An overview of Finance Bill, 2015 - Direct Taxes
[as amended by Lok Sabha, dated 29-04-2015]

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1.  CIT Vs. M/s. Motherson Auto P. Ltd., I.T.A. No. 178/2001, Date of Decision: 13.04.2015, Delhi High Court

Whether the Tribunal was justified in law in holding that the sum of Rs. 51,30,338/- was received by the company from its collaborators on account of goodwill and, therefore, not exigible to tax?

Held_ yes

Brief Facts:
The assessee company was manufacturer of a product known as wireless harness which is used in automobiles. The assessee was taken over by a new company (M/s Motherson Sumi Systems Pvt. Ltd) in terms of a collaboration agreement dated 03-12-1986. As per the Collaboration Agreement, the consideration of the unit as a going concern could be adjusted against the goodwill of the assessee. The valuation of the goodwill was based on “assumptions and projections” evaluated by a chartered accountant. This agreement was approved by the Central Government.  The total consideration (including the goodwill) agreed upon by the parties was ` 60.90 lakhs.

The assessee claimed the value of goodwill transferred to be Rs. 51,30,338/- in the A.Y .1987-88. This was disallowed by the AO on the contention that valuation of the goodwill was not based on any established or known principle. The CIT(A) also upheld the order of AO. However, ITAT observed that valuation of goodwill based on chartered accountants report and other facts i.e. (a) the assessee, though established in 1984 but it take over the business of an existing company which was engaged in business since 1975 (b) the assessee had unexecuted orders worth Rs. 4.87 crores in hand, when the collaboration agreement was signed; its profit for one year offset the loss for the previous year; (c) the assessee held a manufacturing monopoly over the product. Consequently, the ITAT allowed assessee’s appeal.

Held:    
It is worthwhile to recollect that the Supreme Court, in Commissioiner of Income Tax v. Srinivasa Setty [1981] 128 ITR 294, held that since goodwill is a self-generating asset, its transfer would not give rise to a capital gain. The weight attached by the ITAT to the monopoly enjoyed by the assessee in respect of the product manufactured, the continuous functioning - since the business of Sehgal Cables had been taken over by the assessee; the large volume of orders at hand when the collaboration transaction took place, were sufficient basis for valuation. This Court also notices that the AO and CIT (A) did not advert to the report of M/s R. K. Khanna (Chartered Accountant) nor cared to call that firm. In the circumstances, it cannot be held that the valuation of goodwill made by the assessee was unreasonable or untenable in law. For the foregoing reasons, the question of law framed in this case is answered against the revenue and in favour of the assessee.

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2.  ITO Vs. Prem Chand Mittal, I.T.A. No. 2389/Del/2011, Date of Pronouncement: 12.03.2015, ITAT -  Delhi

Whether Ld. AO is justified in substituting ‘the full value of the consideration received or accruing as a result of the transfer of the capital asset’ with the ‘fair market value’ determined by the DVO to calculate Capital Gain, without producing any evidence of understatement of consideration?

Held_No

Brief Facts:
The assessee sold one property during AY 2005-06 in which the assessee had half share. Such property was sold for a sum of Rs. 25 lac. Assessee declared long-term capital gain of Rs.9,90,294/- by taking his half share of sale consideration at Rs.12.50 lac . Stamp value of the property is Rs. 25 Lacs  However, the AO was not satisfied with the amount of sale consideration declared by the assessee.  He deputed an Income-tax Inspector to make a fair estimate of the market value of the property, who gave the approximate value at Rs.1.25 crore.  Thereafter, the matter was referred by the AO to the DVO, who determined the fair market value of the property at Rs.76,46,300/-.  By considering this valuation of the DVO, the AO adopted the sale price at Rs.38,23,150/-,  being half share in the property and re-computed the amount of long-term capital gain. The Ld. CIT(A) reversed the order of AO. Being aggrieved, the Revenue filed appeal before ITAT.

Held:
The obvious reason is that when the legislature has provided to consider the full value of the consideration received or accruing as a result of the transfer of the capital asset, there can be no question of the AO substituting it with the fair market value as determined by the DVO. Of course, the AO is entitled to carry out investigation and conclusively prove with some clinching evidence that the ‘full value of the consideration received or accruing as a result of the transfer of a capital asset’ was, in fact, any amount higher than the one depicted in the sale deed. In the absence of any such an evidence, there can be no scope for frustrating the prescription of section 48, which mandates that the computation of capital gains should be done by considering the full value of the consideration received or accruing as a result of the transfer of a capital asset. A mere report of the DVO estimating higher value of the property cannot be considered as an evidence of the actual full value of consideration received or accruing as a result of the transfer of capital asset.

Also as per section 50C, where ‘the full value of consideration received or accruing as a result of transfer of a capital asset’ is less than the stamp value, then, such stamp value is to be substituted with ‘the full value of consideration.’ It is apparent from a copy of the registered sale deed that the stamp value of the property is the same figure, which is the value of consideration received at Rs.25 lac. Therefore, the provisions of section 50C are also of no help to the Revenue. In view of the foregoing discussion, we are of the considered opinion that the ld. CIT(A) was justified in directing to take full value of consideration of the property transferred at Rs.12.50 lac. In the result, the appeal is dismissed.

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