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TMI Blog2002 (7) TMI 217X X X X Extracts X X X X X X X X Extracts X X X X ..... on business as publishers of daily newspaper, namely, "Dainik Jagran". By an agreement dated 31-3-1989, the business of publishing the newspaper was transferred by the partnership firm, M/s. Jagran Prakashan, Varanasi to M/s. Jagran Prakash an, (Varanasi) Pvt. Ltd., a private limited company limited by shares, with its registered office at 7, P.D. Tandon Road, Allahabad. 4. M/s. Jagran Prakashan (Varanasi) Pvt. Ltd. was incorporated on 23-121988. This assessee-company has subscribed capital of Rs. 10 lakhs (1 lakh shares of Rs. 10 each). Issued and paid up capital of the assessee-company as on 31-3-1990 was Rs. 3,000 (300 shares of Rs. 10 each). There were only three shareholders of the assessee-company as on 31-3-1990, namely, Vinod Kumar Gupta (100 shares), Sunil Kumar Gupta (100 shares) and Sandeep Kumar Gupta (100 shares). 5. M/s. Jagran Prakashan (Varanasi) Pvt. Ltd., successor-company was incorporated with the main object as under: "To succeed, acquire and take over as going concern the business of M/s. Jagran Prakashan (Varanasi) and all or any of the assets and liabilities of the proprietors of the business on terms, conditions as may be mutually agreed upon and then ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... have all the powers and authority to receive the same and realize the same. The transferor succeeded firm was dissolved with effect from 1st April, 1989 after the transfer of the business to the transferee succeeding company. 9. The assessment year 1990-91 (Accounting year 1st April, 1989 to 31st March, 1990) is the first year of assessment. The Assessing Officer observed that the assessee transferee succeeding company has shown a sum of Rs. 37,35,432 as reserve and surplus in the Balance Sheet. It was claimed before the Assessing Officer that out of Reserve and Surplus the amount of Rs. 37,07,000 is the Capital Reserve added during the year and Rs. 27,680 is the investment allowance. It was explained by the assessee succeeding transferee company that it has received the amount of Rs. 41.09 Lakhs (Rs. 30.37 Lakhs from newspapers and Rs. 10.82 for advertisement), which has not been credited to the Profit and Loss Account and this amount has been credited to the Capital Reserve Account. Similarly, the expenditure of Rs. 4.02 lakhs has also not been taken to Profit and Loss Account, but debited to the Capital Reserve Account. It was claimed by the assessee transferee succeeding com ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... has claimed that the amount of Rs. 41.09 lakhs (Rs. 30.37 lakhs from newspaper and Rs.10.82 lakhs from advertisements) has not been taken to the Profit and Loss Account. Similarly, the expenditure of Rs. 4.2 lakhs has also not been taken to the Profit and Loss Account. The ld. D.R. pointed out that the amount receivable from sale of newspapers and advertisements has not been mentioned in the agreement for the purpose of determining the sale consideration of the business. Since the transferee succeeding company follows cash system of accounting, the assessee should have shown the entire amount of Rs. 41.09 lakhs as income on cash basis but the assessee has not shown the full amount and only a part of the amount excluding Rs. 37,35,432 has been shown in the books of account. The Company has followed cash system of accounting under the Income-tax Act for the purpose of declaring the income. This cash system of accounting followed by the company has not been disputed by the Revenue and, therefore, the actual receipt of business has to be considered for the purpose of determining the profit and gains of the business and there is no option to the assessee-company. The attributes of cash ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ted that the assessee transferee succeeding company has become liable for all the liabilities and is also entitled to receive all the trade realisables. According to the ld. Counsel, it was specifically mentioned that the transferee succeeding company became liable to all the debts and right to receive the assets, but all the receipts are not income. According to the ld. Counsel for the assessee whatever amount has been received by the transferee succeeding company is capital asset and it does not have the same character which it has in the hands of the firm. According to the ld. Counsel, the assets have been transferred and no income has been transferred. The ld. Counsel relied on the decision of Madras High Court in the case of Indian Overseas Banks. According to the ld. Counsel, the transferred amount by the transferor succeeded firm is part of capital asset and the receipt of such transferred amount should be considered as capital asset. According to the ld. Counsel, since the entire business was transferred to a company, it was not a transfer to the same person and it was not a conversion of firm into a company under Chapter 9 of the Companies Act. After transfer of the busine ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... td., they were nationalised with effect from 19-7-1969 under the Banking Companies (Acquisition and Transfer of Undertakings) Act, 1970. The banks were given compensation. The banks filed two returns of income, one for the period January 1, 1969 to July 18, 1969, and another for the period July 19, 1969 to December 31, 1969. Profit earned by the bank for the period January 1, 1969 to July 18, 1969 was already declared in the first return of income and it was claimed that the newly constituted bank did not carry any banking business prior to July 19, 1969. It was held that the assessees were not in existence prior to July 19, 1969. It was further held that that the income has accrued or arisen or received only by the erstwhile banks during 1st January, 1969 to July 18, 1969 and not by the assessees. The same income could not during the same period, be stated to have been earned by the assessees. 15. In the case of the assessee before the Tribunal whole business was transferred by the transferor succeeded firm to the assessee transferee succeeding company on 31-3-1989. The transferor succeeded firm as well as the transferee succeeding company have followed cash system of accounting ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hat it was held by the Hon'ble Madras High Court that the income for the period January 1, 1969 to July 18, 1969 was not assessable in the hands of the nationalised banks. 17. In the case of the assessee before the Tribunal, the assessee transferee succeeding company has not paid any amount for the trade debtors because the business has been purchased by the assessee transferee succeeding company from the transferor succeeded firm for a consideration of Rs. 1 lakh only. This consideration of Rs. 1 lakh represents only the amount of goodwill and no amount was paid for the amount receivable by transferor succeeded firm which did not figure in the Balance Sheet of the succeeded firm as on 31-3-1989 because the succeeded transferred firm was maintaining books of account on cash basis. Therefore, the facts regarding the basis for payment for the business of the erstwhile bank as well as business of the transferor succeeded firm were totally different. 18. It seems that in the case of Indian Overseas Bank, the erstwhile banks were maintaining books of account in accordance with the mercantile system of accounting and, therefore, the income was declared on accrued basis in the return ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... has been received by the transferee succeeding company during the financial year 1989-90 relevant to the assessment year 1990-91. The amount receivable on account of sale of newspapers and advertisements is on account of trading activity and, therefore, in our opinion, the amount of Rs. 37,35,432 received by the assessee transferee succeeding company for the sale of newspapers and advertisements in earlier year is a revenue receipt for the reasons given below. 21. A receipt is taxable as a revenue item when it is referable to circulating capital or stock-in-trade. The fixed capital is what the owner intends to provide by keeping it in his own possession. Circulating capital is what he makes profit of by parting with it and letting it change its masters. Since the amount of Rs. 37,35,432 received by the assessee transferee succeeding company is on account of trading activity, the same is a revenue receipt and, therefore, includible in total income. According to cash system of accounting followed by the assessee whatever amount is received on account of trading activity or sale of newspapers and advertisements in earlier years by the assessee transferee succeeding company is includ ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ding company by virtue of trading activity carried on by the transferred succeeded firm and which had been received by the transferee succeeding company, the receipt would be income in the hands of the transferee succeeding company according to the cash system of accounting followed by it. Since the amount of Rs. 37,35,432 has been received on account of amount receivable for earlier years due to business activities carried on by the transferor succeeded firm, the same would constitute trading receipts in the hands of the transferee succeeding company and not the capital receipt. 25. We have gone through the agreement dated 31-3-1989 between the transferor succeeded firm and the assessee transferee succeeding company. As per agreement dated 31-3-1989, the business of the transferor succeeded firm as a whole on lock, stock and barrel basis has been purchased by the assessee transferee succeeding company for a consideration of Rs. 1 lakh only. The consideration of Rs. 1 lakh has been determined on the basis of goodwill. The value of goodwill has been estimated at Rs. 1 lakh only. The Balance Sheet of the transferred succeeded firm as on 31-3-1989 shows the following assets: (i) ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ined for emphasis) derived which is received or deemed to be received in India in such year by or on behalf of such person. The source of net receipt of Rs. 37,35,432 is the agreement dated 31-3-1989. By virtue of this agreement dated 31-3-1989, the assessee transferee succeeding company acquired legal right to receive the amount from sundry trade debtors on account of sale of newspapers and advertisements, which is clearly a trading or revenue receipt and includible in total income. 27. 'Profit' implies a comparison between the state of a business at two specific dates usually separated by an interval of a year. Profit can be ascertained by a comparison of the assets of the business at the two dates. This concept of profit has been adopted by Mr. Justice Mahajan, as he then was, in CIT v. Ahmedbhai Umarbhai Co. [1950] 18 ITR 472 (SC) as under: "Profits of a trade or business are what is gained by the business. The term implies a comparison between the state of business at two specific dates separated by an interval of an year and the fundamental meaning is the amount of gain made by the business during the year and can only be ascertained by a comparison of the assets of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssion as a result of the succession: Since the assessee transferee succeeding company is successor to the business of the transferred succeeded firm, the assessee transferee succeeding company is liable to be assessed in respect of the income of the previous year after the date of succession. The date of succession is 31-3-1989 and, therefore, the successor company is liable to be assessed in respect of the income of the previous year from 1-4-1989 to 31-3-1990 in accordance with the system of accounting. The concept of assessable income goes with the system of accounting followed by the assessee. Therefore, when the provisions of section 170 provide that that the successor shall be assessed in respect of the income of the previous year after the date of succession, it means that the successor shall be assessed in respect of the income of the previous year in accordance with the method of accounting followed by the successor. The assessee-company is following cash system of accounting and, therefore, the assessee company is bound to be assessed in respect of the income of the previous year after the date of succession in accordance with the method of accounting followed by the su ..... X X X X Extracts X X X X X X X X Extracts X X X X
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