Sale of Client Relationship and Goodwill by CA Firm constitute ‘Capital Gain’: ITAT [Read Order]

While granting the deduction claim under Section 54EC of the Income Tax Act to a Chartered Accountants Firm, the Delhi bench of the Income Tax Appellate Tribunal (ITAT) has held that the sale of client relationship and goodwill by the firm was of capital asset under section 2(14), which is chargeable to tax under the head capital gain.

The assessee, a Chartered Accountants Firm having a standing of almost 60 years, discontinued its business of internal audit by transferring it to an international firm Protivity by agreement under which the capital assets including client relationship and goodwill were sold. During the year under consideration, the Assessing Officer denied the claim of long-term capital gain by the assessee in respect of ‘client relationship’ and ‘Goodwill’ in respect of Internal Audit and Risk Consultancy practice and the amount received against that was a capital gain entitled to the deduction under section 54EC of the Act.

On second appeal, the Tribunal analyzed the provisions of the agreement in detail and held that the assessee has transferred it capital assets as defined under section 2 (14) of the income tax act it cannot be said that the above sum received by the assessee is a capital receipt which is not chargeable to tax.

“According to us, the assessee has transferred capital asset, therefore, it is chargeable to tax under the head capital gain. It can also not be considered as a noncompete fee because in the agreement through which the assessee has received INR 29 Lacs does not talk about the noncompete conditions. For the same the assessee has entered into another agreement for which INR 1,600,000 have been paid by the buyer to the assessee, which has been offered by them as noncompete fees as business income. Further, as the above client list and contract relationship is been built by the assessee over past 30 years it can also not be held to be a short-term capital asset but they are a long-term capital asset,” the Tribunal said.

“The assessee has not purchased the reassessment are 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. Therefore INR 2,900,000 on by the assess is chargeable to tax under the head capital gain and the cost of acquisition being nil. Therefore, INR 2,900,000 cannot be taxed as noncompete fees and also cannot be considered as a capital receipt but is chargeable to tax under the head capital gains. As the assessee has made an investment in the specified bonds and capital gain has arisen to the assessee from the transfer of a long-term capital asset, the

assessee is also eligible for exemption under that section. In view of this ground number 1 of the appeal of the assessee is partly allowed,” the Tribunal said.