Income Tax Appellate Tribunal - Allahabad
Deputy Commissioner Of Income Tax vs Jagran Prakashan (Varanasi) (P) Ltd. on 15 July, 2002
Equivalent citations: (2004)82TTJ(ALL)243
ORDER
P.S. Kalsian, A.M.
1. These two appeals filed by the Department are disposed of by a common order for the sake of convenience.
ITA No. 2627/A11/1992, Asst. yr. 19901
2. The appeal is directed by the Revenue against the order of the CIT(A) dt. 18th Oct., 1992. The following grounds of appeal have been taken :
"1. That the CIT(A) erred in law and on facts in deleting the addition of Rs. 37,25,432 following the Madras High Court's decision in CIT v. Indian Overseas Bank and Anr. (1990) 182 ITR 439 (Mad) whereas the facts of the case were not identical. Moreover, the assessee-company has succeeded the firm's lock stock and barrel basis' as a going concern and receipt expenses relating to pre-succession period has actually been received in the hands of successor in business only during the previous year relevant to assessment year under consideration."
3. The facts of the case are as follows :
The partnership firm, M/s Jagaran Prakashan, Varanasi has been carrying on business as publishers of daily newspaper, namely, "Dainik Jagran". By an agreement dt. 31st March, 1989, the business of publishing the newspaper was transferred by the partnership-firm, M/s Jagran Prakashan, Varanasi to M/s Jagran Prakashan, (Varanasi) (P) Ltd., a private limited company limited by shares, with the registered office at 7, P.D. Tandon Road, Allahabad.
4. M/s Jagran Prakashan (Varanasi) (P) Ltd. was incorporated on 23rd Dec., 1988. This assessee-company has subscribed capital of Rs. 10 lakhs (1 lakhs shares of Rs. 10 each). Issued and paid up capital of the assessee-company as on 31st March, 1990 was Rs. 3,000 (300 shares of Rs. 10 each). There were only three shareholders of the assessee-company as on 31st March, 1990, namely, Vinod Kumar Gupta (100 shares), Sunil Kumar Gupta (100 shares) and Sandeep Kumar Gupta (100 shares.)
5. M/s Jagran Prakashan (Varanasi) (P) Ltd., successor-company was incorporated with the main object as under :
"To succeed, acquire and take over as going concern the business of M/s Jagran Prakashan (Varanasi) and all or any of the assets and liabilities of the proprietors of the business on terms, conditions as may be mutually agreed upon and then dissolve the firm."
The assessee-company has two other main object and certain incidental objects also.
6. Thus, by agreement dt. 31st March, 1989, between the successor company and predecessor-firm, the business of the 'firm as a whole on look stock and barrel basis' for consideration of Rs. 1 lakh (Rupees one lakh only) was transferred. The relevant part of the agreement is also reproduced below :
"WHEREAS in terms of such main object clause of the "transferee succeeding company" having expressed its willingness to take over, and succeed to the business of the "transferor succeed firm" as a whole on lock, stock and barrel basis for a consideration of Rs. 1 lakh (Rupees one lakh only), to which the "transferor succeeding firm" has agreed."
The transferor succeeded firm vide agreement dt. 31st day of March, 1989, has transferred its business w.e.f. 1st day of April, 1989. Under this agreement, the assessee-succeeding company has agreed to take over the entire running and going business and concern of the transferor succeeded firm w.e.f. 1st day of April, 1989, as per para 2(a) of the agreement.
7. The transferor-succeeded firm has agreed to transfer and the transferee succeeding company has agreed to take over all the assets including those described in the Schedule 'A' to the agreement. For the sake of convenience, Schedule 'A' is also enclosed with this order as annexure A. Similarly, transferor succeeded firm has agreed to transfer all liabilities including those described in Schedule 'B' and the succeeding transferee company has agreed to take over all liabilities including those described in Schedule 'B' attached to the agreement from the transferor succeeded firm. Schedule 'B' is also enclosed with, this order as annexure B for the sake of convenience. The transferee succeeding company also agreed that it shall take over the services of existing workers, staff and employees and that they shall be on the basis of continued service.
8. In terms of paragraph 7 of the agreement, the transferor succeeded firm, agreed and declared that all debts, claims realizable of the aforesaid running and going business and concern and belonging to the "transferor succeeded firm" shall, with effect from the commencement of the 1st day of April, 1989, belong to the "transferee succeeding company" and the "transferee succeeding company" shall have all the powers and authority to receive the same and realize the same, The transferor succeeded firm was dissolved w.e.f. 1st April, 1989 after the transfer of the business to the transferee succeeding company.
9. The asst. yr. 1990-91 (Accounting year 1st April, 1989 to 31st March, 1990) is the first year of assessment. The AO observed that the assessee-transferee succeeding company has shown a sum of Rs. 37,35,432 as reserve and surplus in the balance-sheet. It was claimed before the AO that out of reserve and surplus the amount of Rs. 37,07,000 is the capital reserve added during the year and Rs. 27,680 is the investment allowance. It was explained by the assessee-succeeding transferee company that it has received the amount of Rs. 41.09 lakhs (Rs. 30.37 lakhs from newspapers and Rs. 10.82 for advertisement), which has not been credited to the P&L a/c and this amount has been credited to the capital reserve account. Similarly, the expenditure of Rs. 4.02 lakhs has also not been taken to P&L a/c, but debited to the capital reserve account. It was claimed by the assessee-transferee succeeding company that the receipt of Rs. 41.9 lakhs and expenses of Rs. 4.02 lakhs have been taken into capital account because those relate to pre-succession and pre-commencement period i.e., prior to 31st March, 1989, and do not relate to company's operation and business which commenced only on 1st April, 1989. The AO did not agree with the assessee. The AO considered that the assessee-transferee succeeding company as well as transferor succeeded firm followed the same cash system of accounting. The transferor succeed firm followed cash system of accounting and the assessee-transferee succeeding company also followed the cash system of accounting. The AO considered that the amount received were neither accrued nor ascertained nor accounted for at the time of succession, Since the assessee-succeeding transferee company, has succeeded the firm lock, stock and barrel as a going concern the trading receipts/expenses can be related to the pre-succession period only if it was ascertained or quantified at the time of succession, but the AO came to the conclusion that the receipts on amount of newspaper or advertisement had neither accrued nor arisen nor the same were receivable in the hands of the transferor succeeded firm till the date of succession. These trading receipts amounting to Rs. 41.09 lakhs in the opinion of the AO have accrued and have actually been received in the hands of the successor in business only during the previous year relevant to the assessment year under consideration. He, therefore, included the net receipts amounting to Rs. 37,35,432 in the total income of the assessee. The assessee felt aggrieved and contested the inclusion of Rs. 37,35,432 (Rs. 37,07,751.95 + Rs. 27,680 investment allowance reserve) into the total income.
10. In first appeal, it was argued by the assessee before the CIT(A) that the issue in question was covered by the decision of the Madras High Court in the case of CIT v. Indian Overseas Bank and Anr. (supra). The learned CIT(A) held that the ratio of the decision of the Hon'ble Madras High Court is applicable to the facts of the case and held that the AO was not justified in bringing to tax the impugned amount. The Department felt aggrieved and carried the matter in appeal before the Tribunal.
11. It is argued by the learned Departmental Representative that the assessee has claimed that the amount of Rs. 41.09 lakhs (Rs. 30.37 lakhs from newspaper and 10.82 lakhs from advertisements) has not been taken to the P&L a/c. Similarly, the expenditure of Rs. 4.2 lakhs has also not been taken to the p&L a/c. The learned Departmental Representative pointed out that the amount receivable from sale of newspapers and advertisements has not been mentioned in the agreement for the purpose of determining the sale consideration of the business. Since the transferee succeeding company follows cash system of accounting, the assessee should have shown the entire amount of Rs. 41.09 Lakhs as income on cash basis but the assessee has not shown the full amount and only a part of the amount excluding Rs. 37,35,432 has been shown in the books of accounts. The company has followed cash system of accounting under the IT Act for the purpose of declaring the income. This cash system of accounting followed by the company has not been disputed by the Revenue and, therefore, the actual receipt of business has to be considered for the purpose of determining the profits and gains of the business and there is no option to the assessee-company. The attributes of cash system of accounting have been explained by the Hon'ble Supreme Court in the decision reported in CIT v. A. Krishna Swami Mudaliar and Ors. (1964) 53 ITR 122 (SC). Under cash system of accounting, there is no guestion of bad debts or outstanding at all and, therefore, whatever amount has been received has to be shown as its income. The learned Departmental Representative referred to paragraph 7 of the agreement executed by the assessee-transferee succeeding company with the transferor succeeded firm and argued that the company was entitled to receive all the realisables, which were realisable by the firm. The learned Departmental Representative pointed out that the assessee-transferee succeeding company has declared loss in the return of income and the reason for loss is non-inclusion of all sale proceeds in the total receipts. According to the learned Departmental Representative, the learned CIT(A) has not properly appreciated the facts of the case decided by the Hon'ble Madras High Court reported in CIT v. Indian Overseas Bank and Anr. (supra). According to the learned Departmental Representative under Section 5 of the IT Act, total income received by the assessee is subject to the provision of the Act. In the case of CIT v. Indian Overseas Bank and Anr. (supra) relied upon by the learned CIT, the system of accounting was not involved and it was a case of compensation paid for deprivation of assets. Under Section 145, the assessee is bound by the cash system of accounting followed by it and the decisions cited by the learned CIT(A) are not applicable as those decisions are not on system of accounting. According to the learned Departmental Representative, the CIT(A) has wrongly followed the decision of the Hon'ble Madras High Court in the case of CIT v. Indian Overseas bank and Anr. (supra).
12. The learned counsel argued that director of the assessee-succeeding transferee company and the partners of the transferor succeeded firm are different persons. It is not a case of conversion of the firm into a company. Under Chapter IX of the Companies Act, parties can apply for conversion of a firm into a company, but in the case of the assesses before the Tribunal, the assessee-transferee succeeding company was already in existence. The assessee-transferee succeeding company took over the business of transferor succeeded firm and the said firm M/s Jagran Prakashan ceased to exist. According to the learned counsel, whatever is received on transfer is capital receipt. The learned counsel referred to the agreement dt. 31st March, 1989, between the transferor succeeded firm and transferee succeeding company and stated that the assessee-transferee succeeding company has become liable for all the liabilities and is also entitled to receive all the trade realisables. According to the learned counsel, it was specifically mentioned that the transferee succeeding company became liable to all the debts and right to receive the assets, but all the receipts are not income. According to the learned counsel for the assessee whatever amount has been received by the transferee succeeding company is capital asset and it does not have the same character which it has in the hands of the firm. According to the learned counsel, the assets have been transferred and no income has been transferred. The learned counsel relied on the decision of Madras High Court in the case of Indian Overseas Bank & Anr. (supra). According to the learned counsel, the transferred amount by the transferor succeeded firm is part of capital asset and the receipt of such transferred amount should be considered as capital asset. According to the learned counsel, since the entire business was transferred to a company, it was not a transfer to the same person and it was not a conversion of firm into a company under Chapter IX of the Companies Act. After transfer of the business, the transferor succeeded firm has ceased to exist and the dissolution has also been intimated to the Department. Therefore, according to the learned counsel whatever amount has been received by the assessee-transferee succeeding company is in the nature of capital receipt.
13. The learned Departmental Representative further argued that book entries do not determine the real nature of transaction. According to the learned Departmental Representative, it is a case of transfer of a business of a going concern and the same business has been continued by the assessee-transferee succeeding company. The transferor succeeded firm was following cash system of accounting and hence receivable amounts were not recorded by the transferor succeeded firm in the balance sheet and P&L a/c. The assessee-company is also following cash system of accounting and, therefore, whatever has been received by the assessee-transferee succeeding company on account of sale of newspaper and advertisement is income of the assessee according to cash system of accounting followed by the assessee-transferee succeeding company.
14. We have considered the facts, rival submissions and the material on record. The learned CIT(A) has relied on the decision of the Madras High Court in the case of CIT v. Indian Overseas Bank and Anr. (supra) and came to the conclusion that the AO was not justified in bringing to tax the amount of Rs. 37,35,432. In the case of CIT v. Sun Engineering Works (P) Ltd (1992) 198 ITR 297 (SC), the apex Court held that it is neither desirable nor permissible to pick out a word or a sentence from the judgment of the Supreme Court divorced from the context of the question under consideration and treat it to be the complete law declared by the Court. The judgment must be read as a whole and the observations from the judgment have to be considered in the light of the questions which were before the Court. A decision of the Supreme Court takes its colour from the questions involved in the case in which it is rendered and, while applying the decision to a later case, Courts must carefully try to ascertain the true principle laid down by the decision. These observations of the apex Court are equally applicable while considering the decision of the Hon'ble High Courts.
14.1 The facts in the case of CIT v. Indian Overseas Bank and Anr. (supra) were different from the facts in the case of the assessee. In the case of Indian Overseas Bank and Indian Bank Ltd., they were nationalised w.e.f. 19th July, 1969, under the Banking Companies (Acquisition and Transfer of Undertakings) Act, 1970. The banks were given compensation. The banks filed two returns of income, one for the period 1st Jan., 1969 to 18th July, 1969, and another for the period 19th July, 1969, to 31st Dec., 1969. Profit earned by the bank for the period 1st Jan., 1969, to 18th July, 1969, was already declared in the first return of income and it was claimed that the newly constituted bank did not carry any banking business prior to 19th July, 1969. It was held that the assessees were not in existence prior to 19th July, 1969. It was further held that the income has accrued or arisen or received only by the erstwhile banks during 1st Jan., 1969, to 18th July, 1969, and not by the assessee. The same income could not during the same period, be stated to have been earned by the assessees.
15. In the case of the assessee before the Tribunal whole business was transferred by the transferor succeeded firm to the assessee-transferee succeeding company on 31st March, 1989. The transferor succeeded firm as well as the transferee succeeding company have followed cash system of accounting. The income of Rs. 37,35,432 received by the assessee-succeeding company during financial year 1st April, 1989 to 31st March, 1990 (asst. yr. 1990-91) was not shown by the transferor succeeded firm as the same was not received upto 31st March, 1989, and the succeeded firm was following cash system of accounting. The succeeded firm was dissolved after the business was transferred to the assessee-transferee succeeding company. The right to receive the amount receivable from trade debtors was transferred to the assessee-transferee succeeding company, Whereas in the case of CIT v. Indian Overseas Bank and Indian Bank Ltd. and Anr. (supra), the income for the period 1st Jan., 1969, to 18th July, 1969, was already shown by both the erstwhile banks in their first returns of income. Since the income for the period 1.1.1969 to 18th July 1969 was already shown in the first returns of income of both the banks there was no question of adding the same in the second return of income for the period 19th July, 1969, to 31st Dec., 1969. In the case of the assessee, there is no such case as the transferor succeeded firm has not shown the income of Rs. 37,35,432 in the return. Therefore, the facts in the case of CIT v. Indian Overseas Bank and Anr. (supra) relied upon by the CIT(A) and the learned counsel for the assessee are totally different.
16. In the case of Indian Overseas Bank & Anr. (supra), the erstwhile banks stood transferred and the business of the banks vested in the corresponding new banks by reason of the operation of the provisions of the Banking Companies (Acquisition and Transfer of Undertaking) Act, 1970. The income of the erstwhile banks also stood transferred and vested in the corresponding new banks. Therefore, the incident of assignment was by operation of the provisions of legislation and in the absence of any provision either in the legislation or in the Act deeming it as income of the assessee, it followed that the amount vested could not be regarded as income of the corresponding banks. Payment of compensation to the erstwhile banks and circular of the Reserve Bank of India dt. 24th Oct., 1970, clearly established that the income earned by the erstwhile banks between 1st Jan., 1969, and 18th July, 1969, was treated as part of the assets of the earlier banks and compensation had been provided for to the erstwhile banks in respect of the deprivation of the assets inclusive of the income earned upto 18th July, 1969. It was in these circumstances that it was held by the Hon'ble Madras High Court that the income for the period 1st Jan., 1969, to 18th July, 1969, was not assessable in the hands of the nationalised banks.
17. In the case of the assessee before the Tribunal, the asses see-transferee succeeding company has not paid any amount for the trade debtors because the business has been purchased by the assessee-transferee succeeding company from the transferor succeeded firm for a consideration of Rs. 1 lakh only. This consideration of Rs. 1 lakh represents only he amount of goodwill and no amount was paid for the amount receivable by transferor succeeded firm which did not figure in the balance sheet of the succeeded firm as on 31st March, 1989, because the succeeded transferred firm was maintaining books of accounts on cash basis. Therefore, the facts regarding the basis for payment for the business of the erstwhile bank as well as business of the transferor succeeded firm were totally different.
18. It seems that in the case of CIT v. Indian Overseas Bank and Anr. (supra) the erstwhile banks were maintaining books of accounts in accordance with the mercantile system of accounting and, therefore, the income was declared on accrued basis in the return of income for 1st Jan., 1969, to 18th July, 1969, by the erstwhile banks. When the income has already been declared in the first return of income for the period 1st Jan., 1969, to 18th July, 1969, by the erstwhile banks, there was no reason for including the same income for the period 1st Jan., 1969, to 18th July, 1969, in the second return of income filed by the nationalised banks for the period 19th July, 1969, to December, 1969, on the basis of receipt.
19. In the case of the assessee before us the books of accounts are maintained on cash basis by both the transferor succeeded firm as well as transferee succeeding company: Therefore, the manner in which the accounts were maintained and the income was declared by the banks in their two returns of income for the period from 1st Jan., 1969, to 18th July, 1969 and 19th July, 1969 to 31st Dec., 1969, was totally different from the system of accounting and the declaration of income on cash basis in the case of the assessee-transferee succeeded company and transferor succeeded firm. Therefore, the facts in the case of CIT v. Indian Overseas Bank and Anr. (supra) relied upon by the CIT(A) as well as the assessee's counsel are totally different and distinguishable from the facts in the case of the assessee before the Tribunal and the ratio laid down by the Madras High Court is not applicable to the case of the assessee. The CIT(A) did not properly appreciate the facts in the case of CIT v. Indian Overseas Bank and Anr. (supra) and the facts in the case of the assessee and the decision of the Hon'ble Madras High Court in the case of CIT v. Indian Overseas Bank and Anr. (supra) is not applicable to the case of the assessee-transferee succeeding company before the Tribunal.
20. Now, the issue to the considered is whether the amount of Rs. 37,35,432 received by the transferee succeeding company during the period 1st April, 1989 to 31st March, 1990, relevant to the asst. yr. 1990-91 is revenue receipt and, therefore, income of the assessee or was capital receipt. It is well settled that a capital receipt is not taxable but revenue receipt is taxable as income. The receipt of Rs. 37,35,432 is on account of sale of newspapers and advertisement. Though the details of this receipt of Rs. 37,35,432 are not on record, but both the learned Departmental Representative and the learned counsel for the assessee agreed that the amount of Rs. 37,35,432 has been received on account of sale of newspapers and advertisements in earlier years. The amount has been received by the transferee succeeding company during the financial year 1989-90 relevant to the asst. yr. 1990-91. The amount receivable on account of sale of newspapers and advertisements is on account of trading activity and, therefore, in our opinion, the amount of Rs. 37,35,432 received by the assessee-transferee succeeding company for the sale of newspapers and advertisements in earlier years is a revenue receipt for the reasons given below.
21. A receipt is taxable as a revenue item when it is referable to circulating capital or stock-in-trade. The fixed capital is what the owner intends to provide by keeping it in his own possession. Circulating capital is what he makes profit of by parting with it and letting it change its masters. Since the amount of Rs. 37,35,432 received by the assessee-transferee succeeding company is on account of trading activity, the same is a revenue receipt and, therefore, includible in total income. According to cash system of accounting followed by the assessee whatever amount is received on account of trading activity or sale of newspapers and advertisements in earlier years by the assessee-transferee succeeding company is includible in the total income under Section 5 of the IT Act, 1961.
22. Section 4 of the IT Act, 1961, is a charging section. Under Section 4, income-tax shall be charged for any assessment year at the rates for that year in accordance with and subject to the provisions of the IT Act in respect of the total income of the previous year for every person.
23. Section 5 defines scope of total income. Under s. 5 of the Act, the total income of any previous year of a person, inter alia, includes all income from whatever source derived which is received or deemed to be received in India. Relevant provisions of Section 5(1) are reproduced below :
"Section 5(1). Subject to the provisions of this Act, the total income of any previous year of a person who is a resident includes all income from whatever source derived which :
(a) is received or is deemed to be received in India in such year by or on behalf of such person."
24. Under Section 145 of the IT Act, 1961, income chargeable under the head "Profits and gains of business or profession" or "Income from other sources" shall, subject to the provisions of Sub-section (2), be computed in accordance with either cash or mercantile system of accounting regularly employed by the assessee. Therefore, income chargeable to tax under Section 4 of the IT Act includible in the total income as per provisions of Section 4 of the IT Act has to be computed in accordance with either cash or mercantile system of accounting. The concept of income, therefore, involves the system of accounting for the purpose of inclusion in the total income. If a receipt from a particular source cannot be computed in accordance with the method of accounting followed by assessee, then that receipt is not an income for the relevant year in accordance with the method of accounting. The transferor succeeded firm followed cash system of accounting and, therefore, whatever amount was receivable on account of sale of newspapers or advertisements etc. was not income of the assessee-transferee succeeding firm because the succeeded firm followed cash system of accounting and only the receipt in cash amounted to income taxable under the IT Act. The assessee-transferee succeeding company also follows cash system of accounting and, therefore, whatever amount is received by the assessee transferee succeeding company by virtue of trading activity carried on by the transferred succeeded firm and which had been received by the transferee succeeding company, the receipt would be income in the hands of the transferee succeeding company according to the cash system of accounting followed by it. Since the amount of Rs. 37,35,432 has been received on account of amount receivable for earlier years due to business activities carried on by the transferor succeeded firm, the same would constitute trading receipts in the hands of the transferee succeeding company and not the capital receipt.
25. We have gone through the agreement dt. 31st March 1989, between the transferor succeeded firm and the assessee-transferee succeeding company. As per agreement dt. 31st March, 1989, the business, of the transferor succeeded firm as a whole on lock, stock and barrel basis has been purchased by the assessee-transferee succeeding company for a consideration of Rs. 1 lakh only. The consideration of Rs. 1 lakh has been determined on the basis of goodwill. The value of goodwill has been estimated at Rs. 1 lakh only. The balance sheet" of the transferee succeeded firm as on 31st March, 1989, shows the following assets :
Rs.
(i) Buildings 1,64,355.27 (ii) Plant and Machinery 1,77,007.11 (iii) Furniture & Fixture 56,582.35
The following assets have been shown as per Schedule 'A' of the agreement dt. 31st March, 1989 :
Rs.
(i) Buildings 1,64,355.27 (ii) Plant and Machinery 1,77,077.11 (iii) Furniture & Fixture 56,582.35 (iv) Goodwill 1,00,000.00
It is, thus, seen that the assessee-transferee succeeding company has paid only Rs. 1 lakh on the basis of the assessee's goodwill which was over and above the other fixed assets. Other assets given by the transferor succeeded firm like, "Loans and advance", cash and bank balances, stocks were taken by the assessee-transferee succeeding company because the liabilities were equal to the assets of the transferor succeeded firm. It is clear from the balance sheet of the transferor succeeded firm as well as Schedule 'A' to the agreement dt. 31st March, 1989, showing assets as on 31st March, 1989, and Sch. 'B' showing liabilities as on 31st march, 1989, that the amount of Rs. 1 lakh has been paid by the assessee-transferee succeeding company for purchase of business only on account of goodwill and no amount was paid on account of amount receivable by the transferor succeeded firm. The assessee-transferee succeeding company has right to receive the amount receivable by the transferred succeeded firm by virtue of Clause 7 of the agreement dt. 31st march, 1989, between the transferor succeeded firm and the assessee-transferee succeeding company, which has been reproduced earlier. Therefore, the source of receipt of Rs. 37,35,432 is the agreement dt. 31st March, 1989, between the transferred succeeded firm and the assessee-transferee succeeding company and the business. Without Clause 7 of the agreement dt. 31st March, 1989, the assessee-transferee succeeding company could not have received any amount from sundry trade debtors on account of sale of newspapers and advertisement, and Clause 7 of the agreement dt. 31st Mach, 1989, gave authority to the assessee-transferee succeeding company to receive the amount from sundry debtors on account of sale of newspapers and advertisements, etc, in earlier years.
26. Section 5 of the IT Act, 1961, specifically provides that the total income of any previous year of a person who is a resident includes all income from whatever source (italicised in print, underlined, for emphasis) derived which is received or deemed to be received in India in such year by or on behalf of such person. The source of net receipt of Rs. 37,35,432 is the agreement dt. 31st march, 1989. By virtue of this agreement dt. 31st March, 1989, the assessee-transferee succeeding company acquired legal right to receive the amount from sundry trade debtors on account of sale of newspapers and advertisements, which is clearly a trading or revenue receipt and includible in total income.
27. 'Profit' implies a comparison between the state of a business at two specific dates usually separate by an interval of a year. Profit can be ascertained by a comparison of the assets of the business at the two dates. This concept of profit has been adopted by Mr. Justice Mahajan, as he then was, in CIT v. Ahmedbhai Umarghai & Co. (1950) 18 ITR 472 (SC) as under:
"Profits of a trade or business are what is gained by the business. The term implies a comparison between the state of business at two specific dates separated by an interval of an year and the fundamental meaning is the amount of gain made by the business during the year and can only be ascertained by a comparison of the assets of the business at the two dates, the increase shown at a later date compared to the earlier date represents the profits of the business."
28. In the case of E.D. Sasoon & Company Ltd. and Ors. v. CIT (1954) 26 ITR 27 (SC) the Hon'ble Supreme Court observed at p. 63 as under :
"It is not the work done or the services rendered by the person but the income received or the income which has accrued to the person within the chargeable accounting period that is the subject-matter of taxation."
29. In the case of the assessee-transferee succeeding company, the amount of Rs. 37,35,432 has been received as a matter of right by virtue of Clause 7 of the agreement dt. 31st March, 1989, between the transferor succeeded firm and transferee succeeding company. The receipt of the amount of Rs. 37,35,432 is a revenue receipt and includible in the total income of the assessee because the receipt represents receipt from trade debtors on account of sale of newspapers and advertisements, etc. in earlier year.
30. The assessee-transferee succeeding company has succeeded to the business carried on by the transferred succeeded firm. In this connection, provisions of Section 170(1)(b) and Explanation are relevant and are reproduced below :
"Section 170(1) : Where a person carrying on any business or profession (such person hereinafter in this section being referred to as the predecessor) has been succeeded therein by any other person (hereinafter in this section referred to as the successor) who continues to carry on that business or profession :
(a) the predecessor shall be assessed in respect of the income of the previous year in which the succession took place up to the date of succession;
(b) the successor shall be assessed in respect of the income of the previous year after the date of succession;
(2) Notwithstanding anything contained in Sub-section (1), when the predecessor cannot be found, the assessment of the income of the previous year in which the succession took place up to the date of succession and of the previous year preceding that year shall be made on the successor in like manner and to the same extent as it would have been made on the predecessor, and all the provisions of this Act shall, so far as may be, apply accordingly.
Explanation--For the purposes of this section, "income" includes any gain accruing from the transfer, in any manner whatsoever, of the business or profession as a result of the succession."
Since the assessee-transferee succeeding company is successor to the business of the transferred succeeded firm, the assessee-transferee succeeding company is liable to be assessed in respect of the income of the previous year after the date of succession. The date of succession is 31st March, 1989, and therefore, the successor company is liable to be assessed in respect of the income of the previous year from 1st April, 1989 to 31st March, 1990, in accordance with the system of accounting. The concept of assessable income goes with the system of accounting followed by the assessee. Therefore, when the provisions of Section 170 provide that the successor shall be assessed in respect of the income of the previous year after the date of succession, it means that the successor shall be assessed in respect of the income of the previous year in accordance with the method of accounting followed by the successor. The assessee-company is following cash system of accounting and, therefore, the assessee-company is bound to be assessed in respect of the income of the previous year after the date of succession in accordance with the method of accounting followed by the successor. The assessee is following cash system of accounting and, therefore, the assessee-company is bound to be assessed, in respect of the income of the previous year after the date of succession in accordance with the method of accounting of the assessee. How the income has been received and in what manner the income has been received is not material if the amounts received by the assessee are revenue or trading receipts. There is no dispute about the fact that the amount of Rs. 37,35,432 has been received by the assessee-transferee succeeding company on account of sale of newspapers and advertisements, etc. in earlier years: Explanation to Section 170 also provides that income includes any gain accruing from the transfer in any manner whatsoever of the business or profession as a result of succession. Therefore, it is clear that the amount of Rs. 37,35,432 received by the assessee is a gain which has resulted from the transfer of the business of the assessee-firm on account of amount received from sundry debtors for newspapers and advertisements in earlier years. The receipt of Rs. 37,35,432 is clearly covered by the Explanation to Section 170 of the Act. Therefore, this amount of Rs. 37,35,432 is a revenue receipt because it has been received by the assessee-transferee succeeding company as it is referable to the circulating capital or sundry debtors and the amount was receivable on account of sale of newspapers and advertisements, etc. by the succeeded firm and the assessee-transferee succeeding company acquired the right to receive the amount on account of the agreement dt. 31st March, 1989, between the transferor succeeded firm and the transferee succeeding company. This amount of Rs. 37,35,432 is not a part of the fixed capital.
31. In the result, the order of the CIT(A) is reversed and the appeal of the Department is allowed.
ITA No. 132/All/1993; Asst. yr. 1991-9232. The only ground of appeal raised by the Revenue in its appeal is as under :
"That the CIT(A) erred in law and on facts in deleting the addition of Rs. 82,154 (wrongly written Rs. 37,25,432) following the Madras High Court's decision reported in CIT v. Indian Overseas Bank and Anr. (supra), whereas the facts of the case were not identical. Moreover, the assessee-company has succeeded the firm 'lock, stock and barrel basis' as a going concern and receipt/expenses relating to pre-succession period has actually been received in the hands of successor in business only during the previous year relevant to assessment year under consideration."
33. We have heard the rival submissions. This issue has been decided by us above in ITA No. 2627/A11/1992 against the assessee and in favour of the Revenue and for the reasons given above, we hold that the amount of Rs. 82,154 is not a part of fixed capital and accordingly, the issue is decided against the assessee and in favour of the Revenue for the assessment year under consideration.
34. In the result, the Revenue's appeal is allowed.
Schedule 'A' referred to in agreement dt. 31st March, 1989, between M/s Jagran Prakashan (Varanasi) (P) Ltd. and M/s Jagran Prakashan (Varanasi) Fixed assets Amounts Rs Buildings 1,64,355.27 Goodwill 1,00,000.00 Plant & machinery 1,77,007.11 Furniture & fixture 56,582.35 Amount recoverable :
Sri N.M. Gupta 44,298.85 SriV.M.Gupta 44,298.84 SriM.M.Gupta 44,298.84 SriD.M.Gupta 44,298.84 Sri J.C. Arya 60,301.85 Sri V.K. Gupta 2,02,661.58 Sri Om Malviya 1,950.00 Sri R.N. Tripathi 3,000.00 Sri Anwar Ali 4,850.00 Sri Anil Saxena 1,500.00 Sri B.P. Yadav 2,300.00 Sri D.C. Srivastava 935.56 Sri D.N. Gupta 1,811.00 Sri H.S. Dwivedi 21,567.56 Sri K.M. Seth 148.00 Sri Markanday 500.00 Sri S.D. Seth 4,000.00 Sri Virendra Ballupuri 5,000.00 Sri P.P. Sharma 2,750.00 M/s I.N.S. 34,880.00 M/s Jagran Prakashan (P) Ltd. 2,36,441.35 M/s J.N. Sharma & Co. 8,000.00 Security for electricity 5,625.00 " for telephones 2,500.00 " for office buildings 53,000.00 " for mirzapur office 900.00 " for telex 10,000.00 " for paper loan from D.J., Kanpur1,84,941.82 Salary advance 78,252.75 Tour advance 9,315.00 Sri Laxmmath Sand 2,250.00 Cash & bank balance LIC margin 13,200.00 Cash on hand 1,32,652.03 CBI, Allahabad 1,800.09 UBI, Allahabad 81,456.98 UBI, Varanasi 2,05,439.06 CBI, Varanasi 20,962.56 Fixed deposit with UBI 46,500.00 Stocks Stock of newsprint 14,90,502.60 " of printing ink 19,800.00 " of stores & spares 35,900.00
Schedule 'B' referred to in agreement dt. 31st March, 1989, between M/s Jagran Prakashan (Varanasi) (P) Ltd. and Jagran Prakashan (Varanasi), Allahabad :
(A) Investment allowance reserve 27,680.37 (B) Secured loan from U.P.F.C. 10,727.67
(C) Unsecured 'loan from U.B.I. (due to over issue of cheques) 15,22,704.90 (D) Other liabilities Security from agents 17,88,755.56 Security from staff 9,500.00 Security from taxi contractor 1,000.00 M/s Jagran Publication 1,13,977.73 Paper loan from Dainik Jagran, Kanpur 1,84,941.82 Sri D.M. Gupta 1,723.42 Sri S.M. Gutpa 1,723.42