Income Tax Appellate Tribunal - Mumbai
Jewel Of India vs Assistant Commissioner Of Income-Tax on 16 September, 2002
Equivalent citations: [2003]87ITD527(MUM)
ORDER
Behari Lal, Accountant Member
1. This appeal of the assessee is directed against the order of the CIT-18, Mumbai which he passed under Section 263 of the Act on 27-3-2002. The various grounds of appeal taken up by the assessee are regarding the validity of the order passed under Section 263 of the Act. According to the assessee, the learned CIT erroneously assumed office under Section 263 of the Income-tax Act, 1961 in passing the impugned order under Section 263 dated 27-3-2002 which is ab initio void, illegal and bad in law and liable to be annulled. The assessee is a partnership firm. Two limited companies (i) Sun-n-Sand Hotel Pvt. Ltd. and (ii) Paramount Hotels Pvt. Ltd., are partners with 66.67% and 33.33% profit/loss sharing ratio respectively. Sun-n-Sand Hotel (P.) Ltd., is the managing partner. The partnership commenced from 7th April, 1987.
2. In 1986, Sun-n-Sand Hotel (one of the partners of the assessee firm) was negotiating with M/s. Nehru Centre, Worli for conducting restaurant and catering business in the premises owned by Nehru Centre known as "Discovery of India" building. Nehru Centre is a Public Institution set up for advancement of science and other education to the general public and engaged in scientific and industrial research and approved by the prescribed authority for the purpose of Section 35(1)(ii) of the Income-tax Act, 1961. It owns various immovable properties wherein a planetarium and science centre is being run by it. In order to facilitate and to meet the requirements of the catering services and of refreshment for the numerous tourists, visitors, customers and clients of Nehru Centre, it was desired by them to have a restaurant and eating establishment in their building. Thus, a Conducting Agreement between Nehru Centre and Sun-n-Sand Hotel was executed on 7th April, 1987 under which Sun-n-Sand Hotel was appointed as conductors. Under the said agreement, Nehru Centre agreed to give on conducting basis, a portion of their premises to undertake the activities related to carrying and conducting the restaurant activities on terms and conditions specified in the said agreement. The monthly compensation was fixed at Rs. 1,70,000 with certain escalation. The above partnership firm was constituted as a result of an agreement between the two partners that the business of Restaurant and Catering to be conducted at Nehru Centre will be carried on as Partnership between themselves. The conducting agreement dated 7th April, 1987 signed between Sun-n-Sand Hotel and Nehru Centre forms part of the partnership deed of the assessee. The validity of the Conducting Agreement was for ten years subject to renewal at the sole discretion of Nehru Centre. Some of the terms and conditions of the said conducting agreement dated 7-4-1987 were as under :
(i) In consideration of the monthly compensation and charges, the owners gave following areas in their premises known as "Discovery of India" building :
(a) Ground floor 7065 sq.ft.
(b) Third floor 4525 sq.ft.
(c) Two open terrace on third floor 22,000 sq. ft. and front lawns.
(ii) The period of conducting in the first instance was for ten years from 1-10-1986 and renewable thereafter exclusively at the discretion of Nehru Centre.
(iii) Monthly compensation was Rs. 1,70,000 with 2% escalation every year (Rs. 93,500 towards royalty; Rs. 68,000 as licence fees for the areas on ground and third floor; and balance Rs. 8,500 towards licence fees for the terrace areas).
(iv) Sun-n-Sand Hotel was to pay 3 months deposit.
(v) Sun-n-Sand Hotel as conductor, agreed to various covenants as mentioned in Paras 6(a) to 6(d) of the said conducting agreement.
(vi) Likewise, Nehru Centre also as owners, agreed to provide various facilities and benefits to Sun-n-Sand Hotel including to have exclusive rights of catering/running restaurants and catering facilities in Nehru Centre and not to allow any other person to do similar business in the same building.
(vii) On termination of expiry of lease, Sun-n-Sand Hotel to vacate and deliver vacant possession within two months.
(viii) Under the said agreement, Nehru Centre has a right to re-enter, upon their premises on non-fulfilment of obligation by Sun-n-Sand Hotel.
3. On the above terms and conditions, the assessee firm had been carrying on restaurant and catering business from the said premises and was paying the agreed monthly compensation for the premises out of its income. On expiry of 10 years in October, 1996, the assessee gave a notice to the Nehru Centre for renewal of the original Conducting Agreement for a further period of 10 years as provided in the original agreement. The validity of the original Conducting Agreement of 1987 was extended by the owners, M/s. Nehru Centre in terms of Extension Agreement signed on 24-2-1997 with Nehru Centre. Under the above renewal agreement, the validity of the original Conducting Agreement of 1987 was extended for a further period of ten years on same terms and conditions except some changed terms. Under the Extension Agreement, the monthly compensation was agreed at Rs. 3,00,000 (Rs. 1,65,000 towards royalty; Rs. 1,20,000 as licence fees for the areas on ground and third floor and balance Rs. 15,000 towards licence fees for the terrace areas). This compensation was further subjected to increase of 25% from October, 1999 (Rs. 3,75,000 p.m.) and further 25% from October, 2002 (Rs. 4,69,000).
4. Simultaneously, on 24-2-1997, a Supplemental Agreement was signed with Nehru Centre. Under the said Supplemental Agreement, it was provided that a further compensation for extension of original Conducting Agreement dated 7-4-1987, the Conductor had agreed to pay a further amount of Rs. 6,25,000 per month to Nehru Centre described as "Goodwill" which was subject to further revision to Rs. 7,81,000 p.m. from October, 1999 and to Rs. 9,76,500 from October, 2002 in the same manner and same extent as the amounts covered under extension agreement were subject to increase.
5. The return of income declaring total income of Rs. 1,98,87,700 was filed by the assessee on 24-10-1997. This return of income was processed under Section 143(1)(a) of the Income-tax Act without making any prima facie adjustments. Thereafter, the Assessing Officer issued notice under Section 143(2) of the Act. The assessee filed the various details as called for by the Assessing Officer. After going through the books of account and other details filed by the assessee, the Assessing Officer completed the assessment under Section 143(3) on 22-3-2000 by computing the income of the assessee at Rs. 1,94,57,820 after making certain disallowances.
6. In his order passed under Section 263 of the Act, the learned CIT had observed that while completing the assessment, the Assessing Officer had allowed the following claims which were considered erroneous insofar as they were prejudicial to the interest of the revenue :
(i) Payment towards goodwill amounting to Rs. 37.50 lakhs.
(ii) Donation @ 100% under Section 35(1) on account of scientific research to Nehru Centre amounting to Rs. 1,50,000.
(iii) Belated contributions to Provident Fund amounting to Rs. 2,93,550.
(iv) Capital expenditure of Rs. 1,50,000 on account of kitchen designing charges.
(v) Expenses amounting to Rs. 23,040 on account of application for registration of trademark.
(vi) Liquor charges amounting to Rs. 1,67,991 and food charges amounting to Rs. 6,32,277 pertaining to the earlier years.
7. Before the learned CIT, it was submitted by the assessee that payment of goodwill was for the purpose of extending the period of conducting agreement dated 7-4-1997 signed with Nehru Centre for a further period of 10 years and the same was not made in lump-sum but formed a part of the monthly rent. It was also submitted that by signing two agreements, the assessee continued to use the same rights and portion of the building owned by Nehru Centre as under the original Conducting Agreement of 1987. Thus, according to the assessee, the expenditure claimed on account of payment of goodwill is allowable as revenue expenditure. To support its submission, the assessee placed reliance on the following judgment :
(i) Praga Tools Ltd. v. CIT [1980] 123 ITR 773 : [1981] 5 Taxman 284 (AP) (FB)
(ii) Empire Jute Co. Ltd. v. CIT [1980] 124 ITR 1 : 3 Taxman 69 (SC)
(iii) CIT v. Madras Auto Service (P.) Ltd. [1998] 233 ITR 468 : 99 Taxman 574 (SC)
(iv) CIT v. Gemini Arts (P.) Ltd. [2002] 254 ITR 201 (Mad.).
8. The learned CIT observed that the payment of goodwill made by the assessee to Nehru Centre appears to be unwarranted and for extraneous considerations. According to him, the assessee has not been able to substantiate the goodwill payment over and above the monthly rent vis-a-vis the benefit derived by it. The learned CIT has further stated that perusal of the records indicate that while making the assessment, the Assessing Officer has not dealt with this issue in depth and has allowed the payment of goodwill without ascertaining the exact nature of the payment and the commercial expediency for incurring such expenditure over and above the monthly rent. Thus, the learned CIT has directed the Assessing Officer to examine the relevant agreements and ascertain the exact purpose for effecting such supplemental agreement and benefit derived by the assessee by agreeing to pay goodwill over and above the monthly rent fixed.
9. At the time of hearing, the learned counsel for the assessee invited our attention to the Conducting Agreement between M/s. Nehru Centre and M/s. Sun-n-Sand Hotel Pvt. Ltd., dated 7th April, 1987 (compilation page 42), the Extension Agreement dated 24th February, 1997 (compilation page 52) and Supplemental Agreement dated 24th February, 1997 (compilation page 58) and contended that the payments are being made by the assessee per month as agreed upon between the parties as per the above said agreements. The monthly consolidated charges are being paid as Royalty, Licence fees for area on ground and third floor, licence fees for the use of terrace area and Goodwill as a consideration for extension of original agreement dated 7-4-1987 (compilation page 61). Thus, according to him, the monthly payment though termed as "Goodwill", the same was nothing but additional compensation/charges along with licence fees and royalty for the use of premises. He also argued that it was provided in the Supplemental Agreement that the said agreement was supplemental to and was forming part of the Extension Agreement of even date and was co-terminus therewith and all the terms and conditions of the both, the original Conducting Agreement and the Extension Agreement shall be binding upon the parties. The learned counsel further contended that on the basis of Extension Agreement and Supplemental Agreement dated 24th February, 1997 effective from October, 1996, the assessee has been paying the increased monthly compensation including the charges described as "Goodwill" as a monthly composite compensation which is payable by the assessee during the currency of the renewal agreement till 30th September, 2006. He explained that in the previous year ended on 31-3-1997 relevant to year under appeal, first six months were covered by the original Conducting Agreement of 1987 and the later six months were covered by new renewal agreements. The assessee paid the monthly compensation of Rs. 9,25,000 (comprising of licence fees, royalty and amount described as goodwill) to Nehru Centre from October. 1996 in terms of two renewal agreements. Thus, the total amounts paid by the assessee during the year were Rs. 11,95,086 pertaining to the first six months of the year and Rs. 55,50,000 pertaining to the later six months of the year. Thus, the total compensation and charges paid were to the tune of Rs. 67,45,086. Thus, the learned counsel argued that "Goodwill" was nothing but additional compensation along with licence and royalty for the use of premises.
10. The learned counsel also invited our attention to the written submissions filed before the learned CIT (compilation page 9). It was explained to the CIT that the payment of monthly compensation by way of goodwill was supplemental to and formed part of the Extension Agreement dated 24-2-1997 and was co-terminus as provided in Clause 2 of the said agreement. Regarding the query raised by the learned CIT that both the agreements dated 24-2-1997 had not been executed by the assessee, the assessee replied that both the agreements had been signed by the assessee itself in its own name through Mr. Gul R. Advani as Managing Director of Sun-n-Sand Hotel (P.) Ltd. It was also explained to the learned CIT that the nomenclature to the amount payable under the Supplemental Agreement had been given as "Goodwill" which in true sense is not akin to the term "Goodwill" as normally understood in business practices as an asset. It was also explained that based on the Extension Agreement and Supplemental Agreement dated 24-2-1997 effective from October, 1996, the assessee had been paying the increased monthly compensation including the amount styled as "Goodwill" as monthly composite compensation which was payable till the end of the tenth year. The assessee had not paid any lump-sum amount to Nehru Centre for acquiring any rights from them. Thus, by signing these two renewal agreements, the assessee continued to use the same rights and portion of the building owned by Nehru Centre as were enjoyed by it under the original Conducting Agreement, 1987. In fact some of the benefits given in the Original Agreement were Curtailed in the Renewal Agreement. Thus, the learned counsel contended that the various details called for by the learned CIT were submitted before him. It was also explained to the CIT that the Assessing Officer also requires the assessec to justify the allowability of payments made to Nehru Centre including goodwill. Detailed note was filed and the Assessing Officer examined the issue in detail and allowed the deduction for the said amount of compensation including amount entitled as goodwill.
11. The learned counsel also invited our attention to the various pages of compilation filed by him. At page 65, there are details of amounts received by Nehru Centre from the assessee which also includes the goodwill. Pages 66 & 67 pertain to the tax to be deducted out of the payments made to Nehru Centre. Nehru Centre forwarded the certificates in original under Section 197(5) of the Income-tax Act, 1961 relating to rent payable without deduction of tax (pages 68 to 71) to the assessee. Compilation pages 75 to 78 pertain to the certificates issued under Section 197(1) of the Act by the Asstt. Director of Income-tax (Exemption)-II(2), Bombay to the assessec authorizing the assessee to pay the rent without deduction of tax. According to the learned counsel, these certificates also included the amount paid as "Goodwill". Therefore, the learned CIT has erroneously treated "Goodwill" as of capital nature. The learned counsel also contended that the provisions of Section 263 have been wrongly invoked as the entire information regarding the goodwill was produced before the Assessing Officer and he allowed the same after going through the various documents including the agreements.
12. The learned counsel argued that the payment of "Goodwill" was recurring and the same was being paid every year, therefore, the same is of revenue nature. In this connection, he invited our attention to the following court cases :
(i) CIT v. Gabriel India Ltd. [1993] 203 ITR 108 : 71 Taxman 585 (Bom.)
(ii) CIT v. Goyal Private Family Specific Trust [1988] 171 ITR 698 : [1987] 35 Taxman 522 (All.).
The learned counsel, thus, contended that the assessee filed an explanatory note with the return of income giving details of increased amount of monthly compensation and charges. During the course of assessment proceedings, the Assessing Officer required the assessee to file copies of the renewal agreements signed during the year and also a note explaining the nature of monthly compensation being paid to Nehru Centre. The assessee filed the copies of the new agreements and also a note explaining the nature of monthly compensation paid to Nehru Centre and the matter was discussed with him. After due application of mind, the Assessing Officer allowed the amount of monthly compensation and charges paid to Nehru Centre, which were for use of premises from where the assessee's business was being carried on and conducted. The learned counsel further pointed out that in the subsequent assessment year, the assessee had paid the monthly charges for the entire year in terms of new agreements under which the old charges were raised upward. In this assessment year also, the Assessing Officer required the assessee to justify the allowability of payments made to Nehru Centre including the charges described as goodwill. The Assessing Officer examined the issue in detail and again allowed the deduction for the said amount including amount titled as goodwill. The learned counsel further contended that the nomenclature given by the parties will not decide the allowability of expenditure but the true nature of the expenditure is relevant to decide the allowability of such expenditure. It was, therefore, contended that the said payment of monthly charges described as goodwill under the Supplemental Agreement along with monthly charges payable for the Extension Agreement were not for obtaining any benefit of enduring nature and were rightly allowed by the Assessing Officer as revenue expenditure. Whether the proper enquiries were made or not, the learned counsel placed his reliance on the following court cases :
(i) Blue Dart Express Ltd. v. Jt. CIT [2000] 75 ITD 414 (Mum.)
(ii) CIT v. Sunder Lal [1974] 96 ITR 310 (All.)
(iii) CIT v. R.K. Metal Works [1978] 112 ITR 445 (Punj. & Har.)
(iv) CIT v. Kanda Rice Mills [1989] 178 ITR 446 : 44 Taxman 316 (Punj. & Har.)
(v) CIT v. Taj Printers [1989] 178 ITR 384 : [1990] 48 Taxman 112 (All.)
(vi) CIT v. Trustees, Anupam Charitable Trust [1987] 167 ITR 129 : 31 Taxman 335 (Raj.).
The learned counsel, thus, contended that the order passed by the learned CIT under Section 263 of the Act is illegal and bad and the same is liable to be annulled.
13. The learned DR supported the findings of the learned CIT. He invited our attention to Clauses (4) and (5) of the statement of facts and contended that the Original Agreement of 1987 was extended by the owners for further ten years in terms of Extension Agreement signed on 24-2-1997 and monthly compensation was agreed at Rs. 3,00,000 which was also subject to increase of 25% from October, 1999 and further 25% from October, 2002. He, therefore, contended that further Supplemental Agreement on the same day for payment, of goodwill of Rs. 6,25,000 per month subject to further revision to Rs. 7,87,000 per month from October, 1999 and Rs. 9,76,000 per month from October, 2002 cannot be in the nature of compensation. According to him, if the "Goodwill" was in the nature of compensation, there was no need of Supplemental Agreement to be signed on the same day. Moreover, this element of "Goodwill" could have been included in the Extension Agreement. The very fact that two different Agreements had been signed on the same day for two different purposes, the nature of the two amounts cannot be the same. He, thus, contended that "Goodwill" had been paid for acquiring enduring benefit, therefore, the amount paid as "Goodwill" assumes the character of capital payment and the same had been allowed by the Assessing Officer erroneously. He invited our attention to page 84, para 2 of compilation filed by the assessee and contended that it has been clearly mentioned therein that the revision upward made in the compensation was more than 362% from October, 1996. This revision was with Nehru Centre on the firm presumption that the annual growth in the business would be 23% as was the case in the last financial year preceding the renewal of the contract. Thus, according to him, "Goodwill" was paid, keeping in view the long-term benefit and therefore, the same was for enduring benefit. He also invited our attention to page 79 of compilation filed by the assessee and contended that lift was provided by Nehru Centre for better amenities of holding parties. Similarly, he invited our attention to compilation page 90, para 3 and contended that Nehru Centre relaxed certain restrictions imposed on wedding ceremonies. Thus, according to the learned DR, the additional amount paid as "Goodwill" was for acquiring the capital asset and long term benefit from Nehru Centre, therefore, this amount is not allowable as revenue expenditure. He further contended that even if the expenditure is incurred for acquiring the capital asset for the rented premises, the same is not allowable as revenue expenditure. To support his contention, he placed his reliance on the following court cases:
(i) Modi Spg. and Wvg. Mills Co. Ltd. v. CIT [1993] 200 ITR 544 (Delhi)
(ii) Silver Screen Enterprises v. CIT [1972] 85 ITR 578 (Punj. & Har.).
The learned DR further contended that the Assessing Officer allowed the expenditure incurred as "Goodwill" without making proper enquiries. Therefore, the learned CIT has correctly directed him to make such enquiries and also examine the agreement properly before allowing expenditure incurred on "Goodwill". He contended that the CIT is fully empowered to direct the Assessing Officer under the provisions of Section 263 of the Act to make further enquiries if such enquiries were not made before passing the assessment order. He placed his reliance on the following court cases :
(i) Malabar Industrial Co. Ltd. v. CIT [2000] 243 ITR 83 : 109 Taxman 66 (SC)
(ii) Gee Vee Enterprises v. Addl. CIT [1975] 99 ITR 375 (Delhi)
(iii) Addl. CIT v. Mukur Corporation [1978] 111 ITR 312 (Guj.)
(iv) Duggal & Co. v. CIT 220 ITR 456 : [1994] 77 Taxman 331 (Delhi)
(v) CIT v. South India Shipping Corporation Ltd. [1998] 233 ITR 546 (Mad.)
(vi) Swamp Vegetable Product Industries Ltd. (No. 1) v. CIT 1991] 187 ITR 412 : 54 Taxman 175 (All.)
(vii) CIT v. MM. Khambhatwala [1992] 198 ITR 144 (Guj.)
(viii) Indian Textiles v. CIT [1986] 157 ITR 112 : 26 Taxman 677 (Mad.)
(ix) K.A. Ramaswamy Chettiarv. CIT [1996] 220 ITR 657 : 88 Taxman 526 (Mad.)
(x) Naklank Diamond v. Asstt. CIT [2000] 67 TTJ (Ahd.) 388.
14. In reply, the learned counsel contended that the learned CIT has not stated in his order whether the amount of "Goodwill" was of capital nature. In fact, he has apparently accepted the submissions of the assessee that the said expenditure was not capital expenditure as was alleged in his notice under Section 263, but he held that such payment appeared to be unwarranted and for extraneous consideration and the assessee had not substantiated its claim for such payment which according to him, was over and above the monthly rent. He further held that the Assessing Officer had not dealt with the issue in depth and allowed the deduction for the same without ascertaining the exact nature of such payment and the commercial expediency for incurring the same. Thus, according to the learned counsel, the conclusion arrived at by the learned CIT were not on the issue covered in his show-cause notice under Section 263 but on totally different grounds for which he did not give any opportunity to the assessee. He placed his reliance on the following court cases to support his case :
(i) CIT v. Jagadhri Electric Supply & Industrial Co. [1983] 140 ITR 490 (Punj. & Har.)
(ii) CIT v. Chandrika Educational Trust [1993] 207 ITR 108 (Ker.)
(iii) CIT v. L.F. D'Silva [1991] 192 ITR 547 : [1992] 62 Taxman 161 (Kar.)
(iv) CITv. Associated Cement Co. Ltd. [1988] 172 ITR 257 : 38 Taxman 110A (SC).
Regarding the terrace, the learned counsel contended that the same was to be used by the assessee. Moreover, the letter was written in 1999 whereas the agreement for payment of "Goodwill" was dated 24-2-1997 pertaining to the assessment year 1997-98. Therefore, the letter written in 1999 cannot have any effect on the agreement entered into on 24-2-1997. To support his views, he placed his reliance on the decision of the Supreme Court in the case of CIT v. Madras Auto Service (P.) Ltd. [1998] 233 ITR 468 : 99 Taxman 575. He, thus, contended that sufficient enquiries were made by the Assessing Officer before passing the order as all the agreements and documents were filed before him. Thus, according to the learned counsel, order passed by the CIT under Section 263 is bad in law and the same should be quashed.
15. We have heard the rival parties. We have also perused the various documents produced before us. Section 263 grants powers to the Commissioner of Income-tax to revise orders which are erroneous and prejudicial to the interest of the Revenue. The Assessing Officer who occupies a vital position in the implementation of the Act is both an investigator and an adjudicator. In the capacity of investigator, he has to ascertain the truth about the facts stated in the return and while doing so, he may have to examine the assessee and other persons and also may have to go behind the papers placed before him by the assessee, but when he writes the assessment order, his functions are quasi-judicial. An assessee, aggrieved by his orders, can prefer appeal to the appellate authority or can apply to the Commissioner for revision under Section 264. But since a quasi-judicial order is passed by the Assessing Officer who represents the Revenue, it is assumed that the Revenue would normally have no grievance against the order passed by its own representative. Naturally, no appeal is provided to the Revenue against the order passed by the Assessing Officer. But the Legislature in their wisdom also realized that the order passed by the representative of the Revenue may contain mistakes of fact and law which are detrimental to the interest of the Revenue. Therefore, Section 263 was enacted to empower the Commissioner to revise such orders. The object is to vest a supervisory jurisdiction in the Commissioner to revise those orders passed by the subordinates, which according to him, are erroneous and against the interests of the Revenue. The Commissioner can suo motu call for and examine the record of any proceedings under the Act and if he considers that any order therein passed by the Assessing Officer is erroneous insofar as it is prejudicial to the interest of the Revenue, he may pass such orders thereon as the circumstances of the case justify which may include enhancement or modification of the assessment order or cancellation of the order with direction to make a fresh assessment. Before passing the aforesaid order, the Commissioner may make or cause to make such enquiries as he considers necessary. The Commissioner must give a hearing to the assessee before passing the order.
16. The Commissioner must pass a speaking order. The powers of the Commissioner are quasi-judicial in nature, that means that the Commissioner has to evaluate the circumstances in an objective manner. Therefore, to show that this was so, he must give his reasons for being satisfied on both the grounds namely (i) that the order passed was erroneous and (ii) that it was prejudicial to the interest of the Revenue. The Commissioner of Income-tax is possessing vast and extensive powers under the provisions of Section 263 of the Act. Orissa High Court in the case oilndian Metals & Ferro Alloys Ltd. [1993] 203 ITR 729 laid down that "The jurisdiction of the Commissioner to proceed under Section 263 is not dependent on the fulfilment of any condition precedent. He is not required to give any notice before assuming the jurisdiction under Section 263 and commencing the enquiry. All that he is required to do before reaching his decision and not before commencing the enquiry is to give the assessee an opportunity of being heard and make or cause to make such enquiries as he deems necessary." However, the Bombay High Court in the case of Gabriel India Ltd. (supra) held that "Notwithstanding the vast powers under Section 263, these can only be exercised, if two circumstances do exist; that is (i) the order is erroneous and (ii) the error in order has caused prejudice to the interest of Revenue."
17. The expression 'erroneous' refers to an order which has an error or in contrary to law. An order would be 'erroneous' if it is based on mistaken view of law or on erroneous application of legal principles. Thus, if the order passed by the Assessing Officer is in accordance with the law, the order is not erroneous. The order cannot be held to be erroneous on the mere grounds that it should have been written more elaborately. Gujarat High Court in the case of CIT v. Smt. Minalben S. Parikh [1995] 215 ITR 81 : 79 Taxman 184 held that "For assuming jurisdiction under Section 263, the only requirement is that the Commissioner must consider that the order passed by the Assessing Officer is erroneous insofar as it is prejudicial to the interest of the Revenue. It is, however, necessary that this preliminary finding must have definite basis. It is necessary that the Commissioner must come to a definite finding that the order is both erroneous as well as prejudicial to the interest of the Revenue. Even if an order is prejudicial to the interest of the Revenue, it cannot be interfered with, if it is not erroneous. Again, the Commissioner should not interfere with an order which is not prejudicial to the interest of the Revenue, even if it is erroneous."
18. What constitutes 'prejudice to the Revenue' has been the subject-matter of a judicial debate. One view was that 'prejudicial to the interest of Revenue' does not necessarily mean loss of Revenue. Madras High Court in the case of Venkatakrishna Rice Co. v. CIT [1987] 163 ITR 129 : 30 Taxman 528 held that "The expression 'prejudicial to the interest of Revenue' is not to be construed in a petty fogging manner, but must be given a dignified construction. The interest of the Revenue is not to be equated to rupees and paise. There must be some grievous error in the order passed by the ITO which might set a bad trend or pattern for similar assessments which, on a broad reckoning, the Commissioner might think to be prejudicial to the Revenue administration. The prejudice must be prejudice to the Revenue administration."
19. The assessment made by the Assessing Officer would be prejudicial to the interest of the Revenue if the Assessing Officer has not made any enquiries or he has made insufficient enquiries. Delhi High Court in the case of Gee Vee Enterprises (supra) held that the Commissioner can regard the ITO's order as erroneous on the ground that in the circumstances of the case, the ITO should have made further enquiries before accepting the statements made by the assessee in his return. Rajasthan High Court in the case of CIT v. Emery Stone Mfg. Co. [1995] 213 ITR 843 : 83 Taxman 643 held that allowing certain deduction without proving the claim or without proper verification or in ignorance of the provisions of law are the various instances on the basis of which the order could be considered prejudicial to the Revenue and could be set right in revisional jurisdiction. Similarly, the Karnataka High Court in the case of Thalibai F. Jain v. ITO [1975] 101 ITR 1 held that assessments made in undue haste and without an enquiry whether the income offered was that of the assessee or some one else, are prejudicial to the interest of the Revenue and what is prejudicial to the interest of Revenue must be held to be erroneous though the converse may not always be true. On the other hand Andhra Pradesh High Court in the case of CIT v. G.K. Kabra [1995] 211 ITR 336 : [1994] 75 Taxman 503 held that it is necessary for the Commissioner to point out the exact error in the order which he proposes to revise so that the assessee would have an adequate opportunity of meeting that error before the final order is made. In the case of Smt. Tara Devi Aggarwal v. CIT [1973] 88 ITR 323 (SC), the Hon'ble Supreme Court laid down that "Where a stereotype order is passed which simply accepts what the assessee has said in the return and fails to make enquiries which are called for in the circumstances of the case, the Commissioner is justified in holding that the order is erroneous and prejudicial to the interest of the Revenue." The Hon'ble Supreme Court in the case of Ram Pyari Devi Saraogi [1968] 67 ITR 84 also held that "Where the assessment is made in undue haste and without enquiry, it will be erroneous and prejudicial to the interest of Revenue."
20. The learned CIT observed that the Assessing Officer allowed certain claims which he considered erroneous insofar as they were prejudicial to the interest of Revenue. Regarding the issue of goodwill, the learned CIT found it appropriate to set aside the assessment on the limited issue of allowability of payment in question. So, the CIT found the order of the Assessing Officer erroneous insofar as the payment of goodwill of Rs. 37.50 lakhs is concerned and therefore, the order passed by the Assessing Officer was considered as prejudicial to the interest of Revenue. According to the learned CIT, goodwill of the business rightfully belongs to the assessee and not to Nehru Centre. Thus, according to him, the payment of goodwill made by the assessee to Nehru Centre was unwarranted and for extraneous considerations. The CIT has further observed that while making the assessment, the Assessing Officer has not dealt with the issue in depth and has allowed the payment of goodwill without ascertaining the exact nature of the payment and the commercial expediency for incurring such expenditure over and above the monthly rent.
21. The first main point for consideration is whether the Assessing Officer made the assessment without causing proper enquiries. The assessee firm commenced business from 7-4-1987. On the same day, Sun-n-Sand Hotel entered into a Conducting Agreement with the Nehru Centre under which the former got the right to carry on and conduct the restaurant and other business in the building owned by Nehru Centre. The owners gave licence and permission to the Conductors to enter upon certain areas in the building called "Discovery of India" for a specific and limited purpose of conducting catering services on the terms and conditions as specified in the agreement. The monthly compensation was Rs. 1,70,000 with 2% escalation every year. On expiry of ten years, in October, 1996, the assessee gave notice to the Nehru Centre for renewal of the Original Conducting Agreement for a further period of ten years as provided in the original agreement. Extension Agreement was signed on 24-2-1997 and the validity of the Original Conducting Agreement of 1987 was extended for a further period of ten years on the same terms and conditions. The monthly compensation was agreed at Rs. 3,00,000 per month subject to the increase of 25% from October, 1999 and further 25% from October, 2002. Simultaneously, on 24-2-1997, a Supplemental Agreement was signed by the assessee with Nehru Centre. Under the said Supplemental Agreement, it was provided that as further consideration for extension of the original agreement dated 7-4-1987, the Conductors have agreed to pay a further amount of Rs. 6,25,000 per month to Nehru Centre described as "Goodwill", which was subject to further revision to Rs. 7,81,000 per month from October, 1999 and to Rs. 9,76,500 per month from October, 2002 in the same manner and same extent as the amounts covered under Extension Agreement were subject to increase. No doubt, the Assessing Officer called for the details pertaining to these agreements and the assessee also filed the various details along with copy of agreements before the Assessing Officer as has been mentioned in the foregoing paragraphs, but the Assessing Officer has not made any further enquiries regarding the nature of these payments. Originally, the assessee entered into only one Conducting Agreement on 7-4-1987 for ten years. On the expiry of ten years, this agreement was further extended to ten years by Extension Agreement dated 24-2-1997. Thereafter, another Supplemental Agreement was signed on the same date i.e., 24-2-1997. If the nature of payments was the same, then what was the necessity of signing two different agreements on the same date. It is also quite surprising that the payment to be made as per Supplemental Agreement has been termed as "Goodwill". If the entire amount payable to Nehru Centre was only compensation charges, then in our opinion, there was no need of preparing two separate agreements, one for compensation of Rs. 3,00,000 per month and the other one for goodwill of Rs. 6,25,000 per month and that too on the same day. It is quite obvious that the nature of payments by both the agreements cannot be the same. There must be some specific purpose for preparing the two agreements. The Assessing Officer, no doubt, called for the various details but he failed to make any further enquiries which he could have made in view of the facts of this case. The Assessing Officer has passed the cryptive order without mentioning anything about these two agreements signed on the same day. Therefore, the order passed by the Assessing Officer is without causing any enquiries regarding the nature of the payment made to Nehru Centre by the assessee as per two separate agreements. Therefore, the order passed by the Assessing Officer was erroneous and prejudicial to the interest of Revenue as has been laid down by the Hon'ble Delhi High Court in the case of Gee Vee Enterprises (supra). The Assessing Officer has passed the stereotype order by simply accepting what the assessee produced before him and failed to make enquiries which were called for in the circumstances of the case, therefore, the Commissioner was fully justified in holding that the order was erroneous and prejudicial to the interest of Revenue as has been laid down by the Hon'ble Supreme Court in the case of Smt. Tara Devi Aggarwal (supra). It appears that the Assessing Officer has made the assessment in undue haste, which is quite indicative from his order, without causing any enquiries whatsoever about the nature of the agreements signed on the same date and also two different amounts being paid to the same party by different nomenclature. If the contention of the assessee is accepted that both the amounts were compensation and charges paid to Nehru Centre for use of premises, then what was the necessity for preparing two separate agreements on the same date by giving different nomenclature to both the amounts. The Assessing Officer has not made any enquiries to these facts. Therefore, the order passed by the Assessing Officer was erroneous and prejudicial to the interest of Revenue as has been laid down by the Supreme Court in the case of Ram Pyari Devi Saraogi (supra). Thus, the Commissioner was justified in restoring the order to the file of the Assessing Officer for passing a fresh order after making necessary enquiries.
22. The next important issue is regarding the nature of the goodwill paid by the assessee to Nehru Centre as per the Supplemental Agreement dated 24-2-1997. The assessee got the premises from Nehru Centre around 1986 by entering into a Conducting Agreement dated 7-4-1987.
The assessee started conducting restaurant and catering services in the said premises. During the period of ten years commencing from 1-10-1986, the assessee generated sufficient goodwill of the restaurant. This goodwill was belonging to the assessee and the assessee wanted to carry on its business of restaurant as the business was flourishing because the goodwill already earned by them during the period of ten years. Nehru Centre, perhaps, was aware of the goodwill earned by the assessee during the last ten years, therefore, they not only wanted enhanced monthly compensation but in addition to that they also wanted to charge for the goodwill which the assessee earned during the last ten years. In our opinion, the assessee never wanted to leave the place because of the goodwill which they have already earned and because of that, they were getting good turnover of the business carried on by them. Perhaps, because of this reason, the assessee had to pay heavy amount of Rs. 6,75,000 per month to save the goodwill and to continue their roaring business. Now the question arises, what would be the nature of the amount paid for securing the goodwill of the business. In our opinion, the amount paid would be of capital nature as the same has been paid for protecting and safeguarding business asset of the assessee (Goodwill). Goodwill belongs to the assessee and the expenditure has been incurred for the procurement of the goodwill, therefore, the expenditure has been incurred for acquiring an enduring benefit for its business. Hon'ble Supreme Court in the case of Assam Bengal Cement Co. Ltd. v. CIT [1955] 27 ITR 34 has laid down that "If the expenditure is made for acquiring or bringing into existence an asset or advantage for the enduring benefit of the business, it is purely attributable to capital and is of the nature of capital expenditure. If on the other hand, it is not made for the purpose of bringing into existence any such asset or advantage but for running the business or working it with a view to produce the profits, it is a revenue expenditure. If any such asset or advantage for the enduring benefit of the business is thus, acquired or brought into existence, it would be immaterial whether the source of the payment was the capital or the income of the concern or whether the payment was made once and far all or made periodically. It is only in those cases where this test is of no avail that one may go to the test of fixed or circulating capital and consider whether the expenditure incurred was part of the fixed capital of the business or part of the circulating capital. If it was part of the fixed capital of the business, it would be of the nature of capital expenditure and if it was part of its circulating capital, it would be of the nature of revenue expenditure." In the present case, the expenditure has been incurred for protecting the "Goodwill" which is an advantage for the enduring benefit of the business, therefore, the same is of capital nature. It appears that the assessee has entered into two agreements separately, one for making the compensation charges for using the premises and the other one for getting the protection of the "Goodwill" which has already been acquired by the assessee during the last ten years. Whatever the case may be, the Assessing Officer has not made any efforts whatsoever to find out the nature of the payment named as "Goodwill" in Supplemental Agreement. Therefore, the CIT correctly resorted to the provisions of Section 263 of the Act. The powers under Section 263 can be exercised even if the issue is debatable one as has been laid down by the Gujarat High Court in the case of M.M. Khambhatwala (supra).
23. The arguments of the learned counsel that the goodwill is recurring and the same is paid every year, therefore, the same is of revenue nature is without any substance. The Hon'ble Supreme Court in the case of Assam Bengal Cement Co. Ltd. (supra) has laid down that if any advantage or asset for the enduring benefit of the business is acquired or brought into existence, it would be immaterial whether the source of payment was the capital or the income of the concern or whether the payment was made once and for all or was made periodically. The contention of the learned counsel that the CIT has not stated whether the payment is of capital nature, is also without any substance. The learned CIT has set aside the assessment on the limited issue of allowability of the payment in question. Therefore, he has directed the Assessing Officer to find out the nature of the payment of "Goodwill" as the Assessing Officer has not dealt with the issue in his order. So it is for the Assessing Officer to decide whether the payment is of capital nature or of revenue nature. Therefore, the question of giving specific findings by the learned CIT does not arise. Madras High Court in the case of CIT v. Seshasayee Paper & Board Ltd. [2000] 242 ITR 490 : 108 Taxman 464 has laid down that the powers of the Commissioner are very wide in exercising the powers of revision under Section 263. The only limitation on his power is that he must have some material which would enable him to form a prima facie opinion that the order passed by the Assessing Officer was erroneous insofar as it is prejudicial to the interest of Revenue. Once he forms such an opinion, the Commissioner is empowered to pass an order as the circumstances of the case may warrant. He may pass an order enhancing the assessment or he may modify the assessment. He is also empowered to cancel the assessment and direct a fresh assessment. The Commissioner is fully empowered to adopt any one of the three clauses indicated in Section 263. It is, no doubt, true that for making a valid order under Section 263, it is essential for the Commissioner to record an express finding that the order sought to be revised was erroneous as well as prejudicial to the interest of Revenue. However, there is nothing in Section 263 to show that the Commissioner should in all cases record his final conclusion on the points in controversy before him. In the present case, the point of controversy is the payment of "Goodwill" which the CIT has mentioned in his show-cause notice issued under Section 263 and therefore, the assessee has been given proper opportunity before passing an order on the issue of "Goodwill". In our opinion, it was not necessary for the CIT to pass a detailed order regarding the nature of "Goodwill".
24. The various court cases (supra) relied upon by the learned counsel for the assessee have no application to the facts of the present case. In the case of Richardson Hindustan Ltd., the issue involved is whether the premises taken on lease through an estate agent for a period of ten years with option for renewal for two consecutive period of ten years amount to acquisition of capital asset. We do not understand how this case is relevant to the fact of the present case. In the present case, the issue is whether the goodwill paid by the assessee to Nehru Centre amounts to capital or revenue expenditure. Therefore, this case has nothing to do with the facts of the present case. In the case of Gabriel India Ltd., the issue involved is whether the CIT can revise order mainly because he disagrees with the conclusion arrived at by the ITO. In the present case, the CIT has not disagreed with the conclusion arrived at by the Assessing Officer. Moreover, the Assessing Officer has not arrived at any conclusion so far as the nature of the payment of goodwill is concerned. Therefore, this case also has no relevance to the facts of the present case. In the case of Goyal Private Family Specific Trust, the CIT did not give any findings that the order of assessment was erroneous. Therefore, the Hon'ble High Court came to the conclusion that setting aside done by the Tribunal of the order of the CIT passed under Section 263 was fully justified. In the present case, the CIT has given his findings to indicate how the order of the Assessing Officer was erroneous. Therefore, this case also is not relevant to the facts of the present case. In the case of Late Sunderlal, the Hon'ble High Court held that the order passed by the Commissioner under Section 33B without giving any reasons for it is vitiated in law. The facts of this case are entirely different from the facts of the present case. In the present case, the Commissioner of Income-tax has given detailed reasons for resorting to the provisions of Section 263 of the Act.
Therefore, this case is also not relevant to the facts of the present case. In the case of R.K. Metal Works, the Hon'ble High Court held that there was no indication in the order as to the basis on which the Commissioner came to the prima facie conclusion that the capital borrowed by the firm was utilized for the business other than that of the firm's business. Therefore, the High Court found full justification of setting aside the order by the Tribunal. We do not find any relevance of this case to the facts of the present case. In the present case, the CIT found that the Assessing Officer had not given any specific findings regarding the nature of the goodwill paid by the assessee to Nehru Centre. Therefore, the CIT found that the order passed by the Assessing Officer was erroneous and prejudicial to the interest of Revenue. In the case of Taj Printers, the High Court set aside the order of the Commissioner passed under Section 263 on the basis that the Commissioner did not record any reason as to how the order of the Income-tax Officer was erroneous and prejudicial to the interest of Revenue. But in the present case, the CIT has recorded the reasons how the order of the Assessing Officer was erroneous and prejudicial to the interest of Revenue. Similarly, in the case of Trustees, Anupam Charitable Trust (supra) the High Court upheld the findings of the Tribunal on the ground that there was no proof that income of the assessee was from a speculative business. The order of the CIT under Section 263 was on the basis that Trust had income from speculative business. In this case, the findings of the Tribunal were purely findings of facts and the Hon'ble Court came to the conclusion that the errors envisaged by Section 263 was not depended on possibility or guess work but it should be actually an error either of fact or of law. In the present case, there was an error on the part of the Assessing Officer for not making any enquiries regarding the nature of goodwill paid by the assessee. Therefore, this case is also not relevant to the facts of the present case. In the case of Chandrika Educational Trust (supra), it was held by the High Court that the Tribunal cannot sustain the order of the CIT on different grounds. We do not find any relevance of this case of the facts of the present case. Similarly, in the case of L.F. D'Silva (supra), the High Court held that the Tribunal cannot alter the basis for initiation of revision proceedings. The facts of this case has nothing to do with the facts of the present case. In the case of Associated Cement Co. Ltd. (supra), the High Court held that since the installations and accessories were the assets of the Municipality and not of respondent, the expenditure did not result in bringing into existence any capital asset for the company. In the present case, this is not the issue for consideration. In the present case, the main question is whether the goodwill paid by the assessee was of capital nature or revenue nature. As we have discussed in detail that the goodwill resulted into enduring benefit to the assessee, therefore, the same was of capital nature. The facts of the present case are entirely different from the above case relied upon by the learned counsel for the assessee. Again Madras Auto Services Pvt. Ltd. 's case (supra) pertains to whether a particular expenditure incurred is of capital or revenue nature. In this case, the assessee took premises on lease for 39 years. The premises were demolished and new building was constructed by the assessee at its own expenses. New building was belonging to the lessor but the assessee was using it by making the payment of very low rent. The Hon'ble Court held that the assessee did not acquire a capital asset but only a business advantage. The amount spent on construction was deductible as revenue expenditure. We do not understand how this case is relevant to the facts of the present case. In the present case, the assessee acquired a durable advantage by making the payment of goodwill. Therefore, the payment was of capital nature. This case, therefore, is of no assistance to the acts of the present case. The facts of the case of Blue Dart Express Ltd., are also not relevant to the facts of the present case. In this case, the claim for deduction under Section 80-O was allowed by the Assessing Officer after due application of mind. Therefore, the Tribunal held that the Commissioner was not justified in holding that the assessment order is erroneous and prejudice to the interest of Revenue simply because, according to him, the order should have been written more elaborately. We do not find any relevance of this case to the facts of the present case. Similarly, the other cases relied upon by the learned counsel are not relevant to the facts of the present case. In the present case, the learned CIT resorted to the provisions of Section 263 because the Assessing Officer accepted the contention of the assessee without making any enquiries regarding the nature of payments made through two different Agreements entered into on the same date. The Assessing Officer also did not make any efforts to find out the nature of the goodwill paid by the assessee. Therefore, the learned CIT was fully justified in setting aside the order passed by the Assessing Officer. In view of the discussion above and also keeping in view the various cases relied upon by the learned DR, we find full justification on the part of the learned CIT for resorting to the provisions of Section 263 of the Income-tax Act. His order is, therefore, upheld.
25. In the result, the appeal of the assessee is dismissed.