Sale of client relationship/ goodwill by CA firm held capital asset eligible for exemption u/s 54EC

Sale of client relationship and goodwill by CA firm was of capital asset u/s 2(14) chargeable to tax under the head capital gain and deduction u/s 54EC was allowable – ITAT

ABCAUS Case Law Citation:
ABCAUS 2867 (2019) (04) ITAT

The appellant assessee was a partnership firm carrying on the profession of chartered accountancy. The firm had sold “client relationship and goodwill‟ of internal audit and risk consultancy ( IARC) practice to another firm and the amount received was shown as sale of long-term capital asset and also exemption u/s 54EC of the Income Tax Act, 1961 (the Act) was claimed by way of investment in specified bond.

However the Assessing Officer (AO) passed the assessment order u/s 143 (3) of the Act wherein he held that the claim of the assessee of the sale of the client relationship and goodwill of the internal audit practice was a non compete fee received for not to carry out a specific business activity and was chargeable to tax under section 28(va) of the Act meaning thereby that there was no question of granting deduction u/s 54EC of the Act.

The CIT(A) also rejected the claim of the assessee.

The Tribunal observed that the assessee was a firm of chartered accountant carrying on the profession of chartered accountancy having a standing of almost 60 years, discontinued its business of internal audit by transferring it to an international firm by an agreement titled as agreement for the purchase and sale of assets.

The Tribunal noted that as per the agreement, it was agreed by the parties that the assessee was engaged in the business of providing services related to internal audit and risk consulting practice. The buyer agreed to purchase the specified assets in terms of the above agreement and the assessee firm had agreed to transfer all rights/ interest entitled in the specified assets. It was further stated that the assessee firm was owner of the “purchased asset” being “client relationships and goodwill” who agreed to sale, transfer aside and convey to the purchaser all the purchased assets.

Going through the various terms of the agreement, the Tribunal opined that the agreement itself showed that before buying the IARC practice of the assessee the buyer had made a complete due diligence of the practice hand and purchased the ongoing contracts along with the client relationship.

The Tribunal opined that the client list, contracts were property of the assessee firm which was connected with the profession of the assessee and fall into the definition of capital asset according to section 2 (14) of the act.

Therefore the Tribunal was of the view that the assessee had transferred it capital assets as defined under section 2(14) of the income tax act it could not be said that the sum received by the assessee was a capital receipt which was not chargeable to tax.

The Tribunal opined that the assessee had transferred capital asset, therefore, it was chargeable to tax under the head capital gain and It could not be considered as a non compete fees because in the agreement through which the assessee had received the sums did not talk about the noncompete conditions. For the same the assessee had entered into another agreement and the amount received under that agreement had been offered by them as a noncompete fees as business income.

Further, the Tribunal pointed out that as the said client list and contract relationship was been built by the assessee over past 30 years it could also not be held to be a short-term capital asset but they were a long-term capital asset.

The Tribunal clarified that since the assessee had not purchased those capital assets, they were self-acquired therefore according to the provisions of section 55(2)(a)(ii) the cost of the acquisition of these essential be taken to be nil.

Further, the Tribunal opined that as the assessee had made an investment in the specified bonds and capital gain had arisen to the assessee from transfer of a long-term capital asset, assessee was also eligible for exemption under section 54EC.

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