2015 (6) TMI 753 - AT - Income Tax

Reopening of assessment - taxing the receipt of INR 21,138,400 as revenue receipt - Held that - As in the current assessment year, assessee received a sum of ₹ 2,11,38,400/- as a partial refund of the business purchase consideration on account of certain objections raised by the assessee. The aforesaid amount was accordingly reduced by the assessee from the amount of Goodwill recorded in the books of account. It is quite clear that upon acquisition of the mining and construction business of KWIL, the total consideration paid was capitalized. Therefore, any reduction in the purchase consideration by way of the impugned refund would retain the same character as the original amount. Therefore, we find no justification on the part of the Assessing Officer to treat the said sum as a revenue receipt. The plea setup by the Revenue that the aforesaid refund was on account of certain items, namely, Stock obsolescence; Doubtful account receivable; EMI; Export incentive; Warranty reserve; and, Immovable property (not usable), etc. which are revenue assets. According to the Assessing Officer, such items are revenue assets and therefore, any receipt therefrom is to be understood as a revenue receipt is unacceptable because the aforesaid items have not been entered the revenue account of the assessee, namely, Profit & Loss Account inasmuch as they have not been considered as an item of expense in the preceding assessment year of 2004-05. Therefore, any refund or adjustment in purchase consideration, even if in relation to the aforesaid assets, would not be an item of the Profit & Loss Account of the assessee. Thus, action of the assessee in treating the same as a capital receipt and reducing it from the amount recorded as Goodwill earlier is in order. - Decided in favour of assessee.

Summary

Issues Involved:
1. Validity of reopening of assessment under section 148 of the Income-tax Act, 1961.
2. Tax treatment of the receipt of INR 21,138,400 as revenue receipt.

Analysis:

Issue 1: Validity of reopening of assessment under section 148 of the Income-tax Act, 1961:
The appellant contested the reopening of the assessment, arguing that there was a full and true disclosure of material facts during the original assessment under section 143(3). The appellant further claimed that the reassessment was based on a mere change of opinion without additional tangible material. The tribunal examined the facts and determined that the settlement agreement reducing the purchase consideration was a capital receipt, not a revenue receipt. Consequently, the tribunal directed the Assessing Officer to delete the addition of INR 2,11,38,400. As the appellant succeeded on the merits, the challenge to the initiation of re-assessment proceedings was considered academic and not adjudicated.

Issue 2: Tax treatment of the receipt of INR 21,138,400 as revenue receipt:
The dispute revolved around whether the refund received by the appellant should be considered a revenue receipt. The Assessing Officer and the CIT(A) contended that the amount was revenue in nature, while the appellant argued it was a capital receipt due to the reduction in the purchase consideration. The tribunal analyzed the transaction details, emphasizing that the original lump-sum consideration was capitalized, and any reduction in it should retain the same character. The tribunal disagreed with the revenue's reasoning that the refund related to revenue assets, as those items were not part of the Profit & Loss Account. Therefore, the tribunal held that the refund was a capital receipt and ordered the deletion of the addition to the income.

In conclusion, the tribunal allowed the appeal of the assessee, setting aside the orders of the lower authorities and directing the deletion of the disputed addition.