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TMI Blog2015 (3) TMI 756X X X X Extracts X X X X X X X X Extracts X X X X ..... herefore, 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 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... leted u/s 143(3) of the Incometax Act, 1961 (hereinafter also called `the Act') on 30.1.2004 making disallowance on account of bad debts and certain expenses relating to exempt dividend income. Thereafter, the AO initiated reassessment proceedings by recording the reasons on 30.5.2005, which have been reproduced in para 7 of the original tribunal order, as under :- "It is from the Notes of accounts that assessee has received a sum of ₹ 173 lakhs as consideration for the transfer of exclusive distribution rights of AC and water cooler. The amount was credited by assessee to the capital reserve A/c and was not treated as income for the year. The amount was chargeable under the head CG being t/f of distribution rights. The Assessing Officer while completing the assessment has also not added the amount of CG and taxed accordingly. In view of the above, I have reason to believe that amount of ₹ 173 lakhs being CG has escaped assessment. Notice u/s 148 issued." 3. It is pertinent to mention that such reasons for initiation of reassessment proceedings were the result of audit objection raised by the Sr. Audit Officer in his report dated 10.2.2005, the relevant part of whic ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 5. The Revenue challenged this decision of the Tribunal before the Hon'ble Delhi High Court. The Hon'ble Full Bench in CIT vs. Usha International Ltd. (supra), by a majority judgment, overturned the Tribunal order rendered in assessee's favour and held that the expression 'Change of opinion' postulates formation of opinion at the first instance and then a change thereof. As the AO did not admittedly examine this issue during the course of original assessment proceedings, the Hon'ble Full Bench held that there cannot be a deemed formation of opinion. The Hon'ble High Court vide the Consequential judgment, while answering the question of law in favour of the Revenue, remitted the matter to the Tribunal for considering the submissions made by the assessee relying on para 39 of the FB judgment and also giving liberty to the assessee to challenge the validity of re-assessment proceedings or re-assessment order on merits. Before closing the judgment, their Lordships rejected the assessee's contention in para 16 of the Consequential judgment that the FB judgment overrules the Full Bench judgment of the Hon'ble Delhi High Court in the case of Kelvinator India (supra). It was observed that ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ove the arguments raised on behalf of the assessee on this issue. There is hardly any need to accentuate that when the Hon'ble jurisdictional High Court has already considered and decided this very aspect of the matter against the assessee by holding that it was not a case of change of opinion, we, being a lower court in hierarchy, cannot permit the ld. AR to reargue the same thing once again before us in an attempt to persuade us for taking a different view from the one already taken by the Hon'ble High Court. At the cost of repetition, we mention that the assessee admitted before the Hon'ble High Court that no query was raised by the AO in original assessment proceedings on this issue. It was on this basis that the Hon'ble High Court recorded in para 23 of its FB judgment that if the AO did not examine a particular subject matter, entry or claim/deduction, it must be presumed that he did not form any opinion on that. It further observed that: "there cannot be deemed formation of opinion, even when the particular subject matter, entry or claim/deduction is not examined." Again, in para 25 of the FB judgment, their Lordships observed that: "Thus, if a subject matter, entry or claim ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cer may in the first round/original proceedings may have examined the subject matter, claim etc., because the aspect or question may be too apparent and obvious'. It is patent from the contents of para 27 in juxtaposition to para 39 of the FB judgment that these are observations set out by their Lordships to be followed in determining as to whether the AO could be said to have applied his mind to a particular claim even when there is no discussion in the assessment order. Such an exception has been carved out in respect of aspects or questions which are 'too apparent or obvious'. The ld. AR contended that point in dispute was an obvious and apparent case of application of mind by the AO. He stressed that firstly, the asset transferred, being the carrying on business, was albeit a capital asset, but did not have any cost of acquisition and hence not liable to tax under the head `Capital gains'. Secondly, it was a case of transfer of source of income and not income itself and hence constituted a capital receipt. It was, ergo, argued that since the issue under consideration arising out of Note no. 10 was apparent and obvious, the same should be treated to have been considered and deci ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ection by the internal audit party 8.1. The next argument taken by the ld. AR was that the initiation of reassessment proceedings on the strength of audit objection could not be validated. He relied on Indian & Eastern Newspaper Society vs. CIT (1979) 119 ITR 996 (SC) and CIT vs. Lucas T.V.S. Ltd. (1998) 249 ITR 306 (SC) to put forth that initiation of re-assessment proceedings on the basis of internal audit report, was not sustainable. When the attention of the ld. AR was drawn towards the judgment of the Hon'ble Supreme Court in the case of CIT vs. PVS Beedis Pvt. Ltd. (1999) 237 ITR 13 (SC) in which the initiation of re-assessment proceedings on the basis of audit objection has been held to be valid, he replied that in that case, the audit party merely pointed out a fact which was overlooked by the AO in the assessment. The ld. AR submitted that it was in the backdrop of such facts that the Hon'ble Supreme Court upheld the initiation of reassessment proceedings. 8.2. In view of the above judgments of the Hon'ble Summit Court on the point, we need to examine as to whether the assessee's case falls within the ratio laid down in PVS Beedis Pvt. Ltd. (supra) or in Indian and East ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sion and proposes substitution of such interpretation with the one it feels right, it crosses its jurisdiction and enters into the realm of judicial supervision, which it is not authorized to do. In such circumstances, the initiation of reassessment based on the substituted interpretation of a provision by the internal audit party, cannot be sustained. It has been categorically held by the Hon'ble Supreme Court in Indian & Eastern Newspaper Society (supra) that the internal audit party of the IT Department 'performs essentially administrative or executive functions and cannot be attributed the powers of judicial supervision over the quasi-judicial acts of IT authorities. The IT Act does not contemplate such power in any internal audit organisation of the IT Department .... The statute supports the conclusion that an audit party can't pronounce on the law, and that such pronouncement does not amount to "information" within the meaning of s. 147(b) of the IT Act, 1961'. Having made the above observations in para 6 of its judgment, the Hon'ble Summit Court made an exception in the same para to the effect that : `But although an audit party does not possess the power to so pr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ly communicates the existence of law to the AO or any other factual inaccuracy, then the initiation of reassessment on such basis cannot be eclipsed. It can be seen that in the case of Indian and Eastern Newspapers Society (supra), the otherwise taxability of receipt from occupation of conference hall and rooms was not disputed. Whereas the AO held such amount to be taxable as 'Business income', the audit party held it to be taxable as 'Income from house property.' It was this adoption of a different interpretation by the internal audit party to the existing factual position, which was not approved by the Hon'ble Supreme Court as a good ground to initiate a valid re-assessment. Similarly, in the case of Lucas TVS Ltd. (supra), the AO allowed deduction u/s 35(2) for the amounts spent in this year as well as the earlier years and the internal audit party opined that only the amount spent during the year was allowable as deduction u/s 35(2). It is obvious that in both these cases, the AO's opinion on the interpretation of the relevant provision was overruled by the internal audit party. In contrast, in the case of PVS Beedis Pvt. Ltd. (supra), the assessee claimed deduction u/s 80G an ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f 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. (supra) read with the exception formulated by the Hon'ble Supreme Court in Indian & Eastern Newspapers Society (supra) 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. I ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... not allowed. 11. Ground no. 2 of the assessee's appeal is against the taxability of ₹ 1.73 crore received against the transfer of exclusive distribution rights, on merits. Briefly stated, the facts of the ground are that the assessee gave Note no.10 to its accounts, reading as under:- "10. A sum of ₹ 173 lacs received from M/s Daikin Shriram Air-conditioning Private Limited as consideration for the transfer of exclusive distribution rights of Air-conditioner and Water Cooler has been credited to Capital Reserve Account and out of the consideration of ₹ 27 lacs for the transfer of Assets, a sum of ₹ 13.32 lacs has been credited to respective Assets Account and the balance ₹ 14.68 lacs to Profit and Loss Account." 12. The factual matrix leading to the above note is that assessee company, which is engaged in the business of consumer durables, such as, sewing machines, kitchen appliances, room heaters, etc., received a sum of ₹ 1.73 crore from M/s Daikin Shriram Air-conditioning Pvt. Ltd. (hereinafter also called Daikin or JVC) as a consideration for the transfer of exclusive distribution rights of air-conditioners and water coolers business. The ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nature of a capital receipt arising from the transfer of a source of income. Elaborating further, he stated that the assessee, apart from selling air conditioners and water coolers, was also engaged in the business of manufacturing and selling of sewing machines, air fans, etc. It was submitted that under the Agreement, the assessee transferred its Business of exclusive distributorship of Air conditioners and Water coolers for the stated consideration. Since such Business constituted a source of income, the amount should be construed as a capital receipt not chargeable to tax, being a consideration for the transfer of a source of income. To bolster this submission, he relied on the judgment of the Hon'ble Supreme Court in the case of Kettlewell Bullen And Co. Ltd. Vs. CIT (1964) 53 ITR 261 (SC), and that of the Hon'ble jurisdictional High Court in the case of Khanna And Annadhanam vs. CIT (2013) 351 ITR 110 (Del). 14. There can be no dispute on the proposition that if there is a receipt arising from the loss of a source of income, rather than the loss of a particular income, then, it cannot be charged to tax. However, this rule is not without exclusion. The exception is that such ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s head. Mode of computation of income under this head is enshrined in section 48, which provides that the amount of (i) expenditure incurred wholly and exclusively in connection with such transfer; and (ii) the cost of acquisition of the asset and the cost of any improvement shall be deducted from the full value of the consideration received or accruing as a result of the transfer of the capital asset. The Hon'ble Supreme Court in CIT vs. B.C. Srinivasa Shetty (1981)128 ITR 294 (SC), considered a case in which the assessee transferred its goodwill for a consideration. Since the goodwill did not have any cost of acquisition, the Hon'ble Supreme Court held that the provisions of section 45(1) would fail due to the impossibility of computation of capital gain u/s 48 because of the absence of a value of the one of the ingredients, namely, 'cost of acquisition.' The legislature stepped in by making an amendment to section 55(2) w.e.f. 1.4.1995 by providing that if a capital asset in the nature of goodwill or tenancy rights or stage carriage permits or looms hours of a business is transferred, then its cost of acquisition shall be taken as Nil, unless the assessee purchased it from a pre ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ew canvassed on behalf of the assessee for sparing the axe of taxation in case of transfer of source of income for a consideration is correct, when such source of income is in the nature of capital asset, being not any of those specified in section 55(2). If however, the source of income in the nature of a capital asset transferred is one of those set out in section 55(2)(a), then, there would arise income under the head 'Capital gains'. 18. Let us examine the facts of the judicial decisions relied by the ld. AR. In the first case of Kettlewell Bullen & Co. Ltd. (supra), the Hon'ble Supreme Court noticed that the assessee, who was holding a managing agency, agreed to part with the same for some compensation. It was held that since the managing agency foregone was in the nature of a source of income, the compensation so received should constitute a capital receipt for loss of source of income and hence not liable for tax. Similar is the position in the case of Khanna And Annadhanam (supra). In that case, the assessee, a CA firm was representing DHS for a long period of 13 years. By virtue of an agreement, the assessee's services were released and in consideration of the termination ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of which has been placed on record. As per this agreement, the assessee was appointed as a `Distributor' for the products, including but not restricting to Air conditioners and water coolers manufactured by SAL. Clause 1 of this agreement provides that it is on principal to principal basis and is for the territory of entire world including India. The assessee was obliged under this agreement to purchase the products from SAL and was also required to offer after-sales services. Though the tenure of this agreement has been mentioned as one year, but the ld. AR stated that it continued to operate till the assessee transferred the Distributor rights, acquired under this agreement, to Daikin under the Business Purchase Agreement dated 1.5.2000, for which it was paid consideration of ₹ 1.73 crore in lieu of transfer of such `Business'. It is also pertinent to mention that simultaneous with the assessee transferring its business under the agreement, SAL also entered into an agreement on 8.8.2000 with Daikin, a copy of which has also been placed on record. As per this agreement, SAL transferred its Manufacturing business to Daikin for a sum of ₹ 10.93 crore. Thus the sequence ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... been made by UIL to customers; and (d) all rights to the UIL's distribution network for the Business excluding UIL's company shops." 20. A careful perusal of the above Clauses of the Agreement divulges that the assessee received a total sum of ₹ 2.0 crore from the JVC, consisting of two amounts, namely, ₹ 1.73 crore as a consideration for the transfer of Exclusive Business Right of air-conditioner and water cooler business and a further sum of ₹ 27 lac for transfer of assets. Out of such sum of ₹ 27 lac for transfer of assets, the assessee transferred a sum of ₹ 13.32 lac to the respective assets accounts and the balance amount of ₹ 14.68 lac was credited to the Profit & Loss Account. 21. In the present appeal, we are concerned only with the treatment of ₹ 1.73 crore, received as a consideration for the transfer of exclusive business right of air conditioner and water cooler business, claimed by the assessee as a case of transfer of `Business' and held by the authorities as a case of transfer of `Goodwill'. The dispute narrows down to determining the nature of the asset transferred, i.e. whether Goodwill or Business. 22.1. It is vivid t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cting the credibility of an enterprise. Each of the above factors along with a host of others, which albeit contribute to the making of goodwill, but cannot independently be construed as goodwill in themselves. For example, if an enterprise transfers its trade mark, though such trade mark helps in the creation of goodwill, but we cannot say that the enterprise has transferred its goodwill by a mere transfer of trademark. The later is a distinct intangible asset. The expression 'Right to carry on any business' is quite clear in itself. 23. 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.' The term 'Assets', inter alia, includes the `Exclusive Business Right.' When we glance at the definition of the later expression, namely, 'Exclusive Business Right', it transpires that JVC, for the stated consideration, got an exclusive right: 'to represent itself as carrying on the business as successor to the UAL' including items listed under clauses (a) to (d). The first three items from (a) to (c) are: 'all records of the Business including records of suppliers and custome ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r 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 (supra). Needless ..... X X X X Extracts X X X X X X X X Extracts X X X X
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