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2015 (3) TMI 756 - AT - Income TaxInitiation of reassessment proceedings - transfer of exclusive distribution rights of AC and water cooler was credited by assessee to the capital reserve A/c and was not treated as income for the year - change of opinion - Held that - Once the Hon ble High Court in assessee's own case 2012 (9) TMI 767 - DELHI 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 the resultant formation of opinion on it. If, now, we accept the assessee s contention that the non-taxability of ₹ 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. Objection by the internal audit party - Held that - The audit party suggested that this amount was chargeable under the head Capital gains and noninclusion 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 ₹ 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 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. (1997 (10) TMI 5 - SUPREME Court) read with the exception formulated by the Hon ble Supreme Court in Indian & Eastern Newspapers Society (1979 (8) TMI 1 - SUPREME Court) 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. No tangible material to justify initiation reassessment - Held that - In the facts and circumstances of the present case, we find 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 . Ground no. 1 challenging the initiation of reassessment proceedings is not allowed. - Decided against assessee. Taxability of transfer of exclusive distribution rights - Held that - 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. At this juncture, it is pertinent to mention that the assessee, apart from carrying on the business of airconditioners 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 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 ₹ 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 merits acceptance nor the contention of the assessee that it was for the transfer of Business is sustainable. 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 ₹ 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 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 (1981 (2) TMI 1 - SUPREME Court). Needless to say, the assessee will be allowed a reasonable opportunity of being heard in such fresh proceedings. - Decided in favour of assessee for statistical purposes.
Issues Involved:
1. Initiation of reassessment proceedings. 2. Objection by the internal audit party. 3. Absence of tangible material to justify reassessment. 4. Taxability of Rs. 1.73 crore received against the transfer of exclusive distribution rights. Issue-wise Detailed Analysis: I. Initiation of Reassessment Proceedings: The first ground in the appeal concerns the initiation of reassessment proceedings. The original assessment was completed under section 143(3) of the Income Tax Act, 1961, making disallowances on account of bad debts and certain expenses related to exempt dividend income. The Assessing Officer (AO) initiated reassessment proceedings by recording reasons on 30.5.2005, which were based on an audit objection. The Tribunal had initially accepted the assessee's claim about the invalid initiation of reassessment proceedings, citing the absence of fresh material or judgment. However, the Hon'ble Full Bench of the Delhi High Court in CIT vs. Usha International Ltd. held that the AO did not examine the issue during the original assessment, thus there was no change of opinion. The Tribunal was directed to reconsider the matter in light of the Full Bench judgment. II. Objection by the Internal Audit Party: The assessee argued that the initiation of reassessment proceedings based on an audit objection was invalid, citing judgments from the Hon'ble Supreme Court in Indian & Eastern Newspaper Society vs. CIT and CIT vs. Lucas T.V.S. Ltd. However, the Tribunal noted that in CIT vs. PVS Beedis Pvt. Ltd., the Supreme Court upheld reassessment based on factual errors pointed out by the audit party. The Tribunal distinguished between the audit party interpreting the law and merely communicating the existence of a law or factual inaccuracy. In this case, the audit objection was seen as a valid communication of law, thus justifying the reassessment. III. No Tangible Material to Justify Reassessment: The assessee contended that reassessment requires tangible material showing escapement of income, as per the Hon'ble Supreme Court in Kelvinator of India. The Tribunal found that the audit objection, raised after the original assessment, constituted tangible material. This audit objection was considered valid information about the escapement of income, thus meeting the requirement for initiating reassessment proceedings. IV. Taxability of Rs. 1.73 Crore Received Against the Transfer of Exclusive Distribution Rights: The assessee received Rs. 1.73 crore from M/s Daikin Shriram Air-conditioning Pvt. Ltd. for transferring exclusive distribution rights of air conditioners and water coolers, which was credited to the Capital Reserve Account. The AO argued that this amount was chargeable as capital gains. The assessee contended that the distribution rights were self-generated intangible assets with no cost of acquisition, thus not taxable under section 45 of the Act. The Tribunal noted that the term "Goodwill" includes various elements contributing to a business's reputation and customer connections. The Tribunal found that the assessee transferred both "Business" and "Goodwill" to Daikin. The consideration for "Goodwill" was taxable under section 45(1), while the consideration for the "Right to carry on business" was not taxable due to the absence of cost of acquisition. The Tribunal concluded that the matter should be remitted to the AO to bifurcate the consideration for "Goodwill" and the "Right to carry on business" reasonably. The part of the consideration related to "Goodwill" would attract tax, while the other part would not, as per the judgment in B.C. Srinivasa Shetty. Conclusion: The appeal was partly allowed for statistical purposes, with the Tribunal directing the AO to reassess the bifurcation of the consideration received by the assessee. The order was pronounced in the open court on 09.03.2015.
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