Income Tax Appellate Tribunal - Chennai
Dr.K.Premraj, Chennai vs Assessee on 24 September, 2013
IN THE INCOME TAX APPELLATE TRIBUNAL
'C' BENCH : CHENNAI
BEFORE Dr. O.K. NARAYANAN, VICE PRESIDENT &
SHRI VIKAS AWASTHY, JUDICIAL MEMBER
I.T.A. No. 1270/Mds/2013
Assessment Year : 2008-09
Dr. K. Premraj, DCIT, Circle-II
No. 15, Old No. 8, 121, M.G. Road,
Third Main Road, Vs Nungambakkam,
R.A. Puram, CHENNAI - 34
CHENNAI - 28
[PAN: AFXPP 5673 G]
(Appellant) (Respondent)
Appellant by : Shri B. Ramakrishnan, FCA
Respondent by : Shri T.N. Betgeri, JCIT
Date of Hearing : 24-09-2013
Date of Pronouncement : 30-10-2013
ORDER
PER VIKAS AWASTHY, JUDICIAL MEMBER:
The appeal has been filed by the assessee assailing the order of the Commissioner of Income Tax(Appeals)-VI, Chennai dated 24-12-2012 relevant to the Assessment Year (AY) 2008-09. 2 I.T.A. No. 1270/Mds/2013
2. The brief facts of the case are: The assessee is an ophthalmologist and was running his clinics and hospital under the name and style of 'Prem's Eye Clinic' in Chennai. He entered into a Professional Collaboration Agreement (herein after referred to as 'PCA') on 20-04-2007 with Dr. A.M. Arun, Chairman, M/s. Vasan Eye Care Hospital. As per the PCA, both the parties agreed to form a new entity in the name and style of 'Vasan Eye Care Hospital Associate Partner of Prem's Eye Clinic'. The assessee transferred his existing clientele and goodwill to the new entity. In lieu of assessee transferring his goodwill, Dr. Arun agreed to pay a sum of `3,50,00,000/- to the assessee. `100,00,000/- was paid to the assessee at the time of signing the agreement and the remaining balance amount of `2,50,00,000/- was to be paid in twenty equal monthly instalments of `12.50 Lakhs each commencing from 1st May 2007. The assessee claimed the lumpsum receipts as capital receipts and credited the same to capital account. The assessee claimed the said amount as exempt from tax. The assessee also invested `50.00 Lakhs in bonds on 31-10-2007 to claim exemption u/s.54EC. As regards other assets i.e., buildings, medical equipment, electrical installations, fixtures etc., owned by the assessee in Prem's Eye 3 I.T.A. No. 1270/Mds/2013 Clinic, the same were taken on license/lease on a monthly rental basis by the new entity.
3. The assessee filed his return of income for the AY. 2008-09 on 30-01-2009 declaring his total income as `95,83,820/- and agricultural income `8,00,850/-. Notice u/s. 143(2) of the Income Tax Act, 1961 (herein after referred to as 'the Act') was issued to the assessee on 23-09-2009. The Assessing Officer vide assessment order dated 27-12-2010 held that although the assessee is a doctor by profession and is filing income tax return by preparing income and expenditure account and the excess of income over the expenditure declared as profit and gain of profession but the real nature of activities carried on by the assessee are that of business. The Assessing Officer treated the lump sum receipts as capital receipts and determined long term capital gain after granting exemption u/s.54EC of the Act.
Aggrieved against the assessment order, the assessee preferred an appeal before the CIT(Appeals). The CIT(Appeals) held that the moneys received by the assessee are not for sale of profession or goodwill and hence are not in the nature of capital receipts but extinguishment of rights to carry out his profession in 4 I.T.A. No. 1270/Mds/2013 the name of 'Dr. Prem's Eye Clinic'. The CIT(Appeals) held that the sum of `2.25 Crores received during the relevant AY is to be treated as receipts u/s.28(va).
The assessee has come in second appeal before us impugning the order of the CIT(Appeals).
4. Shri B. Ramakrishnan, FCA appearing on behalf of the assessee submitted that the CIT(Appeals) has erred in coming to the conclusion that the moneys received by the assessee are in the nature of non-compete fee and not on account of sale of goodwill. The amount received on sale of goodwill is always capital in nature. The ld. AR further submitted that as per the provisions of section 55(2), goodwill is taxable only in case of business. In the instant case the amount has been received on account of transfer of goodwill of profession, therefore, the capital receipts are not taxable. The ld. AR contended that the CIT(Appeals) instead of deleting the addition made by the Assessing Officer has enhanced the rate of tax by treating the capital receipts as non-compete fee under the provisions of section 28(va). The ld. AR placed on record a copy of PCA to show that the moneys received by the assessee are not in the nature of non- 5 I.T.A. No. 1270/Mds/2013 compete fee but are for transferring of reputation and goodwill. The ld. AR in order to support his contentions and to distinguish business from profession, relied on the judgment of the Hon'ble Supreme Court of India in the case of G.K.Choksi & Co Vs. CIT reported as 295 ITR 376 (SC).
5. On the other hand, Shri T.N. Betgeri, appearing on behalf of the Revenue vehemently supported the order of the CIT(Appeals) and submitted that the payments received by the assessee are not capital receipts as held by Assessing Officer but are in the nature of non-compete fee under the provisions of section 28(va). The ld. DR submitted that a perusal of the terms and conditions of the PCA would show that the amount has been paid to the assessee in lieu of surrendering his commercial rights over the name 'Prem's Eye Clinic' which is intrinsically connected for carrying his business or profession. Therefore, the amount paid to the assessee for surrendering his profession is not towards the goodwill but not to carry on the profession under the name 'Prem's Eye Clinic'. The ld. DR strongly prayed for the dismissal of the appeal of the assessee.
6 I.T.A. No. 1270/Mds/2013
6. We have heard the submissions made by the representatives of both the sides and have perused the orders of the authorities below as well as the judgment relied on by the ld.AR. The assessee who is an ophthalmologist by profession was running his clinic and eye hospital under the name and style of 'Prem's Eye Clinic'. He entered into PCA on 20-04-2007 with Dr. A.M. Arun, Chairman, M/s. Vasan Eye Care Hospital. As per the covenants of the agreement, the assessee ceases to carry on his profession under the name and style of 'Prem's Eye Clinic' and form a new entity by the name and style of 'Vasan Eye Care Hospital Associate Partner of 'Prem's Eye Clinic'. The assessee agreed to transfer his existing cliental to the new entity. In lieu of transferring his reputation and goodwill, Dr. Arun agreed to pay a sum of `350 Lakhs to the assessee in a scheduled manner. The relevant extract of the agreement with regard to purchase of goodwill and reputation is reproduced herein below:
"3. PURCHASE OF GOODWILL In consideration of Dr. K. Premraj transferring his reputation and goodwill under this Agreement, Dr. Arun will pay a sum of `350 Lakhs (Rupees Three Hundred and Fifty Lakhs) to Dr. Premraj as per the following schedule 7 I.T.A. No. 1270/Mds/2013 a. At the time of signing this Agreement - `100 lakhs (Rupees One Hundred lakhs) b. Balance `250 Lakhs (Rupees Two Hundred and Fifty lakhs) in 20 equated monthly instamllments of `12.50 lakhs each payable on first of every month commencing from 1st May 2007".
As regards other facilities of 'Prem's Eye Clinic' viz building medical equipments, electrical installation, furniture and fittings, they were continued to be owned by the assessee but were taken on hire/license by the new entity on monthly rental basis on mutually agreed terms and conditions. We have perused the entire PCA including para 9 & 10 which list outs the responsibilities of Dr. Arun and the assessee respectively. Nowhere, from the agreement we are able to gather that the amount paid to the assessee are in lieu of his surrendering profession, or not competing with the new entity. Neither in Para No.10 of the PCA which gives the details of responsibilities of the assessee nor in any other part of the PCA it has been mentioned that the assessee cannot practice individually or compete with 'Vasan Eye Care Hospital Associate Partner of 'Prem's Eye Clinic'. Therefore, the contention of the DR that the payments made are in the nature of non-compete fee is not tenable. While determining the nature of 8 I.T.A. No. 1270/Mds/2013 agreement, it is necessary to stick to the terms and conditions as spelled out in the document rather than travelling beyond and drawing inferences by importing the sense which it does not intend to convey.
7. The assessee has admitted that the amount received in lieu of goodwill is a capital receipt. The Assessing Officer has also held the same to be capital in nature. However, the point of difference between the contention of the assessee and the view of Assessing Officer is; the assessee is treating the capital receipts, received in the course of profession different from the one received during business. Whereas, the Assessing Officer has held business and profession to be the same and the capital receipts on the sale of goodwill to be taxable under the provisions of section 55(2). The ld. AR to support his contentions has relied on the judgment of the Hon'ble Supreme Court of India in the case of G.K.Choksi & Co (supra). The Hon'ble Apex Court while dealing with the similar issue u/s.32(1) had differentiated the terms business and profession. The Hon'ble Court has held as under: 9 I.T.A. No. 1270/Mds/2013
"18. We agree with the submissions made by the counsel for the appellant that in view of the settled law, if two interpretations are possible, then the one in favour of the assessee should be adopted. But, we are of the view that in the present case two interpretations are not possible as the word 'business' occurring in cl.(iv) of s.32(1) by no stretch of imagination, can be said to include 'profession' as well. If the expression 'business' is interpreted as including within its scope 'profession' it would not mean that the lacuna has been made good by giving a wider interpretation to the word business. There is nothing in s.32(1)(iv) which envisages the scope of word 'business' to include in it 'profession' as well. If the expression 'business' is interpreted to include within its scope 'profession' as well, it would be doing violence to the provisions of the Act. Such interpretation would amount to first creating an imaginative lacuna and then filling it up, which is not permissible in law. The contention of the counsel for the appellant that s. 32(1)(iv) should be given purposive interpretation to include 'profession', has thus to be rejected".
Thus, from the above, it can be safely construed that business and profession are two different streams and treatment has to be given differently in case the statue provides for taxing any income under the head 'business' only. A perusal of section 55(2)(a) which is re- produced herein below would show that the term used in the Act is business.
10 I.T.A. No. 1270/Mds/2013
"55(2) For the purpose of sections 48 and 49, 'cost of acquisition' -
(a) In relation to a capital asset, being goodwill of a business [or a right to manufacture, produce or process any article or thing] [or a right to manufacture, produce or process any article or thing] [or right to carry on any business], tenancy rights, stage carriage permits or loom hours, -
(i) In the case of acquisition of such asset by the assessee by purchase from a previous owner, means the amount of the purchase price; and
(ii) In any other case [not being a case falling under sub-
clauses (i) to (iv) of sub-section (1) of section 49], shall be taken to be nil;"
Be that as it may, the income arising out of sale of goodwill in case of 'profession' relates to the personal competence of the 'professional'. In profession, goodwill is gained by an individual from his personal skill and experience which he gains over the period of time. The sale of goodwill in the present case results in generation of capital receipts in the hands of the assessee out of his profession and as such do not come within the ambit of the provisions of section 55(2)(a). The appeal of the assessee is allowed and the impugned order is set aside. Assessing Officer is 11 I.T.A. No. 1270/Mds/2013 directed to delete the addition made on account of Long Term Capital Gains from goodwill.
Order pronounced on Wednesday, the 30th October, 2013 at Chennai.
Sd/- Sd/- (Dr. O.K. NARAYANAN) (VIKAS AWASTHY) VICE PRESIDENT JUDICIAL MEMBER Dated: 30th October, 2013 TNMM
Copy to: Appellant/Respondent/CIT(A)/CIT/DR