2010 (12) TMI 837 - HC - Income Tax

Reopening - Income escaping assessment - The proviso to section 147 of the Act, among other things, empowers the assessing authority to invoke section 148 of the Act to issue notice for reopening the assessment beyond the prescribed period of four years, from the end of the relevant assessment year, if the assessee failed to disclose fully and truly all material facts necessary for the assessment for that year - the factum of common directors of the transferor company and the transferee company, and the location of both offices in the same place, though specifically raised in the grounds of appeal before the Tribunal, were not controverted by the appellant - Moreover, as rightly pointed out by the Tribunal, the failure of the appellant in not having disclosed the agreement before the Assessing Officer really raises very many doubts as to the genuineness of the alleged transaction by way of transfer of division - The order of the assessing authority and consequently, the impugned order of the Tribunal in having set aside the order of the Commissioner of Income-tax (Appeals) and restoring the order of the Assessing Officer, was perfectly justified - The appeal fails and the same is dismissed

Summary

Issues Involved:
1. Whether the amount received towards restrictive covenant is revenue receipt and taxable.
2. Whether the non-compete fee would be considered for taxation within the meaning of the provisions of section 28(va) only with effect from April 1, 2003.
3. Whether the reopening of assessment by invoking sections 147 and 148 of the Income-tax Act was maintainable.

Detailed Analysis:

Issue 1: Taxability of Amount Received Towards Restrictive Covenant
The Tribunal held that the amount received towards the restrictive covenant is a revenue receipt and therefore taxable. The appellant argued that the receipt of Rs. 542 lakhs should be considered as a non-compete fee, which would be considered for taxation only from April 1, 2003, under section 28(va) of the Income-tax Act. However, the Tribunal found that the appellant failed to provide a true and full disclosure of the transaction. The Tribunal's analysis indicated that the receipt of Rs. 542 lakhs was not satisfactorily explained as a non-compete fee and was instead treated as revenue receipt. The Tribunal's decision was based on the lack of substantial evidence provided by the appellant to support their claim.

Issue 2: Applicability of Section 28(va)
The appellant contended that the non-compete fee should be considered for taxation only from April 1, 2003, as per section 28(va). However, the Tribunal and the court found that the appellant did not disclose the agreement or provide sufficient details about the transaction. The Tribunal noted that the forex business commenced only on January 3, 1995, and questioned how a business that started two years prior could negotiate a substantial non-compete fee of Rs. 542 lakhs. The Tribunal concluded that the payment was not genuinely a non-compete fee and thus did not fall under the provisions of section 28(va).

Issue 3: Validity of Reopening Assessment under Sections 147 and 148
The appellant challenged the reopening of the assessment under sections 147 and 148, arguing that there was no new material and that the reopening was based on a mere change of opinion. The court, however, found that the appellant did not fully and truly disclose all material facts necessary for the assessment. The notice under section 148 was issued on December 20, 2003, beyond the four-year period, which expired on March 31, 2002. The court noted that the appellant's failure to disclose the agreement and the nature of the transaction raised doubts about the genuineness of the transaction. Consequently, the court upheld the validity of the reopening of the assessment, stating that the appellant did not provide true and full disclosure, justifying the issuance of the notice under section 148.

Conclusion:
The court dismissed the appeal, upholding the Tribunal's decision. The court agreed with the Tribunal's findings that the amount received towards the restrictive covenant was taxable as revenue receipt, the non-compete fee was not applicable under section 28(va), and the reopening of the assessment under sections 147 and 148 was valid. The court concluded that the appellant failed to provide sufficient evidence and full disclosure to substantiate their claims.