6. [2019] 201 TTJ (Rai.) 683 DCIT vs. Dr. Sandeep Dave ITA No.: 175/Rpr/2013 A.Y.: 2009-10 Date of order: 1st July, 2019
Sections 28(ii), 45 – Amount of Rs. 1.75
crores received by assessee towards professional goodwill was not chargeable
u/s 28(ii)(a) as no case was made out by AO to establish that the assessee was
the person who was managing the whole or substantially the whole of the affairs
of the company
Section 55(2) does not specify cost of
acquisition of management right. There is no deemed cost of acquisition in the
statute. Therefore, the charge u/s 45 never intended to levy a tax on transfer
of management rights
FACTS
The assessee received a certain amount from company CARE. According to
it, the amount was received as professional goodwill and was liable to be
treated as capital receipt not liable to capital gain. The AO observed that the
amount was received by the assessee on account of relinquishment of his rights
in the management of a company in favour of CARE, and not on account of
relinquishment of any right relating to professional expertise or acumen as
surgeon. The AO, accordingly, brought the amount to tax holding that it was
covered under the provision of section 28(ii)(a). On appeal, the Commissioner
(Appeals) deleted the addition made by the AO. Aggrieved by this order, the
Revenue filed an appeal.
HELD
The Tribunal held
that the work of management was entrusted to different committees and such
committees had other members / doctors apart from the assessee. Therefore, it
was incumbent on the Revenue to establish that in spite of there being other
members on various managerial committees, it was the assessee alone who was
actually managing the affairs of different committees. In such a case, it is
the board of directors collectively who can be said to be managing the business
affairs of the company.
Management right
has now been included in the definition of ‘property’ and, therefore, is a
‘capital asset’ u/s 2(14). This being so, the taxability of any amount received
against relinquishment of ‘management right’ has to be tested on the touchstone
of provisions relating to computation of capital gain. The assessee argued that
since management right is a capital asset, provisions relating to capital gain
will apply and when such computation provisions are applied, they are
unworkable. It is true that under the scheme of taxation of capital gain it is
not the entire sale consideration of an asset which is chargeable to tax but it
is the ‘profit or gain’ arising on transfer thereof which is taxable. This
observation is subject to the specific provisions of law which prescribe that
in case of some category of capital assets, cost of acquisition is considered
to be nil and, in those cases, full consideration accruing on transfer will
become taxable. In the instant case, it is the stand of the assessee that cost
of acquisition of management right being indeterminate, no capital gain can be
worked out and so the provisions are not workable.
Section 55(2) does
not specify the cost of acquisition of ‘management right’. There is no deemed
cost of acquisition provided in the statute. No case has been made out by the
AO to show as to what was the cost of management right in the hands of the
assessee. Therefore, what has been brought to tax is the entire consideration
for relinquishment of management right which runs contrary to the settled
proposition of law, which was laid down by the Supreme Court in the case of CIT
vs. B.C. Srinivasa Setty [1981] 5 Taxman 1/128 ITR 294. In this
decision, the Supreme Court has laid down the proposition that machinery and
charging provisions constitute an integrated code and in the situation where
the computation provision fails, it has to be assumed that such a transaction
was not intended to be falling within the charging section and, therefore, the
charge on account of capital gain must fail.
It is evident that
the Revenue has not established that the assessee was managing the whole or
substantially the whole of the affairs of the company as no case has been made
out by the Revenue that the amount received by the assessee from CARE was on
account of relinquishment of any managerial rights. Even assuming that the
amount received by the assessee is relatable to relinquishment of any
managerial right, in view of the ratio laid down by the Supreme Court in the
case of B.C. Srinivasa Setty (Supra), the cost of any such
managerial right being indeterminate, provisions relating to computation of
capital gain are not workable and, consequently, it has to be held that the
charge u/s 45 never intended to levy a tax on such a transaction. Therefore,
the amount received by the assessee is neither chargeable u/s 28(ii)(a) nor
under the head capital gain.
