2013 (11) TMI 173 - AT - Income Tax

Necessity of classification of head of Income in the assessment by the Assessing officer Passing of direction by commissioner u/s 263 of the Income Tax Act Assessee had entered into an agreement for transfer of its business of providing Automated Teller Machines (ATM) with all accessories of the above said business to a purchaser company namely Classic payment Solutions and Services Private Limited Assessing officer never enquired the assessee about the head of the income i.e. whether the income was from business or from any other head as prescribed in the Act Held that - CIT in his order nowhere writes a finding that the assessment order is erroneous causing prejudice to the interest of the Revenue Assessing officer has held that the receipt in question is not business income , but income from other sources . Thereafter, he has dealt with other issues pertaining to business loss and depreciation - CIT has rightly passed the impugned order under section 263 of the Act by directing the Assessing Officer to proceed afresh about the head of income and other issues.

Issues Involved:
1. Assessment of Earn-Out Income
2. Deduction of Hardware Upgradation Charges
3. Depreciation on Software License Fee
4. Set-off of Unabsorbed Business Losses

Issue-Wise Detailed Analysis:

1. Assessment of Earn-Out Income:
The primary issue was whether the earn-out income received from the business transfer agreement should be classified as 'business income' or 'income from other sources'. The CIT observed that the income was received for a business already transferred, and thus, it should not be treated as business income. The CIT directed the Assessing Officer to examine the real nature of the income and determine the appropriate head under which it should be assessed. The Tribunal upheld the CIT's view, noting that the Assessing Officer had failed to make any inquiry or record findings about the head of income during the scrutiny proceedings.

2. Deduction of Hardware Upgradation Charges:
The assessee claimed hardware upgradation charges against the earn-out income. The CIT noted that the Business Transfer Agreement did not specify that the assessee was liable for these charges. The CIT held that the Assessing Officer did not examine the eligibility of this provision for deduction, rendering the assessment order erroneous. The Tribunal agreed, stating that the Assessing Officer failed to verify if the provision for hardware upgradation was deductible, especially since it was only a provision and not an actual expense.

3. Depreciation on Software License Fee:
The assessee claimed depreciation on software license fees, which the CIT contested, arguing that the software might have been transferred along with the business. The CIT found that the Assessing Officer did not ascertain whether the software was retained and used by the assessee after the business transfer. The Tribunal upheld the CIT's finding that the Assessing Officer's failure to examine this aspect rendered the assessment order erroneous.

4. Set-off of Unabsorbed Business Losses:
The assessee claimed set-off of unabsorbed business losses against current business income. The CIT found discrepancies in the carry forward and set-off of these losses, noting that adjustments made in the assessment year 2005-06 were not reflected in the assessment year 2007-08. The Tribunal upheld the CIT's finding that the assessment order was erroneous regarding this issue.

Conclusion:
The Tribunal upheld the CIT's order, agreeing that the assessment order was erroneous and prejudicial to the interest of the Revenue. The Tribunal found that the Assessing Officer had failed to conduct proper inquiries and record necessary findings on the nature of the earn-out income, the eligibility of hardware upgradation charges, the depreciation on software, and the set-off of unabsorbed business losses. The Tribunal dismissed the assessee's appeal, affirming the CIT's direction for a fresh examination of all relevant facts and issues.

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