Income Tax Appellate Tribunal - Hyderabad
M/S Prajna Technologies & Services ... vs Department Of Income Tax on 12 November, 2014
IN THE INCOME TAX APPELLATE TRIBUNAL
HYDERABAD BENCH 'A', HYDERABAD
BEFORE SHRI P.M.JAGTAP, ACCOUNTANT MEMBER
AND SHRI SAKTIJIT DEY, JUDICIAL MEMBER
ITA No.772/Hyd/14 : Assessment year 2002-03
Dy. Commissioner of Income- V/s. M/s. Prajna Technologies &
tax, Circle 16(3), Hyderabad Services Ltd., Hyderabad
(PAN - AABCP 9162 A)
(Appellant) (Respondent)
Appellant by : Shri B.Ramakrishna
Respondent by : Shri S.Rama Rao
Date of Hearing 28.10.2014
Date of Pronouncement 12.11.2014
ORDER
Per P.M.Jagtap, Accountant Member :
This appeal is preferred by the Revenue against the order of the learned Commissioner of Income-tax(Appeals) V, Hyderabad dated 16.10.2013, whereby he cancelled the penalty of Rs.11,11,250 imposed by the Assessing Officer under S.271(1)(c) of the Act.
2. The assessee in the present case is a company, which is engaged in the business of providing consultancy services in connection with the business and financial management. The return of income for the year under consideration was filed by it on 31.10.2012 declaring total income at Rs.NIL under the normal provisions and Rs.2,08,300 under S.115JB of the Act. The said return was initially accepted by the Assessing Officer under S.143(1). Subsequently, it was found during the scrutiny assessment in the case of M/s. Pintell Systems Pvt. Ltd. that the assessee company has sold commercial rights to the said company during the year under consideration for a sum of Rs.31,75,000. Since the income arising from the said transaction was not offered by the 2 ITA No.772/Hyd/2014 M/s. Prajna Technologies & Services Ltd., Hyderabad assessee in the return of income for the year under consideration, the assessment was reopened by the Assessing Officer and a notice under S.148 of the Act was issued by him. During the course of re-assessment proceedings, it was found that the assessee has entered into an agreement with M/s. Pintell Systems Pvt. Ltd. on 1.1.2002 to transfer the MOU which was entered into by the assessee with M/s. Eldis sro Czech Republic for consultancy and developing different types of software as and when required in the aviation field. When the assessee was called upon by the Assessing Officer to show cause as to why the short-term capital gains arising out of the said transaction should not be assessed in its hands, it was contended that the commercial rights sold by the assessee in its consultancy business to M/s. Pintell Systems Pvt. Ltd. had no cost of acquisition and therefore, no capital gains tax was liviable in respect of the said transaction as per the provisions of S.45 of the Act in view of the decision of the Hon'ble Supreme Court in the case of CIT V/s. Srinivasa Setty (128 ITR 294). This contention of the assessee was not found acceptable by the Assessing Officer. According to him, it was not a case of sale or transfer of right to carry on any business by the assessee, but what was sold by the assessee as per the MOU to M/s. M/s. Pintell Systems Pvt. Ltd. was a specific sales contract with the client. He held that it was thus a case of sale of commercial right by the assessee and the profit arising from the same was chargeable to tax in the hands of the assessee as short term capital gains. On appeal, the learned CIT(A) upheld the action of the Assessing Officer on this issue observing that it was a case of sale of its rights to produce aviation software which transaction is squarely covered within the provisions of S.55(2)(a) of the Act. On further appeal, the Tribunal also upheld the order of the learned CIT(A) confirming the addition made by the Assessing Officer on account of short term capital gains.
3 ITA No.772/Hyd/2014M/s. Prajna Technologies & Services Ltd., Hyderabad
3. As a result of the sustenance of the addition made on account of short term capital gain by the Tribunal in the quantum proceedings, notice was issued by the Assessing Officer requiring the assessee to show cause as to why penalty under S.271(1)(c) should not be imposed in respect of the said addition. In reply, the submission made during the course of quantum proceeding was reiterated on behalf of the assessee. The Assessing Officer however, did not find the same to be acceptable. According to him, the assessee had not disclosed the receipt of income of Rs.31,75,000 from the sale of commercial rights through MOU in the return of income and this fact was brought to light only as a result of scrutiny assessment made in the case of M/s. Pintell Systems Pvt. Ltd. He also held that the claim made by the assessee for not offering the capital gains from the sale of a commercial rights on the basis that no cost of acquisition was ascertainable, was patently wrong and the case law relied upon by the assessee in support of such claim was totally irrelevant to its case. He accordingly held that the assessee was guilty of concealing the particulars of its income and imposed a penalty of Rs.11,11,250 under S.271(1)(c), being 100% of the tax sought to be evaded by the assessee by way of such concealment.
4. The penalty imposed by the Assessing Officer under S.271(1)(c) was challenged by the assessee in appeal filed before the learned CIT(A) and the following submissions, as reproduced in the impugned order of the learned CIT(A), were made on behalf of the assessee in support of its case that penalty imposed by the Assessing Officer was not sustainable.
4 ITA No.772/Hyd/2014M/s. Prajna Technologies & Services Ltd., Hyderabad 5 ITA No.772/Hyd/2014 M/s. Prajna Technologies & Services Ltd., Hyderabad
5. The learned CIT(A) found merit in the submissions made by the assessee. He held that the assessee had entertained a bona fide belief that the profit arising from the relevant transaction with M/s. Pintell Systems Pvt. Ltd. was not chargeable to tax. He also held that all the relevant particulars in support of its claim in this regard were duly furnished by the assessee and based on those very particulars, a different view was taken by the Assessing Officer, rejecting the claim of the assessee for exemption on account of short term capital gains. According to the learned CIT(A), the decision of the Hon'ble Supreme Court in the case of Reliance Petro Products P. Ltd. (322 ITR 158) cited by the assessee was squarely applicable in the case of the assessee and relying on the same, he cancelled the penalty imposed by the Assessing Officer under S.271(1)(c) holding that there was neither concealment of particulars of its income by the assessee nor furnishing of inaccurate particulars of income. Aggrieved by the order of the learned CIT(A), Revenue has preferred this appeal before the Tribunal.
6. The Learned Departmental Representative, at the outset, submitted that the claim of the assessee for exemption of short term capital gains arising from the transaction entered into with M/s. Pintell Systems Pvt. Ltd. has already been rejected by the Tribunal in the quantum proceedings by passing a well reasoned and well discussed order. He invited our attention to the relevant observations/findings recorded by the Tribunal in paragraph No.9 of its order dated 24.6.2011 passed in ITA No.1331/Hyd/2010 and submitted that the same are 6 ITA No.772/Hyd/2014 M/s. Prajna Technologies & Services Ltd., Hyderabad sufficient to show that the clam of the assessee for exemption of short term capital gains was patently wrong. As regards the observations of the learned CIT(A) that the claim of the assessee for such exemption was disallowed by the Assessing Officer by taking a different view than the one taken by the assessee, he contended that no such exemption was actually claimed by the assessee specifically in the return of income, and there was thus no question of the Assessing Officer taking a different view than the one taken by the assessee. He also pointed out that the relevant details of the transaction with M/s. Pintell Systems Pvt. Ltd. were not at all furnished by the assessee alongwith its return of income, and it was totally wrong on the part of the learned CIT(A) to observe in his impugned order that all the relevant particulars in respect of its claim for exemption of short term capital gains were fully furnished by the assessee. He submitted that the relevant transaction in fact, came to the light only as a result of scrutiny assessment made in the case of M/s. Pintell Systems Pvt. Ltd. and consequently, the assessment in the case of the assessee was reopened to bring to tax the short term capital gains arising from the said transaction. He took us through the copy of the agreement entered into between the assessee company and M/s. Pintell Systems Pvt. Ltd. placed at pages 29 and 30 of the paper book and pointed out that it was a case of transfer of commercial right by the assessee and not the sale of a right to carry on any business, as rightly held by the Tribunal. He contended that the profit arising from such transfer therefore was chargeable to tax in the hands of the assessee as short term capital gains and the claim made by the assessee for exemption was patently wrong, attracting imposition of penalty under S.271(1)(c) as rightly held by the Assessing Officer. He therefore, urged that the impugned order of the learned CIT(A) cancelling the penalty may be set aside and that of the Assessing Officer be restored.
7 ITA No.772/Hyd/2014M/s. Prajna Technologies & Services Ltd., Hyderabad
7. The learned counsel for the assessee, on the other hand, invited our attention to the relevant portion of the Directors' Report at page 6 of the paper-book and submitted ha that fact of sale of its consultancy business by the assessee company for a consideration of Rs.31.75 lakhs was clearly disclosed in the Directors' Report, which was filed alongwith the return of income. In reply to the query raised by the Bench regarding the accounting treatment given to this transaction, he clarified that the net income arising from the said transaction amounting to Rs.20,12,902 was credited by the assessee company to Capital Reserves Account and the same was disclosed under 'Reserves and Surplus' in the Schedule II forming part of the Balance Sheet. He also took us through the agreement entered into by the assessee with M/s. Pintell Systems Pvt. Ltd. in an attempt to support the case of the assessee that what was transferred as per the said agreement was right of the assessee to carry on the business. He contended that since the said right had no cost of acquisition, no capital gain arising from the transfer of the such right was chargeable to tax in the year under consideration, i.e. assessment year 2002-03, and this position is duly supported by the amendment made in the provisions of S.55(2)(a), whereby capital gain arising from the transfer or sale of right to carry on business is made liable to capital gains tax with effect from assessment year 2003-04. He contended that the Tribunal, however did not appreciate the exact nature of the right transferred by the assessee to M/s. Pintell Systems Pvt. Ltd. while rejecting the claim of the assessee for exemption on account of short term capital gains. He also contended that although the said decision of the Tribunal is not disputed by the assessee by filing a further appeal before the Hon'ble High Court, the fact remains that the claim made by the assessee for exemption on account of short term capital gains was bona fide claim and the relevant particulars having been fully furnished by the assessee, it was not a fit case to impose penalty under S.271(1)(c) as rightly held by the learned 8 ITA No.772/Hyd/2014 M/s. Prajna Technologies & Services Ltd., Hyderabad CIT(A). He therefore, strongly supported the impugned order of the learned CIT(A) cancelling the penalty imposed by the Assessing Officer under S.271(1)(c) and urged that the same deserves to be upheld.
8. We have heard the arguments of both the sides and also perused the relevant material on record. It is observed that the penalty imposed by the Assessing Officer under S.271(1)(c) in respect of addition made to the total income of the assessee on account of short term capital gains has been cancelled by the learned CIT(A) on the basis that the claim made by the assessee for exemption of such short term capital gain was a bona fide claim and all the particulars relevant to the said clam were duly furnished by the assessee. Insofar as the claim of the assessee for exemption on merit is concerned, it is observed that the same has already been rejected by the Tribunal in the quantum proceedings for the following reasons given in paragraph 9 of its order dated 24.6.2011 in ITA No.1331/Hyd/2010.
"9. We have considered the submissions of the rival parties and perused the material available on record. We find from the order of the CIT (A) that the assessee had never sold its right to carry on the business of software development or its right to carry on any business and it merely sold a specific sales contract with a client, which is routine outsourcing in all businesses and in the present case, only a specific contract has been outsourced. We further find that the expression from section 55(2)(a) of the Act which is applicable in the instant case "right to manufacture, produce or process any article or thing", and in our opinion, the case of the assessee clearly fell within the purview of sub- section 55(2)(a) of the Act and there is no doubt that the amount received on the sale of the MOU was clearly taxable as per specific provision of the Act. The said expression in section 55(2)(a) of the Act was inserted by the Finance Act, 1997 with effect from 1-4- 1998 and hence the contention of the learned counsel for the assessee that the amendment to section 55(2)(a) bringing the transfer of commercial right to capital gain tax is effective from the assessment year 2003-04 and 2002-03, is not correct. In view of the above and after considering the totality of facts and the circumstances of the instant case, we do not find any infirmity in the order of the CIT (A) in upholding the order of the assessing officer. Therefore, no interference is called for."
9 ITA No.772/Hyd/2014M/s. Prajna Technologies & Services Ltd., Hyderabad
9. As held by the Tribunal in the quantum proceedings, there was no transfer of right to carry on business as claimed by the assessee and it was a case of transfer of a commercial right by the assessee company, the profit of which was chargeable to tax as capital gain in the year under consideration, taking the cost of acquisition as 'nil' as per the provisions of S.55(2)(a) . At the time of hearing before us, the learned counsel for the assessee has taken us through the relevant agreement between the assessee company and M/s. Pintell Systems P. Ltd. and has relied on clause (iii) thereof whereby the assessee had agreed not to solicit the client with respect to consultancy of software business, in support of his case that there was a transfer of right to carry on business by the assessee company. We find it difficult to accept this contention of the learned counsel for the assessee. In our opinion, the relevant clause relied upon by the learned counsel for the assessee cannot be seen in isolation to ascertain the exact nature of asset transferred by the assessee, and it is necessary to read the entire agreement as a whole to ascertain such nature. If the entire agreement is read as a whole, we find that the assessee company had entered into an MOU with Eldis sro Czech Republic for consultancy and developing different types of software as and when required in the aviation field and the said MOU was transferred by it to M/s. Pintell Systems Pvt. Ltd for a total consideration of Rs.31,75,000. It was thus a clear case of transfer of commercial right by the assessee as rightly held by the Tribunal in the quantum proceedings, and in our opinion, there is nothing in the agreement to suggest or indicate that any right to carry on business was transferred by the assessee. As rightly contended by the Learned Departmental Representative, the claim made by the assessee for exemption of short term capital gain arising from the transaction entered into with M/s. Pintell Systems Pvt. Ltd on the basis that the said transaction involved transfer of right to carry on business, thus, 10 ITA No.772/Hyd/2014 M/s. Prajna Technologies & Services Ltd., Hyderabad was patently a wrong claim and there is nothing to show that the Said claim of the assessee was a bona fide claim.
10. As regards the claim of the assessee that all the material particulars relating to its claim of exemption of short term capital gains were duly furnished by it, it is observed that in the Directors' Report, a passing reference only was made to indicate that its consultancy business was sold by the assessee company for Rs.31,75,000. There was however, no mention made about this transaction in the notes forming part of accounts, despite the fact that a sum of Rs.20,12,902 stated to be profit arising from the transaction was credited to the capital account and the same was directly shown under "Reserves and Surplus" in Schedule 2 of the balance Sheet. No details were given showing the exact nature of this amount appearing as capital reserve nor the basis of arriving at the said figure was given either in the Schedule or even in the notes forming part of the accounts for the year under consideration. It is also pertinent to note that no exemption for the short term capital gain was separately or specifically claimed by the assessee either in the return of income or even in the computation of total income and even the basis of claiming the said exemption being the relevant asset having no cost of acquisition was not mentioned by the assessee either in the return of income or in any of the documents filed alongwith the return of income. Having regard to all these facts of the case borne out from the record, we find it difficult to agree with the view of the learned CIT(A) that all the material particulars relating to its claim for exemption on account of capital gain were fully and truly furnished by the assessee.
11. As regards the reliance placed by the disallowed CIT(A) on the decision of the Hon'ble Apex Court in the case of Reliance petro Products Ltd. (supra), it is observed that the question before the 11 ITA No.772/Hyd/2014 M/s. Prajna Technologies & Services Ltd., Hyderabad Hon'ble Supreme Court in that case was whether the assessee could be said to have furnished inaccurate particulars of his income and in this context, the meaning of the expression 'inaccurate particulars' was explained by the Hon'ble Supreme Court. In the present case, penalty under S.271(1)(c) was imposed by the Assessing Officer holding the assessee to be guilty of concealing particulars of its income, and therefore, there being no charge levelled against the assessee of having furnished inaccurate particulars of its income, the ratio of the decision of the Hon'ble Supreme Court in the case of Reliance Petro Products (supra), in our opinion, is not applicable in the case of the assessee.
12. For the reasons given above, we are of the view that the claim made by the assessee for exemption on account of short term capital gain arising from the transaction entered into with M/s. Pintell Systems Pvt. Ltd was patently a wrong claim and the assessee having failed to furnish the correct particulars of its income on account of short term capital gains, it is a fit case to impose penalty under S.271(1)(c) of the Act. In that view of the matter, we set aside the impugned order of the learned CIT(A) cancelling the penalty imposed by the Assessing Officer, and restore that of the Assessing Officer.
13. In the result, appeal of the Revenue is allowed.
Order pronounced in the court on 12th November, 2014 Sd/- Sd/-
(Saktijit Dey) (P.M.Jagtap)
Judicial Member Accountant Member
Dt/- 12th November 2014
12 ITA No.772/Hyd/2014
M/s. Prajna Technologies & Services Ltd.,
Hyderabad
Copy forwarded to:
1. M/s. Prajna Technologies & Services Ltd., C/o. Dagliya & Co., Chartered Accountants, 5-5-9/13, Second Floor, Srinivasa Building, Ranigunj, Secunderabad
2. Dy, Commissioner of Income-tax Circle 16(3), Hyderabad
3. Commissioner of Income-tax(Appeals) V, Hyderabad
4. Commissioner of Income-tax IV, Hyderabad
5. Departmental Representative, ITAT, Hyderabad. B.V.S