code;

A claim for compensation (lost commission payments as per Article 7:441(1) of the Dutch Civil Code) for the period starting June 4, 2010 and ending on December 31, 2010, in an amount to be determined by the Arbitral Tribunal, plus interest and compensation for exchange rate losses under Article 6:125 of the Dutch Civil Code;

A claim for damages and/or compensation for goodwill (as per Article 7:442 (1) of the Dutch Civil Code; in an amount to be determined by the Arbitral Tribunal, plus interest and compensation for exchange rate losses under Article 6:125 of the Dutch Civil Code.

A claim for commission payments with respect to future  transactions resulting from the Claimant’s activities (as per Article 7:431(2) of the Dutch Civil Code), in an amount to be determined by the Arbitral Tribunal, plus interest:

A claim for damages resulting from the Respondent’s failure to act in good faith vis-à-vis the Claimant during and in relation to the negotiations that took place after September 2009 to come to a new contract between the Parties, in an amount to be determined by the Arbitral Tribunal, plus interest and compensation for exchange rate losses under Article 6:125 of the Dutch Civil Code,

A cost award on the basis of Article 31(1) of the ICC Rules of Arbitration, including but not limited to reasonable legal fees and other costs incurred for this arbitration, plus interest.

22 The amount of the abovementioned claims depends on essential information and data in the possession of VMI. In this arbitration, SBM will request the Arbitral Tribunal to order VMI to produce these relevant documents. Following document production, SBM will be in a position to properly quantify its various claims. Therefore, SBM expressly reserves the right to amend and quantify its claims at a later stage of these proceedings

The amount in dispute

23. The total amount in dispute is currently estimated at EUR 5.5 million. This amount is a provisional estimate, to the best of SBM’s knowledge.”

6.4. Thus, the relief sought by the Appellant included a claim for commission due, claim for lost commission, claim for future commission payments, claim for compensation for damage to goodwill, claim for declaration that the termination was invalid and a claim for damages for invalid termination.

6.5. However, during the pendency of the arbitral proceedings, the parties arrived at an amicable settlement which was recorded by way of Settlement Agreement (for short ‘SA’) which came into force on 08/01/2013. As per Clause 2 of the SA, the following financial arrangement was agreed upon between the parties:

“2. Financial Arrangements

2.1 In order to pay SBM for the Goodwill for transfer of the benefits of the business from the clientele list developed since 1995. VMI accepts to pay to SBM Euro 2,000,000 (two million). In order to settle the Agreement, Disputes and all other claims released by Section 4.1, as well as to extinguish all remaining obligations VMI may have under the Agreement. VMI accepts to pay to SBM Euro 200.000 (two hundred thousand). VMI accepts to pay these amounts as a single lump sum cash payment of EURO 2.200.000 (two million and two hundred thousand) which total amount must be paid ultimately on 9 January 2013.”

6.6. On perusal of the above ‘Financial Arrangement’ we find that the aggregate compensation of Euro 22,00,000/- paid by VMI to the Appellant had two elements (a) payment of Euro 20,00,000/- for the Goodwill for transfer of the benefits of the business from the clientele list developed since 1995. This amount of Euro 20,00,000/- was treated as capital receipt for transfer of goodwill and capital gains were offered to tax by the Appellant under the head ‘Capital Gains’ in the return of income for the Assessment Year 20 13-14, and (b) balance payment of Euro 2,00,000/- in order to settle the disputes and all other claims well as to extinguish all remaining obligations of VMI under the agreement terminated by VMI. This amount of Euro 2,00,000/- which was offered to tax as business income by the Appellant in the return of income for the Assessment Year 2013-14.

6.7. The Assessing Officer accepted Euro 2,00,000/- offered to tax by the Appellant as business income. The issue raised in the present appeal pertains to the payment of Euro 20,00,000/- made by VMI to the Appellant which was treated as business income by the Assessing Officer and the CIT(A). On perusal of record, we find that the Appellant taken a consistent stand before the Assessing Officer and the CIT(A) that the payment of Euro 20,00,000/- (INR 14,33,15,000/-) was for transfer of goodwill and the capital gains arising from the same were correctly offered to tax as Capital Gains. However, before the Tribunal it was contended on behalf of the Appellant that the aforesaid payment was capital receipt not liable to tax in the hands of the Appellant.

6.8. The Learned Senior Counsel appearing on behalf of the Appellant pointed out the contribution made by the Appellant in propagating the use of radial tyre manufacturing technology/machinery in India and the consequent growth of radial tyre market in India leading to increased sales of VMI machinery in India. The Learned Senior Counsel submitted that the Appellant represented VMI for sale of its machinery in India which was being used in manufacture of radial tyre and related activities. On account of the efforts made by the Appellant spanning over 14 years starting from 1985, the Appellant was able to establish sales of products manufactured/traded by VMI in Indian market. Because of efforts made by the Appellant VMI was well-positioned to dominate the sales of machinery used for manufacture of radial tyres in India. Since VMI machinery was sophisticated, the Appellant hired technical personnel and engineers to provide support the customers purchasing machines from VMI. Thus, the Appellant was able to set up separate and distinct business apparatus for sale of machines manufactured/traded by VMI. The termination of the Sales Agency Agreement, dated 07/04/2004, led to the destruction of the aforesaid apparatus and therefore, the compensation received by the Appellant for the same was capital receipt not liable to tax in the hands of the Appellant. The Learned Senior Counsel further submitted that there was no principle agent relationship between Appellant and VMI. Referring to the terms of Sale Agency Agreement, dated 07/04/2004, the Learned Senior Counsel submitted that the Appellant and VMI were acting on principle to principle basis. The Appellant did not have authority to bind VMI. Therefore, the CIT(A) erred in invoking the provisions of Section 28(ii)(c) of the Act.

6.9. Per contra, the Learned Departmental Representative supported the Assessment Order and the CIT(A). He invited our attention the relief claimed by the Appellant in the Request for Arbitration, dated 01/06/2011 (placed at page 62 to 70 of the paper-book) filed by the Appellant. The Ld. Departmental Representative submitted that the payment received by the Appellant was nothing but the compensation for termination of agency. The Appellant was acting as agent for VMI in India for the purpose of sale of machinery of VMI in India and earned commission income from the same. The compensation received by the Appellant from VMI was for termination of agency and represented the loss of profit which the Appellant would have made in future. Therefore, the payment of Euro 20,00,000/- received by the Appellant was correctly taxed as business income. There was no separate and distinct profit earning apparatus as has been claimed by the Appellant. The Learned Departmental Representative referred to the order passed by the CIT(A) and submitted that submitted that the Appellant had claimed deduction for expenses incurred over the past years. No expenses were capitalized in the books of accounts to show that any business apparatus as claimed by the Appellant was created. He submitted that the Appellant had stated during the assessment proceedings that the payments received were for loss of goodwill on account of termination of contract while at the same time the Appellant relied upon legal opinion wherein it was opined that the payment received by the Appellant was for transfer of goodwill. The Ld. Departmental Representative submitted that the payments received by the Appellant were in the nature of revenue receipts connected with the business of the Appellant and represented compensation for future profits. On the basis of the aforesaid, the Ld. Departmental Representative submitted that the receipt of Euro 2,00,000/- was taxable as business income.

6.10. Having considered the rival submissions, we are not in agreement with the factual averments/submissions advanced. A perusal of the material on record, clearly brings out the fact that the Appellant had never claimed before the assessment proceedings or before the CIT(A) that the payment of Euro 20,00,000/- received by the Appellant from VMI was not liable to tax. The claim that was set up by the Appellant was that the aforesaid payment was for transfer of goodwill. This factual averment was made by the Appellant on multiple occasions. In reply dated 14/03/2016, filed by the Appellant in response to the order sheet noting dated 03/03/2016 it was stated as under:

“VMI Epe Holland had an existing agency agreement with SBM Chemicals and Instruments Pvt Ltd for approximately fifteen years which was terminated by VMI Epe Holland SBM Chemicals & Instruments Pvt. Ltd were their agents since 1″ January 1995 and build up substantial business for them. VMI Epe Holland agreed to pay Goodwill and compensate SBM Chemicals & Instruments Pvt Ltd and entered into settlement agreement effective on 8 January 2013 (Copy already handed over). In order to pay SBM Chemicals &  Instruments Pot. Ltd for the goodwill for handover of benefits of the  business from clientele List developed since 1995, VMI Epe Holland accepted to pay SBM Chemicals & Instruments Pot Ltd Euro  20,00,000/-.

The opinion of our counsel D. M. Harish & Co which describes in detail the purpose of the payment of Euro 20,00,000/- in para 3,4,5,6,7,8,9 and para 10,11,with case law, is attached herewith for convenience as well. In conclusion consequently the entire amount of Euro 20,00,000/- is chargeable to tax under capital gain in the AY 13-14 in the hands of SBM Chemicals & Instruments Pvt. Ltd

The said payment is Goodwill for the loss of future business due to discontinuance of the existing agency agreement and is taxable under Capital Gains and accounted as such.

Section 45 states that the transfer of a Capital Asset effected in the previous year will be chargeable to Capital Gain Section 55 (1)(b)(1)  The Compensation received in relation to a Capital asset being goodwill cost of improvement is to be taken as NIL.

Euro 20,00,000 was received in INR 14,33,15,000/-

Further, Euro 2,00,000 was received “In order to settle the  agreement disputes of all other claims as well as extinguish all remaining obligation” vide the above agreement.

INR 1,43,98,000/- was received and accounted as business income.” (Emphasis Supplied)

6.11. The above factual averments made by the Appellant before the Assessing Officer are supported by Clause 2 of the SA reproduced in paragraph 6.5. above.

6.12. Even in the statement of facts forming part of appeal (in Form No. 35) filed before CIT(A) the Appellant had stated as under:

“1. The Return of Income was filed on 27/09/2013 declaring total income of Rs. 22,94,11,820/-.

2. The Appellant is engaged in the business of trading in Polymers/Rubber, Chemicals, and Equipments and are Commission Agents.

Ground No. 1: Capital Gains or Business Income

3. Since 1st January, 1995, the Appellant was appointed by VMI Epe Holland, to provide agency services in India, which was  renewed over a period of time.

4. However some disputes arose between the parties and the matter was referred to an Arbitration proceedings at the ICC International Court of Arbitration.

5. In order to resolve all disputes, the parties entered into a  Settlement Agreement dated 08-01-2013, wherein it was  mutually agreed that VMI Epe Holland would pay a sum of Rs.  14,33,15,000 (equivalent to Euro 20,00,000), which was for the purposes of transferring the Goodwill generated for more  than 15 years for the transfer of the business from the  clientele list developed since 1995.

6. This income of Rs. 14,33,15,000/- was offered for tax, under the head ‘Capital gains’. However the AO has treated this income as Business Income.”

6.13. Thus, in the above statement of facts duly verified by the Appellant, it was stated that the payment of Euro 20,00,000/- (INR 14,33,15,000/-) was for transfer of Goodwill. A perusal of the Revised Computation of Income filed by the Appellant would show that the Appellant had computed herein capital gain from transfer of goodwill. The cost of acquisition/improvement of the goodwill was taken at ‘Nil’. After claiming benefit of deduction of INR 50,00,000/- under Section 54EC of the Act, the capital gains was computed at INR 13,83,15,000/-.

6.14. However, before the Tribunal it has been contended on behalf of the Appellant that the payment made to VMI was for destruction of separate and distinct business apparatus generated by the Appellant. The factual plea made on behalf of the Appellant is inconsistent with the stand taken by the Appellant before the Assessing Officer and CIT(A). The pleas raised by the Appellant before the Tribunal that the payment is for destruction of business apparatus which constituted the source of income and the plea raised by the Appellant before the Assessing Officer and CIT(A) that the payment received from VMI was for transfer of goodwill are mutually destructive and cannot be made in the same set of facts. While the plea raised by on behalf of the Appellant before Assessing Officer and the CIT(A) is supported by the material on record, the plea made during the course of the hearing that the payment is for loss of business apparatus is not supported by any material on record. Apart from broad averments, there is nothing to show the existence of separate and distinct business apparatus. Thus, we reject the contention raised on behalf of the Appellant that payment received by the Appellant was a capital receipt being payment for destruction of separate business apparatus.

6.15. Having said as above, we also do not find merit in the stand taken by the Assessing Officer and the CIT(A) that the payment under consideration was for termination of agency. While the claims raised by the Appellant before the Arbitral Tribunal included various claims related to the payment of accrued/lost/future commission, the same were not adjudicated by the Arbitral Tribunal as the parties agreed to settle the dispute. Clause 3 of the SA clearly provided that the execution of SA did not amount to admission of liability in the following manner:

“No Admission of Liability

Each Party acknowledges that nothing contained in this Settlement Agreement constitutes or is to be considered, deemed, construed or interpreted to be an admission or concession of liability, fault or wrongdoing or of any fact, and any such admission or concession is expressly denied by both Parties. Each Party acknowledges that all agreements or undertakings herein are made solely for the purpose of compromise to avoid further involvement in arbitration of disputed claims, and such agreements or undertakings do not constitute any admission of liability in relation to any such claims.”

6.16. 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.

6.17. 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.