1985 (7) TMI 121 - AT - Income Tax

Summary

Issues Involved:
1. Jurisdiction of the IAC to change the head of income under section 144B of the Income-tax Act, 1961.
2. Justification of treating Rs. 1,40,000 as income from the evaluation of technical know-how.
3. Justification of treating Rs. 42,071 as income under section 41(2) of the Income-tax Act.
4. Adoption of the Annual Letting Value (A.L.V.) of the property at Rs. 9,000 instead of Rs. 6,000 as declared by the assessee.

Detailed Analysis:

1. Jurisdiction of the IAC to Change the Head of Income:
The assessee contended that the IAC had no jurisdiction to change the head of income under section 144B of the Income-tax Act, 1961. The facts revealed that the assessee transferred his proprietary business to a partnership firm, and Rs. 1,40,000 was credited to his account for technical know-how. The ITO initially treated this as a capital gain. However, the IAC, under section 144B, directed that this amount be treated as a revenue receipt, which the assessee objected to, arguing that the IAC had no power to enhance the assessment or change the head of income under section 144B.

The Tribunal agreed with the assessee, emphasizing that section 144B does not grant the IAC the power to enhance assessments or change the head of income. The Tribunal cited the Calcutta High Court decision in Bengal & Assam Investors Ltd. v. CIT, which held that assessments not covered by the draft order are invalid if enhanced by the IAC under section 144B.

2. Evaluation of Technical Know-How:
The ITO included Rs. 1,40,000 as capital gains from the evaluation of technical know-how. The assessee argued that technical know-how is a self-generated intangible asset, similar to goodwill, and should not be taxed as capital gains. The Tribunal agreed, referencing the Supreme Court decision in CIT v. B.C. Srinivasa Setty, which held that no capital gains tax is applicable on self-generated assets for which no acquisition cost was paid.

The Tribunal concluded that technical know-how, being a capital asset, should not attract capital gains tax, and the ITO's initial treatment was correct. The IAC's direction to treat it as a revenue receipt was deemed invalid.

3. Treatment of Rs. 42,071 under Section 41(2):
The assessee reiterated his earlier submissions against the inclusion of Rs. 42,071 as income under section 41(2) of the Act. The Tribunal found no infirmity in the order of the Commissioner (Appeals) on this point and upheld the decision, supporting the action of the income-tax authorities.

4. Adoption of A.L.V. of Property:
The assessee did not press the issue regarding the adoption of the A.L.V. at Rs. 9,000 by the income-tax authorities. Consequently, the Tribunal upheld the order of the Commissioner (Appeals) on this point.

Conclusion:
The Tribunal partly allowed the appeal, holding that the IAC's directions under section 144B to treat Rs. 1,40,000 as revenue receipt were invalid. The inclusion of Rs. 1,40,000 was deleted from the total income of the assessee. The Tribunal upheld the decisions of the Commissioner (Appeals) regarding the treatment of Rs. 42,071 under section 41(2) and the adoption of A.L.V. at Rs. 9,000.