Sale of a technical concept, that the assessee developed on his own is taxable under PGBP

Ashish Tandon v. ACIT (2019) 103 taxmann.com 315 / 199 TTJ 137 / 176 DTR 353 (Ahd.) (Trib.).

HELD THAT

Sale of a technical concept, that the assessee developed on his own, with respect to website malware monitoring, assessable as business income.

FACTS OF CASE

A technical concept was conceptualized by assessee-employee to safeguard websites from getting infected with malware against consideration and thereafter, an agreement was entered into between assessee, employer-Indusface India, Indusface Canada, and Trend Micro USA, for sale of all rights in concept so developed/against consideration and claim of assessee was that amount received by assessee from Trend Micro was a capital gain in his hands, but as it had no cost of acquisition, this capital gain was not taxable in nature.

Sale of technical concept claimed as capital receipt as no cost of acquisition was incurred.

THE TRIBUNAL

Dismissing the appeal of the assessee the Tribunal has applied test of human probabilities to decide whether what is apparent is real. Since a perusal of Asset Purchase Agreement clearly shows that dominant intention of purchaser for making payment to assessee was to prevent him from engaging in any business which could have competed with business purchased by Trend Micro from sellers and hence amount received by assessee is revenue receipt in his hands and is taxable as business income under S. 28(va).

Further, in any case, cost of acquisition, in case of non-compete rights, under S. 55(2)(a) is to be taken as NIL, and, as a corollary thereto, entire receipts is to be taxed in hands of assessee.

Tax authorities are not required to put on blinkers while looking at documents. They are entitled to look into the surrounding circumstances to find out the reality.

DISCLAIMER: The above case law is only for information and knowledge of readers. in case of necessity do consult with professionals.

Footnotes

Section 28(va) of Income Tax Act,1961- any sum, whether received or receivable, in cash or kind, under an agreement for-

(a) not carrying out any activity in relation to any business or profession; or

(b) not sharing any know-how, patent, copyright, trade-mark, license, franchise or any other business or commercial right of similar nature or information or technique likely to assist in the manufacture or processing of goods or provision for services:

Provided that sub-clause (a) shall not apply to-

1. any sum, whether received or receivable, in cash or kind, on account of transfer of the right to manufacture, produce or process any article or thing or right to carry on any business or profession, which is chargeable under the head "Capital gains";
2. any sum received as compensation, from the multilateral fund of the Montreal Protocol on Substances that Deplete the Ozone layer under the United Nations Environment Programme, in accordance with the terms of agreement entered into with the Government of India.

Explanation. -For the purposes of this clause, -

(i) "agreement" includes any arrangement or understanding or action in concert, -

(A) whether or not such arrangement, understanding or action is formal or in writing; or

B) whether or not such arrangement, understanding or action is intended to be enforceable by legal proceedings;

(ii) "service" means service of any description which is made available to potential users and includes the provision of services in connection with business of any industrial or commercial nature such as accounting, banking, communication, conveying of news or information, advertising, entertainment, amusement, education, financing, insurance, chit funds, real estate, construction, transport, storage, processing, supply of electrical or other energy, boarding and lodging.

Section 55(2a) of Income Tax Act,1961- For the purposes of sections 48 and 49, "cost of acquisition", 

1. in relation to a capital asset, being goodwill of a business or a trade mark or brand name associated with a business
2. or a right to manufacture, produce or process any article or thing
3. or right to carry on any business, tenancy rights, stage carriage permits or loom hours, —

• 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
• 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 ;