Income Tax Appellate Tribunal - Delhi
Usha International Ltd, vs Assessee on 9 March, 2015
IN THE INCOME TAX APPELLATE TRIBUNAL
DELHI BENCHES : H : NEW DELHI
BEFORE SHRI R.S. SYAL, AM AND SHRI I.C. SUDHIR, JM
ITA No.1615/Del/2008
Assessment Year : 2001-02
Usha International Ltd., Vs. DCIT,
19, Kasturba Gandhi Marg, Circle 18(1),
New Delhi. New Delhi.
PAN: AAACU0032B
(Appellant) (Respondent)
Assessee By : Shri Ajay Vohra, Sr. Advocate
Department By : Shri J.P. Chandrarkar, Sr. DR
Date of Hearing : 03.03.2015
Date of Pronouncement : .03.2015
ORDER
PER R.S. SYAL, AM:
This appeal by the assessee has been remanded to the Tribunal for a fresh decision by the Hon'ble Delhi High Court vide its judgment dated 03.07.2013 (hereinafter also called `the Consequential judgment') ITA No.1615/Del/2008 pursuant to majority decision in the Full bench judgment rendered in assessee's own case for this very year since reported as CIT vs. Usha International Ltd. (2012) 348 ITR 485 (Del) (FB) (hereinafter also called `the FB judgment'). The Tribunal order (ITA No.1615/Del/2008) dated 30.04.2010, deciding the question of initiation of reassessment in the assessee's favour, has been set aside with a direction to decide the appeal afresh in conformity with the dictum of the FB judgment and on merits as per law.
2. The first ground in the appeal is against the initiation of re- assessment proceedings. Briefly stated, the facts of the case are that the original assessment in this case was completed u/s 143(3) of the Income- tax Act, 1961 (hereinafter also called `the Act') on 30.1.2004 making disallowance on account of bad debts and certain expenses relating to exempt dividend income. Thereafter, the AO initiated reassessment proceedings by recording the reasons on 30.5.2005, which have been reproduced in para 7 of the original tribunal order, as under :-
"It is from the Notes of accounts that assessee has received a sum of Rs.173 lakhs as consideration for the transfer of 2 ITA No.1615/Del/2008 exclusive distribution rights of AC and water cooler. The amount was credited by assessee to the capital reserve A/c and was not treated as income for the year.
The amount was chargeable under the head CG being t/f of distribution rights. The Assessing Officer while completing the assessment has also not added the amount of CG and taxed accordingly.
In view of the above, I have reason to believe that amount of Rs.173 lakhs being CG has escaped assessment. Notice u/s 148 issued."
3. It is pertinent to mention that such reasons for initiation of reassessment proceedings were the result of audit objection raised by the Sr. Audit Officer in his report dated 10.2.2005, the relevant part of which is reproduced hereunder from para 8 of the original tribunal order:-
"U/s 45(1) of the Income Tax Act, 1961 any profit of gains arising from the transfer of a capital asset effected in the previous year, shall be chargeable to income tax under the head "Capital gains" and shall be deemed to be the income of the previous year in which transfer took place. Further sec. 2(14) defines a capital asset as property of any kind held by 3 ITA No.1615/Del/2008 the assessee. This includes not only tangible assets but also intangible rights.
Income tax assessment in case of above assessee for the assessment year 2001-02 was completed in January, 2004 at an income of Rs.7,02,73,350/- after scrutiny. Audit scrutiny revealed that as per notes to account, the assessee received a sum of Rs.173 lakhs as consideration for the transfer of exclusive distribution rights of Air conditioner and water cooler. The amount was credited by the assessee to capital reserve account and was not treated by the assessee as income for the year. This amount was chargeable under the head capital gains, being transfer of distribution rights. Non inclusion of this amount in assessee's total income has resulted in income amounting to Rs.173 lakhs escaping assessment with consequent short levy of tax by Rs.39,09,800/- @ 20%+13% SC- being tax on capital gains). Reply to above audit memo may please be furnished."
4. The assessee unsuccessfully challenged the initiation of re- assessment proceedings before the ld. CIT(A). The Tribunal, vide its original order, accepted the assessee's claim about invalid initiation of re- assessment proceedings on the ground that there was no mention of any fresh material or fresh judgment behind the reasons recorded by the AO 4 ITA No.1615/Del/2008 to hold that a sum of Rs.173 lac should have been charged to tax as capital gain. Considering the judgment of the Hon'ble Delhi High Court in the case of CIT vs. Kelvinator of India (2002) 174 CTR (Del)(FB) 617 as approved by the Hon'ble Supreme Court in CIT vs. Kelvinator of India (2010) 320 ITR 561 (SC), the Tribunal held that the factum of no inquiry having been conducted by the AO during the course of original assessment proceedings on the impugned receipt of Rs.173 lakh, was not a valid ground to initiate the re-assessment. As such, the assessment order flowing out of such invalid initiation of reassessment was quashed and set aside.
5. The Revenue challenged this decision of the Tribunal before the Hon'ble Delhi High Court. The Hon'ble Full Bench in CIT vs. Usha International Ltd. (supra), by a majority judgment, overturned the Tribunal order rendered in assessee's favour and held that the expression 'Change of opinion' postulates formation of opinion at the first instance and then a change thereof. As the AO did not admittedly examine this issue during the course of original assessment proceedings, the Hon'ble Full Bench held that there cannot be a deemed formation of opinion. The 5 ITA No.1615/Del/2008 Hon'ble High Court vide the Consequential judgment, while answering the question of law in favour of the Revenue, remitted the matter to the Tribunal for considering the submissions made by the assessee relying on para 39 of the FB judgment and also giving liberty to the assessee to challenge the validity of re-assessment proceedings or re-assessment order on merits. Before closing the judgment, their Lordships rejected the assessee's contention in para 16 of the Consequential judgment that the FB judgment overrules the Full Bench judgment of the Hon'ble Delhi High Court in the case of Kelvinator India (supra). It was observed that the majority opinion in assessee's own case explained and elucidated upon the observations made in the case of Kelvinator India Ltd. (supra) and did not overrule the same. That is how, the assessee is before us contesting the initiation of re-assessment proceedings.
6. We have heard the rival submissions and perused the relevant material on record. Three broad objections were taken by the ld. AR against the initiation of reassessment, viz., i) It is a case of change of opinion; ii) Objection by the internal audit party cannot justify initiation of reassessment proceedings; and iii) There was no tangible material to 6 ITA No.1615/Del/2008 justify the initiation reassessment. We will espouse these objections, one by one.
I. Change of opinion 7.1. The ld. AR's first objection was to the effect that having examined all the relevant aspects of the assessment during the course of original assessment proceedings, the recourse to the reassessment for charging to tax the receipt of Rs.173 lakh was nothing but a case of change of opinion. He put forth that Note no.10 of Schedule 10 to the Annual Accounts, being 'Accounting Policies and Notes', clearly divulged that the assessee received a sum of Rs.173 lacs from M/s Daikin Shriram Air Conditioning Pvt. Ltd., as consideration for the transfer of exclusive distribution rights of air conditioner and water cooler which was credited to the Capital Reserve Account. He submitted that Note no. 9, immediately above Note No.10, was specifically considered by the AO during the course of original assessment proceedings. Our attention was drawn towards a questionnaire issued by the AO inquiring about Note no. 9 to the Schedule 10. Since Notes on Accounts were examined by the 7 ITA No.1615/Del/2008 AO, the ld. AR argued that the presumption should be drawn that the AO did take into consideration the contents of Note no. 10, which later on formed the foundation for the initiation of re-assessment proceedings. Having so considered Note no. 10 during the course of original assessment proceedings, the ld. AR argued that considering the same Note again without anything further, for initiating the assessment proceedings, led to change of opinion. Relying on the judgment of the Hon'ble Supreme Court in the case of Kelvinator India Ltd. (supra), the ld. AR contended that a change of opinion cannot be allowed for initiating the assessment proceedings.
7.2. We do not approve the arguments raised on behalf of the assessee on this issue. There is hardly any need to accentuate that when the Hon'ble jurisdictional High Court has already considered and decided this very aspect of the matter against the assessee by holding that it was not a case of change of opinion, we, being a lower court in hierarchy, cannot permit the ld. AR to reargue the same thing once again before us in an attempt to persuade us for taking a different view from the one already taken by the Hon'ble High Court. At the cost of repetition, we 8 ITA No.1615/Del/2008 mention that the assessee admitted before the Hon'ble High Court that no query was raised by the AO in original assessment proceedings on this issue. It was on this basis that the Hon'ble High Court recorded in para 23 of its FB judgment that if the AO did not examine a particular subject matter, entry or claim/deduction, it must be presumed that he did not form any opinion on that. It further observed that: "there cannot be deemed formation of opinion, even when the particular subject matter, entry or claim/deduction is not examined." Again, in para 25 of the FB judgment, their Lordships observed that: "Thus, if a subject matter, entry or claim/deduction is not examined by an Assessing Officer, it cannot be presumed that he must have examined the claim/deduction or entry and, therefore, it is the case of 'change of opinion'. When at the first instance, in the original assessment proceedings, no opinion is formed, principle of 'change of opinion' cannot and does not apply." The Hon'ble High Court highlighted the difference between 'change of opinion' and 'failure or omission of the Assessing Officer to form an opinion on a subject matter, entry, claim or deduction etc'. It was held that : `When the Assessing Officer fails to examine a subject matter, entry, 9 ITA No.1615/Del/2008 claim or deduction, he forms no opinion. It is a case of no opinion." That is how, the Hon'ble jurisdictional High Court rejected the assessee's contention that in the absence of specific examination of this aspect, the AO should be deemed to have examined the same. In view of the fact that the Hon'ble High Court has held in assessee's own case for the extant year that it was a case of no formation of opinion in the original assessment proceedings and the initiation of re-assessment proceedings could not be held as a case of change of opinion, we are unable to re- appreciate the similar contention, which has already been considered and rejected by their Lordships.
7.3. The next leg of the ld. AR's submissions was that the observations of the Hon'ble Delhi High Court contained in para 39 of the FB judgment are applicable to his case and hence the initiation of reassessment be declared as null and void.
7.4. In this regard, it is relevant to note that the Hon'ble High Court in para 27 of the FB judgment has observed that its observations in paras 23-26 should not be read in isolation, but, be read with caveat set out in 10 ITA No.1615/Del/2008 para 39. That is how, their Lordships explained in para 27 that the question whether or not the AO had applied his mind and examined the subject matter, claim, etc., depends upon the factual matrix of each case and the AO can examine a claim or subject matter even without raising a written query. It observed that there can be cases when an aspect or question is too apparent or obvious to hold that the AO did not examine a particular subject matter, claim, etc. Then in para 39 of the FB judgment, it was explained 'there may be cases where the Assessing Officer does not and may not raise any written query but still the Assessing Officer may in the first round/original proceedings may have examined the subject matter, claim etc., because the aspect or question may be too apparent and obvious'. It is patent from the contents of para 27 in juxtaposition to para 39 of the FB judgment that these are observations set out by their Lordships to be followed in determining as to whether the AO could be said to have applied his mind to a particular claim even when there is no discussion in the assessment order. Such an exception has been carved out in respect of aspects or questions which are 'too apparent or obvious'. The ld. AR contended that point in dispute was an 11 ITA No.1615/Del/2008 obvious and apparent case of application of mind by the AO. He stressed that firstly, the asset transferred, being the carrying on business, was albeit a capital asset, but did not have any cost of acquisition and hence not liable to tax under the head `Capital gains'. Secondly, it was a case of transfer of source of income and not income itself and hence constituted a capital receipt. It was, ergo, argued that since the issue under consideration arising out of Note no. 10 was apparent and obvious, the same should be treated to have been considered and decided by the AO in the assessee's favour in original proceedings without raising any query on it.
7.5. We express our inability to accept this contention. Para 39 talks of such issues which are 'too apparent and obvious', meaning thereby, trivial issues or prima facie acceptable points not requiring any deep examination. If, however, there is a need to examine a particular issue which is not prima facie acceptable, but the AO fails to examine the same during the course of assessment proceedings and later developments warrant its examination, it would not fall within the domain of 'change of opinion' at the time of initiation of reassessment. When we read the FB 12 ITA No.1615/Del/2008 judgment in a holistic manner, the position which emerges is that the Hon'ble High Court has held the non-examination of the issue in question to be a case of `no formation of opinion by the AO' in the original assessment proceedings and not a deemed formation of opinion in the context of para 39, meaning thereby, the issue has been held to be not prima facie acceptable without specific application of mind. That is how, the initiation of re-assessment proceedings has been held to have been rightly made, rejecting the assessee's contention to be a case of a mere change of opinion. The observations made in paras 27 and 39 about the presumption of examination by the AO in respect of an obvious and self-evident matter are exception to the assessee's case inasmuch as their Lordships have categorically held that it was not a case in which the AO could be presumed to have examined the subject matter. Once the Hon'ble High Court has considered and held it to be not a case of deemed formation of opinion by the AO during the course of original assessment proceedings, being not a trivial or an axiomatic issue, it implies that the same was not found to be falling within the purview of 'obvious and apparent', so as to bring it within the scope of deemed examination and 13 ITA No.1615/Del/2008 the resultant formation of opinion on it. If, now, we accept the assessee's contention that the non-taxability of Rs.179 lac was 'too apparent and obvious', it would mean that the situation falls within para 39 of the FB judgment, which, in turn, would mean taking a contrary view from the one that has been canvassed by their Lordships in the FB judgment. We, therefore, refuse to accept the contention advanced by the ld.AR on this issue.
II. Objection by the internal audit party 8.1. The next argument taken by the ld. AR was that the initiation of re- assessment proceedings on the strength of audit objection could not be validated. He relied on Indian & Eastern Newspaper Society vs. CIT (1979) 119 ITR 996 (SC) and CIT vs. Lucas T.V.S. Ltd. (1998) 249 ITR 306 (SC) to put forth that initiation of re-assessment proceedings on the basis of internal audit report, was not sustainable. When the attention of the ld. AR was drawn towards the judgment of the Hon'ble Supreme Court in the case of CIT vs. PVS Beedis Pvt. Ltd. (1999) 237 ITR 13 (SC) in which the initiation of re-assessment proceedings on the basis of audit objection has been held to be valid, he replied that in that case, the audit 14 ITA No.1615/Del/2008 party merely pointed out a fact which was overlooked by the AO in the assessment. The ld. AR submitted that it was in the backdrop of such facts that the Hon'ble Supreme Court upheld the initiation of re- assessment proceedings.
8.2. In view of the above judgments of the Hon'ble Summit Court on the point, we need to examine as to whether the assessee's case falls within the ratio laid down in PVS Beedis Pvt. Ltd. (supra) or in Indian and Eastern Newspapers Society and Lucas TVS Ltd. (supra) 8.3. In the case of Indian and Eastern Newspapers Society (supra), the assessee received some amount on account of occupation of its conference hall and rooms which was assessed by the AO as 'Business income.' The audit party of the Department formed an opinion that the amount should have been taxed under the head 'Income from house property.' It was in that background of the facts that the Hon'ble Supreme Court held that the opinion of the internal audit party on a point of law could not be a ground for initiation of re-assessment proceedings. Similar is the position in the case of Lucas TVS Ltd. (supra). In that case, the 15 ITA No.1615/Del/2008 original assessment was completed by allowing deduction for a sum of Rs.6,37,003/- u/s 37(2) of the Act. The audit party pointed out that only a sum of Rs.2,95,131/- was incurred during the year and the balance amount related to earlier years and hence could not be allowed. The AO in the assessment made u/s 147, restricted the claim of deduction to Rs.2,95,135/-. It is on the basis of such facts that the Hon'ble Supreme Court held that the opinion of the audit party on a question of law, could not constitute an information justifying the initiation of re-assessment proceedings. In the case of PVS Beedis Pvt. Ltd. (supra), the original assessment was completed allowing deduction u/s 80G. The audit party observed that the payment made to the trust, for which deduction was allowed, was not a recognized charitable trust as its recognition had expired and, hence, no deduction should be allowed u/s 80G. The Hon'ble Apex Court upheld the initiation of re-assessment proceedings on the basis of factual error pointed out by internal audit party. 8.4. The logic in not sustaining the initiation of reassessment on the basis of interpretation of law by the audit party is that the internal auditor cannot be allowed to perform functions of judicial supervision over the 16 ITA No.1615/Del/2008 Income-tax authorities by suggesting to the Assessing Officer about how a provision should be interpreted and whether the interpretation so given by the AO to a particular provision of the Act is right or wrong. An interpretation to a provision given by the internal audit party cannot be construed as a declaration of law binding on the AO. When an internal audit party objects to the interpretation given by the AO to a provision and proposes substitution of such interpretation with the one it feels right, it crosses its jurisdiction and enters into the realm of judicial supervision, which it is not authorized to do. In such circumstances, the initiation of reassessment based on the substituted interpretation of a provision by the internal audit party, cannot be sustained. It has been categorically held by the Hon'ble Supreme Court in Indian & Eastern Newspaper Society (supra) that the internal audit party of the IT Department 'performs essentially administrative or executive functions and cannot be attributed the powers of judicial supervision over the quasi-judicial acts of IT authorities. The IT Act does not contemplate such power in any internal audit organisation of the IT Department .... The statute supports the conclusion that an audit party can't pronounce on the law, and that such 17 ITA No.1615/Del/2008 pronouncement does not amount to "information" within the meaning of s. 147(b) of the IT Act, 1961'. Having made the above observations in para 6 of its judgment, the Hon'ble Summit Court made an exception in the same para to the effect that : `But although an audit party does not possess the power to so pronounce on the law, it nevertheless may draw the attention of the ITO to it. Law is one thing, and its communication another. If the distinction between the source of the law and the communicator of the law is carefully maintained, the confusion which often results in applying s. 147(b) may be avoided. While the law may be enacted or laid down only by a person or body with authority in that behalf, the knowledge or awareness of the law may be communicated by anyone. No authority is required for the purpose'. When we read the judgment in Indian & Eastern Newspaper Society (supra) in entirety, what unfolds is that though the audit party is not entitled to judicially interpret a provision, but at the same time, it can communicate the law to the AO, which he omitted to consider. This position has been aptly explained in CIT vs. First Leasing Co. of India Ltd. (2000) 241 ITR 248 (Mad) by holding that : `The Supreme Court in Indian and Eastern 18 ITA No.1615/Del/2008 Newspaper Society vs. CIT (supra), has made a distinction between the interpretation of the law and bringing to the attention of the ITO the relevant provision of law and if the audit party interpreted the law, then the report by the audit party cannot be regarded as "information" for the purpose of reopening an assessment under s. 147(b) of the Act. However, if the audit party has merely drawn the attention of the ITO to the existence of the law, the opinion of the audit party would be regarded as information and the Supreme Court has made a distinction between the communication of law and interpretation of law.' That is how, the Hon'ble Madras High Court held that the audit report should be regarded as a communication of law and there is no interpretation of law involved in the matter. The tribunal order, holding that the audit party had interpreted the relevant provisions relating to the granting of extra depreciation allowance and thus the AO had no jurisdiction under s. 147(b) of the Act to reopen the assessment, was set aside. 8.5. It is discernible from a close look at the above three judgments rendered by the Hon'ble Apex Court that where the audit party interprets the provision of law in a manner contrary to what the AO had done, it 19 ITA No.1615/Del/2008 does not lay down a valid bedrock for the initiation of re-assessment proceedings. If however, the audit party does not offer its own interpretation to the provisions and simply communicates the existence of law to the AO or any other factual inaccuracy, then the initiation of reassessment on such basis cannot be eclipsed. It can be seen that in the case of Indian and Eastern Newspapers Society (supra), the otherwise taxability of receipt from occupation of conference hall and rooms was not disputed. Whereas the AO held such amount to be taxable as 'Business income', the audit party held it to be taxable as 'Income from house property.' It was this adoption of a different interpretation by the internal audit party to the existing factual position, which was not approved by the Hon'ble Supreme Court as a good ground to initiate a valid re-assessment. Similarly, in the case of Lucas TVS Ltd. (supra), the AO allowed deduction u/s 35(2) for the amounts spent in this year as well as the earlier years and the internal audit party opined that only the amount spent during the year was allowable as deduction u/s 35(2). It is obvious that in both these cases, the AO's opinion on the interpretation of the relevant provision was overruled by the internal audit party. In 20 ITA No.1615/Del/2008 contrast, in the case of PVS Beedis Pvt. Ltd. (supra), the assessee claimed deduction u/s 80G and the internal audit party pointed out that such deduction was not permissible because the registration of the trust to which contribution was made had already expired. It is manifest that in the case of PVS Beedis Pvt. Ltd. (supra), the audit party did not interpret section 80G in a different manner, but, simply drew the attention of the AO to the existence of law. The Hon'ble Supreme Court in Indian and Eastern Newspapers Society (supra) having held that the interpretation of the internal audit party on a point of law does not constitute 'information' u/s 147, drew a line of distinction between the cases of interpretation of law and communication of existence of law. If the audit party merely draws the attention of the AO to the existence of law, the opinion of the audit party can be regarded as 'information' leading to a valid initiation of reassessment. In a nutshell, whereas the initiation of re- assessment proceedings on the basis of an interpretation to the provisions of law by the audit party is forbidden, the communication of existence of law or the factual inconsistencies by the internal audit party, does not operate as a hindrance in the initiation of re-assessment proceedings. 21 ITA No.1615/Del/2008 8.6. Now, let us examine whether the facts of instant case fall on this side or that side of the dividing line. We have reproduced above the relevant audit objection raised by the Sr. Audit Officer as per his report dated 10.2.2005. A close look at such objection divulges that the first para is a communication of the existence of law about the chargeability of capital gain in respect of intangible assets, without any reference to the facts of the instant case. In the second para, the audit party pointed out that the assessee received a sum of Rs.173 lac as consideration for the transfer of exclusive distribution rights on air conditioner and water cooler which was credited to Capital Reserve Account and was not treated by the assessee as income for the year. The audit party suggested that this amount was chargeable under the head 'Capital gains' and non- inclusion of this amount in the assessee's total income resulted into the escapement of income to that extent. It shows that the AO was simply informed about a fact which had escaped his attention during the course of assessment proceedings to the effect that a sum of Rs.173 lac was a consideration for the transfer of exclusive distribution rights which was received but not taken to the Profit & Loss Account. It was conveyed 22 ITA No.1615/Del/2008 that such amount is chargeable to tax u/s 45(1) of the Act which is nothing, but, communication of law to the AO. We are not confronted with a situation in which the AO, after due consideration of the matter in the original assessment proceedings, interpreted section 45(1) as not applicable to transfer of intangible asset, but the audit party interpreted this provision in a different manner from the way in which it was interpreted by the AO and then suggested that the amount ought to have been charged to tax. The instant case is fully covered by the judgment in the case of PVS Beedis Pvt. Ltd. (supra) read with the exception formulated by the Hon'ble Supreme Court in Indian & Eastern Newspapers Society (supra) drawing a line of distinction between communication of law and interpretation of law. The contention of the ld. AR on this issue, being devoid of any merit, is hereby jettisoned. It is, therefore, held that the audit objection in the instant case constituted an information about the escapement of income to the AO, thereby justifying the initiation of reassessment.
23 ITA No.1615/Del/2008 III. No tangible material to justify initiation reassessment 9.1. Relying on the judgment of the Hon'ble Summit Court in Kelvinator of India (supra), the ld. AR contended that no reassessment can be taken up in the absence of any tangible material in the hands of the AO showing escapement of income. He submitted that since there was no tangible material with the AO in the instant case, the reassessment was liable to be quashed. The ld. DR countered this argument.
9.2. Having heard the rival submissions and perused the relevant material on record, we find it as an undisputed position that the Hon'ble Apex Court has laid down in no uncertain terms that the concept of "change of opinion" is an essential safeguard to protect unwarranted reassessments and hence the AO has power to reopen, provided there is a "tangible material" for coming to the conclusion that some income escaped assessment. We respectfully bow before this ratio decidendi as the logic is simple that only the existence of some tangible material would oust the case of change of opinion.
9.3. However, in the facts and circumstances of the present case, we find 24 ITA No.1615/Del/2008 the requirement of the existence of some tangible material showing escapement of income, has been duly met with. It can be noticed from the factual matrix discussed above that it was only after the completion of original assessment that the audit objection was raised by the audit party on 10.02.2005, which led to the initiation of reassessment by recording such reasons on 30.05.2005. In an earlier para, we have held that the audit objection in the instant case is a valid piece of information about the escapement of income. Such audit objection is nothing but a tangible material. As this tangible material, in the shape of audit objection, came into existence after the completion of the original assessment and led to the initiation of reassessment, we hold this report of the internal audit party, formed a valid foundation for the initiation of reassessment proceedings, thereby pushing the case outside the ambit of `change of opinion'.
10. In view of the foregoing discussion, we hold that all the objections taken by the ld. AR against the initiation of reassessment are legally unsustainable. These deserve to be and are hereby rejected. Ex consequenti, ground no. 1 challenging the initiation of reassessment 25 ITA No.1615/Del/2008 proceedings is not allowed.
11. Ground no. 2 of the assessee's appeal is against the taxability of Rs.1.73 crore received against the transfer of exclusive distribution rights, on merits. Briefly stated, the facts of the ground are that the assessee gave Note no.10 to its accounts, reading as under:-
"10. A sum of Rs.173 lacs received from M/s Daikin Shriram Air-conditioning Private Limited as consideration for the transfer of exclusive distribution rights of Air-conditioner and Water Cooler has been credited to Capital Reserve Account and out of the consideration of Rs.27 lacs for the transfer of Assets, a sum of Rs.13.32 lacs has been credited to respective Assets Account and the balance Rs.14.68 lacs to Profit and Loss Account."
12. The factual matrix leading to the above note is that assessee company, which is engaged in the business of consumer durables, such as, sewing machines, kitchen appliances, room heaters, etc., received a sum of Rs.1.73 crore from M/s Daikin Shriram Air-conditioning Pvt. Ltd. (hereinafter also called Daikin or JVC) as a consideration for the transfer of exclusive distribution rights of air-conditioners and water coolers business. The AO observed that this amount was directly taken to the 26 ITA No.1615/Del/2008 Capital Reserve Account without offering it for taxation. It was opined that such amount was chargeable to tax under the head 'Capital gains.' On being called upon to explain this position, the assessee stated that no cost was incurred to acquire such exclusive distribution rights which was in the nature of intangible asset and hence incapable of valuation. In the absence of any provision to compute the cost of acquisition of such rights/intangible assets, the assessee contended that the amount received against its transfer could not be charged to tax as income under section 45 of the Act. The AO refused to accept such contention by holding that the distribution rights transferred by the assessee were in the nature of a self generated asset like `Goodwill'. This view of the AO was based on the premise that the assessee transferred not only distribution rights to Daikin but also certain benefits and advantages attached to its name. On a perusal of the Business Purchase Agreement (hereinafter also called `the Agreement') under which such distribution rights were transferred, the AO opined that though the assessee gave it a nomenclature of 'transfer of exclusive distribution right', but in reality, it was nothing but the transfer of `Goodwill' in favour of Daikin. Invoking the provisions of section 27 ITA No.1615/Del/2008 55(2)(a)(ii), the AO held that the cost of acquisition of Goodwill was Nil and hence the entire amount was chargeable under the head `Capital gains'. The ld. CIT(A) noticed that the Agreement clearly depicted that the assessee transferred ongoing business of the exclusive distribution rights of air-conditioners and water coolers which resulted in transferring the whole advantage of its reputation, connections with customers, all the assets in distribution network and all the components, which were attributable to earning profits over a course of years because of its reputation, location, distribution network and other features. He affirmed the view of the AO that the assessee transferred `Goodwill' and, hence, the amount was rightly charged under the head `Capital gains'. The assessee is against the confirmation of this addition.
13. We have heard the rival submissions and perused the relevant material on record. The ld. AR contended that the amount of Rs.1.73 crore cannot be charged to tax as it is in the nature of a capital receipt arising from the transfer of a source of income. Elaborating further, he stated that the assessee, apart from selling air conditioners and water coolers, was also engaged in the business of manufacturing and selling of 28 ITA No.1615/Del/2008 sewing machines, air fans, etc. It was submitted that under the Agreement, the assessee transferred its Business of exclusive distributorship of Air conditioners and Water coolers for the stated consideration. Since such Business constituted a source of income, the amount should be construed as a capital receipt not chargeable to tax, being a consideration for the transfer of a source of income. To bolster this submission, he relied on the judgment of the Hon'ble Supreme Court in the case of Kettlewell Bullen And Co. Ltd. Vs. CIT (1964) 53 ITR 261 (SC), and that of the Hon'ble jurisdictional High Court in the case of Khanna And Annadhanam vs. CIT (2013) 351 ITR 110 (Del).
14. There can be no dispute on the proposition that if there is a receipt arising from the loss of a source of income, rather than the loss of a particular income, then, it cannot be charged to tax. However, this rule is not without exclusion. The exception is that such a capital receipt should not be otherwise chargeable to tax under some other specific provisions of the Act or should not arise from the transfer of a capital asset which is chargeable under the head 'Capital gains.' The first category of capital receipts chargeable to tax, otherwise than by way of transfer of a capital 29 ITA No.1615/Del/2008 asset, can include the amounts referred to in and subject to the provisions of section 56(2)(v) and (vi) etc. The second category covers the cases in which a capital asset is transferred and the amount so received on transfer of a capital asset is chargeable under the provisions of Chapter IV-E of the Act. But for these two types of categories, a capital receipt is not chargeable to tax to be governed by the ratio laid down in these two judgments cited by the ld. AR. The above referred second category needs a little more elaboration. The position is that if an amount is received by an assessee on transfer of a capital asset, which is otherwise not chargeable to tax u/s 45 due to one reason or the other, then it would not magnetize taxation. If, however, the receipt is on account of transfer of an asset, which falls within the definition of capital asset u/s 2(14) of the Act and the provisions of Chapter IV-E fully apply, then, there can be no escape from the chargeability of income under the head 'Capital gains.'
15. The legislature has inserted an Explanation to section 2(14) by the Finance Act, 2012 with retrospective effect from 1.4.1962, which reads as under:-
30 ITA No.1615/Del/2008
Explanation.--For the removal of doubts, it is hereby clarified that "property" includes and shall be deemed to have always included any rights in or in relation to an Indian company, including rights of management or control or any other rights whatsoever.
16. An examination of the Explanation divulges that 'rights of management or control or any other rights whatsoever' fall within the definition of capital asset with retrospective effect from 1.4.1962 and resultantly their transfer would attract chargeability under the head 'Capital gains', subject to the fulfillment of the prescription of the provisions contained in the Chapter IV-E. Section 45, which is a charging provision of this Chapter, provides through sub-section (1) that any profits or gains arising from the transfer of a capital asset, effected in the previous year shall be chargeable to income-tax under this head. Mode of computation of income under this head is enshrined in section 48, which provides that the amount of (i) expenditure incurred wholly and exclusively in connection with such transfer; and (ii) the cost of acquisition of the asset and the cost of any improvement shall be deducted from the full value of the consideration received or accruing as a result of the transfer of the capital asset. The Hon'ble Supreme Court in 31 ITA No.1615/Del/2008 CIT vs. B.C. Srinivasa Shetty (1981)128 ITR 294 (SC), considered a case in which the assessee transferred its goodwill for a consideration. Since the goodwill did not have any cost of acquisition, the Hon'ble Supreme Court held that the provisions of section 45(1) would fail due to the impossibility of computation of capital gain u/s 48 because of the absence of a value of the one of the ingredients, namely, 'cost of acquisition.' The legislature stepped in by making an amendment to section 55(2) w.e.f. 1.4.1995 by providing that if a capital asset in the nature of goodwill or tenancy rights or stage carriage permits or looms hours of a business is transferred, then its cost of acquisition shall be taken as Nil, unless the assessee purchased it from a previous owner by paying some purchase price. With the insertion of this provision, the ratio laid down in B.C. Srinivasa Shetty (supra) to this extent has became inapplicable to the transfer of a capital asset in the nature of goodwill or tenancy rights or stage carriage permits or looms hours because of the provision mandating that the cost of acquisition of such assets shall be taken at Nil. The net result of this amendment to section 55(2) is that where a capital asset in the nature of goodwill or tenancy rights or stage carriage permits 32 ITA No.1615/Del/2008 or looms hours is transferred by an assessee for a consideration, even though there is no identifiable cost of acquisition of such goodwill etc, still the capital gain shall be computed u/s 45 by taking such cost of acquisition at Nil. The Finance Act, 1997 increased the list of such capital assets having Nil cost of acquisition by including 'a right to manufacture, produce, process any article or thing' w.e.f. 1.4.1998. The list of such capital assets with Nil cost of acquisition got further expanded by the insertion of 'a trade mark or brand name associated with a business' by the Finance Act, 2001 w.e.f. 1.4.2002. The Finance Act, 2002 still further increased the ambit of such capital assets with Nil cost of acquisition by introducing 'a right to carry on any business' w.e.f. 1.4.2003. With the inclusion of afore stated capital assets in section 55(2), the chargeability to tax of the profit on their transfer under the head 'Capital gains' has become mandatory despite there being no cost of acquisition.
17. We come back to the argument of the ld. AR, relying on the decisions in the case of Kettlewell Bullen & Co. Ltd. (supra) Khanna And Annadhanam (supra), that a capital receipt for transfer of a source of 33 ITA No.1615/Del/2008 income is not chargeable to tax. The contention of the ld. AR that any amount received in lieu of a source of income is a capital receipt not chargeable to tax, in our considered opinion, is partly correct. We have noted above that section 55(2) lists certain capital assets which are in the nature of source of income, such as, a right to manufacture, produce or process any article or thing or right to carry on any business. While computing the capital gain on the transfer of such capital assets, their cost of acquisition, unless any purchase price was paid at the time of their acquisition, is to be taken at Nil. The view canvassed on behalf of the assessee for sparing the axe of taxation in case of transfer of source of income for a consideration is correct, when such source of income is in the nature of capital asset, being not any of those specified in section 55(2). If however, the source of income in the nature of a capital asset transferred is one of those set out in section 55(2)(a), then, there would arise income under the head 'Capital gains'.
18. Let us examine the facts of the judicial decisions relied by the ld. AR. In the first case of Kettlewell Bullen & Co. Ltd. (supra), the Hon'ble Supreme Court noticed that the assessee, who was holding a managing 34 ITA No.1615/Del/2008 agency, agreed to part with the same for some compensation. It was held that since the managing agency foregone was in the nature of a source of income, the compensation so received should constitute a capital receipt for loss of source of income and hence not liable for tax. Similar is the position in the case of Khanna And Annadhanam (supra). In that case, the assessee, a CA firm was representing DHS for a long period of 13 years. By virtue of an agreement, the assessee's services were released and in consideration of the termination, a compensation was given. The AO took the view that the receipt was taxable as professional income. When the matter finally reached the Hon'ble High Court, Their Lordships held the receipt representing compensation for the loss of a source of income and hence not chargeable to tax. It is manifest from the judgment in the case of Kettlewell Bullen & Co. Ltd. (supra) that the assessment year under consideration is 1953-54 and in the case of Khanna And Annadhanam (supra) it is 1997-98, when none of the capital assets in the nature of income producing source was covered within the ambit of section 55(2) of the Act. The ratio decidendi laid down in Kettlewell Bullen & Co. Ltd. (supra) and Khanna And Annadhanam (supra) would 35 ITA No.1615/Del/2008 squarely apply only to such cases of transfer of a source of income for a consideration, which do not fall in the category of any of the capital assets specified in section 55(2). It cannot extend to cases, where the source of income transferred is in the nature of capital asset set out in section 55(2).
19. Coming back to the facts of the instant case, the controversy boils down in determining the true nature of asset transferred by the assessee to Daikin under the Business Purchase Agreement entered on 1.5.2000. The ld. AR fairly admitted that the assessee transferred a capital asset in terms of section 2(14) of the Act, which is in the nature of 'Right to carry on business'. As such, we will concentrate on ascertaining from the terms of the Business Purchase Agreement if the capital asset transferred is in the nature of `Goodwill' or ` Right to carry on business'? The Agreement is between the assessee carrying on the business, inter alia, of exclusive distribution of air-conditioners and water coolers manufactured by Siel Aircon Ltd. (SAL) on one hand and Daikin Shriram Airconditioning Private Limited, on the other, which is a joint venture between Daikin Industries Ltd. and Siel Ltd. At this stage, we want to make it clear that 36 ITA No.1615/Del/2008 SAL which was manufacturing air-conditioners and water coolers to be distributed by the assessee, is a related concern of the assessee. SAL took over the business of manufacturing air conditions and water cooler equipments from SIEL Ltd. on 1.4.1996. These products were sold under the brand name of `Shriram' by SIEL Ltd. On 16.10.1996, SAL transferred distribution rights to the assessee under an Agreement, a copy of which has been placed on record. As per this agreement, the assessee was appointed as a `Distributor' for the products, including but not restricting to Air conditioners and water coolers manufactured by SAL. Clause 1 of this agreement provides that it is on principal to principal basis and is for the territory of entire world including India. The assessee was obliged under this agreement to purchase the products from SAL and was also required to offer after-sales services. Though the tenure of this agreement has been mentioned as one year, but the ld. AR stated that it continued to operate till the assessee transferred the Distributor rights, acquired under this agreement, to Daikin under the Business Purchase Agreement dated 1.5.2000, for which it was paid consideration of Rs.1.73 crore in lieu of transfer of such `Business'. It is also pertinent to mention 37 ITA No.1615/Del/2008 that simultaneous with the assessee transferring its business under the agreement, SAL also entered into an agreement on 8.8.2000 with Daikin, a copy of which has also been placed on record. As per this agreement, SAL transferred its Manufacturing business to Daikin for a sum of Rs.10.93 crore. Thus the sequence of events is that whereas the ACs and water coolers which were earlier manufactured by SAL under the brand name of `Shriram' and sold through the assessee stood transferred by SAL as well as the assessee to Daikin, which eventually acquired the hitherto manufacturing rights from SAL and distribution rights from the assessee. We again come back to the facts of the assessee under consideration, who transferred the business of ACs and water coolers to Daikin for a consideration of Rs.1.73 crore under the Agreement. When we peruse the terms and conditions of the Agreement, it transpires that the assessee agreed to sell and the Daikin (i.e. the joint venture company) agreed to purchase the `said business and the goodwill and other assets thereof' from the assessee for the stated consideration. The term `Business' which was transferred pursuant to the Agreement has been defined in Clause 1.1 to mean: "The whole of the business in respect of 38 ITA No.1615/Del/2008 the distribution, export, import, assembly, installation, repair, maintenance and service of Products carried on by UIL (i.e., the assessee) ". The expression 'Products' has been defined to mean: "Air- conditioners and water coolers." Clause 2 of the Agreement mandates that the assessee "shall sell and JVC shall purchase, on the Completion Date, the Business as a going concern with all associated goodwill and the Assets free from all encumbrances." The term `Assets' has been defined in the Agreement to mean `(a) the Exclusive Business Right; (b) the Transferrable Deposits; and (c) the Fixed Assets'. Purchase price has been given in Clause 3 to mean the aggregate of: (a) the consideration for the Exclusive Business Rights set out in clause 4; (b) Rs.27 lac; and (c) the amount of Transferrable Deposit...... as reduced by: (i) the amount of Security Deposit from the Dealers; (ii) Sales Advanced from dealers; and
(iii) the amount of unexpired warranty obligation. Consideration of Rs.1.73 crore is for the transfer of 'Exclusive Business Right' which has been defined in the definition clause as under:-
39 ITA No.1615/Del/2008
"Exclusive Business Right" means that exclusive right of JVC to represent itself as carrying on the Business as successor to UIL including:
(a) all records of the Business including records of suppliers and customers;
(b) the benefit of the Current Orders;
(c) the benefit of all bids and proposals that have been made by UIL to customers; and
(d) all rights to the UIL's distribution network for the Business excluding UIL's company shops."
20. A careful perusal of the above Clauses of the Agreement divulges that the assessee received a total sum of Rs.2.0 crore from the JVC, consisting of two amounts, namely, Rs.1.73 crore as a consideration for the transfer of Exclusive Business Right of air-conditioner and water cooler business and a further sum of Rs.27 lac for transfer of assets. Out of such sum of Rs.27 lac for transfer of assets, the assessee transferred a sum of Rs.13.32 lac to the respective assets accounts and the balance amount of Rs.14.68 lac was credited to the Profit & Loss Account. 40 ITA No.1615/Del/2008
21. In the present appeal, we are concerned only with the treatment of Rs.1.73 crore, received as a consideration for the transfer of exclusive business right of air conditioner and water cooler business, claimed by the assessee as a case of transfer of `Business' and held by the authorities as a case of transfer of `Goodwill'. The dispute narrows down to determining the nature of the asset transferred, i.e. whether Goodwill or Business.
22.1. It is vivid that the term `Goodwill' has not been expressly defined in the Act except mentioning in section 56 that `Goodwill' is one of the intangible assets and then Explanation (ii) below section 92B(2) defining the expression "intangible property" as including (j) `goodwill related intangible assets', such as, institutional goodwill, professional practice goodwill, personal goodwill of professional, celebrity goodwill, general business going concern value. The above references simply show that the term `Goodwill' has not been directly and properly defined in the Act except pointing out that is an `intangible asset'. As such, we need to dive deep to pull out the true connotation of this term. The Hon'ble Supreme Court in CIT vs. B.C.Srinivasa Setty (1981) 128 ITR 294 (SC) has 41 ITA No.1615/Del/2008 elaborated explained this concept by laying down that : `A variety of elements go into its making, and its composition varies in different trades ..... And yet, because of its intangible nature, it remains insubstantial in form and nebulous in character..... In a progressing business goodwill tends to show progressive increase. And in a failing business it may begin to wane. .... It is affected by everything relating to the business, the personality and business rectitude of the owners, the nature and character of the business, its name and reputation, its location, its impact on the contemporary market, the prevailing socio-economic ecology, introduction to old customers and agreed absence of competition. .... It comes silently into the world, unheralded and unproclaimed and its impact may not be visibly felt for an undefined period'. The Oxford Dictionary of Law 5th edition (2003) defines `Goodwill' as : `The advantage arising from the reputation and trade connections of a business, in particular the likelihood that existing customers will continue to patronize it.' 42 ITA No.1615/Del/2008 22.2. In common parlance and with the assistance from the above material, the term 'goodwill' can be loosely construed as including but not restricted to a reputation or a name which an enterprise makes and enjoys from the cumulative effect of various factors over a period of time, such as, its business dealings with customers and suppliers, its after-sale services, its business set-up, its patents, its trademarks, quality of its products etc. etc. To put it simply, goodwill is a subjective thing reflecting the credibility of an enterprise. Each of the above factors along with a host of others, which albeit contribute to the making of goodwill, but cannot independently be construed as goodwill in themselves. For example, if an enterprise transfers its trade mark, though such trade mark helps in the creation of goodwill, but we cannot say that the enterprise has transferred its goodwill by a mere transfer of trademark. The later is a distinct intangible asset. The expression 'Right to carry on any business' is quite clear in itself.
23. When we look at the Preamble part of the Agreement, it can be easily noticed that the assessee agreed to sell 'the said business and the goodwill and other assets thereof.' The term 'Assets', inter alia, 43 ITA No.1615/Del/2008 includes the `Exclusive Business Right.' When we glance at the definition of the later expression, namely, 'Exclusive Business Right', it transpires that JVC, for the stated consideration, got an exclusive right:
'to represent itself as carrying on the business as successor to the UAL' including items listed under clauses (a) to (d). The first three items from
(a) to (c) are: 'all records of the Business including records of suppliers and customers; the benefit of the Current Orders; and the benefit of all bids and proposals that have been made by UAL to customers.' These items obviously fall in the category of transfer of 'Right to carry on any business.' The fourth item at Sl. no. (d) which has been transferred to JVC is: 'all rights to the UIL's distribution network for the Business excluding UIL's company shops'. At this juncture, it is pertinent to mention that the assessee, apart from carrying on the business of air-
conditioners and water coolers, was also engaged in the business of fans, sewing machines, etc. By transferring its distribution network for the business of ACs and water coolers, and continuing to retain it for the business of fans and sewing machines, the assessee, in fact, transferred to Daikin a part of its goodwill earned over the period with such 44 ITA No.1615/Del/2008 distributors. When we consider the definition of `Exclusive Business Right' in a holistic manner, it transpires that the assessee not only transferred records and benefit of orders and bids to JVC on one hand, but also `to represent itself as carrying on the business as successor to UAL' (the assessee) and the goodwill earned by it over the period in its distribution network. That appears to be the reason for which Clause B in the preamble part of the Agreement mentions in unambiguous terms about the transfer of 'the said business and the goodwill'. Similar position follows when we consider Clause 2 of the Agreement with the caption 'Purchase of Assets'. Sub-clause (1) of this clause categorically mentions that the assessee shall sell: 'the business as a going concern together with all associated goodwill and the Assets free from all Encumbrances'. In a nutshell, the Agreement amply demonstrates that the assessee not only transferred its 'Business' to Daikin, but also the 'Goodwill' and the consideration of Rs.1.73 crore is for both of such capital assets. Ex consequenti, neither the view point of the authorities below that the entire consideration was for the transfer of `Goodwill' 45 ITA No.1615/Del/2008 merits acceptance nor the contention of the assessee that it was for the transfer of `Business' is sustainable.
24. It has been noticed above that `Goodwill' having Nil cost of acquisition was inserted in section 55(2) w.e.f. the assessment year 1995- 96 and the `Right to carry on any business' having Nil cost of acquisition w.e.f. the assessment year 2003-04. There cannot be any retrospective operation of the latter insertion, as it casts a fresh and an additional tax liability. As the assessment year under consideration is 2001-02, there can be no question of computation of capital gain on the transfer of 'Right to carry on any business' during the year in question. At the same time, the transfer of `Goodwill' with Nil cost of acquisition to the assessee will rightly trigger the provision of section 45(1) of the Act. Since the authorities below have treated the entire amount of Rs.1.73 crore as a consideration for the transfer of `Goodwill', we cannot uphold the same. The impugned order on this score is set aside and the matter is remitted to the AO for bifurcating the consideration for transfer of `Goodwill' and for transfer of `Right to carry on business' in some reasonable and justifiable manner. The part of the consideration relating 46 ITA No.1615/Del/2008 to transfer of `Goodwill' would attract taxability u/s 45(1) and the other part would escape the taxation net because of the absence of cost of acquisition and the resultant impossibility of computation of capital gain in terms of the judgment in B.C. Srinivasa Shetty (supra). Needless to say, the assessee will be allowed a reasonable opportunity of being heard in such fresh proceedings.
In the result, the appeal is partly allowed for statistical purposes. The order pronounced in the open court on 09.03.2015.
Sd/- Sd/-
[I.C. SUDHIR] [R.S. SYAL]
JUDICIAL MEMBER ACCOUNTANT MEMBER
Dated, 09th March, 2015.
dk
Copy forwarded to:
1. Appellant
2. Respondent
3. CIT
4. CIT (A)
5. DR, ITAT
AR, ITAT, NEW DELHI.
47